IFRS 9/IAS 28 — Is measurement of long-term interests in associates and joint ventures, including impairment, in accordance with IFRS 9, IAS 28, or both?

Date recorded:

Measurements of interests in associates and joint ventures that, in substance, form part of the net investment

This topic was first discussed in September 2015, as a new item for the Interpretations Committee (see Agenda Paper 10 for that meeting). 

IAS 28.38 sets out the requirements for when an entity’s share of losses exceeds its interest in an associate or joint venture.  IAS 28.38 states that, for this purpose, the interest in an associate includes any “long-term interests that, in substance, form part of the net investment in the associate or joint venture.”  Examples included in IAS 28.38 of such items are long-term receivables and loans, which are financial instruments.      

The Interpretations Committee has been asked to clarify whether long-term interests that are part of the net investment should be assessed for impairment using IAS 36 Impairment of Assets or using IFRS 9. 

Our assessment is that the question turns on whether IAS 28.38 means that these other interests are part of the net investment only for the purposes of determining the extent of the share of losses to be recognised or whether IAS 28.38 means that the other interests are being accounted for using the equity method.  The first interpretation would suggest that the other instruments remain within the scope of IFRS 9 whereas the second interpretation suggests that they are within the scope of IAS 36.

At its September meeting the Committee noted that the feedback received from the outreach had indicated that there were divergent views on how to account for the impairment of long-term interests and that the issue was widespread. The Committee concluded that the interaction between the requirements of IFRS 9 and IAS 28 were unclear.

Staff recommendation

At this meeting, the staff will present their analysis of this issue. The September paper suggested four alternatives:  Entirely in the scope of IFRS 9 (subject to an IAS 28.38 loss allocation); entirely in the scope of IFRS 9 (subject to an IAS 28.38 loss allocation) and also in the scope of IAS 28/36 for impairment; entirely in the scope of IAS 28; and in the scope of IFRS 9 for classification and measurement.  The last of these alternatives received the strongest support for the members of the Interpretations Committee.

In the current paper the staff are recommending a fifth alternative:

a) the long-term interests are accounted for in accordance with IFRS 9 in their entirety, including the impairment requirements;

b) as part of the net investment, the long-term interests are subject to allocation of share of losses of an investee; and

c) as part of the net investment, the long-term interests are assessed for impairment using the indicators that are included in IAS 28.

Under this approach, long-term interests would be subject to two different methods of impairment testing. The staff acknowledged this fact and concluded that the two layers of impairment testing is consistent with the measurement objective of both IAS 28 and IFRS 9.

Therefore, the staff recommends a narrow-scope amendment to IAS 28 based on this new approach.

Committee discussion and decision

While some Committee members welcomed the alternative view introduced by the staff, others were reluctant to deviate from the views expressed in the previous meeting. Those in favour welcomed the fact that both impairment models applied in layers while those who opposed the staff recommendation struggled with the fact that entities had to apply three different Standards (IFRS 9, IAS 28 and IAS 36) to one net investment which, in their view, was not beneficial.  

One Committee member said that IAS 28 often did not reflect the economic reality as it was common to have contractual agreements prescribing how losses are absorbed. While investors took those agreements into account when making decisions, IAS 28 accounting did not. She conceded that this was unrelated to the submitted issue but more a general problem with the equity method of accounting. For her, the core issue was that IAS 28 aggregates the equity investment and the long-term investment into one item. That was supported by fellow Committee members who expressed a desire to define the term ‘net investment’. The Chairman added that the issue would only arise in a loss-making situation and that otherwise IFRS 9 would apply.

Several Committee members agreed that the equity method was flawed but acknowledged that it would take a significant amount of time to address those issues. However, since the issue was urgent, the Committee needed to decide whether IFRS 9 was applicable to achieve a short-term solution.

The Chairman called a vote on the staff recommendation. Only six of the 14 Committee members supported the staff recommendation. Two members supported View D (within the scope of IFRS 9 for classification and measurement but excluded from IFRS 9 impairment) from the previous paper. The Chairman concluded that neither view had sufficient support. As a next step, the Director of Implementation Activities proposed to report the contents of the discussion back to the IASB since they were currently undertaking a larger project on the equity method of accounting.

One Committee member said it should be clarified that all of the requirements of IFRS 9 applied to all financial instruments even though IAS 28 items were scoped out of IFRS 9. An observing Board member clarified that the scope exemption was only intended for equity items that gave the entity significant influence.

Some Committee members suggested ruling out View A (Entirely within the scope of IFRS 9) and View C (entirely within the scope of IAS 28) to reduce diversity in practice.

An observing IASB member suggested asking the Board for direction and clarification what was intended to be included in the net investment. The Chairman agreed that this was a good way forward and stressed that it should be discussed in a public Board meeting rather than in informal conversations.

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