Equity method in separate financial statements

Date recorded: 23 Apr 2014

The project manager introduced the agenda paper. He said that the paper
addressed the comments received from respondents.
He continued by saying that the first issue dealt with the application of the elected
method of accounting for investees. He said that IAS 27 permitted the investor to
elect a different method of accounting for each category of investment. As an
example, that could lead to subsidiaries being accounted for at cost, associates
being accounted for using the equity method and joint ventures being accounted for
using fair value. He said that respondents had asked the Board to assess the
purpose of separate financial statements. However, he thought that this was only a
facilitative amendment and therefore suggested to adhere to the principles of IAS
27 stated in the Basis for Conclusions. He said those principles stated that the
purpose was to assess the assets as equity investments. He asked the Board
whether they agreed with the staffs recommendation to amend IAS 27 to require an
investor to elect a method of accounting for the investee on an instrument-by-in-
strument basis as this would be more in line with the principles of an individual as-
sessment of equity investments.
One Board member asked whether there would be guidance on how to decide on an
accounting method. The project manager replied it would be a free choice. He said
that the advantage of the amendment would be that the accounting would not have
to be changed when there was a change in the status of the investment (e.g. from
subsidiary to associate). The Board member asked whether this meant that
although two subsidiaries had substantially the same activities, they could be
accounted for differently. The project manager confirmed this.
Another Board member asked her fellow Board members whether anyone saw a
comparability problem. She also asked whether the staff meant instrument-by-in-
strument or rather investee-by-investee. The project member said that the idea was
investee-by-investee.
One Board member said he was concerned about the fact that when a change in
status occurred, e.g. from associate to subsidiary, the investor had no ability to
change the accounting to make it consistent with other subsidiaries. The project
manager replied that he knew that comparability was an issue with separate
financial statements, but thought that the amendment would better reflect the
intention of the standard. The Board member agreed that it was simpler, but the
amendment had conceptual flaws. He said that it would give a lot of leeway for
structuring. The Board member asked the project manager to confirm that a change
of accounting method would not be permitted at a change in status. The project
manager confirmed this.

1
Another Board member said that although investors had a choice, it was not a free
choice of which accounting method they could use. For example, investment
entities would not have a choice as they had to account for their investments in
subsidiaries at fair value.
One Board member came back to the question how Board members saw the compa-
rability issue, which had been raised by another Board member. He said that he was
not sure whether separate financial statements would actually be used as a basis
for information. He further said that the election should actually be allowed on an
instrument-by-instrument basis as, for example, an investor could have different in-
tentions for ordinary shares of an investee and preference shares of the same
investee. He said that the accounting should be able to reflect those different inten-
tions.
Another Board member said that in light of the amendment being a facilitating
amendment, the Board should not change the requirements for the accounting by
category. She said that the Board had not thought enough about separate financial
statements to understand the unintended consequences that came with the
amendment recommended by the staff. Also, she said that not all constituents had
demanded this amendment. Considering that it would also prohibit investors from
changing their classification on a change in status, some constituents might object
to this change. Therefore, she felt that the change required re-exposure. In light of
this she suggested not to go forward with the change.

One Board member supported the staffs view not to undertake a fundamental as-
sessment of separate financial statements in this amendment. She said that the
amendment should continue to be facilitative and should therefore not look into
issues that had not been addressed in the exposure draft. She reminded the Board
that the objective was to allow the application of IFRSs for separate financial state-
ments in countries where the equity method was required, which would be achieved
without the instrument-by-instrument amendment.
Upon calling a vote, the IASB agreed not to include the instrument-by-instrument
amendment.
The project manager continued by asking Board members whether they agreed with
the staffs recommendation to allow using the carrying value of the net assets of the
investee attributable to the investor in the investors consolidated financial state-
ments or those of the investors ultimate or intermediate parent to arrive at the
opening balance of the investment on initial application of the proposed amend-
ments or on first-time adoption.
One Board member said that she would not fundamentally object to this proposal on
conceptual grounds, however, she was concerned that there would be too many al-
ternatives available. She asked how pervasive the problem had been in the

2
comments received. The project manager replied that the comments were
balanced, i.e. around 50% had asked for transition relief while 50% had not. The
Board member replied that the problem might be fixable by postponing the
mandatory effective date to give entities more time to calculate their opening
balance. She said that she did not see the need to solve the problem in this
amendment.
Another Board member disagreed with the staffs recommendation to clarify that
dividends would be accounted for in accordance with IFRS 9 when an entity elected
to account for the investments in accordance with IFRS 9. He said that this had not
been exposed and, therefore, should not be changed. The project manager replied
that they had discussed dividends with the revenue project team. He said that upon
issuance of IFRS 15 the revenue recognition guidance for dividends would be moved
to IFRS 9. To avoid further amendments, the staff would like to incorporate the
recognition criteria for dividends in IAS 27. He also said that the exposure draft
proposed to recognise dividends in profit or loss. Some respondents had
commented that if an entity elected to account for their investments in accordance
with IFRS 9, the requirements of IFRS 9 with regard to dividend recognition would
apply, particularly if the investment was classified at fair value through OCI. Those
respondents suggested clarifying this in IAS 27. The Board member replied that
without re-exposure, unintended consequences of this amendment might not be dis-
covered.
Another Board member agreed with this view. She said that IFRS 9 referred to IAS
18 for recognition of dividends and that it would only be incorporated in IFRS 9
when IFRS 15 became effective, which would be in 2017. She therefore suggested
saying as little as possible about dividends in this amendment and relying on the re-
quirements of other IFRSs.
Upon calling a vote, the IASB disagreed with the staffs recommendation.
The project manager continued by asking the Board whether they agreed with the
staffs recommendation to amend the definition of separate financial statements
and explicitly state that the financial statements of an investor that has no invest-
ments in subsidiaries and has investments in associates or joint ventures which are
accounted for in accordance with IAS 28 were not separate financial statements.
One Board member said that with this recommendation, too, she was worried about
unintended consequences. She said that amending the definition without exposing
for comment would probably lead to problems. She said from this definition it was
unclear whether an investment entity that did not consolidate its subsidiaries did in
fact prepare separate financial statements. She suggested adding the proposed
amendment as an observation to the Basis for Conclusions.
Another Board member supported this by saying that the intention was not to
change the current practice of equity accounting. The project manager replied that

3
respondents had asked for amendments of IAS 28 to provide guidance on sub-
sidiaries that are accounted for using the equity method. He said that the staff rec-
ommendations made in the agenda paper would help to solve this problem. A Board
member replied that he thought the scope should be the same as in the exposure
draft.
The project manager asked whether the amendments should be finalised without
amendment and, therefore, without re-exposure and whether the effective date
should be 1 January 2016, as proposed. The Board agreed.
The project manager asked whether the Board was satisfied that all due process
steps applicable had been complied with and whether any of the Board members
intended to dissent from the final amendment. The Board was satisfied with the due
process and no IASB member intended to dissent.

Related Topics