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IAS 28 — Elimination of intercompany profits between an issuer and its joint venture

Date recorded:

The Committee considered a request to clarify the accounting for a transaction between a joint venturer (an entity) and its joint venture. The request considers a specific fact pattern in which the amount of gains to eliminate from the transaction exceeds the amount of the entity‘s interest in the joint venture. The submitter requested clarification as to whether the gain from the transaction should be eliminated only to the extent that it does not exceed the carrying amount of the entity‘s interest in the joint venture; or the remaining gain in excess of the carrying amount of the entity‘s interest in the joint venture should also be eliminated and if so, to where it should be eliminated.

Committee members expressed general support that all of the entity’s share of the gain should be eliminated (as opposed to elimination only to the extent that it does not exceed the carrying amount of the entity’s interest in the joint venture). Committee members cited paragraph 28 of IAS 28 (2011), which states that gains and losses resulting from upstream and downstream transactions between an entity and its associate or joint venture are recognised in the entity‘s financial statements only to the extent of unrelated investors‘ interests in the associate or joint venture, as the reason for this view.

The Committee then considered how the entity should present the corresponding entry for the remaining gains to eliminate that are in excess of the amount of the investment in the joint venture (e.g., account for it consistent with deferred income or account for it in the same way as for a deduction of the related asset).

Committee members expressed mixed views on this topic. Several Committee members believed elimination in a manner consistent with deferred income was not appropriate based on guidance in paragraph 30 of IAS 28 (2011) and the fact that eliminated gains do not meet the definition of a liability as defined in the Conceptual Framework for Financial Reporting. However, others were not supportive of the accounting in the same way as for a deduction of the related asset. Several Committee members believed fundamental differences in defining the equity method (as either a one-line consolidation or as a measurement basis) were deriving Committee views on this issue. This led to a long discussion of which manner of defining the equity method was appropriate. Committee members were unable to reach a consensus on whether the equity method was a one-line consolidation or a halfway house to fair value, but acknowledged that reaching a conclusion on this issue would not necessarily resolve differing views on how an entity should present the corresponding entry for the remaining gains to eliminate that are in excess of the amount of the investment in the joint venture.

Following the debate, the Committee Chair asked for tentative views of Committee members. He broke up the vote into ‘cash deals’ (i.e., where no related asset is available with which to offset) and transactions in which an asset/receivable is available. For cash deals, he asked who preferred presentation of the corresponding entry for the remaining gains to eliminate that are in excess of the amount of the investment in the joint venture in profit or loss, and who preferred treatment consistent with deferred income. Views were split on this issue (5 to 6, respectively). For transactions in which an asset/receivable exists, the Chair asked who preferred presentation of the corresponding entry as a deduction of the related asset and who preferred treatment consistent with deferred income. Views were again split, with 6 supporting a deduction of the related asset, 3 supporting deferred income and 2 abstaining given that they did not see a conceptual basis for picking one alternative over the others.

Given inconclusive votes, the Committee Chair asked whether an agenda decision could be drafted to state that all of an entity’s share of the gain should be eliminated in the fact pattern submitted, but the determination of how the entity should present the corresponding entry for the remaining gains to eliminate is driven by facts and circumstances requiring judgement. Several Committee members expressed concern with addressing this issue in an agenda decision. They noted that the staff’s outreach had revealed divergent practice/divergent views by some accounting firms on the issue of whether all of an entity’s share of the gain should be eliminated, thus suggesting an annual improvement or narrow-scope amendment was necessary. The Committee Chair asked the staff to consider this feedback and bring back a paper to a future meeting providing a recommendation of possible action steps.

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