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IFRS 9 and IAS 28 — Accounting for long-term interests

Date recorded:

Recap

In September and November 2015, the Interpretations Committee discussed an issue relating to the interaction between IFRS 9 and IAS 28. Specifically, the issue relates to whether an entity applies IFRS 9, IAS 28 or a combination of both Standards in assessing and accounting for an impairment of the long-term interests in a joint venture or an associate that, in substance, form part of the ‘net investment’ in the joint venture or associate, but to which the equity method is applied.

The Interpretations Committee concluded that the scope exemption in IFRS 9 regarding interests in associates and joint ventures is not clear. Consequently, the Committee considered that an amendment to either IFRS 9 or IAS 28 may be required to clarify the issue. As the Committee did not reach a consensus on which alternative to propose as an amendment, the Committee decided to consult the Board about the scope exemption in IFRS 9. The Board agreed that the exemption did not apply to long-term interests as they were not accounted for using the equity method. Instead, the requirements in IFRS 9 were applied. The carrying amount resulting from IFRS 9 measurement should be included for allocating any losses of the associate or joint venture. The entity should then assess the net investment for impairment applying IAS 28 and IAS 36. Any allocated losses or IAS 28/IAS 36 impairment should be ignored for the IFRS 9 accounting in subsequent periods.

Subsequent to the Board discussion, the Committee discussed the issue in March and raised some further concerns, particularly with regard to the loss allocation. The concerns raised included double counting of losses when applying two Standards to one item, application of the expected credit loss model in IFRS 9 and how different types of interests are presented in an associate or joint venture.

The staff analysed that further research would be required to assess whether an amendment to IAS 28 would resolve the identified concerns, without creating new issues. Any consideration would need to be part of a research project and possibly linked to future research work regarding the equity method.

Staff recommendation

The staff therefore recommended following the previously recommended approach that had also been agreed to by the Board. They think the requirements in IFRS Standards provide an adequate basis to enable an entity to determine how to account for long-term interests in an associate or joint venture. Accordingly, would not be required to amend IFRS 9 or IAS 28 to answer the question raised in the submission. However, the staff conceded that it might not be straight-forward to piece together how the requirements in IAS 28 and IFRS 9 interact with respect to long-term interests. Consequently, the staff recommended issuing an agenda decision that will provide clarity in this respect.

Decision

The Interpretation Committee rejected issuing an agenda decision and decided instead to pursue an Interpretation of the Standard. The Interpretation Committee members also asked the staff to include this issue in the equity method project so that it could be analysed in detail.

Discussion

Before starting the discussion, the staff and the Chairman reminded the Interpretation Committee members that the recommended agenda decision was based on the requirements on the existing Standards. The staff analysis does not comment on whether that approach provides meaningful information. 

The Interpretation Committee members agreed in general with the path taken in the agenda decision. However, many were concerned that this was not necessarily the only interpretation of the Standards, nor one that provides the best financial reporting information.   There was an extensive debate on that issue, although the concerns raised were similar. The Committee considered referring the matter back to the Board or expanding the agenda decision.  There were several rounds of voting and no common ground was found. As a consequence, the Committee determined that it would be more appropriate to develop an Interpretation.

The concerns raised were the following:

(a) the issue was significant and there was diversity in practice; the majority of respondents seemed unclear of what to do;

(b) the path taken by the staff to reach the conclusion did not seem obvious to many Interpretation Committee members; (i.e. meaning that there could be different interpretations);

(c) the concerns about double counting had not been addressed; for example when an entity applied the expected credit loss under IFRS 9 it could recognise an impairment; and then when the loss were to be materialised it would record another impairment under IAS 28;

(d) the approach followed by the staff would not necessarily lead to the best possible answer;

(e) consequences for entities that were applying a different approach (i.e. whether it would be considered an error by auditors and regulators).

In relation to the specific wording of the agenda decision, many Interpretation Committee members expressed the following concerns:

(a) the staff analysed a specific path to reach this conclusion, which was not reflected in the agenda decision; that information should be kept in some way in the agenda decision so as not to lose the analysis performed by the staff;

(b) practical application of the agenda decision, for example what an entity should do after applying the requirements of IAS 28 and had to then apply IFRS 9;

(c)  the application of the logic followed by the staff could lead to an amount which would not necessarily be meaningful;

(d) if more information was added to the agenda decision (i.e. examples and more clarification); it would likely cease to be an agenda decision and be more like an interpretation;

(e) the example seemed to be simplistic; for example it did not consider the issue that IFRS 9 required the use of an effective interest rate whereas IAS 28 required the use of pre-tax rates.

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