Comments from ACCA to the International Accounting Standards Board, April 2013.
ACCA welcomes the opportunity to comment on the Exposure Draft (ED) of Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Proposed amendments to IFRS 10 (‘Consolidated Financial Statements’) and IAS 28 (‘Investments in Associates and Joint Ventures’). ACCA’s Global Forum for Corporate Reporting has considered the ED, and its views are reflected in the following general comments, and in the answers to the specific questions raised by the IASB.
The ED aims to make the Standards on Consolidation and Investment in Associates and Joint Ventures more consistent in their treatments of gains and losses. The treatment will depend on whether the related transaction involves a business, and ACCA concurs overall with the changes which are proposed.
As set out below, in our joint response to Questions 1 and 2, we have also raised some questions about the content of the changes as worded, and would have appreciated clarification on the inconsistency with the Business Combinations project referred to in the ED’s Basis for Conclusions.
It would also have been beneficial for respondents to be made more fully aware of issues for or against the prospective application of the proposals, and for the IASB to propose an implementation date. With this information, respondents would be able to give fuller, more reasoned comments on the proposals for transition.
Question 1: proposed amendment to IFRS 10
The IASB proposes to amend IFRS 10 so that the gain or loss resulting from the sale or contribution of a subsidiary that does not constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture is recognised only to the extent of the unrelated investors’ interests in the associate or joint venture. The consequence is that a full gain or loss is recognised on the loss of control of a subsidiary that constitutes a business, as defined in IFRS 3, including cases in which the investor retains joint control of, or significant influence over, the investee.
Do you agree with the amendment proposed? Why or why not? If not, what alternative do you propose?
Question 2: proposed amendment to IAS 28 (2011)
The IASB proposes to amend IAS 28 (2011) so that:
(a) the current requirements for the partial gain or loss recognition for transactions between an investor and its associate or joint venture only apply to the gain or loss resulting from the sale or contribution of assets that do not constitute a business, as defined in IFRS 3; and
(b) the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture is recognised in full.
Do you agree with the amendment proposed? Why or why not? If not, what alternative do you propose?
We have given a joint response to Questions 1 and 2, as the proposed amendments will result in the requirements of the two Standards ‘mirroring’ each other.
ACCA agrees that the IASB needs to take steps to address the identified divergence in practice, which will persist when entities start to apply IFRS 10 and IAS 28 (2011). We generally agree that the changes proposed in the ED will achieve the IASB’s intention, and that they should reflect the IASB’s broader aims (in this case, the developments in the Business Combinations Project).
We also have the following comments:
Question 1
The change to IFRS 10 has the status of guidance (in proposed para B99A), whilst the changes are reflected in the body of IAS 28 (proposed paras 28, 30, 31A and 31B). We believe that the changes relate to requirements and consequently, that the amendment to IFRS 10 should be included within the body of the Standard itself, as is the case for IAS 28.
Questions 1 and 2
As noted in para BC8, the IASB intends that the amendments encompass both ‘upstream’ and ‘downstream’ transactions. We believe that this needs to be specifically stated in the proposed amendments to IFRS 10.
We would also suggest that a brief confirmation is provided in the relevant proposed additional paragraph (para 31A) in IAS 28. This would only need to be brief, as this paragraph is preceded by content which mentions ‘upstream’ and ‘downstream’ in the context of assets which do not involve a business.
In forming our view on the proposed amendments, and any further amendments which might need to be made, ACCA would have appreciated clarification on the point made in para BC7. The IASB has noted in that the proposed changes are not entirely in accordance with the ideas of the Business Combinations Project, as to achieve this would mean tackling issues which are described as ‘multiple’ and ‘cross-cutting’. Further details of what these issues involve, and how they might be addressed in future, would enable us to place our comments on the ED in a broader context, where applicable.
Question 3: transition requirement
The IASB proposes to apply the proposed amendments to IFRS 10 and IAS 28 (2011) prospectively to sales or contributions occurring in annual periods beginning on or after the date that the proposed amendments would become effective.
Do you agree with the proposed transition requirements? Why or why not? If not, what alternative do you propose?
From the wording of the question above, it is unclear whether the proposals in the ED will be effective prospectively once approved, or prospectively from a date to be set which follows approval, although the ‘effective date’ paragraphs in the body of the ED indicate the latter. We believe that it would be helpful to respondents for an effective date to be given for comment.
The proposed changes will be applied prospectively, whereas the rest of IFRS 10 will be implemented retrospectively. ACCA notes the argument in para BC9 of the ED, concerning the cost of preparing comparatives over the benefit of doing so. However, we would be able to provide more reasoned comments for or against the proposal for prospective application, if the cost / benefit issue had been explored more fully by the IASB.
For example, the gathering of information to reflect the proposed changes should be a relatively straightforward and therefore low-cost exercise. For the likely minority of entities which regularly undertake such transactions, retrospective application would also provide better comparability.