IASB issues Amendments to the Fair Value Option for Investments in Associates and Joint Ventures
IASB issues Amendments to the Fair Value Option for Investments in Associates and Joint Ventures
The International Accounting Standards Board (IASB) has finalised and issued targeted amendments to the fair value option in IAS 28 Investments in Associates and Joint Ventures.
As entities prepare to implement IFRS 18 Presentation and Disclosure in Financial Statements, stakeholders have raised differing views on how its requirements interact with the fair value option in IAS 28, affecting the classification of income and expenses in profit or loss. The narrow scope amendments address these concerns without disrupting existing practice or causing unintended consequences elsewhere in IFRS® Accounting Standards.
IFRS 18 classification requirements and implications
IFRS 18 introduces classification requirements for income and expenses in the statement of profit or loss. In the context of investments in associates, joint ventures and unconsolidated subsidiaries, the classification of income and expenses related to those investments depends on both the measurement of the investment and whether the entity invests in such entities as a main business activity.
Where investments are accounted for using the equity method, all related income and expenses are classified in the investing category, irrespective of the entity’s main business activities. Where these investments are measured at cost or fair value, the related income and expenses are only classified in the operating category if the entity invests in such entities as a main business activity. Otherwise, it is classified in the investing category.
This distinction is illustrated below, highlighting how the use of the equity method overrides an entity’s main business activities for income and expenses classification purposes.
Fair value measurement prior to amendments
Fair value measurement of Investments in associates and joint ventures can only be achieved in two circumstances:
This is summarised below, prior to the amendments:
Amendments: clarification of fair value option
The IASB received feedback that there was diversity in interpretation of the term ‘similar entities’ in IAS 28.18. The resulting lack of clarity about which entities can apply the fair value option in IAS 28.18 also led to possible diversity in practice in applying the classification requirements of IFRS 18. That is because if an entity measures associates and joint ventures at FVTPL rather than the equity method, it is possible for the associated income and expenses to be classified in the operating category. Therefore, the IASB issued the amendments to IAS 28 to clarify the meaning of ‘similar entities’ in IAS 28.18.
The amendments made to IAS 28 now clarify that ‘similar entities’ include those entities that invest in the following assets as its main business activity (IFRS 18.53(a) – (c)):
This amendment will enable ‘similar entities’ to elect to measure investments in associates and joint ventures at fair value through profit or loss and to consequently classify these investments’ related income and expenses in the operating category in the statement of profit or loss if they invest in those investments as a main business activity.
Effective date and transition provisions
IAS 28.45M requires these amendments to be applied in accordance with IFRS 18.C7 that permits entities eligible to apply IAS 28.18 to change their accounting policy election from the equity method to fair value through profit or loss at the date of initial application of IFRS 18.
This transitional provision ensures alignment between recognition and presentation upon adoption. As these amendments expand the scope of the fair value option in IAS 28, and the transitional requirements of IFRS 18 permit entities to move eligible investments from the equity method to FVTPL, it is crucial for entities to determine whether they are eligible to use the fair value option and if so, whether they wish to use it before they transition to IFRS 18, as this may affect the classification of income and expenses associated with those investments.
Future developments
Although the amendments are targeted, the IASB has acknowledged stakeholder feedback advocating for a broader fair value option. The Board will reconsider the scope of the fair value option more holistically depending on feedback it receives to its agenda consultation.
Further information
If you have any questions, please contact a member of BDO’s IFRS Policy Committee or your local IFRS Country Leader.
As entities prepare to implement IFRS 18 Presentation and Disclosure in Financial Statements, stakeholders have raised differing views on how its requirements interact with the fair value option in IAS 28, affecting the classification of income and expenses in profit or loss. The narrow scope amendments address these concerns without disrupting existing practice or causing unintended consequences elsewhere in IFRS® Accounting Standards.
IFRS 18 classification requirements and implications
IFRS 18 introduces classification requirements for income and expenses in the statement of profit or loss. In the context of investments in associates, joint ventures and unconsolidated subsidiaries, the classification of income and expenses related to those investments depends on both the measurement of the investment and whether the entity invests in such entities as a main business activity.
Where investments are accounted for using the equity method, all related income and expenses are classified in the investing category, irrespective of the entity’s main business activities. Where these investments are measured at cost or fair value, the related income and expenses are only classified in the operating category if the entity invests in such entities as a main business activity. Otherwise, it is classified in the investing category.
This distinction is illustrated below, highlighting how the use of the equity method overrides an entity’s main business activities for income and expenses classification purposes.
Fair value measurement prior to amendments
Fair value measurement of Investments in associates and joint ventures can only be achieved in two circumstances:
- When the investments are held by an investment entity as defined by IFRS 10 Consolidated Financial Statements, resulting in mandatory fair value through profit or loss (FVTPL) measurement (IFRS 10.31 and IAS 27.11A); or
- When the investments are ‘held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds’, the entity may elect to measure those investments at fair value through profit or loss in accordance with IFRS 9 Financial Instruments’ (IAS 27.11 and IAS 28.18)
This is summarised below, prior to the amendments:
Amendments: clarification of fair value option
The IASB received feedback that there was diversity in interpretation of the term ‘similar entities’ in IAS 28.18. The resulting lack of clarity about which entities can apply the fair value option in IAS 28.18 also led to possible diversity in practice in applying the classification requirements of IFRS 18. That is because if an entity measures associates and joint ventures at FVTPL rather than the equity method, it is possible for the associated income and expenses to be classified in the operating category. Therefore, the IASB issued the amendments to IAS 28 to clarify the meaning of ‘similar entities’ in IAS 28.18.
The amendments made to IAS 28 now clarify that ‘similar entities’ include those entities that invest in the following assets as its main business activity (IFRS 18.53(a) – (c)):
- investments in associates, joint ventures and unconsolidated subsidiaries;
- cash and cash equivalents; and
- other assets if they generate a return individually and largely independently of the entity’s other resources.
This amendment will enable ‘similar entities’ to elect to measure investments in associates and joint ventures at fair value through profit or loss and to consequently classify these investments’ related income and expenses in the operating category in the statement of profit or loss if they invest in those investments as a main business activity.
Effective date and transition provisions
IAS 28.45M requires these amendments to be applied in accordance with IFRS 18.C7 that permits entities eligible to apply IAS 28.18 to change their accounting policy election from the equity method to fair value through profit or loss at the date of initial application of IFRS 18.
This transitional provision ensures alignment between recognition and presentation upon adoption. As these amendments expand the scope of the fair value option in IAS 28, and the transitional requirements of IFRS 18 permit entities to move eligible investments from the equity method to FVTPL, it is crucial for entities to determine whether they are eligible to use the fair value option and if so, whether they wish to use it before they transition to IFRS 18, as this may affect the classification of income and expenses associated with those investments.
Future developments
Although the amendments are targeted, the IASB has acknowledged stakeholder feedback advocating for a broader fair value option. The Board will reconsider the scope of the fair value option more holistically depending on feedback it receives to its agenda consultation.
Further information
If you have any questions, please contact a member of BDO’s IFRS Policy Committee or your local IFRS Country Leader.