Equity method in separate financial statements: proposed amendments to IAS27

Comments from ACCA to the International Accounting Standards Board (IASB)
3 February 2014


General Comments

For practical reasons (as set out in the response to Question 1 below), ACCA supports the proposed option for an entity to adopt equity accounting in its separate financial statements. We also agree that the proposals for transition and for first-time adopters of IFRS are proportionate, given the nature of the accounting changes in the ED.

We also draw attention to our further comments in the response to Question 5. As a supporter of the global convergence of accounting standards as far as is possible, ACCA would question the fact that the IASB is proposing changes to IFRS in response to a request by one or a limited number of national jurisdictions. We have also questioned the extent to which the IASB now views separate financial statements as being within its remit.

Whilst our responses to Question 5 concern broader issues than the specifics of the changes proposed, we believe that these would merit clarification by the IASB when opening up for comment the proposals in the ED.


Specific comments

Question 1- Use of the equity method

The IASB proposes to permit the equity method as one of the options to account for an entity’s investments in subsidiaries, joint ventures and associates in the entity’s separate financial statements.

Do you agree with the inclusion of the equity method as one of the options? If not, why?

ACCA concurs overall with the reintroduction of an option for entities to adopt the equity method for the investments in subsidiaries, joint ventures and associates in their separate financial statements, rather than be restricted to using either the cost basis or IFRS 9.

Our support is based on two main factors. Firstly, the proposals concern an option, rather than a requirement. In addition, for certain jurisdictions, the ED may be a practical solution, with low perceived risks internationally (as they concern the separate financial statements only).

We also draw attention to the matters on which we believe that further explanations are required, as part of this ED (as set out in our response to Question 5).

Question 2- Transition provisions

The IASB proposes that an entity electing to change to the equity method would be required to apply that change retrospectively, and therefore would be required to apply IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Do you agree with the proposed transition provisions? If not, why and what alternative do you propose?

We agree with the proposed transition provisions. As pointed out by the IASB in paras BC12-14 of the ED, the adoption of equity accounting in the separate financial statements will be a straightforward process.

Question 3 - First-time adopters

The IASB does not propose to provide any special relief for first-time adopters. A first time adopter electing to use the equity method would be required to apply the method from the date of transition to IFRSs in accordance with the general requirements of IFRS 1 First-time Adoption of International Financial Reporting Standards.

Do you agree that a special relief is not required for a first-time adopter? If not, why and what alternative do you propose?

We agree that no implementation assistance will be needed for first-time adopters, such as prospective application. This is for the same reason as set out in our response to Question 2 above.

Question 4 - Consequential amendment to IAS 28 Investments in Associates and Joint Ventures

The IASB proposes to amend paragraph 25 of IAS 28 in order to avoid a conflict with the principles of IFRS 10 Consolidated Financial Statements in situations in which an entity loses control of a subsidiary but retains an ownership interest in the former subsidiary that gives the entity significant influence or joint control, and the entity elects to use the equity method to account for the investments in its separate financial statements.

Do you agree with the proposed consequential amendment? If not, why?

In view of our overall support for the principal change proposed (Question 1), ACCA also supports this consequential amendment, which appears to provide a logical clarification. We would also have welcomed a clearer overall explanation of this change in para BC11 of the ED, for example by confirming the situations which the proposed amendment needs to differentiate.

Other comments

We would not wish the IASB to create an expectation that it will routinely amend IFRS to accommodate the needs of local regulators. Where there are conflicts between IFRS and local GAAP, another solution may be more appropriate, such as an amendment to local requirements for consistency with IFRS, given that the jurisdiction has already decided to adopt IFRS.

In addition, there will remain instances (such as regulated financial services) where differences between IFRS and the requirements imposed by individual jurisdictions are likely to remain. In such instances, additional compliance costs will be unavoidable as a consequence of the local regulation.

ACCA would also have appreciated an explanation of the apparent change of view by the IASB on the use of the equity method in separate financial statements. The proposed reintroduction of the equity method follows its removal in 2003. The principal reason for this earlier removal was that it is unnecessary to repeat information given in in the consolidated / individual financial statements, because the focus of the separate financial statements is on the performance of the investments concerned as investments. Furthermore in para BC7of this ED, the IASB appears to place separate financial statements at a distance, by pointing out that entities produce them by choice, or due to local requirements.