IAS 28 — Contributing property, plant and equipment to an associate

Date recorded:


This was a new issue.

The IC received a request to clarify how an entity accounts for a transaction in which it contributes property, plant and equipment (PPE) to a newly-formed associate in exchange for shares in that associate.

In the submission, three entities under common control set up an associate. The PPE contributed by the investors are not a business as defined, the contribution is considered to have commercial substance and the transaction is carried out at market terms.

The submitter asked three questions:

  • a) whether IFRSs provide a general exemption from applying the requirements of a particular Standard to common control transactions;
  • b) Do ‘unrelated investors’ in IAS 28.28 (which requires an investor to recognise gains and losses from upstream and downstream transactions only to the extent of unrelated investors’ interests in the associate) refer to:
    • (i) any investor other than the reporting entity, or
    • (ii) investors that do not meet the definition of a related party in IAS 24? and
  • Should the investor determine the gain or loss on contributing PPE to the associate and the cost of its investment in the associate based on:
    • (i) the fair value of the PPE contributed, or
    • (ii) the fair value of the acquired interest in the associate?

Staff analysis

Question A

This question was discussed by the IC in its June 2017 meeting (see AP 8 to that meeting). At that meeting, the IC concluded that unless a Standard specifically excludes common control transactions from its scope, an entity applies the requirements in the relevant Standard to common control transactions. An entity should not apply the scope exception in IFRS 3.2(c) with regard to business combinations under common control by analogy to other common control transactions.

Question B

The Staff observed that the term ‘unrelated investors’ refers to investors other than the entity (including its consolidated subsidiaries). This is consistent with the requirements of SIC 3 Elimination of Unrealised Profits and Losses on Transactions with Associates, which was withdrawn in 2003 and had its requirements incorporated into IAS 28, principle unchanged, albeit reworded. In addition, this interpretation is consistent with the premise that financial statements are prepared from the perspective of the reporting entity, and not, for example, from the perspective of the parent of the reporting entity.

Question C

The Staff believed that in an arm’s length transaction, it would be relatively rare for the fair value of the PPE contributed to differ significantly from the fair value of acquired interest. If there is any initial indication of such a difference, the investor should understand the reason for the difference (e.g. whether other items have been exchanged as part of the transaction, in which case those other items should be accounted for applying the relevant Standards) and assess whether it has determined fair value appropriately, including any potential impairment of the PPE contributed or of the acquired interest.

Be that as it may, the Staff used a numerical example to illustrate how to account for the difference if it did exist. The net result of the example reflects a determination of the cost of the investment and the resulting gain/loss on the PPE contributed based on IAS 28.32. In other words, they are determined based on the higher of the fair value of the PPE given up (being the deemed purchase price of the investment) and the investor’s share of the fair value of the net assets of the associate. Both these ‘fair values’ have been determined after eliminating the investor’s share of the gain on contribution of PPE to the associate.

Staff recommendation

The Staff recommended that the IC not add this issue to its agenda on grounds that the requirements in the existing Standards provide an adequate basis for an entity to account for such transactions.


The IC agreed with the Staff recommendation. There was no significant discussion on questions A and B.

On question C, the IC was generally comfortable with the outcome of the Staff analysis. The IC emphasised that it is important to understand the reason for any potential difference in fair value between the PPE given up and the associate acquired, and to reassess the fair values as appropriate. A few members observed that there is an inconsistency between IAS 16.71 on the calculation of the gain on disposal of PPE and IAS 28.32 on the determination of the cost of the investment in associate. IAS 16.71 requires the gain on disposal of PPE to be determined using the net proceeds on disposal (essentially the fair value of the associate acquired); whereas IAS 28.32 requires the investment in associate to be measured at cost (essentially the fair value of the PPE given up). Given the conflict in literature, the Staff’s analysis may not be the only appropriate solution. In determining the appropriate accounting treatment, the IC reiterate that an entity will have to apply judgement in determining which fair value is more reliable depending on facts and circumstances.

The IC also debated on how to draft the tentative agenda decision to include the points raised by the IC above.

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