Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate
Comments from ACCA
February 2008
ACCA is pleased to have this opportunity to comment on the Exposure Draft (ED) of proposed amendments to IFRS1 and IAS27 which was considered by ACCA's Financial Reporting Committee.
ACCA responses to specific questions raised by IASB
Deemed cost
Q1 Do you agree with the two deemed cost options as they are described in this exposure draft? If not, why?
We agree that relief should be offered from the existing requirements of IFRS1 for first time adopters in determining the cost of an investment in accordance with IAS27.
We also believe the proposals for using a deemed cost offer a positive solution to the problem of identifying an appropriate carrying value at transition. However, in our response to the Board's exposure draft Cost of an Investment in a Subsidiary , we accepted the previous proposals to also allow the ‘net assets under IFRS' approach to deemed cost. We can see no obvious reason for this option to be rescinded, given that this provides both useful information and is consistent with other elements of financial statements reported using IFRS.
Therefore, whilst we accept the proposals in the current ED, we believe that the original option to allow the ‘net assets under IFRS' approach to identify the carrying value at transition should also be included.
Change in scope
Q2 Do you agree with the proposal to allow the deemed cost option for investments in jointly controlled entities and associates? If not, why?
We agree that the approach should be consistently applied across the full range of investment types.
Cost method
Q3 Do you agree with the proposal to delete the definition of the cost method from IAS 27? If not, why?
We agree with this proposal to delete the definition of the cost method, and effectively replacing this by the proposal that any dividends paid by a subsidiary, jointly controlled entity or associate to its parent entity can be recognised as income by the investor.
Q4 Do you agree with the proposed requirement for an investor to recognise as income dividends received from a subsidiary, jointly controlled entity or associate and the consequential requirement to test the related investment for impairment? If not, why?
As mentioned in our response to question 3, we are in favour of recognising dividends received from their investments in a subsidiary, jointly controlled entity or associate as income in the parent's individual financial statements. We further believe that this treatment is likely to be similar to currently existing GAAPs in many jurisdictions and would therefore also negate any need to apply a deemed cost - there being no difference between an amended IAS27 and the pre-existing GAAP.
We do however have concerns over the consequential amendment to IAS36, as proposed under in paragraph A3(c). Whilst we appreciate that the payment of a dividend from pre-acquisition profits may in some situations be indicative of impairment, we believe that this is not always the case by any means.
The requirement for an impairment test on the investment if the entity has received such a dividend from that investment, irrespective of any indication of impairment is likely to be a significant exercise for larger groups and not cost-effective.
Formation of a new parent
Q5 Do you agree with the proposed requirement that, in applying paragraph 37(a) of IAS 27, a new parent should measure cost using the carrying amounts of the existing entity? If not, why?
We agree with this proposal.
Transition
Q6 Do you agree that prospective application of the proposed amendments to IFRS 1 and IAS 27 is appropriate? If not, why?
We agree that the proposed amendments should be applied prospectively.