IFRS 11 Joint Arrangements — Remeasurement of previously held interests — Loss of control — Agenda paper 4

Recap

The IFRS Interpretations Committee had been considering the requirements in IFRS when an entity transfers an asset (or group of assets) it controls to a joint operation, but retains an interest in that asset (or group of assets).  Specifically, does IFRS require that the retained interest(s) be remeasured?    

Some members of the Interpretations Committee though that the retained interest should be remeasured when the asset, or group of assets, constituted a business.  However, the Interpretations Committee concluded that there was a conflict between the requirements in IFRS 10 and IFRS 11 with respect to the loss of control transaction which was similar to the conflict that exists between IFRS 10 and IAS 28.  IFRS 11 required an entity to recognise gains or losses on the sale or contribution of assets to a joint operation only to the extent of the other parties’ interests in the joint operation whereas IFRS 10 required that an entity should remeasure any retained interest when it loses control of a subsidiary.

The Board was considering the relationship between IFRS 10 and IAS 28 as part of its research project on equity accounting, and had already deferred amendments to IFRS 10 and IAS 28.  On this basis, the Interpretations Committee exposed for comment a tentative agenda decision that these matters should be considered by the Board and not the Interpretations Committee.

The purpose of this session was to consider the comment letters received and consider the staff recommendations to finalise the agenda decision.

Comment letter analysis

The Interpretations Committee received four comment letters. Two comment letters supported the tentative agenda decision and two disagreed.

The disagreement centred on whether a “loss of control” transaction was similar to a sale or contribution of assets to an associated or joint venture and whether the equity method of accounting was relevant.

The staff reiterated their analysis included in the Mach 2016 Agenda paper 3 which outlined the reasons they recommended that the Interpretations Committee publish the tentative agenda decision.  The staff did not agree with the respondent that stated that the sale or contribution of assets to an associate or a joint venture was an intra-group transaction, on the grounds that a group was defined as “a parent and its subsidiaries”, and associates, joint ventures and joint operations were not part of a group.

The staff also indicated that although there is diversity in practice, they do not think the matter is urgent.

Staff recommendations

The staff recommendation was that the Interpretations Committee confirm the tentative agenda decision.

Decision

The Interpretations Committee approved the staff recommendation to finalise the agenda decision.

Discussion

The Chairman asked the staff to clarify how the staff planned to notify the Board about the decision.  The staff stated that at the next Board meeting they would present an IFRIC update. Some committee members said that they would like clearer feedback from the Board than they had been getting on recommendations the IFRS Interpretations Committee makes to the Board.  The Chairman noted that the intention was to ensure there is a “paper trail” to keep track of communications between the Interpretations Committee and the Board.

There was general support for finalising the agenda decision and some members added that the future PIR on IFRS 10 and 11 would be a good opportunity to address this issue.

One Interpretations Committee member expressed a concern about the amendments to IFRS 10 and IAS 28 (that address the accounting for the sale or contribution of assets to an associate or a joint venture). He noted that although these amendments had been postponed they were available for early application.  If an entity decided to apply those amendments would they be required, or could they choose, to also apply them to this issue? The staff clarified that they did not intend to imply that if an entity early applies the amendments to IFRS10 and IAS 28 that they would be obliged to apply those amendments to this issue. The staff also acknowledged that in this agenda decision the Interpretations Committee was not providing and answer and there may be more diversity in practice.