Cover paper (Agenda Paper 13)

The objective of the Equity Method project is to assess whether application questions with the equity method, as set out in IAS 28, can be addressed in consolidated and individual financial statements by identifying and explaining principles in IAS 28.

The purpose of this session was to ask the IASB:

• Whether it should develop proposals on how an investor applies the equity method when an associate issues an equity-settled share-based payment or a share warrant

• How to answer the application question: How to, initially and subsequently, recognise and measure contingent consideration on acquisition of an investment in an associate applying IAS 28?

Towards an Exposure Draft—Transactions and other events that change an investor’s ownership interest (Agenda Paper 13A)

The purpose of this paper wass to ask the IASB whether it should develop proposals on how an investor applies the equity method when an associate issues an equity-settled share-based payment or a share warrant.

In this agenda paper, the staff had analysed why the requirements in IAS 28 and the IASB’s tentative decision on changes in ownership whilst retaining significant influence are not sufficient to address other changes in an investor’s ownership interest that arise from an associate’s issuing a share-based payments and a share warrant.

The IASB tentative decisions provided a solution for transactions and other events that change the investor’s ownership interest. Whilst the tentative decisions address many of these transactions and events, they do not resolve how to apply the equity method when an associate issues a share-based payment and a share warrant. As there is a wide range of potentially dilutive instruments and transactions, the staff considered that trying to provide requirements for all possible fact patterns is not the objective of the project.

Staff recommendation

Considering the analysis and outreach, the staff recommended that the IASB does not develop proposals on how an investor applies the equity method when an associate issues an equity-settled share-based payment or a share warrant.

IASB discussion

All IASB members stated that they agreed with the staff recommendation not to develop proposals on how an investor applies the equity method when an associate issues an equity-settled share-based payment or a share warrant. Several IASB members mentioned that the issue was not pervasive, not likely to be material, and it would be difficult to develop proposals for all possible fact patterns and types of transactions, and as such the cost of developing new requirements would not justify the benefit from it. A few IASB members also stated that there was not much diversity in the current practice being followed and that the current practice was acceptable.

A few IASB members agreed that the requirements in IAS 33 provide users with the necessary information on the potential dilutive effect of an associate’s share-based payments or share warrants while others said that IAS 33 is not applicable to all entities and that it might be relevant to think about disclosures for other entities, and whether or not disclosure requirements from other relevant standards such as IAS 1 and IFRS 12 would provide adequate information in such instances.

A few IASB members suggested that the reasons not to develop this proposal should form a part of the Basis for Conclusions. It was also proposed that this consideration should be mentioned in the Exposure Draft to which several IASB members stated that it can be explained in the Exposure Draft (such as when explaining the scope) but should probably not be raised as a question.

IASB decision

All IASB members voted in favour of the staff recommendation.

Towards an Exposure Draft— Contingent consideration on acquisition of an investment in an associate, including subsequent measurement (Agenda Paper 13B)

The purpose of this paper was to ask the IASB to decide if, and if so, how to propose amendments to IAS 28 to recognise and measure contingent consideration on acquisition of an investment in an associate, including the subsequent measurement of that contingent consideration.

The staff considered that to answer the application question, the IASB should decide: (a) if consideration transferred includes contingent consideration, as part of the cost of an investment; and (b) if (a) is yes, how an investor recognises changes in the fair value of contingent consideration, at each reporting date, until it is settled (subsequent measurement of contingent consideration).

Staff recommendation

• The staff recommended the IASB proposes that an investor:

• On acquisition of an investment in an associate, recognises contingent consideration as part of the cost of the investment and measures that contingent consideration at fair value
• After the acquisition date:
  • For contingent consideration classified as equity—accounts for its subsequent settlement within equity
  • For other contingent consideration—measures contingent consideration at fair value at each reporting date and recognises changes in fair value in profit or loss

IASB discussion

All IASB members stated that they agreed with the staff recommendations. One IASB member stated that on the first proposal, the recommendation was consistent with the decisions made by the IASB previously and on the second proposal, the recommendation was consistent with IFRS 3 and the current practice. Any other recommendation would need to be explained.

One IASB member recommended that a measurement period window, similar to the concept in IFRS 3, must also be considered for application in these proposals. A few IASB members responded that they do not agree with that recommendation as that would be bringing in a new concept into IAS 28. This could be adding a complexity that may not be necessary at this stage.

A few IASB members mentioned that while they agree with the staff recommendations, the basis for these recommendations should not be based on IFRS 3, but instead the staff should explain why they are logical within the framework of IAS 28 and that they are consistent with other standards such as IFRS 3.

IASB decision

All IASB members voted in favour of the staff recommendations.