IAS28 - exemptions

[hubertd]

Hi Everyone,

Paragraph 17 of IAS28 states that: "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."

It doesn't state however how such investments are to be measured. I assume in line with IFRS 9 ,so either at FV through profit or loss or FVOCI. Any views?

[Marek Muc]

To me, it just means that an entity without subsidiaries that meets these exemption criteria is not required to produce additional financial statements (other than separate financial statements under IAS 27). If an entity has investments in associates but no subsidiaries and does not meet these exemption criteria, it must prepare financial statements in which these investments are accounted for using the equity method. This is despite not preparing consolidated financial statements. It's a common misconception that the equity method is required only in consolidated financial statements.

I need to add what I've just written to the knowledge base

[JRSB]

On that final point Marek "It's a common misconception that the equity method is required only in consolidated financial statements." - is that to say that a single company with an associate, in its standalone company accounts should still show a share of the associate's profit/loss in its own P&L (etc)?

[Marek Muc]

Yes, if it isn't exempted under IAS 28.17 (refer also to IAS 27.8).

[hubertd]

Thanks Marek. And yes, this is very confusing. Anyway, I think I found the answer to my question. We're exempted under IAS 28.17. Then IAS 27.8 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 further to that 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"

So basically, we have a choice and I'm planning to use IFRS 9 (either FVOCI or FV through PnL)

[Marek Muc]

Just to clarify: you can use all three options outlined in IAS 27.10 when preparing separate financial statements irrespective of whether you are exempted under IAS 28.17. The IAS 28.17 exemption just spares you from preparing extra financial statements beyond the separate ones.

[hubertd]

Thanks Marek. It's really helpful clarification. Seems it's only now I have the full understanding of it. I've been always confused in the past.