Instruments to be treated according to the equity method

[fr.perezca]

Hello again IFRS community. I am writing to you on this occasion since I have a question of practical application related to the application method, specifically about what instruments (if any) should be measured according to the equity method when there is significant influence. There may be cases where the investor may own common shares of an investee (of one or more series) along with other instruments such as preferred shares, warrants, options, convertible debt instruments or debt instruments whose "interest" rate depends on the performance of the investee (EBIT, EBITDA, etc.), futures or forwards, etc. (some of them providing potential voting rights currently exercisable) How do I know which of all these instruments will be measured in accordance with IFRS 9 or IAS 28? I know that paragraph 13 of IAS 28 indicates that they must be instruments that give access to the entity's returns, and that this would rule out some of the instruments that provide potential voting rights currently exercisable, since one thing is the evaluation of the significant influence (based on voting power) and another measurement according to equity method or not. Therefore, if anyone has experience in determining what is treated with the equity method and what is not, with investees that have complex capital structures (with more than one of the instruments indicated above) I would appreciate if you could help me by answering my concern. using the examples I just mentioned. If you know of a real case, of which financial statements can be consulted (with disclosures that really disclose hahaha) that would be great too.

It should be noted that my query is "academic", I am not facing a problem like this at the moment, thank goodness hahaha, but the doubt kills me.

At the time I read material from Deloitte's Accounting Research Tool (I no longer have access to it, sorry) which (in my opinion) based a good part of its analysis on the evaluation of In-substance common stock investments of the US GAAP, but then I read KPMG's comments (in the document I link below, page 160) and it seems that IAS 28 is different and less restrictive than US GAAP to determine whether an instrument should be measured according to the equity method to IAS 28.
https://assets.kpmg.com/content/dam/kpm ... p-2023.pdf

Thanks!!!

[Leo]

I think even IAS 32 deals with the classification of financial instrument from the issuer's perspective, it is important to assess whether an instrument either equity or liability. If it's an equity instrument, the instrument might be included in the equity method to account for the investment. However, if it's a liability, then, it would be unlikely to be included in the equity method, and it would make more sense to account it either as a derivative or a receivable.

I think the preference shares are the most likely subject to this assessment. The other financial instrument you mentioned would be more likely to be treated as a derivative or a receivable.

[Ketan Marwah]

Hi,

When applying the equity method, an investor’s share is based on their current ownership interest. Thus, potential voting rights aren’t considered unless they, in substance, represent an existing ownership (IAS 28.12-13).

[hubertd]

Equity method doesn’t mean the investment needs to be an equity instrument. Significant influence can be evidenced in equity like or even enhanced debt investments. If you have significant influence you may need to apply equity method no matter what instrument your nvestment is. You may need to but not necesserily hsve to. In certain circumstances investor with significant influence may prepare separate financial statements as its only statements in which case it can account for an associate either at equity method, cost or in line with ifrs 9.

[Marek Muc]

See the second paragraph in this section https://ifrscommunity.com/knowledge-bas ... nt-venture

[fr.perezca]

Thanks guys. important clarifications. They have helped me clarify my doubts about it.