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IFRS 10 and IAS 28 — Sale or contribution of assets between and investor and its associate or joint venture

Date recorded:

Background

In December 2012 the IASB published for comments the Exposure Draft Sale or Contribution of assets between an investor and its associate or Venture (the ‘ED’). The IASB proposed to amend IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures. This proposal arose from the issues related to the changes made in IAS 27 Consolidated and Separate Financial statements (2008) as part of the Business Combination Project. According to IAS 27 when a Parent losses control of a subsidiary, it derecognises the subsidiary’s assets and liabilities and recognises an investment retained in the former subsidiary at fair value and a loss or gain in the profit and loss account (this reflects the difference between the fair value of the retained investment in the former subsidiary and its carrying value when control was lost). This conflicted with SIC- 13 Jointly Controlled Entities – Non Monetary Contributions by Ventures, where the gain or loss resulting from the contribution of a non-monetary assets to a jointly controlled entity in exchange for an equity interest in that jointly controlled entity is restricted to the extent of the interest that are attributable to the unrelated equity holders in the jointly controlled entity. The conflict identified is that IAS 27 requires a full gain or loss recognition on the loss of control of subsidiary whereas SIC-13 requires a partial gain or loss recognition in transactions between an investor and its associate or joint venture. The IASB observed:

  • IFRS 10 supersedes IAS 27 (effective 1 January 2013)
  • IAS 28 (2011) supersedes both IAS 28 Investments in Associates (2003) and SIC-13 (effective 1 January 2013)
  • The accounting requirements under IFRS 10 for the loss of control of a subsidiary are similar to IAS 27.
  • SIC-13 requirements are incorporated into IAS 28 (2011) hence resulting in a conflict between IFRS 10 and IAS 28 (2011).

The IASB proposed to amend IAS 28 (2011) so that the current requirements for the partial gain or loss recognition between an investor and its associate or joint venture only apply to gains and losses from the sales or contribution of asset that do not constitute a business and those gains or losses arising from sale or contribution of asset that do constitute a business are recognised in full. In line with this the IASB propose to amend IFRS 10 so that gains or losses resulting from the sale or contribution of a subsidiary that does not constitute a business (as defined by IFRS 3 Business Combinations) between an investor and its associate or joint venture is recognised only to the of unrelated investors’ interest in the associate or joint venture.

Comments were received on these and two thirds of the respondents were supportive of the proposals. A majority of those respondents emphasised the definition of a ‘business’. One third disagreed with the proposals based on the definition of a ‘business’ being unclear, the proposals being conceptually unsound and providing on a short-term solution. Nearly all respondents agreed the proposals should be applied prospectively.

The IASB and Interpretations Committee concluded that the accounting for a loss of control of a business should be consistent with that developed in Business Combinations project and a full gain or loss should therefore be recognised on loss of control of a business. The current requirements in IAS 28 (2011) regarding a partial gain or loss should only apply to assets that constitute a business.

At the July 2013 meeting, the Committee members indicated that they believed that the definition of a “business” needed to be explained better, as the current definition was unclear and should be reviewed. The Committee agreed in principle with the staff recommendations to finalise the amendments to IFRS 10 and IAS 28 but they also recommended addressing the issue around the definition of a “business” promptly.

Also presented to the Committee was the issue around the scope of paragraph B99A of IFRS 10 which deals with the gain or loss resulting from the sale or contribution of a subsidiary that does not constitute a business. It was emphasised to the Committee that there may be transactions, other than sales or contributions, which result in a loss of control of a subsidiary and therefore Staff recommended that the wording within paragraph B99A of IFRS 10 be amended to refer to “loss of control of a subsidiary” rather than the “sale or contribution of a subsidiary”.

The Committee agreed with the proposal subject to changes in the wording within the paragraph to create consistency and clarification around reclassification, and eliminate the discussion regarding impairment, as this was found to be unnecessary.

Paragraph 31 in IAS 28 deals with the accounting for a gain or loss resulting in the contribution of non-monetary assets depended on whether equity interest is received in exchange or whether other asses are received. Staff suggested deleting the paragraph as this would result in all sales and contributions of assets that do not constitute a business being accounted for similarly. The Committee members raised a concern about deleting the paragraph as it may lead to a difference that could potentially be unaccounted for and they were unable to see how the mechanics would work. The Committee members agreed that the proposal to eliminate paragraph 31 should be part of the Exposure Draft that deals with eliminating the share of gains against the carrying amount of associates. Staff is presenting this to the IASB where their proposal is to eliminate the share of gain and where it exceeds investment amount to recognise the deferred amount in the balance sheet. Members agreed to bring this into this project where staff can set out the logic behind the deletion and show the link.   

The Committee agreed to permit early adoption of the amendments to IFRS 10 and IAS 28, and agreed to a consequential amendment to IFRS 1.

The third issue discussed was how to determine gains and losses on de-recognition of financial assets. The two possibilities under IFRS 9 and IFRS 10 on whether the gains/losses are recognised partially or fully recognised were discussed. The Committee generally supported the staff recommendations not to make changes to address  the interaction between paragraph B99A of IFRS 10 and IFRS 5, and the interaction between paragraph B99A of IFRS 10 and the de-recognition requirements of IFRS 9. 

The final issue was dealt with staff recommending the following topics should not be part of the narrow scope project:

  • the sales and contributions of assets between an investor and its associate or joint venture from the separate financial statements’ point of view;
  • the sales and contributions of assets between an investor and its joint operation;
  • the elimination of gains in a downstream transaction resulting in a negative investment.

There was general support from the Committee for not addressing these topics as part of the narrow scope project.  However, the Committee suggested dealing with these in a separate project, as the issues raised were important to address.

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