IAS 28 Amendments - Equity Method: Share of other net asset changes

Project History

The IASB issued an Exposure Draft ED2012/3 Equity Method: Share of Other Net Asset Changes (Proposed amendments to IAS 28) in November 2012.    

The current requirements

There is no guidance in current IAS 28 (2011) on how to account for other net asset changes. 

The proposals

he amendments proposed that an investor should recognise directly in equity its ownership interest other net asset changes. Such changes include those arising from movements in the share capital of the investee (e.g. when the investee issues additional shares to third parties or buys back shares from third parties) and movements in other components of the investee's equity (e.g. when an investee accounts for an equity settled share-based payment transaction).

In addition, the proposed amendments propose reclassification to profit or loss of the cumulative amount of equity that the investor previously recognised when the investor discontinues the use of the equity method.

EFRAG's draft comment letter

On 21 December 2012, EFRAG issued its draft comment letter on the proposed amendments. EFRAG agreed that diversity in practice existed on how investors recognised their share of other net asset changes. However, EFRAG TEG members had three different views on the accounting for these. These views could be summarised as :

• View 1: Agreed that other net asset changes should be recognised in equity and reclassified to profit or loss when the investor discontinues the use of the equity method (the IASB's proposal).
• View 2: The investor should only recognise changes in the investee's net assets that arise from profit or loss, other comprehensive income and distributions received. Under this view, reclassification would not be necessary.
• View 3: The investor should account for the investee's other net asset changes that result in indirect decreases and increases in the investor's ownership interest in the same way as actual disposals and acquisitions of interest in the investee. Under this view, reclassification would not be necessary.

Feedback from constituents

EFRAG received 11 comments letters from constituents on its draft comment letter. These can be accessed below by viewing the 'Input for Status' of the Draft Comment Letter.

Most constituents did not support the proposed amendments, with a majority expressing a view equivalent to View 3 above.

EFRAG's final comment letter

EFRAG's final comment letter was published on 12 April 2013. In the final comment letter EFRAG supported the IASB's efforts to address the issue.

However, EFRAG believed that the approach proposed by the IASB would present certain transactions between an investee and third parties, as if they were transactions with the investor's owners. This would lead to an inconsistency with the presentation requirements in IAS 1 Presentation of Financial Statements, which requires an entity to present all non-owner changes in equity within comprehensive income. EFRAG believed that the current issues stemmed from a lack of clarity on the principles underlying the equity method. These principles should be clarified in order to address the accounting for the various types of transactions that could result in other net asset changes.

EFRAG also believed that there was no conceptual basis to 'recycle' to profit or loss other net asset changes, especially given that the proposed amendments started from the premise that other net asset changes should be treated in the same way as transactions with owners.

In EFRAG's view, a short-term solution should not create inconsistencies with existing IFRS or create a new form of 'recyclable equity'. EFRAG therefore disagreeed with the proposed amendments and requested that the IASB clarify the principles underlying the application of the equity method.

Finalisation of amendments by the IASB

In meetings during 2013 and 2014, the IASB decided to proceed with the amendments on the basis set out in the Exposure Draft, but modified to reflect a decision that an investor should only reflect those changes in net assets which were attributable to it. This means that an investor would not recognise a change in net assets due to a share-based payment reserve or the issuance of a warrant.

EFRAG Letter expressing concern regarding finalisation of amendments

On 28 March 2014 EFRAG sent a letter to the IASB expressing concerns that the amendments were expected to be finalised on the basis set out in the Exposure Draft. In particular, EFRAG reiterated its concerns from its final comment letter that the amendments would result in conflicts with existing IFRS, economically similar transactions being accounted for differently and deferred recognition of losses. The letter also sets out an alternative model that is consistent with both current practice and existing IFRS.

At its May 2014 meeting, the IASB decided to abandon the proposed amendments.