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KASB publishes research report on the equity method

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30 Sep 2014

The Korean Accounting Standards Board (KASB) has published a a research report with issues that the KASB believes should be addressed in connection with the IASB's equity method research project.

The KASB believes that the most fundamental application issue regarding the equity method is the vagueness of its underlying concept, whether it serves as one-line consolidation or measurement basis, which seem to be two unrelated concepts. Therefore, the KASB introduces a new dimension called 'scope of equity-accounted group' (reflecting the relationship between an investor and its associate) to bring the concepts 'one-line consolidation' and 'measurement basis' onto one continuum. This allows the KASB to establish three concepts of the equity method, including a concept existing in the middle of the continuum. The report explains how the equity method accounting standard may vary under each of the three alternative concepts.

In its paper, the KASB also presents additional issues that should be considered in the equity method research project. Under its national GAAP Korea accumulated extensive experience in resolving equity method-related issues and the KASB believes this will provide valuable insights when amending IAS 28 Investments in Associates and Joint Ventures.

Lastly, this paper reports the results of the empirical research regarding the value relevance of the equity method. It shows the importance of the equity method, not on a conceptual level but on an empirical and practical level. The report also points at the amendments to IAS 27 Separate Financial Statements the IASB published in August 2014 to again allow application of the equity method in separate financial statements, which will extend usage of the equity method.

The research report builds on a discussion paper on the same topic published in June 2014. It includes the comment letters the KASB received and a summary of the views expressed. The KASB stresses that the purpose of its research paper is not to provide a final version of a new standard on the equity method but to provide a starting point of discussions for developing a better standard for the equity method.

The research report is available on the KASB website.

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