Cover paper (Agenda Paper 13)

In October 2020, the IASB discussed and decided on the objective and approach of the Equity Method project. The IASB last discussed the Equity Method Project in October 2021, when it was decided that the staff should undertake research before considering the application questions in the scope of the project. Since the last meeting the staff have engaged with Accounting Standards Advisory Forum (ASAF) members and Global Preparers Forum (GPF) members to seek their views on the application questions identified within the scope of the project.

The purpose of this meeting was to:

• Discuss the staff analysis on purchases of an additional interest in an associate without a change in significant influence
• Present a summary of the research findings on changes made to IFRS Accounting Standards arising from the Conceptual Framework, Business Combinations and Joint Arrangements project

At future meetings, the staff plan to present staff analysis on other application questions with regard to the scope of the project and highlight other application questions which will not be addressed in the project.

There was no discussion of this paper.

Purchases of an additional ownership interest in an associate without a change in significant influence (Agenda Paper 13A)

IAS 28 does not include requirements for purchases of an additional interest in an associate without a change in significant influence. This paper discusses how to apply the equity method when the investor purchases an additional interest in an associate without a change in significant influence.  

The staff believe that, in part, the application question may be due to uncertainty in how to measure the cost of an investment in an associate.

In order to answer the application question, the staff recommend that the IASB consults (via a Discussion Paper or in an Exposure Draft) on measuring the cost of an investment as the fair value of the consideration transferred at the date significant influence is obtained, including the fair value of any previously held interest in the investee at that date.

The staff have identified three approaches for accounting for the acquisition of an additional interest in an associate without a change in significant influence.

• Approach A—continue to measure the investment as a single asset; the approach would remeasure both the investor’s share of the associate’s net assets at fair value and measure the aggregate cost of the investment at fair value at the date of acquiring the additional interest
• Approach B—measure the interest as an accumulation of purchases. The investor would recognise its additional share of the associate’s net assets with the cost (being the fair value of the consideration transferred) for the additional interest
• Approach C—continue to measure the interest as a single asset, but based on the investor’s share of the associate’s net assets at their carrying amounts for the investment, with the cost (being the fair value of the consideration transferred) for the additional interest

The staff recommended that the IASB continue to explore Approaches A and B and consider how each approach could be used to develop solutions to other application questions. The staff did not recommend continuing with Approach C.

Questions for the IASB

The staff asked IASB members whether:

• They agree with the staff recommendation to consult on measuring the cost of an investment as the fair value of the consideration transferred at the date significant influence is obtained, including the fair value of any previously held interest in the investee at that date
• They have comments on the staff analysis and application of the qualitative characteristics to the approaches discussed
• They agree with the staff recommendation to continue exploring approaches A and B in developing solutions to other application questions

IASB discussion

Overall, the IASB agreed with the staff recommendation to consult on measuring the cost of an investment as the fair value of the consideration transferred at the date significant influence is obtained, for both an initial investment and additional investments.

They agreed it is important to articulate what is meant by cost, as it is currently not clear in IAS 28 that cost is the fair value of consideration paid rather than the fair value of the investment acquired. 

IASB decision

All 10 Board members voted in favour of the staff recommendation.

The IASB agreed with the staff recommendation to not continue with Approach C, as the IASB found it complex to follow and believe the other options provide a more straightforward solution.

One IASB member requested that the staff do not consider the approach alongside the cost/benefit analysis, but rather first consider what is the right conceptual response and if this is considered too costly, then consider potential practical expedients or other solutions. However, another IASB member disagreed as this is a practical project and not a conceptual project.

One conceptual question raised was whether it was appropriate to have goodwill on acquisition on interest in a joint venture or interest in an associate. However, as this is a targeted project it would not fall into scope of this discussion.

The IASB was generally in favour of Approach B for various reasons.

Approach A has similarities to the IFRS 9 requirements as it requires fair value presentation. In general, the IASB did not see the benefits of having investments recognised at fair value and did not think comparability amongst entities was that important in this context. In addition, the IASB were not sure whether Approach A would require preparers to derecognise the previous investment and recognise the old and new investment at fair value, causing a P&L impact.

Overall, it was agreed that the staff will use Approach B as the preferred approach on the application questions but will highlight to the IASB any significant consequences if Approach A was used instead.

Research findings (Agenda Paper 13B)

This paper summarised findings on research performed by the staff and was for information only. The IASB was not asked to make any decisions.

The staff focused its research on projects whose objectives were to improve IFRS Accounting Standards for interests in other entities because these changes may be relevant to how the equity method is applied and to help develop solutions for the application questions in the Equity Method project.

In addition, the staff also considered the Conceptual Framework project as it describes the objectives of, and the concepts for, general purpose financial reporting. The economic entity perspective in the Conceptual Framework is consistent with some of the changes introduced in the Business Combinations project such as the measurement and presentation of non-controlling interests, changes in the level of ownership in a subsidiary and business combinations achieved in stages.

In its Joint Arrangements project, the IASB removed a choice of accounting for interests in jointly controlled entities—eliminating proportionate consolidation. IFRS 11 requires a joint venturer to measure an investment in a joint venture using the equity method. It also concluded that obtaining or losing significant influence or joint control is fundamentally different from obtaining or losing control. The IASB characterised obtaining or losing control as a significant economic event, because it modifies the boundaries of the group as defined in IFRS 10. This characterisation explains the remeasurement of any previously held or retained interests in the investee when obtaining or losing control. The IASB did not consider revisions to the equity method in any of the projects noted above.

The staff asked the IASB members if they have comments or questions on the above summary.

Board discussion

The IASB found this paper useful as it highlighted the inconsistencies within IAS 28 and will be a useful guide throughout the project.

The following specific points were raised:

• It is helpful to note that IAS 28 does not override the initial recognition requirements of IFRS 9
• A revision to IFRS 3 in 2008 meant that goodwill was only measured once, at the date control was obtained

No decisions were made.