A company is generally required to account for investments in associates and joint ventures under the equity method1. To address longstanding application questions on equity accounting under IAS 28 Investments in Associates and Joint Ventures, the International Accounting Standards Board (IASB) is proposing to amend the standard.
The exposure draft covers a number of different areas, including when an investor:
- obtains significant influence or joint control over an existing investee (that was not previously accounted for under the equity method);
- has transactions with an equity-accounted investee; and
- has an interest in an associate or joint venture that is reduced to zero.
The IASB also proposes to reorder the existing requirements in IAS 28.
The proposals represent a step forward in addressing application questions about the equity method with some new requirements and clarifications. This would help to drive consistency of financial reporting for investments in associates and joint ventures.
What areas do the proposals address?
The proposals address the following areas.
| Area | Key proposals |
| An existing investment becomes an equity-accounted investee | An investor would determine the initial cost of the investment in an associate or joint venture at the fair value of the consideration transferred, including the fair value of the previously held interest. |
| An investor’s interest changes but the investee continues to be accounted for under the equity method | An investor purchases an additional interest Any difference between the consideration transferred for the additional interest and the investor’s additional share of the fair value of the investee’s assets and liabilities would be recognised as goodwill (included as part of the carrying amount of the investee) or as a gain on a bargain purchase in profit or loss. The existing investment would not be remeasured. An investor disposes of a portion of its interest A gain or loss would be recognised in profit or loss. This would be measured as the difference between any consideration received and the carrying amount of the interest disposed of. Other changes in an investor’s ownership interest The accounting for other changes would be consistent with either purchasing or disposing of an interest (as set out above). An example of such a change would be an issuance of shares, with the accounting depending on whether the issuance has increased the investor’s stake or diluted it. |
| An investor has reduced its interest to zero due to losses | An investor would not recognise (‘catch up’) unrecognised losses when purchasing an additional interest. In addition, an investor would recognise separately its share of the investee’s profit or loss and its share of the investee’s other comprehensive income. |
| Transactions with equity-accounted investees | An investor would recognise in full the gains and losses from all ‘upstream’ and ‘downstream’ transactions with its associates and joint ventures, including transactions involving loss of control of a subsidiary, in profit or loss. This proposal would replace the current IAS 28 requirement that limits the recognition of gains and losses from such transactions. |
| Deferred tax on initial recognition of an investee | An investor would include a deferred tax asset or liability in the investment’s carrying amount, based on its share of the associate or joint venture’s identifiable net assets and liabilities at fair value. |
| Contingent consideration | An investor would measure contingent consideration at fair value. Classification and subsequent measurement would also be consistent with the existing requirements in IFRS 3 Business Combinations. |
| Impairment | A decline in fair value would be assessed in relation to the carrying amount of the investment rather than the original cost. |
These proposals would apply prospectively, except for the recognition of gains and losses on transactions with equity-accounted investees, which would be applied retrospectively.
Contingent consideration would be recognised and measured at fair value at the date of transition.
What new disclosures would be required?
The proposals would introduce several new disclosure requirements, including the following:
- A reconciliation of the carrying amount of equity-accounted investments – detailing the share of profit or loss and other comprehensive income, distributions, impairment losses and ownership changes.
- Gains or losses from other ownership changes and downstream transactions.
- Information on any contingent consideration arrangements.
Have your say
The IASB has requested comments by 20 January 2025. Take this opportunity to read and comment on the proposals.
For further information on the proposals, speak to your KPMG contact.
1 Provided the exemption criteria in paragraphs 17 to 19 of IAS 28 do not apply.
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