International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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a surrogate for such a value. Where there is both a purchased call and a written put
option, particularly where the options have the same fixed redemption price, it is likely
that the fair values of the purchased call option and written put option will differ.
7 FUTURE
DEVELOPMENTS
The IASB has been engaged in a number of implementation projects that have led or
could lead to ‘narrow-scope amendments’ to IFRS 10 and other IFRSs and could change
the consolidation procedures applied or the accounting for non-controlling interests.
However, these have all been put ‘on hold’ until the finalisation, or are being
reconsidered as part, of related research projects.
7.1
Sale or Contribution of Assets between an Investor and its
Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)
One issue that the IASB has been trying to resolve was a conflict between the IFRS 10
requirements relating to loss of control over a subsidiary and those of IAS 28 for
transactions where a parent sells or contributes an interest in a subsidiary to an associate
or a joint venture. In order to resolve the conflict, in September 2014, the IASB had
issued Sale or Contribution of Assets between an Investor and its Associate or Joint
Venture (Amendments to IFRS 10 and IAS 28).
These amendments, where applied, would require the gain or loss resulting from the
loss of control of a subsidiary that does not contain a business (as defined in IFRS 3) –
as a result of a sale or contribution of a subsidiary to an existing associate or a joint
venture (that is accounted for using the equity method) – to be recognised only to the
extent of the unrelated investors’ interests in the associate or joint venture. The same
applies if a parent retains an investment in a former subsidiary and the former subsidiary
is now an associate or a joint venture that is accounted for using the equity method.33
However, a full gain or loss would be recognised on the loss of control of a subsidiary
that constitutes a business, including cases in which the investor retains joint control of,
or significant influence over, the investee.
In the Basis of Conclusions, the IASB clarifies that the amendments do not apply where
a transaction with a third party leads to a loss of control (even if the retained interest in
the former subsidiary becomes an associate or joint venture that is accounted for using
the equity method), nor where the investor elects to measure its investments in
associates or joint ventures at fair value in accordance with IFRS 9. [IFRS 10.BC 190I].
These amendments were to be applied prospectively to transactions occurring in
annual periods beginning on or after 1 January 2016, with earlier application
permitted.34 However, in December 2015, the IASB issued a further amendment –
Effective Date of Amendments to IFRS 10 and IAS 28. This amendment defers the
effective date of the September 2014 amendments until the IASB has finalised any
revisions that result from the IASB’s research project on the equity method
(although the IASB now plans no further work on this project until the Post-
implementation Review of IFRS 11 is undertaken).35 Nevertheless, the IASB has
Consolidation procedures and non-controlling interests 527
continued to allow early application of the September 2014 amendments, which
must be disclosed, as it did not wish to prohibit the application of better financial
reporting. [IFRS 10.C1C, BC190L-190O, IAS 28.45C, BC37J].36
The amendments are discussed at 3.3.2 and 3.3.2.B above.
7.2
Sale or contribution of assets to a joint operation (where the
entity has joint control or is a party to the joint operation)
In July 2016, the Interpretations Committee discussed whether an entity should remeasure
its retained interest in the assets and liabilities of a joint operation when the entity loses
control of a business, or an asset or group of assets that is not a business. In the transaction
discussed, the entity either retains joint control of a joint operation or is a party to a joint
operation (with rights to assets and obligations for liabilities) after the transaction.
Because of the similarity between the transaction being discussed by the
Interpretations Committee and a sale or contribution of assets to an associate or joint
venture (see 7.1 above), the Interpretations Committee decided not to add the issue
to its agenda, but instead to recommend that the IASB consider the issue at the same
time that it further considers the accounting for the sale or contribution of assets to
an associate or a joint venture. The Interpretations Committee observed that the
Post-implementation Review of IFRS 10 and IFRS 11 would provide the IASB with
an opportunity to consider loss of control transactions and a sale or contribution of
assets to an associate or joint venture.37
The decision of the Interpretations Committee, and the accounting for such
transactions are discussed further at 3.3.3 above.
7.3
Fair value measurement: unit of account
As discussed at 3.3.2.D above, although IFRS 10 requires that any investment retained
in the former subsidiary is to be recognised at its fair value at the date when control is
lost, no guidance is given in the standard as to how such fair value should be determined.
In September 2014, the IASB had issued an Exposure Draft that proposed, inter alia,
some clarifications to the requirements for measuring fair value, in accordance with
IFRS 13, for investments in subsidiaries, joint ventures and associates.38 However, in
January 2016, the IASB decided not to consider this topic further until the Post-
implementation Review (‘PIR’) of IFRS 13 is complete. 39 In May 2017, the IASB
published a request for information for the PIR of IFRS 13.40 The work on the PIR has
now concluded. At its March 2018 meeting, the IASB considered the findings of the PIR
and concluded that IFRS 13 is working as intended. However, the IASB decided that it
would consider the PIR’s findings on the usefulness of disclosures in its work on Better
Communication in Financial Reporting, continue liaison with the valuation profession,
monitor new developments in practice and promote knowledge development and
sharing. The IASB also decided that it would conduct no other follow up activities, for
example further work in the area of prioritising the unit of account or Level 1 inputs
(because the costs of such work would exceed its benefits).41
A Project Summary and Feedback Statement is expected to be published in the fourth
quarter of 2018.42 These issues are discussed further in Chapter 14 at 5.1.1.
528 Chapter
7
7.4
Financial Instruments with Characteristics of Equity project
As discussed more fully at 6.5 above, the Interpretations Committee and the IASB have
been debating the accounting for put options written on non-controlling interests (‘NCI
puts’) over a number of years. At its meeting in March 2013, the IASB tentatively decided to
reconsider the requirements in paragraph 23 of IAS 32, including whether all or particular
put options and forward contracts written on an entity’s own equity should be measured on
a net basis at fair v
alue.43 However, the IASB decided subsequently that this project should
be incorporated into the broader project looking at the distinction between liabilities and
equity – the Financial Instruments with Characteristics of Equity (‘FICE’) project.44
In June 2018, the IASB issued Discussion Paper – Financial instruments with
Characteristics of Equity45 (which is open for comments until 7 January 2019). The
Discussion Paper proposes an approach that articulates the principles for classification
of financial instruments as either financial liabilities or equity (from the perspective of
the issuer), without significantly altering most existing classification outcomes of IAS 32
(although there would be some changes). There are separate classification principles for
derivative financial instruments (because of particular challenges arising from
classification of derivatives on own equity).
The IASB’s preferred approach would also require consistent accounting for
redemption obligation arrangements, including NCI puts and compound instruments.
The requirement to identify a gross liability component would also apply to redemption
obligation arrangements that require a transfer of a variable number of own shares, if
the amount of the contractual obligation to transfer own shares is independent of the
entity’s available economic resources.
Applying the Board’s preferred approach (should the proposals ultimately lead to
amendments to IFRSs) to the accounting for an NCI put in the consolidated financial
statements would thus require:
• recognition of a liability component at the redemption amount (which will be
subsequently measured in accordance with IFRS 9);
• derecognition of the NCI – the ordinary shares of the subsidiary that represent the
NCI – on which put options are written, at the fair value of the ordinary shares of
the subsidiary at the date the put options are issued; and
• recognition of an equity component for the (implicit) written call option on the
subsidiary’s shares. If the NCI put is a fair value put, the equity component would
be nil.
Under the IASB’s preferred approach, gains or losses, including those arising from
subsequent measurement of the liability component, would be recognised as income and
expense, while changes in the equity components would be recognised in the statement of
changes in equity. If the NCI put is exercised and settled by delivering cash at the end of the
option exercise period, the financial liability would be derecognised and the carrying
amount of the equity component would be reclassified within equity. If the NCI put expires
unexercised, the financial liability and the carrying amount of the equity component would
be derecognised, and the NCI in the shares of the subsidiary would be recognised.46
See Chapter 43 at 12 for further discussion of the FICE project, including the
Discussion Paper.
Consolidation procedures and non-controlling interests 529
7.5
Mandatory purchase of non-controlling interests
As discussed more fully at 6.2.4 above, neither IFRS 10 nor IFRS 3 specifically addresses
the accounting for a sequence of transactions that begins with an acquirer gaining
control over another entity, followed by it acquiring additional ownership interests
shortly thereafter. This frequently happens where public offers are made to a group of
shareholders and there is a regulatory requirement for an acquirer to make an offer to
the non-controlling shareholders of the acquiree. This issue had been considered by
the Interpretations Committee and was escalated to the IASB. In February 2017, the
IASB tentatively decided as part of its FICE project 47 (see 7.4 above) to consider
whether it should take any action to address the accounting for mandatory tender
offers, including potential disclosure requirements.48
As noted at 7.4 above, in June 2018, the IASB issued Discussion Paper – Financial
instruments with Characteristics of Equity. The Discussion Paper notes that
classification based on an assessment of contractual terms consistent with IFRS 9 would
result in, for example, the obligations that arise in mandatory tender offers, which have
similar consequences to those that arise from written put options, not being considered
for the purpose of classification because they are beyond the scope of IAS 32. Other
IFRSs might have specific guidance for issues that arise when an entity accounts for
rights and obligations arising from law (such as IAS 37). However, the IASB did not
design other IFRSs to address the classification of liabilities and equity.
Alternatively, if the treatment of rights and obligations that arise from law were
considered as equivalents of contractual terms under IAS 32 then mandatory tender
offers might be accounted for consistently with written put options. However, such a
fundamental change to the scope of IAS 32 and IFRS 9 to include rights and obligations
that arise from law could have consequences beyond the distinction between liabilities
and equity.
In the IASB’s preliminary view, an entity would apply the IASB’s preferred approach to
the contractual terms of a financial instrument consistently with IAS 32 and IFRS 9. The
IASB will consider whether it should take any action to address the accounting for
mandatory tender offers, including potential disclosure requirements, following its
analysis of responses to this Discussion Paper.49
References
1
Sale or Contribution of Assets between an 3 IASB Update, May 2016.
Investor and its Associate or Joint Venture,
4
Effective Date of Amendments to IFRS 10 and
(Amendments to IFRS 10 and IAS 28), IASB,
IAS 28, IASB, December 2015.
September 2014, IFRS 10, paras. 26, B99A.
5 Sale or Contribution of Assets between an
2
Sale or Contribution of Assets between an
Investor and its Associate or Joint Venture,
Investor and its Associate or Joint Venture,
(Amendments to IFRS
10 and IAS
28),
(Amendments to IFRS
10 and IAS
28),
IFRS 10, paras. 25, 26, B98 and B99.
IFRS 10, para. C1C and IAS 28, para. 45C.
530 Chapter
7
6 Sale or Contribution of Assets between an 28 DI/2012/2, para. 8.
Investor and its Associate or Joint Venture,
29 IFRIC Update, January 2013.
(Amendments to IFRS
10 and IAS
28), 30 IASB Update, March 2013.
IFRS 10, paras. 25, 26, B99A.
31 Put options written on non-controlling interests
7 Sale or Contribution of Assets between an
(Proposed amendments to IAS 32), Project
Investor and its Associate or Joint Venture,
news, IASB Website (archive), 23 June 2014.
(Amendments to IFRS
10 and IAS
28), 32 IFRIC Update, November 2016.
IFRS 10, paras. 26, B99A, Example 17.
33 Sale or Contribution of Assets between an
8
Exposure Draft (ED/2014/4), Measuring
Investor and its Associate or Joint Venture,
Quoted Investments in Subsidiaries, Joint
; (Amendments to IFRS
10 and IAS
28),
Ventures and Associates at Fair Value
IFRS 10, paras. 26, B99A.
(Proposed amendments to IFRS 10, IFRS 12,
34 Sale or Contribution of Assets between an
IAS 27, IAS 28 and IAS 36 and Illustrative
Investor and its Associate or Joint Venture,
Examples for IFRS
13), IASB,
(Amendments to IFRS
10 and IAS
28),
September 2014.
IFRS 10, para. C1C and IAS 28, para. 45C.
9
IASB Update, July 2015.
35 IASB Update, May 2016.
10 IASB Update, January 2016.
36 Effective Date of Amendments to IFRS 10 and
11 Request for Information – Post-implementation
IAS 28.
Review – IFRS 13 Fair Value Measurement,
37 IFRIC Update, July 2016.
IASB, May 2017.
38 ED/2014/4.
12 Work plan, IASB website, 19 July 2018.
39 IASB Update, January 2016.
13 IFRIC Update, July 2015.
40 Request for Information – Post-implementation
14 IFRIC Update, July 2016.
Review – IFRS 13 Fair Value Measurement,
15 IASB Update, May 2009.
IASB, May 2017.
16 IFRIC Update, January 2013.
41 IASB Update, March 2018.
17 IFRIC Update, May 2009.
42 Work plan, IASB website, 19 July 2018.
18 IFRIC Update, November 2013.
43 IASB Update, March 2013.
19 IFRIC Update, November 2006.
44 Put options written on non-controlling interests
20 Put options written on non-controlling interests
(Proposed amendments to IAS 32), Project
(Proposed amendments to IAS 32), Project
news, IASB Website (archive), 23 June 2014.
news, IASB Website (archive), 23 June 2014.
45
Discussion Paper (DP/2018/1), Financial
21 IFRIC Update, November 2016.
Instruments with Characteristics of Equity,
22 IFRIC Update, March 2013.
IASB, June 2018.
23 IASB Update, May 2013.
46 DP/2018/1, paras. 5.35-5.42.
24 Put options written on non-controlling interests
47 Put options written on non-controlling interests
(Proposed amendments to IAS 32), Project
(Proposed amendments to IAS 32), Project