The International Accounting Standards Board (IASB) is taking important steps to improve the application of the equity method of accounting under IAS 28 Investments in Associates and Joint Ventures. The changes, outlined in an Exposure Draft issued on 19 September 2024, aim to address long-standing application questions about the equity method by introducing new requirements and clarifications, thereby providing clearer and more consistent financial reporting guidelines for investments in associates and joint ventures.
Why the changes?
IAS 28 requires entities to use the equity method when accounting for investments in associates and joint ventures in their consolidated financial statements. However, in practice, the lack of detailed guidance has led to diverse interpretations and inconsistencies. These inconsistencies have made it challenging for users to compare financial statements across entities.
To resolve this, the IASB’s proposed amendments focusing on:
- Clarifying how the equity method should be applied,
- Aligning the guidance with other IFRS standards,
- Enhancing disclosures to support the above two focus areas for better transparency.
Key proposals at a glance
The IASB’s proposals revolve around five key areas, all designed to bring uniformity, precision, and improved disclosures.
- Standardising the measurement of investment cost
A key challenge with IAS 28 has been the lack of clear guidance on how to determine the cost of an investment when an investor obtains significant influence over an associate, specifically, whether any previously held ownership interest should be measured at fair value and how to recognise and measure any contingent consideration.
The proposals suggest:
- The initial cost should reflect the fair value of the consideration transferred, including the fair value of any previously held interest.
- Contingent consideration should be recognised at fair value, with ongoing fair value changes (unless classified as equity which is not remeasured) recognised in profit or loss.
- When an investor increases or decreases its stake but retains significant influence, the additional ownership should be measured at fair value, and any difference between consideration paid and the investor’s share of fair value should be treated as either goodwill or a bargain purchase.
2. Clarifying the recognition of the investor’s share of losses
Investors often face uncertainty when their investment’s carrying amount reduces to zero due to losses. Should they “catch up” unrecognised losses if they later acquire more interest?
Where an investor has reduced its interest to zero due to losses, IASB proposes:
- No requirement to ‘catch up’ unrecognised losses when purchasing additional interest after reaching a zero carrying amount.
- Investors should recognise their share of profit or loss and other comprehensive income as separate components.
- Transactions with equity-accounted investees
Under current IAS 28 rules, gains from transactions with associates or joint ventures, especially those involving the loss of control over a subsidiary to entities associate or joint venture are only partially recognised, conflicting with IFRS 10 which requires recognition in full of the gain or loss on losing control of a subsidiary.
The proposed change:
- Require investors to recognise full gains or losses from all transactions with associates and joint ventures (resulting from all ‘upstream’ and ‘downstream), bringing consistency with IFRS 10.
- Applying the equity method in separate financial statements
Entities sometimes choose to apply the equity method in separate financial statements under IAS 27 Separate Financial Statements. The proposed amendments to IAS 28 would also apply in such cases, ensuring consistent treatment across both consolidated and separate financial statements.
- Impairment assessment
Currently, IAS 28 guidance leaves ambiguity on whether impairment should be assessed against the original cost or the carrying amount of the investment.
The IASB proposes:
For impairment to be assessed by comparing the fair value of the investment with its carrying amount, not the original cost, providing a more relevant measure of recoverability.
Enhanced disclosure requirements
To complement the technical changes, the Exposure Draft proposes new and improved disclosure requirements, aimed at giving users a clearer picture of an entity’s investments and their performance. The proposals are as follows:
- A detailed reconciliation of equity-accounted investments showing profits, losses, comprehensive income, distributions, impairments, and changes in ownership.
- Information on gains or losses from ownership changes and downstream transactions.
- Clear disclosures about contingent consideration arrangements.
- Aligned disclosure requirements in IFRS 12 Disclosure of Interests in Other Entities and IAS 27, with simplified disclosures for entities applying IFRS 19 Subsidiaries without Public Accountability.
What’s next?
The IASB is finalizing amendments to IAS 28 following stakeholder feedback on Exposure Draft ED/2024/7. The final amendment is expected soon and may significantly affect how entities apply the equity method. Stakeholders should begin preparing for potential changes in reporting, systems, and disclosures. Updates will be shared to support impact assessments once the final amendments are published.
References
IFRS Foundation. Exposure Draft – Equity Method of Accounting, IAS 28 Investments in Associates and Joint Ventures [September 2024].
By Fredrick Tito,
Senior IFRS consultant and trainer at AARO Academy
