IFRS 10 — A non-investment entity’s application of the equity method for investment entity investees

Date recorded:

The issue addressed in this paper relates to a request received by the IFRS Interpretations Committee to clarify some issues related to the Investment Entities amendments to IFRS 10, IFRS 12 and IAS 27.  One of the issues is how a non-investment entity should account for investments in a joint venture that is an investment entity.

A non-investment entity parent of an investment entity must ‘unwind’ the fair value accounting of its investment entity subsidiaries and consolidate all subsidiaries in the group in accordance with paragraph 33 of IFRS 10.  However, it is not clear whether the non-investment entity must also ‘unwind’ the fair value accounting of its joint ventures or associates that are investment entities.

The staff recommended that the Interpretations Committee should not take this issue onto its agenda, because the existing paragraphs 27, 35 and 36 of IAS 28 sufficiently address the issue. The staff noted that paragraph 27 of IAS 28 requires that entities should apply the equity method to the group financial statements of a joint venture, when the joint venture has a subsidiary and an associate. In addition, paragraph 27 of IAS 28 requires that the entity should apply equity method to the joint venture’s financial statements, after making any adjustments necessary to give effect to uniform accounting policies in accordance with paragraphs 35 and 36 of IAS 28.

Questions for the Interpretations Committee

1. Does the Interpretations Committee agree that the non-investment Entity A should unwind the fair value accounting of its investment in the investment entity joint venture before applying the equity method, in accordance with paragraphs 27, 35 and 36 of IAS 28?

2. Does the Interpretations Committee agree with the staff’s recommendation that the Interpretation Committee should not take this issue onto its agenda?

3. Does the Interpretations Committee have any comments on the proposed wording in Appendix A for the tentative agenda decision?

Before going to Committee, the Chairman invited a member of staff to comment on the background to the issue.

The staff noted that the issue stems from the Board’s intentional decision that the roll up of the fair value only applies if the entity higher in the group is itself an investment entity.  The fair value accounting was given because of the special business purpose of an investment entity.

The Board noted that if a higher entity in a group is not an investment entity, the fair value would not roll up to that higher entity.

This was clearly discussed in the context of subsidiaries; however, the Board also touched on the issue in relation to associates – and decided they were not going to touch IAS 28.

The staff’s recommendation in this paper is very consistent with the Board’s decision not to allow the roll up of the fair value accounting if it was not there before.

The members of the Committee then discussed the issue addressed in the paper and the staff’s questions to the Committee.

A number of members noted that they disagreed with the staff’s answer, questioning the need to unwind the specialised accounting because of the requirements for uniform accounting policies in IAS 28.  A member noted that it is not entirely clear that IAS 28, when talking about uniform accounting policies, contemplates a situation like this where there is a fundamental basis of accounting for an investment entity – it is not clear whether this needs to be aligned or not.

These members disagreed with the staff’s conclusion and noted that it is something that needs to be clarified as this is not clear in IAS 28.

There was considerable discussion around the practicality of the requirement to unwind the fair value and apply uniform accounting policies when applying equity accounting.  A member commented on the possibility of adding an exemption for cases where it would be impracticable to apply because the entity does not have access to the information required to perform a line by line consolidation.

Several members noted that they agreed with the staff’s conclusion.  The fact that the Board made it clear that the fair value does not roll up for subsidiaries – why should this principle not be taken across to IAS 28 also?  The staff added that they believe the intention of the Board was the same whether an entity is consolidating or equity accounting.

The members agreeing with the staff’s conclusion noted that the answer in the paper is where the literature gets you - if you have significant influence, IAS 28 requires uniform accounting policies, so the logical answer is that you need to back out the fair value accounting.  However, the members supported clarification (in an annual improvement) that you do unwind the fair value accounting.

The staff noted that they had discussed the issue with EFRAG who thought it would be worth elaborating further in the analysis on the relationship between this and paragraph 18 of IAS 28.  The use of the fair value option allowed in paragraph 18 as an exemption from the equity method (for venture capital organisations, unit trusts and similar entities) applies to entities using a fair value driven basis in their accounting so it would be helpful to more clearly articulate the relationship between this exemption and the investment entities and why they would be different and accounted for in different way.

In summarising, the Chairman put the question to the members, whether the staff’s view follows from a reading of the literature?  There was a tie.

As a result, the Chairman proposed that the solution of this question ought to wait pending on what comes out of the research project on equity accounting (due in May).

10 members voted in favour.

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