ACCA welcomes the opportunity to provide views in response to the IASB’s exposure draft (ED) for the Equity Method of Accounting – IAS 28 Investments in Associates and Joint Ventures (revised 202x). Our response has been developed with the assistance of ACCA’s Global Forum for Corporate Reporting.
Our general comments on the proposed amendments are as follows:
We commend IASB for significantly amending the IAS 28 to answer application questions relating to accounting for investments in associates and joint ventures (and investments in subsidiaries in separate financial statements) using the equity method. Reorganising the standard has also improved its understandability.
We anticipate the proposed new and amended requirements will reduce diversity in practice and reducing the need for entities to develop own accounting policies, which collectively leads to providing more comparable information to users.
We’d like to highlight some areas for improvement to support consistent application of the proposed requirements.
The use of different units of account throughout the draft standard to account for essentially the same investee – ie in determining the cost of investment in an associate or joint venture, changes in ownership interest while retaining significant influence, and when performing an impairment test – needs to be reviewed. Switching between different units of account throughout the revised IAS 28 will be very confusing for the whole spectrum of stakeholders, and potentially costly to apply.
While the definition of cost in Appendix A is helpful, there is room for better clarity.
The proposal to identify the fair value of identifiable assets and liabilities in an equity-accounted associate (often called purchase price allocation (‘PPA’)) presents several drawbacks. This stems from determining the unit of account for investment in an associate which also raises doubts about the appropriateness of accounting for the temporary differences arising from the fair value adjustments on the associate’s assets and liabilities (ie the deferred tax effects). Accounting for the deferred tax effects on adjusted assets and liabilities upon achieving significant influence and for subsequent reporting periods for what would essentially be a single line item in the financial statements seems excessive. The relevance of recognising goodwill or bargain purchase gains in the context of equity-accounted associates is also questionable.
The proposed approach to account for an increase in ownership interest while retaining significant influence creates multiple layers of investments, albeit for the same associate. Requiring an entity to perform PPA for each layer of investment, at the point of purchasing additional ownership interest and subsequent measurement, would complicate the accounting of the investment in an associate or joint venture. Accordingly, we are not in favour of extending the proposed approach to account for other changes that increase ownership interests (ie deemed purchases). This approach would be burdensome and costly to operate on an ongoing basis and may result in higher audit costs. Further, there are doubts about whether users of the entity’s financial statements need such granular information in making decisions. See our comments in questions 1 and 2.
Not requiring an entity to deduct its unrecognised share of losses from the carrying amount of newly acquired ownership interest in the same investee at the date of purchase is a step in the right direction. However, this creates a conundrum when the entity recognises goodwill in its newly acquired ownership interest when its net investment in the same associate has become negative (ie there are unrecognised losses). This adds to our concern at the proposal to perform PPA on equity-accounted investments and recognising goodwill within the carrying amount of the investment or to recognise bargain purchase gains. See our comments in questions 3.
We are supportive of rephrasing and clarifying the requirement to assess whether the net investment in an associate or joint venture might be impaired, revising the indicator of impairment by replacing ‘cost’ with ‘carrying amount’, as well as removing the ‘significant or prolonged decline in fair value’ criterion.
Eliminating the conflict between IFRS 10 and IAS 28 on the accounting for the sale or contribution of a subsidiary to its associate is a step in the right direction.
Applying one version of the equity method in both the consolidated and separate financial statements of an entity is desirable. However, we have a few concerns that need to be resolved. See our comments in question 6.
Lastly, we are supportive of enhancing the disclosure requirements to provide information that helps users understand the underlying transactions, the related amounts and the measurement uncertainty.
Our detailed responses to the specific questions asked and suggestions for improvements are set out on the document found for download on this page.
