Equity method exemptions

[hubertd]

Hi Everyone,

According to IAS 28:17

An entity need not apply the equity method to its investment in an associate or a joint venture if the entity is a parent that is exempt from preparing consolidated financial statements by the scope exception in paragraph 4(a) of IFRS 10 or if all the following apply:
(a) The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the entity not applying the equity method.
(b) The entity’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets).
(c) The entity did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation, for the purpose of issuing any class of instruments in a public market.
(d) The ultimate or any intermediate parent of the entity produces financial statements available for public use that comply with IFRS, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with IFRS 10.

Then IAS27:8 says: “An entity that is exempted in accordance with paragraph 4(a) of IFRS 10 from consolidation or paragraph 17 of IAS 28 (as amended in 2011) from applying the equity method may present separate financial statements as its only financial statements.“

AND finally: IAS 27:10

When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures and associates either:
(a) At cost;
(b) In accordance with IFRS 9; or
(c) Using the equity method as described in IAS 28

My question is: if my company ticks off all of the points under IAS 28:17 and I choose to account for my associates in accordance with IFRS 9, what does my Parent (we're 100% subsidiary) need to do? Would it need to apply the equity method for any associates, i.e. would they need to make an adjustment to reverse out my IFRS 9 treatment and replace it with the equity method accounting?

[Leo]

I think if your company elects to apply the investment accounting under IFRS 10, it means you can produce separate financial statements and account for the investments at fair value under IFRS 9.

I don't know whether in this context, applying IFRS 9 is the only option.

[kevin.aycardo]

If the Parent is not exempt in preparing consolidated financial statements under IFRS 10.4(a), I believe the Parent shall account for the investment in associate by Your Company under equity method in its consolidated FS.

I couldn't find the explicit statement from the standard so I stand to be corrected. But because IAS 28.17 exemption only applies to intermediate entities, it follows that the usual accounting (i.e. equity method) applies to non-exempt entities.

[hubertd]

Thanks Kevin. That is the view I've been closest too as well. Not that it helps me however -)I've been hoping I could apply IFRS 9 fair value for these investments given I'm outsourcing fair value valuations. My parent won't allow me to do fair values once they would need to apply equity method.

[Marek Muc]

Your choices under IAS 27.10 have no impact on the accounting in the consolidated financial statements of your parent. So yes - they would have to reverse your entries under IFRS 9. PS. Why not opt for the simpler solution, i.e. the cost method under IAS 27.10(a) in your separate financial statements?

[hubertd]

Actually, I'm not sure what financial statements I should prepare. I'm falling under the exemption under IAS 27.10 but my Parent would never 'allow' me to prepare the separate financial statements at cost or in line with IFRS 9 whereas they would need to do all the legwork to equity account for my associates. On that count I will need to equity account for my associates but I don't know 'which' statements I need to prepare. According to the decision tree I would need to prepare the separate statements as my only financial statements. Just wondering, would it mean I need to prepare them in line with equity method given my Parent wants me to equity account for my associates? Or do I prepare 'economic interest' financial statements? Is the exemption in IAS 27.10 binding or optional?

[Marek Muc]

The exemption in IAS 27.8 is optional so you could prepare two sets of financial statements: separate under IAS 27 and 'economic interest' under IAS 28. But if the goal is for you to account for the associates using the equity method, you can prepare only the separate financial statements and opt for equity accounting for associates under IAS 27.10(c).

[hubertd]

Thanks Marek. This is what I was thinking about. Seems like best solution in my circumstances.

[Marek Muc]

Is your parent using any consolidation software? These types of software generally support equity method accounting, which should eliminate the need for manual effort.

[hubertd]

British government is consolidating in a spreadsheet -). At least my parent department does.

[JRSB]

some fairly sizeable organisations use spreadsheets for consolidation in the UK, I wonder if it differs elsewhere.

[hubertd]

I worked for Maersk in NL and BE. We used Hyperion group wise. Countries were reporting in Hyperion and sending their numbers to regions which consolidated in Hyperion and sent the numbers for final global consolidation at Centre in Copenhagen, again done in Hyperion.

[Leo]

British companies are not tidy at all when it comes to accounting. I've seen some quite large groups doing conso in a spreadsheet, and some incapable of providing a statutory TB in one click!

In my experience, french companies are the best in bookkeeping.

Hyperion is the old SAP BFC, it was discontinued many years ago.

[JRSB]

Am I right to say that France has a mandated 'chart of accounts'? In which case that would explain it.

[Leo]

Yes, companies follow the same codification. And don't get me cancelled here, but I think there is a culture element in it. French people like when it's clear, so they practice an accounting by rules as opposed to IFRS. The concept of fair value is almost inexistent in French GAAP, and accounting is very aligned to tax and legal.

On the contrary, if you grab a set of accounts of a random UK company on the Companies House, you would notice that the presentation of the BS is quite arbitrary.

[Marek Muc]

So you keep derivatives off balance sheet, for example?

[Leo]

yes.

I was talking about french GAAP for statutory accounts. French GAAP for group accounts tends to converge with IFRS.

[Marek Muc]

Well, this approach may have worked until like 19th century when there were no complex financial instruments...

[JRSB]

in my experience of french administration, 19th century sounds about right. the amount of payroll deductions all with different rules.....