IAS 28 — Application of the equity method when an associate's equity changes outside of comprehensive income
The Committee previously considered a request to correct the inconsistency between the requirements of IAS 28 (revised in 2011) and IAS 1 Presentation of Financial Statements (revised 2007) regarding the description and application of the equity method and clarify the accounting for the investor´s share of the other changes in the investee´s net assets that are not recognised in the investee´s profit or loss or other comprehensive income, or that are not distributions received.
The issue focuses on the fact that paragraph 3 of IAS 28 indicates that all changes in the net assets of an investee should be recognised by the investor. However, because of the consequential amendments to paragraph 10 of IAS 28, the standard no longer states whether and where the investor should account for its share of changes in the net assets that are not recognised in net profit or other comprehensive income of the investee (such as movements in other reserves of the associate or gains and losses arising on an associate´s transactions with non-controlling interest of its subsidiaries).
At the Board´s September 2011 meeting, the Board asked the Committee to analyse this issue and recommend a short-term solution (e.g., development of an underlying principles to be brought back to the Board).
At its January 2012 meeting, considering illustrative examples provided by the staff, the Committee tentatively agreed on a principle that where an investor´s share ownership interest in the associate is reduced, whether directly or indirectly, the affect of the change should be recognised in profit and loss of the investor; and where an investor´s share ownership interest in the associate increases, whether directly or indirectly, the affect of the change should be accounted for as an incremental purchase of the associate and should be recognised at cost. At that meeting, the Committee also directed the staff to analyse the accounting by the investor for equity settled share-based payments of an associate and written call options issued by an associate for cash for discussion at a future meeting.
At this meeting, the staff presented its analysis of equity settled share-based payments of an associate and written call options issued by an associate in an attempt to develop comprehensive principles to present to the Board in considering whether or how to amend IAS 28 (revised in 2011).
The staff, in analysing two specific examples of equity settled share-based payments of the associate and written call options issued by the associate for cash, considered multiple alternative views of the appropriate accounting; ultimately proposing a principle that any change in the other net assets of an associate that is not a direct or indirect disposal or acquisition should be presented in the same way as the associate itself presents the transaction. This principle would require an investor to take into account any related other changes in equity that may have occurred at an earlier point in time when determining a net dilution gain or loss.
Many Committee members expressed support for the underlying principle developed by the staff. However, this support was limited given the perceived complexity of the principle in application. Committee members also expressed specific concerns including a view that the principle resulted in ‘an extreme form of recycling´ (as it would result in recycling from equity in the examples described by the staff), relied on having a thorough understanding of an associate´s accounting records (which may not be known) and was developed in anticipation of dilution which might not occur if options are not exercised (which would be unique from convertible preference shares, for example, where dilution is not created until the conversion takes place).
Given the perceived complexity of principles developed for share-based payments of the associate and written call options issued by the associate for cash, the Committee tentatively decided that its proposal to the Board would be limited to those developed during the January 2012 meeting; namely:
- where an investor´s share ownership interest in the associate is reduced, whether directly or indirectly, the affect of the change should be recognised in profit and loss of the investor; and
- where an investor´s share ownership interest in the associate increases, whether directly or indirectly, the affect of the change should be accounted for as an incremental purchase of the associate and should be recognised at cost.
The Committee would not propose principles associated with share-based payments and written call options, noting that these transactions exceeded the original scope of examples outlined in the submission to the Committee.