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Investor and its Associate or Joint Venture (amendments to IFRS 10 and IAS 28) to
address the conflict between IFRS 10 and IAS 28.15 The amendments require that:
• the partial gain or loss recognition for transactions between an investor and its
associate or joint venture only applies to the gain or loss resulting from the sale or
contribution of assets that do not constitute a business as defined in IFRS 3; and
• the gain or loss resulting from the sale or contribution of assets that constitute a
business as defined in IFRS 3, between an investor and its associate or joint venture
be recognised in full.
In December 2015, the IASB deferred the effective date of these amendments
indefinitely due to feedback that the recognition of a partial gain or loss when a
transaction involves assets that do not constitute a business, even if these assets are
housed in a subsidiary, is inconsistent with the initial measurement requirements of
IAS 28.32(b). This issue will be reconsidered as part of the equity method research
project (see 11 below). However, entities may early apply the amendments before the
effective date.
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We believe that until the amendments become mandatorily effective, and where the non-
monetary asset contributed is an interest in a subsidiary that constitutes a business, entities
have an accounting policy choice as to whether to apply IFRS 10 or IAS 28. This policy
choice arises because of the conflict between the requirements of IFRS 10 deal, which deal
with the specific issue of loss of control, and the requirements of IAS 28, which are more
generic. Once selected, the entity must apply the selected policy consistently. Where the
requirements of IFRS 10 are followed for transactions involving a contribution of an
interest in a subsidiary that constitutes a business, IAS 28 would generally apply to other
forms of non-monetary assets contributed, such as items of property, plant and equipment
or intangible assets and an interest in a subsidiary that does not constitute a business.
However, where an entity elects to apply IFRS 10 paragraph 25 to the loss of control
over all investments in subsidiaries (i.e. those that constitute a business and those that
do not) as discussed above, it will apply IFRS 10 paragraph 25 to the contribution of a
subsidiary that does not constitute a business.
8.2.4
Joint venture becomes an associate (or vice versa)
If a joint venturer loses joint control but retains an interest in an associate, it would
continue to apply the equity method. An entity does not remeasure its retained interest
in an associate when it loses joint control over a joint venture. The same applies where
an entity gains joint control over an associate that becomes an investment in a joint
venture. [IAS 28.24]. In the Basis for Conclusions to IAS 28, the IASB acknowledged that
the nature of the investor-investee relationship changes upon changing from joint
venture to associate (or vice versa). However, since the investment continues to be
accounted for using the equity method (i.e. there is no change in the measurement
requirements) and there is no change in the group, it is not an event that warrants
remeasurement of the retained interest at fair value. [IAS 28.BC30].
If an entity’s ownership interest in an associate or a joint venture is reduced, but the
investment continues to be classified either as an associate or a joint venture
respectively, the entity shall reclassify to profit or loss the proportion of the gain or loss
that had previously been recognised in other comprehensive income relating to that
reduction in ownership interest if that gain or loss would be required to be reclassified
to profit or loss on the disposal of the related assets or liabilities. [IAS 28.25].
The above requirements of IAS 28 also are discussed in Chapter 11 and at 7.4.2.C
and 7.12.3 above.
8.2.5
Joint venture becomes a financial asset (or vice versa)
If a joint venture becomes a financial asset, the measurement method changes. An entity
measures its retained interest in the financial asset at fair value, which becomes its fair
value on initial recognition as a financial asset.
The entity recognises in profit or loss any difference between:
(a) the fair value of any retained interest and any proceeds from disposing of a part
interest in the joint venture; and
(b) the carrying amount of the interest in the joint venture at the date the equity
method was discontinued.
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If a gain or loss previously recognised by the entity in other comprehensive income
would be reclassified to profit or loss on the disposal of the related assets or liabilities,
IAS 28 requires the entity to reclassify the gain or loss from equity to profit or loss when
the equity method is discontinued. For example, gains and losses related to foreign
currency translation adjustments accumulated in equity would be reclassified to profit
or loss. [IAS 28.22, 23].
The above requirements of IAS 28 also are discussed in Chapter 11 at 7.12.2.
An entity may gain joint control over an existing investment (accounted for as a financial
asset). IAS 28 is unclear on how piecemeal acquisitions of a joint venture should be
treated. This issue is discussed in Chapter 11 at 7.4.2.A.
8.2.6
Disposal of an interest in a joint venture
When an entity disposes of its interest in a joint venture and loses joint control, it ceases
to apply the equity method as of that date. It also derecognises its interest and recognises
any gain or loss upon sale, as discussed at 8.2.5 above. [IAS 28.22, 23]. In such cases, an
entity cannot restate its financial statements for the period (or the comparative period)
as if it did not have joint control during the reporting period. IAS 28 requires that the
entity use the equity method up to the date that the joint venturer disposes of its interest
in the joint venture. This assumes that the entity is not exempt from preparing financial
statements by IFRS 10, IAS 27 or IAS 28 and that it is not using the fair value
measurement exemption (see 2.3.1 above).
8.2.7
Interest in a joint venture held for sale
When a joint venturer plans to dispose of part of its interest in a joint venture, it applies
IFRS 5 (see Chapter 4) and only reclassifies the interest to be disposed of as held for sale
when that portion meets the criteria for classification as held for sale. The joint venturer
continues to account for the retained interest in the joint venture using the equity
method until the disposal of the interest classified as held for sale occurs. This is because
an entity continues to have joint control over its entire interest in the joint venture until
it disposes of that interest. Upon disposal, it reassesses the nature of its retained interest
and accounts for that interest accordingly (e.g. as a financial asset is joint control is lost).
[IAS 28.20].
If an interest (or a portion of an interest) in a joint venture no longer meets the criteria
to be classified as held for sale, the interest is accounted for using the equity method
retrospectively from the date of its classificatio
n as held for sale. [IAS 28.21].
The above requirements of IAS 28 also are discussed in Chapter 11 at 6.
8.3
Changes in ownership of a joint operation that is a business
8.3.1
Acquisition of an interest in a joint operation
An entity that acquires an interest in a joint operation that is a business as defined in
IFRS 3 is required to apply, to the extent of its share, all of the principles of IFRS 3 and
other IFRSs that do not conflict with IFRS 11, which include:
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(a) measuring identifiable assets and liabilities at fair value, other than items for which
exceptions are given in IFRS 3 and other IFRSs;
(b) recognising acquisition-related costs as expenses in the periods in which the costs
are incurred and the services are received, with the exception that the costs to
issue debt or equity securities are recognised in accordance with IAS 32 –
Financial Instruments: Presentation – and IFRS 9;
(c) recognising deferred tax assets and deferred tax liabilities that arise from the initial
recognition of assets or liabilities, except for deferred tax liabilities that arise from
the initial recognition of goodwill;
(d) recognising as goodwill any excess of the consideration transferred over the net
amount of identifiable assets acquired and the liabilities assumed; and
(e) testing for impairment a cash-generating unit to which goodwill has been allocated
at least annually, and whenever there is an indication that the unit may be
impaired, as required by IAS 36 – Impairment of Assets. [IFRS 11.B33A].
In addition, the entity should disclose the information that is required in those IFRSs in
relation to business combinations.
The IASB recognised that the acquisition of an interest in a joint operation did not meet
the definition of a business combination in IFRS 3, but it concluded that it was the most
appropriate approach to account for an acquisition of an interest in a joint operation
whose activity meets the definition of a business, as defined in IFRS
3.
[IFRS 11.BC45E, BC45F].
The above approach also applies to the formation of a joint operation, but only if an
existing business (as defined in IFRS 3) is contributed by one of the parties that
participates in the joint operation. In other words, the above approach should not be
applied if the parties that participate in the joint operation only contribute (groups of)
assets that do not constitute businesses to the joint operation on its formation.
[IFRS 11.B33B]. The requirements applies to the acquisition of both the initial interest and
additional interests in a joint operation (while still maintaining joint control) in which
the activity of the joint operation constitutes a business. [IFRS 11.21A].
If a joint operator increases its interest in a joint operation that is a business (as defined
in IFRS 3) by acquiring an additional interest while still retaining joint control, it should
not remeasure its previously held interest in that joint operation. [IFRS 11.B33C].
This requirement does not apply to ‘the acquisition of an interest in a joint operation
when the parties sharing joint control, including the entity acquiring the interest in the
joint operation, are under the common control of the same ultimate controlling party or
parties both before and after the acquisition, and that control is not transitory’.
[IFRS 11.B33D].
8.3.2
Control or joint control over a former joint operation
In December 2017, the IASB issued an amendment to IFRS 3 and IFRS 11: Previously
Held Interests in a Joint Operation, as part of the Annual Improvements to IFRS
Standards 2015-2017 Cycle. The amendments to IFRS 3 clarify that, when an entity
obtains control of a business that is a joint operation, it applies the requirements for a
business combination achieved in stages, including remeasuring previously held
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interests in the assets and liabilities of the joint operation at fair value. In doing so, the
acquirer remeasures its entire previously held interest in the joint operation. The
amendments to IFRS 11 apply to a party that participates in, but does not have joint
control of, a joint operation, that then obtains joint control of the joint operation in
which the activity of the joint operation constitutes a business as defined in IFRS 3. The
amendments clarify that the previously held interests in that joint operation are not
remeasured. An entity applies those amendments to transactions in which it obtains
joint control on or after the beginning of the first annual reporting period beginning on
or after 1 January 2019. Earlier application is permitted.
8.3.3
Former subsidiary becomes a joint operation
In some transactions, it is possible that an entity would lose control of a subsidiary, but
retain an interest in a joint operation. In terms of IFRS 10 paragraph 25, in accounting
for a loss of control of a subsidiary, a parent is required to:
(a) derecognise the assets and liabilities of the subsidiary;
(b) recognise any investment retained in the former subsidiary at fair value at the date
when control is lost; and
(c) recognise any resulting gain or loss in profit or loss.
However, it is unclear how these requirements should be applied when the retained
interest is in the assets and liabilities of a joint operation. One view is that the retained
interest should be remeasured at fair value. Another view is that the retained interest
should not be derecognised or remeasured at fair value, but should continue to be
recognised and measured at its carrying amount.
In July 2016, the Interpretations Committee discussed this issue and noted that
paragraphs B34 to B35 of IFRS 11 (see 6.6 above) could be viewed as conflicting with the
requirements in IFRS 10, which specify that an entity should remeasure any retained
interest when it loses control of a subsidiary. The IASB decided not to add this issue to
its agenda but, instead, to recommend that the Board consider the issue at the same time
the Board further considers the accounting for the sale or contribution of assets to an
associate or a joint venture.
In the meantime, we believe that, when a parent loses control over a subsidiary but
retains an interest in a joint operation that is a business, entities have an accounting
policy choice as to whether to remeasure the retained interest at fair value.
8.3.4
Other changes in ownership of a joint operation
IFRS 11 does not explicitly address the accounting for a former joint operation, and the
situations in which:
• it becomes an associate or a financial instrument – when a former joint operation
becomes an associate or financial instrument, it would generally be appropriate to
derecognise the assets and liabilities previously recognised in accordance with
IFRS 11 and account for the new interest based on the applicable IFRS at that date.
This approach may also be appropriate when the rights to assets or obligations for
liabilities that the entity held when it was a joint operation differ from its rights or
obligations when it ceases to be a party to a joi
nt operation;
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• the rights to assets or obligations with respect to that joint operation change –
when a joint operator’s rights to assets or obligations for liabilities change (e.g.
other operators obtain rights to the assets or assume obligations for those
liabilities), the joint operator would generally:
• derecognise the relevant portion of the assets and liabilities;
• recognise the fair value of any consideration received;
• recognise the resulting gain or loss; and
• recognise any rights to assets it acquires from other joint operators, and obligations
it assumes from other joint operators, or from the joint arrangement itself.
If an interest in a joint operation (or portion thereof) no longer meets the criteria to be
classified as held for sale, an entity restates the financial statements for the periods since
classification as held for sale. [IFRS 5.28].
8.3.5
Disposal of interest in a joint operation
When an entity disposes of its interest in a joint operation, it ceases to account for
the rights to assets and obligations for liabilities, and recognises any gain or loss as
of the disposal date, in accordance with the relevant IFRS. The only exception
would be if the same rights to assets or obligations for liabilities replaced that
interest directly. In this case, there would be no change in accounting, because, in
both cases, the assets and liabilities are recognised in accordance with the relevant
IFRS (see 6 and 8.3.4 above).
Consistent with the treatment of joint ventures (see 8.2.6 above) an entity continues to
reflect its interest in a joint operation for the reporting period (and comparative period)
in which it held that interest. An entity does not restate its financial statements as if it
never held the interest in the disposed joint operation.
8.4
Changes in ownership of a joint arrangement that does not
constitute a business
8.4.1
Joint operator obtains control or parties that participate in a joint
arrangement but do not have joint control obtain joint control
At its January 2016 meeting, the Interpretations Committee discussed whether
previously held interests in the assets and liabilities of a joint operation, which does not
constitute a business, should be remeasured when: