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Comments from ACCA
April 2007

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the exposure draft of proposed amendments to IFRS 1 for the cost of investment in a subsidiary, which was considered by ACCA's Financial Reporting Committee . I am writing to give you their views.

ACCA's responses to questions raised for comment by IASB

Q1. Use of net assets or fair value at transition date as deemed cost

We agree that these are acceptable substitutes for actual cost where this is not known or cannot be readily established. However these may well vary significantly from actual cost, could that be established, and are therefore arbitrary substitutes. We note that in paragraph BC4 these measures are claimed to provide useful information of values at transition date, but quite rightly no claim to approximate to cost is made.

Q2. Determination of distributions as pre-acquisition

We agree that the proposed approach is simpler when using the deemed cost approach, but it is likely to maximise the extent of pre-acquisition profits that, if distributed, would lead to a write-down of the deemed cost. As noted above the deemed costs allowed under this amendment would be arbitrary and could well be considerably above actual cost in many cases.

There seem two main consequences from such arbitrary blocks on distributions that could result. Firstly it calls into question the whole treatment in IAS27 of distributions from pre-acquisition profits as reductions in the cost of investment. We consider that the better amendment would be the substitution of this rule with an impairment test on the investment's carrying amount in the case of such distributions. Secondly it may continue to inhibit the take-up of IFRS as the basis of preparation of the individual financial statements of holding companies and intermediate holding companies, which can already be observed in Europe since the transition of their consolidated accounts in 2005.

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