Topic 404 - Associates and joint ventures

IAS 28 Investments in Associates and Joint Ventures

IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

• 404.2.1.1

• IFRIC Agenda Decision - Fund manager’s assessment of significant influence

• 404.3.1.1

• IFRIC Agenda Decision - Potential effect of IFRS 3 Business Combinations (as revised in 2008) and IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) on equity method accounting

• 404.3.1.2

• IFRIC Agenda Decision - Investment in a subsidiary accounted for at cost: Step acquisition

• 404.5.1.1

• IFRIC Agenda Decision - Contributing property, plant and equipment to an associate

• 404.10.1.1

• IFRIC Agenda Decision - Impairment of an Equity Security

• 404.10.1.2

• IFRIC Agenda Decision - Potential effect of IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) on equity method accounting

• 404.10.1.3

• IFRIC Agenda Decision - Meaning of "significant or prolonged”

404.2.1.1

IFRIC Agenda Decision - Fund manager’s assessment of significant influence

March 2017 - The Committee received a request to clarify whether a fund manager assesses significant influence over a fund that it manages and in which it has an investment, and, if so, how it makes this assessment. In the scenario described in the submission, the fund manager applies IFRS 10 Consolidated Financial Statements and determines that it is an agent and thus does not control the fund. The fund manager has also concluded that it does not have joint control of the fund. 

The Committee observed that a fund manager assesses whether it has control, joint control or significant influence over a fund that it manages applying the relevant IFRS Standard, which in the case of significant influence is IAS 28.

The Committee noted that, unlike IFRS 10 in the assessment of control, IAS 28 does not address decision-making authority held in the capacity of an agent in the assessment of significant influence. When it issued IFRS 10, the Board did not change the definition of significant influence, nor any requirements on how to assess significant influence in IAS 28. The Committee concluded that requirements relating to decision-making authority held in the capacity of an agent could not be developed separately from a comprehensive review of the definition of significant influence in IAS 28.

In addition, the Committee observed that paragraph 7(b) of IFRS 12 Disclosure of Interests in Other Entities requires an entity to disclose information about significant judgements and assumptions it has made in determining that it has significant influence over another entity. The examples in paragraph 9 of IFRS 12 clarify that the requirement in paragraph 7(b) of IFRS 12 applies both when an entity has determined that it has significant influence over another entity and when it has determined that it does not.

The Committee concluded that it would be unable to resolve the question asked efficiently within the confines of existing IFRS Standards. Consequently, it decided not to add this matter to its standard-setting agenda.

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404.3.1.1

IFRIC Agenda Decision - Potential effect of IFRS 3 Business Combinations (as revised in 2008) and IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) on equity method accounting

July 2009 - The IFRIC staff noted that the FASB’s Emerging Issues Task Force (EITF) had added to its agenda EITF Issue No. 08-6 Equity Method Investment Accounting Considerations. EITF 08-6 addresses several issues resulting from the joint project by the IASB and FASB on accounting for business combinations and accounting and reporting for non-controlling interest that culminated in the issue of IFRS 3 (as revised in 2008) and IAS 27 (as amended in 2008) and SFAS 141(R) and SFAS 160.

At its meeting in May 2009, the IFRIC deliberated two of the issues considered in EITF 08-6:

• How the initial carrying amount of an equity method investment should be determined
• How an equity method investee’s issue of shares should be accounted for.

The IFRIC noted that IFRSs consistently require assets not measured at fair value through profit or loss to be measured at initial recognition at cost. Generally stated, cost includes the purchase price and other costs directly attributable to the acquisition or issuance of the asset such as professional fees for legal services, transfer taxes and other transaction costs. Therefore, the cost of an investment in an associate at initial recognition determined in accordance with paragraph 11 of IAS 28 [The equivalent requirement is now in paragraph 10] comprises its purchase price and any directly attributable expenditures necessary to obtain it.

...

The IFRIC concluded that the agenda criteria were not met mainly because, given the guidance in IFRSs, it did not expect divergent interpretations in practice. Therefore, the IFRIC decided not to add these issues to its agenda.

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404.3.1.2

IFRIC Agenda Decision - Investment in a subsidiary accounted for at cost: Step acquisition

January 2019 - The Committee received a request about how an entity applies the requirements in IAS 27 to a fact pattern involving an investment in a subsidiary.

In the fact pattern described in the request, the entity preparing separate financial statements:

• elects to account for its investments in subsidiaries at cost applying paragraph 10 of IAS 27.
• holds an initial investment in another entity (investee). The investment is an investment in an equity instrument as defined in paragraph 11 of IAS 32 Financial Instruments: Presentation. The investee is not an associate, joint venture or subsidiary of the entity and, accordingly, the entity applies IFRS 9 Financial Instruments in accounting for its initial investment (initial interest).
• subsequently acquires an additional interest in the investee (additional interest), which results in the entity obtaining control of the investee⁠–⁠–ie the investee becomes a subsidiary of the entity.

The request asked:

Question A

IAS 27 does not define ‘cost’, nor does it specify how an entity determines the cost of an investment acquired in stages. The Committee noted that cost is defined in other IFRS Standards (for example, paragraph 6 of IAS 16 Property Plant and Equipment, paragraph 8 of IAS 38 Intangible Assets and paragraph 5 of IAS 40 Investment Property). The Committee observed that the two approaches outlined in the request arise from different views of whether the step acquisition transaction involves:

Based on its analysis, the Committee concluded that a reasonable reading of the requirements in IFRS Standards could result in the application of either one of the two approaches outlined in this agenda decision (ie fair value as deemed cost approach or accumulated cost approach).

The Committee observed that an entity would apply its reading of the requirements consistently to step acquisition transactions. An entity would also disclose the selected approach applying paragraphs 117⁠–⁠124 of IAS 1 Presentation of Financial Statements if that disclosure would assist users of financial statements in understanding how step acquisition transactions are reflected in reporting financial performance and financial position.

...

For Question A, the Committee considered whether to develop a narrow-scope amendment to address how an entity determines the cost of an investment acquired in stages. The Committee observed that:

On balance, the Committee decided not to undertake standard-setting to address Question A.

...

Consequently, the Committee decided not to add these matters to its standard-setting agenda.

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404.5.1.1

IFRIC Agenda Decision - Contributing property, plant and equipment to an associate

January 2018 - The Committee received a request about 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 the associate.

In the fact pattern described in the request:

The request asked:

In analysing the request, the Committee assumed the contribution of PPE to the associate has commercial substance as described in paragraph 25 of IAS 16 Property, Plant and Equipment.

Question A

Paragraph 7 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires an entity to apply an IFRS Standard to a transaction when that Standard applies specifically to the transaction. The Committee observed, therefore, that unless a Standard specifically excludes common control transactions from its scope, an entity applies the applicable requirements in the Standard to common control transactions.

Question B

Paragraph 28 of IAS 28 requires an entity to recognise gains and losses resulting from upstream and downstream transactions with an associate only to the extent of unrelated investors’ interests in the associate. Paragraph 28 includes as an example of a downstream transaction the contribution of assets from an entity to its associate.

The Committee observed that the term ‘unrelated investors’ in paragraph 28 of IAS 28 refers to investors other than the entity (including its consolidated subsidiaries)—ie the word ‘unrelated’ does not mean the opposite of ‘related’ as it is used in the definition of a related party in IAS 24 Related Party Disclosures. This is consistent with the premise that financial statements are prepared from the perspective of the reporting entity, which in the fact pattern described in the request is each of the investors.

Accordingly, the Committee concluded that an entity recognises any gain or loss on contributing PPE to an associate to the extent of other investors’ interests in the associate.

Question C

This question has an effect only if the fair value of the PPE contributed differs from the fair value of the equity interest in the associate received in exchange for that PPE. The Committee observed that in the fact pattern described in the request, it would generally expect the fair value of PPE contributed to be the same as the fair value of the equity interest in the associate that an entity receives in exchange. If there is initially any indication that the fair value of the PPE contributed might differ from the fair value of the acquired equity interest, the investor first assesses the reasons for this difference and reviews the procedures and assumptions it has used to determine fair value.

The Committee observed that applying the requirements in IFRS Standards, an entity recognises a gain or loss on contributing PPE and a carrying amount for the investment in the associate that reflects the determination of those amounts based on the fair value of the PPE contributed—unless the transaction provides objective evidence that the entity’s interest in the associate might be impaired. If this is the case, the investor also considers the impairment requirements in IAS 36 Impairment of Assets.

If, having reviewed the procedures and assumptions used to determine fair value, the fair value of the PPE is more than the fair value of the acquired interest in the associate, this would provide objective evidence that the entity’s interest in the associate might be impaired.

For all three questions, the Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to account for the contribution of PPE to an associate in the fact pattern described in the request. Consequently, the Committee decided not to add this matter to its standard-setting agenda.

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404.10.1.1

IFRIC Agenda Decision - Impairment of an Equity Security

June 2005 - [Paragraphs 41A⁠⁠–⁠⁠41C were added to IAS 28 as a consequential amendment when the Board issued IFRS 9. The requirements in paragraphs 41A-41C are similar to those in paragraphs 59⁠⁠–⁠⁠61 of IAS 39.]

The IFRIC considered whether to develop guidance on how to determine whether under paragraph 61 of IAS 39 (as revised in March 2004) [now paragraph 41C of IAS 28] there has been a ‘significant or prolonged decline’ in the fair value of an equity instrument below its cost in the situation when an impairment loss has previously been recognised for an investment classified as available for sale.

The IFRIC decided not to develop any guidance on this issue. The IFRIC noted that IAS 39 referred to original cost on initial recognition and did not regard a prior impairment as having established a new cost basis. The IFRIC also noted that IAS 39 Implementation Guidance E.4.9 states that further declines in value after an impairment loss is recognised in profit or loss are also recognised in profit or loss. Therefore, for an equity instrument for which a prior impairment loss has been recognised, ‘significant’ should be evaluated against the original cost at initial recognition and ‘prolonged’ should be evaluated against the period in which the fair value of the investment has been below original cost at initial recognition.

The IFRIC was of the view that IAS 39 is clear on these points when all of the evidence in the requirements and the implementation guidance of IAS 39 are viewed together.

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404.10.1.2

IFRIC Agenda Decision - Potential effect of IFRS 3 Business Combinations and IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) on equity method accounting

March 2009 - The IFRIC staff noted that the FASB’s Emerging Issues Task Force (EITF) recently added to its agenda, EITF Issue No. 08‑6 Equity Method Investment Accounting Considerations. EITF 08‑6 addressed several issues resulting from the recently concluded joint project by the IASB and FASB on accounting for business combinations and accounting and reporting for non-controlling interests that culminated in the issue of IFRS 3 (as revised in 2008) and IAS 27 (as amended in 2008) and FASB SFAS 141(R) and SFAS 160.

The IFRIC noted that IAS 28 provides explicit guidance on two issues:

Therefore, the IFRIC did not expect divergence in practice and decided not to add these issues to its agenda.

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404.10.1.3

IFRIC Agenda Decision - Meaning of "significant or prolonged”

July 2009 - [Paragraphs 41A⁠–⁠41C were added to IAS 28 as a consequential amendment when the Board issued IFRS 9. The requirements in paragraphs 41A-41C are similar to those in paragraphs 59⁠–⁠61 of IAS 39.]

The IFRIC received a request to provide guidance on the meaning of ‘significant or prolonged’ (as described in paragraph 61 [now paragraph 41C of IAS 28]) in recognising impairment on available-for-sale equity instruments in accordance with IAS 39.

The IFRIC agreed with the submission that significant diversity exists in practice on this issue. The IFRIC concluded that some of this diversity is the result of differing ways the requirements of IAS 39 are being implemented, some of which were identified in the submission. The IFRIC noted some applications in particular that are not in accordance with the requirements of IAS 39. For example:

• The standard cannot be read to require the decline in value to be both significant and prolonged. Thus, either a significant or a prolonged decline is sufficient to require the recognition of an impairment loss. The IFRIC noted that in finalising the 2003 amendments to IAS 39, the Board deliberately changed the word from ‘and’ to ‘or’. 
• Paragraph 67 of IAS 39 requires an entity to recognise an impairment loss on available-for-sale equity instruments if there is objective evidence of impairment. Paragraph 61 [now paragraph 41C of IAS 28] of IAS 39 states: ‘A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is also objective evidence of impairment.’ [emphasis added] Consequently, the IFRIC concluded that when such a decline exists, recognition of an impairment loss is required. 
• The fact that the decline in the value of an investment is in line with the overall level of decline in the relevant market does not mean that an entity can conclude the investment is not impaired. 
• The existence of a significant or prolonged decline cannot be overcome by forecasts of an expected recovery of market values, regardless of their expected timing. 

The IFRIC noted that the applications that are not in accordance with the requirements of IAS 39 it discussed were examples only and were unlikely to be an exhaustive list of all the inconsistencies with the standard that might exist in practice. 

The IFRIC also noted that the determination of what constitutes a significant or prolonged decline is a matter of fact that requires the application of judgement. The IFRIC noted that this is true even though an entity may develop internal guidance to assist it in applying that judgement consistently. The IFRIC further noted that an entity would provide disclosure about the judgements it made in determining the existence of objective evidence and the amounts of impairment in accordance with paragraphs 122 and 123 of IAS 1 Presentation of Financial Statements and paragraph 20 of IFRS 7 Financial Instruments: Disclosures [IFRS 7 is not applicable to interests in associates and joint ventures accounted for in accordance with IAS 28]. 

Although the IFRIC recognised that significant diversity exists in practice, it noted that the Board has accelerated its project to develop a replacement for IAS 39 and expects to issue a new standard soon. Therefore, the IFRIC decided not to add this issue to its agenda.

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