Agenda decisions on accounting for an investment

In January 2019, the IFRS IC finalised two agenda decisions related to the accounting for an investment in a subsidiary in the entity’s separate financial statements. The first agenda decision looks at how to account for a partial disposal when the entity has elected to recognise its investment at cost in accordance with IAS 27, whilst the second agenda decision looks at the opposite fact pattern of a step acquisition.

Keywords: Mazars, Thailand, IFRS, IFRS IC, IAS 27, OCI, IFRS 9, Accounting, Investment, Subsidiary, Separate Financial Satements

19 March 2019

Partial disposal of the investment in a subsidiary accounted for at cost in the separate financial statements

In the situation submitted to the IFRS IC, the entity loses control of its subsidiary and retains neither joint control nor significant influence on the investee. It therefore has to account for its equity investment in accordance with IFRS 9.

Similarly to IAS 28.22(b) on investments in associates and joint ventures and IAS 27.11B, it first needs to account, in profit or loss, for the difference between the cost of the retained interest and the fair value of the investment at the date control is lost.

The IFRS IC concluded that, subsequently, the investment retained, if not held for trading, is eligible to be accounted for at fair value with changes in fair value recorded in other comprehensive income (OCI) as defined by IFRS That election has to be made when the entity first applies IFRS 9 to that investment.

Step acquisition of an investment in a subsidiary accounted for at cost in the separate financial statements

In the reverse situation of stepping up from an equity investment accounted for under IFRS 9 because it is neither an associate, a joint venture nor a subsidiary to a subsidiary, the IFRS IC concluded that, since IAS 27 does not define cost, two methods are possible to determine the cost of the investment in the subsidiary depending on whether the entity considers that the step acquisition involves the entity:

  • exchanging its initial interest, plus consideration paid for the additional interest, for a controlling interest in the investee (fair value as deemed cost approach), or
  • purchasing the additional interest while retaining the initial interest (accumulated cost approach).

Such choice is however considered by the IFRS IC as being an accounting policy choice, which needs to be consistently applied to such operations and disclosed in the notes to the financial statements. However, Committee members consider that the first of these two methods would provide more useful information to users of financial statements than the second.

When using the second method, regardless of where, in profit or loss or OCI, the entity had presented changes in fair value of the initial interest under IFRS 9, the difference between the fair value of the initial interest at the date of obtaining control and its original cost is to be recognised in profit or loss.