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 was open for comment until 20 January 2025.

EFRAG's draft and final comment letters

EFRAG's draft comment letter (DCL) was published on 12th November 2024 and remained open for comments until 6 January 2025.

EFRAG's final comment letter (FCL) was published on 20 January 2025. 

Overall, EFRAG agrees with many of the ED's proposals and considers these to be a positive step towards reducing the existing diversity in practice in the application of IAS 28 requirements, but we also have significant concerns with several of the proposals where there is a need for further simplification and clarifications.  Moreover, based on the feedback, EFRAG recommends that, for its forthcoming agenda consultation, the IASB includes and seeks views on the fundamental review of the equity method (including the scope of its application and the definition of significant influence) as a possible candidate for the future IASB workplan. 

Detailed answers to the ED questions can be found in EFRAG's final comment letter. 

EFRAG supports the following ED proposals: 

• Measurement of cost of an associate or joint venture.
• Transactions with associates and joint ventures: EFRAG supports the proposed requirement for the recognition of full gains or losses. It is also a simplified and less costly solution compared to the other alternatives considered by the IASB.
• Disclosures: EFRAG supports the proposed disclosures with a suggestion to expand their scope in identified areas for the benefit of users and another suggestion to alleviate concerns that some stakeholders have expressed.
• Impairment indicators.

EFRAG has highlighted the key concerns and made suggestions for the following ED proposals: 

• Transaction costs treatment: The ED is silent on the treatment of transaction costs. EFRAG recommends clarifying the accounting treatment of these costs.  

• Acquiring additional ownership interest while retaining significant influence (layered approach): EFRAG disagrees with a full-fledged purchase price allocation (PPA) exercise for each additional acquisition of ownership interest through the ED's proposed layered approach as it is too costly and complex.  EFRAG suggests the IASB explores alternative and simpler approaches and we have suggested a modified-PPA approach as an alternative the IASB could consider as a starting point.

• Other changes in ownership interest while retaining significant influence: due to associated cost and complexity, EFRAG disagrees with the ED's proposal to treat other changes in ownership arising from non-exchange transactions by the investee as deemed purchases or disposals of ownership interest and suggests developing holistic, principle-based solution. 

• Recognition of investor's share of losses: EFRAG supports the ED's proposed exclusion of 'catch-up' losses from the cost of acquiring additional ownership interests.  However, EFRAG recommends that the IASB prohibit the recognition of goodwill for the acquired additional ownership interest/investment if the latter is a de facto funding or bail-out arrangement. 

• Separate financial statements: EFRAG supports the ED's proposed application of a single equity method and suggests that the IASB clarify whether the ED's proposals for the equity method are applicable when an investment is measured at cost in separate financial statements.

• Transition requirements: EFRAG agrees with the proposed transition requirements except for the proposal to require retrospective application of the remaining portion of a previously restricted gain or loss arising from transactions with associates or joint ventures.