Towards an Exposure Draft—Cover paper (Agenda Paper 13)

The objective of the equity method project is 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 was to ask the IASB to:

• clarify several matters arising from its tentative decisions and decide whether to propose amendments to IFRS Accounting Standards; and
• consider which, if any, of the disclosure requirements to be proposed in the future exposure draft should also be proposed as amendments to the forthcoming IFRS Accounting Standard Subsidiaries without Public Accountability: Disclosures (the subsidiaries standard).

This paper was not discussed as it was an overview paper.

Towards an Exposure Draft—Clarifications to the IASB’s tentative decisions (Agenda Paper 13A)

At its November 2023 meeting, the IASB completed its technical discussions on the application questions in the scope of the equity method project.

The purpose of this meeting was to ask the IASB to clarify several matters arising from its tentative decisions and decide whether to propose amendments to IFRS Accounting Standards.

Staff recommendation

The staff recommended that the IASB proposes:

• to clarify that if a parent entity has elected to use the equity method to account for its investments in subsidiaries in its separate financial statements, the parent applies IAS 28:24 to a step acquisition of a subsidiary (that is, the parent entity does not remeasure the previously held interest to which it has applied the equity method) (Recommendation 1);
• to retain the project’s scope, by not adding the following application questions:
  • How should a parent entity measure the cost of its investment in a subsidiary acquired in stages and accounted for at cost in separate financial statements? (Recommendation 2A)
  • How does an entity recognise the acquisition-related cost for investments to which the entity applies the equity method of accounting? (Recommendation 2B);
• to clarify that an investor or a joint venturer applies the IASB’s tentative decisions to contingent consideration arrangements and deferred taxes when it purchases an additional interest in an associate or a joint venture (Recommendation 3); and
• to amend IAS 28:10 to refer to “changes in the investor’s share in the associate’s net assets” (Recommendation 4).

IASB discussion

Almost all IASB members supported Recommendation 1 as that would support having just one equity method and would help in reducing diversity in applying the method. One IASB member did not support Recommendation 1 and preferred the staff’s alternative recommendation to allow an accounting policy option which would be useful for entities, especially in certain jurisdictions, where the current practice might not be aligned to Recommendation 1 and separate financial statements are used for various purposes.

On Recommendations 2A and 2B, almost all IASB members agreed with the staff recommendation as they were out of the scope of this project. On Recommendation 2B, a few IASB members mentioned that the recognition of acquisition-related costs had already been implicitly answered before. A few IASB members and the IASB Chair suggested that this could form part of the basis for conclusions to the standard.

All IASB members agreed with Recommendation 3.

Most IASB members agreed with Recommendation 4 on the basis that it would make the two paragraphs within IAS 28 consistent. A few IASB members said that this probably did not need a clarification as an issue had not been raised in the past related to it. One IASB member did not support Recommendation 4 as he did not see any inconsistence within IAS 28 and any amendments could have knock-on consequences that might not yet have been considered.

IASB decision

On Recommendation 1, 13 of the 14 IASB members voted in favour of the staff recommendation.

On Recommendations 2A and 2B, 13 IASB members voted in favour of the staff recommendation.

On Recommendation 3, all IASB members voted in favour of the staff recommendation.

On Recommendation 4, 13 IASB members voted in favour of the staff recommendation.

Towards an Exposure Draft—Interaction with the IASB’s project Disclosure Initiative—Subsidiaries without Public Accountability: Disclosures (Agenda Paper 13B)

The purpose of this paper was to ask the IASB to consider which, if any, of the disclosure requirements to be proposed in the future exposure draft, should also be proposed as amendments to the subsidiaries standard.

Staff recommendation

The staff recommended that the IASB proposes amendments to the subsidiaries standard to require an eligible subsidiary to disclose:

• on obtaining significant influence in an associate or joint control of a joint venture—the amount of contingent consideration recognised as part of the cost of the investment, a description of the contingent consideration arrangement and the basis for determining the amount of the payment (Recommendation 1);
• for each subsequent reporting period until the eligible subsidiary collects or settles the contingent consideration or until it is cancelled or expires—any changes in the recognised amounts, including any differences arising upon settlement, and the valuation techniques and key model inputs used to measure the contingent consideration (Recommendation 2);
• a reconciliation between the opening and closing carrying amount of its investments in associates and joint ventures (Recommendation 3); and
• gains or losses on downstream transactions to its associates, joint ventures and subsidiaries when a parent elects to use the equity method to account for its investments in subsidiaries in separate financial statements as permitted in IAS 27 (Recommendation 4).

IASB discussion

All IASB members agreed with Recommendations 1 and 2.

Many IASB members did not support Recommendation 3 as they noted that the benefits might not exceed the costs of preparing the reconciliation at the subsidiary level and that it might not provide useful information to the users of the financial statements. However, a few IASB members thought that the reconciliation could provide useful information and the costs of preparing it might not be high. This is because the information is likely to be required in any case for the consolidated financial statements, auditors, entity’s internal controls, etc. It was also mentioned that removing this disclosure requirement could require bringing back other disclosure requirements that were not separately considered. A few IASB members proposed that it should be included in the exposure draft and a conclusion should be made based on the feedback in that.

On Recommendation 4, most IASB members agreed with the staff recommendation. One IASB member proposed including it in the exposure draft to assess if there was any value in that disclosure.

IASB decision

On Recommendation 1 and 2, all IASB members voted in favour of the staff recommendation.

On Recommendation 3, only 4 of the 14 IASB members voted in favour of the staff recommendation.

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