Background

In developing IFRS 13 Fair Value Measurement, the IASB intended to prioritise Level 1 inputs into the fair value hierarchy but did not expressly state that Level 1 inputs should be prioritised even when those inputs to not correspond to the unit of account of the asset measured (the investment as a whole). Therefore, questions arose on the unit of account for investments in subsidiaries, joint ventures and associates and on their fair value measurement when those investments are quoted in an active market. Similarly, the IASB also received questions on the measurement of the recoverable amount of cash-generating units (CGUs) on the basis of fair value less costs of disposal when they correspond to entities that are quoted in an active market.

Therefore, the IASB has now published proposed amendments that would confirm that the unit of account for investments in subsidiaries, joint ventures and associates is the investment as a whole, but that the fair value measurement of quoted investments in subsidiaries, joint ventures and associates should be the product of the quoted price multiplied by the quantity of financial instruments held, without adjustments. The IASB also proposes to align the fair value measurement of a quoted CGU to the fair value measurement of a quoted investment. Lastly, the proposed amendments also include an addition to the Illustrative Examples for IFRS 13 to illustrate the application of paragraph 48 of that standard to a net risk exposure of Level 1 financial assets and financial liabilities.

Suggested changes

The IASB proposes amendments to six standards in ED/2014/4 Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value (Proposed amendments to IFRS 10, IFRS 12, IAS 27, IAS 28 and IAS 36 and Illustrative Examples for IFRS 13):

• IFRS 10  Consolidated Financial Statements. The amendments would specify that when an investment entity has an investment in a subsidiary that is quoted in an active market, its fair value shall be the product of the quoted price multiplied by the quantity of the financial instruments that make up the investment without adjustment.
• IFRS 12  Disclosure of Interests in Other Entities. The amendments would define that the fair value of an investment in a joint venture or associate that is quoted in an active market shall be the product of the quoted price multiplied by the quantity of the financial instruments that make up the investment without adjustment.
• IAS 27  Separate Financial Statements. The amendments would clarify that when an entity accounts for its investments in subsidiaries, joint ventures and associates at fair value and those investments are quoted in an active market, their fair value shall be the product of the quoted price multiplied by the quantity of the financial instruments that make up the investments without adjustment.
• IAS 28  Investments in Associates and Joint Ventures. The amendments would state that when an entity measures its investments in associates or joint ventures at fair value and those investments are quoted in an active market, their fair value shall be the product of the quoted price multiplied by the quantity of the financial instruments that make up the investments without adjustment.
• IAS 36  Impairment of Assets. The amendments concern CGUs where the recoverable amount is determined on the basis of fair value less costs of disposal. They clarify that when the CGU is an investment in a subsidiary, joint venture or associate that is quoted in an active market, its fair value shall be the product of the quoted price multiplied by the quantity of the financial instruments that make up the investments without adjustment.
• IFRS 13  Fair Value Measurement. The amendments consist of an illustrative example showing the application of the exception in paragraph IFRS 13.48 to a group of financial assets and financial liabilities whose market risks are substantially the same and whose fair value measurement is categorised within Level 1 of the fair value hierarchy.

Dissenting opinion

One IASB member voted against the publication of the ED. This member believes that using the product of the quoted price multiplied by the quantity of the financial instruments is neither appropriate for the fair value measurement of investments nor for determining the recoverable amount of CGUs. If the IASB concludes conclusion that the unit of account is the investment as a whole instead of the individual financial instruments that make up the investment, this board member believes that the unit of account used for the fair value measurement should also be the investment as a whole and not the underlying financial instruments. According to this board member, the investment's fair value should either be measured using another valuation technique or by adjusting the Level 1 input to reflect the price differences between the investment as a whole and the underlying individual financial instruments.

Effective date and transition requirements

The ED does not contain a proposed effective date. For the proposed amendments related to quoted investments the IASB suggests mandatory application from the beginning of the year the amendment is first applied; for the proposed amendments related to the measurement of CGUs the IASB suggests prospective application.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the exposure draft on the IASB website
• Deloitte's IFRS in Focus newsletter explaining the proposed amendments
• Our IAS Plus project page on IFRS 13 — Unit of account