Equity Method- IASB Standard Setting Project

• assess whether application questions with the equity method, as set out in IAS 28, can be addressed in consolidated and individual financial statements by identifying and explaining principles in IAS 28.  

The Board decided that to achieve this objective, the project should be focused on:

• identifying application problems and deciding which of these problems to address;

• addressing these application problems by identifying and explaining the principles that underlie IAS 28. Identifying and explaining these principles may also help the Board develop new requirements, new application guidance or other amendments to the Standard.

In June 2021, the IASB Staff presented to the IASB a list of principles underlying the IAS 28 requirements. The IASB Staff also collected application issues/questions, and presented their short list, following the application of selection criteria. 

Regarding the selection criteria, in order to be further considered by the IASB, the application questions would need to be not-yet-solved, possible to solve without fundamentally rewriting IAS 28; possible to solve without amending other IFRS Standards; important - i.e., frequent, widespread, material - and affecting the consistent application of IAS 28. 

The selection criteria ameans that the IASB will not fundamentally reconsider the IAS 28 guidance and this may exclude some of the application issues from the scope of the Project.   

Previous EFRAG Work

In January 2014, EFRAG published The Equity Method: A One-line Consolidation or a Measurement Basis? which discussed various views on the conceptual underpinnings of the equity method. This EFRAG Discussion Paper is available here. The details of the feedback received from EFRAG constituents is available here. These papers were part of EFRAG's Short Discussion Series - the details of the project can be found here. 

From research project to a standard-setting work plan

In October 2022, the IASB reviewed the progress of its Equity Method research project and decided to retain the project's objective and approach. 

In April 2023, the IASB decided to move the Equity Method research project to its standard-setting work plan. Because of the project’s focus on answering application questions, rather than a fundamental review, the IASB decided to work towards publishing an exposure draft, rather than first publishing a discussion paper. At the same time, the objective of the project was updated to: develop answers to application questions about the equity method, as set out in IAS 28 Investments in Associates and Joint Ventures, using the principles derived from IAS 28 where possible. 

Following this decision, the IASB finalised its deliberations and tentative decisions and discussed sweep issues. 

• proposed amendments to IAS 28 to answer application questions about how to apply the equity method of accounting; 

• proposals to improve the disclosure requirements in IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements to complement the proposed amendments to IAS 28. 

The Exposure Draft is open for comment until 20 January 2025.

EFRAG has published its draft comment letter on the IASB Exposure Draft on 12th November 2024.  Feedback to EFRAG’s DCL should be received by 6 January 2025.

EFRAG's draft comment letter (DCL) considers the ED's proposed amendments to be a positive step towards addressing existing application challenges, reducing diversity in practice in application of IAS 28 requirements, enhancing their understandability, and improving comparability. In particular, the DCL supports several of the ED's proposals including the measurement of cost of an associate or joint venture,  treatment of gains or losses from transactions with an investee (associate or joint venture), disclosure requirements, and impairment indicators.

At the same time, the DCL points to several areas where further simplification, clarifications, and amendments are necessary. Specifically, there is need for simplification of the proposed layered approach to be applied when acquiring additional ownership interests while retaining significant influence.  The DCL does not support the ED's proposals related to other changes in ownership interest and instead calls for a holistic, principle-based solution. It also calls for further clarification of the ED's proposals related to the recognition of losses when the carrying amount of the investment has been reduced to nil.

EFRAG has gotten mixed views on ED's proposals related to separate financial statements' treatment of investments in subsidiaries. The DCL seeks further feedback on this matter including on the alternative view expressed in the ED. It also notes the mixed views on proposed transition requirements related to the treatment of contingent consideration and previously unrecognised  gains or losses from transactions with investees and seeks constituents' suggestions for alternative approaches.

• Read EFRAG's full draft comment letter.

• Submit your comments through by 6 January 2025.