Cover paper (Agenda Paper 13)

The objective of the Equity Method project was to develop answers to application questions about the equity method, as set out in IAS 28, using the principles derived from IAS 28 where possible.

The purpose of this meeting is to ask the IASB to discuss:

• The implications of applying its tentative decisions (for investments in associates) to investments in subsidiaries in separate financial statements and joint ventures
• Whether to propose amendments to improve the disclosure requirements for investments in associates
• Whether to expand the project’s scope

This paper was not discussed.

Towards an Exposure Draft—Implications of applying the IASB’s tentative decisions to investments in subsidiaries in separate financial statements (Agenda Paper 13A)

At its July 2023 meeting, the IASB concluded its discussions on application questions in the scope of the Equity Method project for investments in associates. The IASB’s approach was to develop answers to the application questions for investments in associates and, later, consider any implications to other investments accounted for applying the equity method.

The purpose of this paper was to:

• Discuss application of the equity method to investments in subsidiaries in separate financial statements
• Summarise informal feedback from outreach with national standard-setters and regional bodies (NSSs) in jurisdictions where parent entities prepare separate financial statements and account for investments in subsidiaries using the equity method as applicable in IAS 28
• Consider the staff’s preliminary analysis on possible ways forward

In this paper, the staff discussed the type of reporting entities covered by the paper, the concept of control in IAS 27 and the informal feedback from outreach with NSSs.

The staff also identified two possible alternatives as the way forward:

• Alternative 1—Equity method as applicable in IAS 28 (i.e. equity method as it would be amended by the IASB’s tentative decisions)
• Alternative 2—Equity method as applicable in IAS 28, with a requirement to restrict gains or losses from transactions between the parent and its subsidiaries

The IASB was asked if they have comments or questions on the preliminary analysis and for their views on the alternatives set out in the paper.

IASB discussion

Most IASB members who provided their views on the alternatives set out in the paper preferred Alternative 1.

Some IASB members said that Alternative 2 was equivalent to creating another equity method. Many IASB members said that the changes proposed through Alternative 2 were beyond the scope of this project and they did not think the cost-benefit analysis would support it. A few IASB members also stated that this seemed to be a jurisdictional issue which can be addressed at that level and that Alternative 2 should not be adopted to address specific jurisdictional issues. A few IASB members stated that the problem was that IAS 27 provided three diverse options for accounting for subsidiaries in separate financial statements and that the issue was not coming from IAS 28.

One IASB member preferred Alternative 2 as another approach might result in differences in separate and consolidated financial statements. He mentioned that the separate financial statements are used for various purposes such as taxes, compliance, etc. and these should not be different from consolidated financial statements if both are prepared in accordance with IFRS.

Some IASB members said that it might be useful to understand the objective of separate and consolidated financial statements in different jurisdictions and the kind of information being used from these financial statements and whether they are impacted by these alternatives.

Towards an Exposure Draft— Implications of applying the IASB’s tentative decisions to investments in joint ventures (Agenda Paper 13B)

At its July 2023 meeting, the IASB concluded its discussions on application questions in the scope of the Equity Method project for investments in associates. The IASB’s approach was to develop answers to the application questions for investments in associates and, later, consider any implications to other investments accounted for applying the equity method.

The purpose of this paper was to:

• Discuss application of the equity method to investments in joint ventures
• Consider the staff’s preliminary analysis on whether the IASB’s tentative decisions continue to hold for investments in joint ventures

In this paper, the staff provided its preliminary analysis on whether IASB’s tentative decisions related to ‘purchasing an additional interest’ and ‘transactions with equity-accounted investments’ continue to hold for investments in joint ventures. In the staff’s view, the IASB’s rationale for both tentative decisions continue to hold for investments in joint ventures.

The IASB was asked if they have comments or questions on the preliminary analysis in the paper.

IASB discussion

Most IASB members agreed with the staff’s view that the tentative decisions continue to hold for investments in joint ventures as well. Some IASB members acknowledged that while associates and joint ventures are not the same, preparers should not apply the equity method differently. Some IASB members also said that applying a different method may create further issues when an associate changes to a joint venture or vice versa. A few IASB members mentioned that applying different decisions to joint ventures was beyond the scope of the project and that the IASB should not introduce new principles through this project. One IASB member thought it would be useful to understand the staff’s view on whether there were any drawbacks of applying the tentative decisions to associates and joint ventures equally. A few IASB members pointed out that it was important that the questions raised to the Accounting Standards Advisory Forum (ASAF) are precise and relevant, and to understand their feedback.

Towards an Exposure Draft—Possible improvements to disclosure requirements for investments in associates (Agenda Paper 13C)

The purpose of this paper was to ask the IASB to decide whether to propose amendments to improve the disclosure requirements for investments in associates arising from its tentative decisions on the Equity Method project to date.

At its September 2022 meeting, the IASB discussed how an investor recognises and measures changes in an associate’s net assets that change the investor’s ownership interest when the investor retains significant influence (dilution gains or losses). Applying the IASB’s tentative decision, an investor would recognise a gain or loss in its profit or loss, as in a partial disposal whilst retaining significant influence.

At its June 2023 meeting, the IASB tentatively decided how an investor would recognise and measure contingent consideration on obtaining significant influence in an associate. The IASB’s tentative decision was derived from the recognition and measurement requirements for contingent consideration in IFRS 3.

At its March 2023 meeting, the IASB tentatively decided to propose that an investor should recognise the full gain or loss on all transactions with an associate. The IASB said it would consider improvements to the disclosure of these transactions. IAS 24:18 requires disclosing the amount of these transactions and the amount of any outstanding balances.

Staff recommendation

The staff recommended that the IASB propose amendments to IFRS 12:

To require an investor to disclose gains or losses arising from an increase or decrease in the associate’s net assets that changes the investor’s ownership interest if the investor continues applying the equity method and does not exchange consideration with its associate (Recommendation 1)

To require an investor to disclose, for contingent consideration arrangements: (Recommendation 2)

On obtaining significant influence in an associate—the amount recognised at the acquisition date; a description of the arrangement and the basis for determining the amount of the payment; and an estimate of the range of outcomes (undiscounted)

For each reporting period after the acquisition date until the investor collects or settles the contingent consideration or it is cancelled or expires—any changes in the recognised amounts, including any differences arising upon settlement; any changes in the range of outcomes (undiscounted) and the reasons for those changes; and the valuation techniques and key model inputs used to measure the contingent consideration

To require an investor to disclose gains or losses resulting from transactions with its associates (Recommendation 3)

To introduce a disclosure objective to disclose information that enables users to evaluate the changes in the amounts in an investor’s financial statements arising from investments in associates (Recommendation 4)

To require an investor to disclose a reconciliation between the opening and closing carrying amount of the investments in associates, to meet the objective in Recommendation 4 (Recommendation 5)

IASB discussion

Most IASB members supported Recommendation 1 as it provides disclosures that were important from a user’s perspective, the information was easy to get and it was not expected to be costly to the preparers. A few IASB members said that this would help patch the various disclosure requirements that are currently there. A few IASB members stated that they do not disagree with the staff’s recommendation but pointed out that another way to approach this might be through the disaggregation principle being introduced through the Primary Financial Statements (PFS) project and that it would be useful to understand how that principle works with this requirement.

Most IASB members supported Recommendation 3. A few IASB members mentioned that the disclosure was useful and since it only pertained to that specific transaction, it would not require companies to have a carry on tracking effect after the period in which the transaction occurred. A few IASB members mentioned that it was important to think about where this requirement would be placed and how it fits in with the existing disclosure requirements of IFRS 12 and IAS 24. One IASB member did not support the staff recommendation on the basis that the costs would exceed the benefit as it would be difficult for many companies such as those that have many such transaction or have investments spread globally. One IASB member asked if the requirement only pertained to downstream transactions, i.e. from an investors perspective or upstream as well. Based on that question, a few IASB members suggested that the disclosure requirements and related cost-benefit analysis should be done separately for downstream and upstream transactions, as the downstream transaction disclosures might be more useful and are likely to have a lower costs of tracking them as compared to upstream transactions.

Many IASB members supported Recommendations 4-5 as they thought it was information that the users found useful and that it was expected that the preparers would have this information available and could prepare it without incurring significant costs. A few IASB members thought that the staff recommendations were beyond the scope of the project and the PIR of IFRS 12 did not ask directly for these reconciliations. One IASB member suggested that the basis of why this requirement is being introduced should be explained in the basis on why investors find this useful.

IASB decision

All of the 14 IASB members voted in favour of Recommendations 1-2 and 5.

On Recommendation 3 for downstream transactions, 12 of the 14 IASB members voted in favour of the staff recommendation.

On Recommendation 3 for upstream transactions, only 3 of the 14 IASB members voted in favour of the staff recommendation.

On Recommendation 4, 11 of the 14 IASB members voted in favour of the staff recommendation.

Towards an Exposure Draft—Project scope (Agenda Paper 13D)

The purpose of this paper was to ask the IASB whether to extend the scope of the Equity Method project (project scope) for three application questions.

At its meeting in March 2021, the IASB agreed on a process for selecting the application questions to be included in the project scope. When applying the process, there were three application questions with recurrent themes that were excluded from the project scope:

• Ownership interests that currently give access to returns, IAS 28:13
• Reciprocal interests
• Non–coterminous reporting date and dissimilar accounting policies

The staff said they would bring these application questions to a future meeting so that the IASB could decide whether to add them to the project scope.

Staff recommendation

The staff recommended the IASB:

• Retains the project’s scope (Recommendation 1)
• To ask in the invitation to comment on the exposure draft (ED) whether the IASB should seek views in its next agenda consultation on adding to its work plan a project on assessing the rights that currently give an investor access to returns when applying IAS 28 (Recommendation 2)

IASB discussion

All IASB members agreed with Recommendation 1. A few IASB members said that the topic on non-coterminous reporting date and dissimilar accounting policies might bring out more practical questions.

Most IASB members did not agree with Recommendation 2.

IASB decision

On Recommendation 1, all IASB members voted in favour of the staff recommendation.

On Recommendation 2, only 2 of the 14 IASB members voted in favour of the staff recommendation.