Equity method of accounting
Project update and next steps (Agenda Paper 13)
The purpose of this paper is to update the Board on the equity method research project, specifically on:
- Identifying application questions
- Identifying and explaining principles of IAS 28
Identifying application questions
The staff have compiled from various sources 71 application questions for consideration. Based on the project scope decided by the Board in October 2020, the staff will assess each application question against the following five criteria:
- Is the application question unresolved (i.e. has it already been resolved by another Standard or an Agenda Decision)?
- Can the application question be solved without fundamentally rewriting IAS 28?
- Can the application question be solved without amending other IFRS Standards?
- Does the question affect the consistent application of IAS 28?
- Is the application question important? (i.e. how frequently is the question encountered, how widespread is the question, potential magnitude of the question)
If the question fails any of the first three criteria, then the question is removed from the list. Criteria 4 and 5 are then assessed together to decide whether to remove the question.
The staff are currently working through this process.
Identifying and explaining principles of IAS 28
The staff are currently mapping the requirements of the Standard. The focus is on principles that relate to how to apply the equity method of accounting, including initial recognition and measurement, subsequent measurement, and impairment losses.
At a future meeting, the staff will ask the Board to review the list of application questions and discuss the identified principles.
The staff asked the Board at this meeting whether they have comments or questions on how the criteria for selecting the application questions are being applied.
Board discussion
The Board suggested that the criteria should be used as guidelines rather than rigid rules. The Board highlighted that the aim of the project is not to remove all inconsistencies in IAS 28 and the focus should be on issues that could have a material effect on the entity.
The Board agreed with the staff that the underlying principles, which will be identified as part of this project, will be used to help the Board develop solutions to the application issues.
The Board requested if questions relating to the scope of IAS 28 could be included in the project. The staff confirmed they are focusing on application issues, but as many respondents have asked this question, it will also be included.
One Board member did not agree with criterion 1 or 4. For Criterion 1, resolved issues were narrow in scope and based on a specific fact pattern. They have created inconsistencies within the standard and therefore may need to be included in this project scope. For Criterion 4, some divergence in practice may have been eliminated due to a changes introduced, however in order to meet the objective it is important to identify all circumstances where there is lack of relevant information.
