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IAS 28 — Potential effect of IFRS 3 (as revised in 2008) and IAS 27 (as amended in 2008) on equity method accounting

Date recorded:

By way of background, in November 2008, the IFRIC asked the staff to carry out additional research and analysis on the two additional issues:

  • Issue 1 – How the initial carrying value of an equity method investment should be determined; and
  • Issue 3 – How an equity method investee's issue of shares should be accounted for.

At IFRIC's March 2009 meeting, the staff updated the IFRIC that a broader review of the potential effect of IFRS 3R was being performed by the staff and would be deliberated by the Board in the future. Issues 1 and 3 were included in this review. Further, issues 1 and 3 are being included in the staff analysis of the comments received on the exposure draft ED 10 Consolidated Financial Statements issued in December 2008.

In relation to issue 1, the staff view is that other IFRSs provide consistent guidance on the treatment of costs. When assets are:

  1. measured at fair value through profit or loss, the only cost allowed to be capitalised is the fair value of the asset itself with all other costs expensed as incurred; or
  2. measured on a basis other than fair value through profit or loss (that is, historical unamortised cost, amortised cost, available-for-sale assets, etc), all costs required to obtain the asset are included in the measurement of the asset on initial recognition.

In relation to issue 3, the staff view is that if an investor's ownership interest in an associate is reduced through the equity method investee's issuance of shares rather than by the sale of the investor's holdings, the investor would recognise a gain or loss, including the amounts described in paragraph 19A of IAS 28*. As a result, in the staff's opinion, the accounting for the equity method investee's issuance of shares should be consistent with the guidance provided in paragraph 19A of IAS 28 and as expanded throughout other IFRSs.

The IFRIC agreed with the staff conclusion in relation to issue 1; however, one staff member suggested that the agenda decision be amended to describe the two questions being addressed, and also not address the EITFs directly. The other IFRIC members agreed. Another IFRIC member thought that it was inconsistent to say that they did not expect divergence in practice, and at the same time note that the Board is currently considering the issue. It was agreed to take out the last paragraph of the rejection.

In relation to issue 3, some IFRIC members were not convinced that 19A requires the answer provided, although they liked the accounting. Overall, the IFRIC agreed with the staff recommendation.

 


* Paragraph 19A of IAS 28 states (relevant section underlined):
If an investor loses significant influence over an associate, the investor shall account for all amounts recognised in other comprehensive income in relation to that associate on the same basis as would be required if the associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by an associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, the investor reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when it loses significant influence over the associate. For example, if an associate has available-for-sale financial assets and the investor loses significant influence over the associate, the investor shall reclassify to profit or loss the gain or loss previously recognised in other comprehensive income in relation to those assets. If an investor's ownership interest in an associate is reduced, but the investment continues to be an associate, the investor shall reclassify to profit or loss only a proportionate amount of the gain or loss previously recognised in other comprehensive income.

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