Cover paper (Agenda Paper 13)

At its April 2022 meeting, the IASB discussed, as part of its project on the equity method of accounting, the application question of how an investor applies the equity method when purchasing an additional interest in an associate while retaining significant influence. The IASB discussed possible approaches to the application question and asked the staff to develop further analysis applying its preferred approach and consider the implications for an alternative approach.

The purpose of this meeting was to discuss the staff’s analysis applying the IASB’s preferred approach and to consider the implications for an alternative approach, to other transactions and events that change the investor’s ownership interest in an associate, including an investor purchasing an additional interest that is a bargain, and making a partial disposal of the associate, while retaining significant influence; and changes arising from equity transactions of the associate.

There was no discussion of the cover paper.

Purchase of an additional interest (and disposal of an interest) in an associate while retaining significant influence (Agenda Paper 13A)

At its April 2022 meeting, the IASB discussed possible approaches to the application question and asked the staff to develop its analysis further applying its preferred approach. The approaches were:

Preferred approach

After obtaining significant influence, an investor measures its additional interests in an associate as an accumulation of purchases. An investor recognises, at the date of purchasing an additional interest, its additional share in the fair value of the associate’s net assets and measures that additional interest at the fair value of the consideration transferred.

The IASB also asked the staff to consider the implications for an alternative approach.

Alternative approach

After obtaining significant influence, an investor measures its investment in the associate as a single asset. An investor measures its aggregated share of the associate’s net assets at fair value and remeasures the cost of the investment at fair value at the date of acquiring an additional interest in an associate while retaining significant influence.

This paper extends the analysis of the application question to two further transactions, in which an investor retains significant influence and purchases an additional interest that is a bargain and makes a partial disposal.

Staff recommendation

The staff recommended that in applying the preferred approach while retaining significant influence:

• An investor purchasing an additional interest that is a bargain recognises the bargain purchase gain separately in profit or loss
• An investor making a partial disposal determines the portion of the carrying amount of an investment in the associate to be derecognised by applying:
  • A specific identification method, if the investor can identify the specific portion of the investment being disposed of and its cost; or
  • The last-in first-out (LIFO) method

IASB discussion

IASB members widely agreed with the staff recommendation as regards the bargain purchase. However, with regard to the accounting treatment of the partial disposal, IASB members had mixed views. Those in favour of the staff recommendation acknowledged that LIFO was not a conceptually sound concept and has indeed been ruled out for other Standards. However, they conceded that the staff’s analysis had convinced them as to why LIFO was the appropriate way to account for a partial disposal of shares. In their view it is a layered approach that led to a build up in investment and those layers would be taken off one by one in case of a partial disposal.

Those not supporting the staff recommendation preferred a weighted average cost approach as in their view, shares are fungible and once the shares have been acquired, it would not be meaningful to treat them differently to already held shares. This was countered by some IASB members saying that the layers had different economic phenomena. For example, the layer that led to significant influence usually includes goodwill and it would not be appropriate to dispose of part of the goodwill when doing a partial disposal. However, the Chairman challenged this notion by saying that the goodwill could have been acquired with a later tranche, for example when the tranche that led to significant influence was a bargain purchase.

While he did not agree with the staff recommendation, he would also not object to it as he acknowledged the practicality of the approach. He conceded that it would be difficult to develop a conceptually sound approach.

IASB decision

All IASB members supported the staff recommendation on the bargain purchase.

Only 5 of the 10 IASB members (not including the Chairman) supported the staff recommendation on the partial disposal. The staff recommendation as drafted was therefore rejected.

However, 6 IASB members stated that they would not object to the staff recommendation after the staff examined whether there was another approach that could be considered at a future meeting.

The staff confirmed that they would take back the feedback heard in the meeting and will consider whether there is another approach that could be presented to the IASB at a future meeting.

Other changes in associate’s net interest (Agenda Paper 13B)

Transactions and events other than purchases and disposals can also change an investor’s ownership interest in an associate. This paper introduced how the equity method of accounting might be applied to these transactions and events. The staff examined the case of an investee issuing new shares (by that diluting the investor’s share) and the investor subsequently subscribing to the new shares (by that increasing its share).

The staff considered two views to account for this. View A was to account for a loss of share due to dilution with a subsequent increase in share due to subscription. View B was to account for the net increase in share only.

Two IASB members spoke in favour of View B and suggested that the staff should not continue examining View A further. One IASB member thought this was a relative minor issue that had been discussed for decades, with no clear-cut solution. She said that the IASB could consider dropping the issue to make sure that the project can be concluded in a timely manner. US GAAP provided some guidance on the issue and the staff could assess whether that guidance is useful for the IASB as well. She warned though not to mix authoritative US GAAP guidance with guidance from the firms who have undoubtedly also formed an opinion on the matter.

IASB decision

9 of the 10 IASB members supported View B. The staff was therefore asked to focus on View B for any future considerations of this matter.