Summary
Developments, Key Differences & History
Compared to IFRS
Interpretations
Rejection Notices
Questions & Answers
Articles
AASB website
IFRIC Rejections and Guidance
- November 2008 - Potential effect of IFRS 3 Business Combinations (as revised in 2008) and IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) on equity method accounting
- November 2006 - SIC-12 Consolidation—Special Purpose Entities – Relinquishment of Control
- January 2007 - Financial Instruments puttable at an amount other than Fair Value
- March 2006 - Separate financial statements issued before consolidated financial statements
- April 2003 - Equity method application
- November 2002 - Possible amendment to SIC-12
- August 2002 - The effects of rights of veto on control
- August 2002 - Reciprocal interests
- February 2002 - Investments in associates – investments after discontinuing equity accounting
1. November 2008 - Potential effect of IFRS 3 Business Combinations (as revised in 2008) and IAS 27 Consolidated and Separate Financial Statements (as amended in 2008) on equity method accounting
Issue:
The IFRIC staff noted that the FASB’s Emerging Issues Task Force (EITF) recently added to its agenda, EITF Issue No. 08-6 Equity Method Investment Accounting Considerations. EITF 08-6 addresses several issues resulting from the recently concluded joint project by the IASB and FASB on accounting for business combinations and accounting and reporting for non-controlling interests that culminated in the issue of IFRS 3 (as revised in 2008) and IAS 27 (as amended in 2008) and SFAS 141(R) and SFAS 160.
IFRIC's Tentative decision:
EITF 08-6 addresses the following four issues:
1 How the initial carrying value of an equity method investment should be determined
2 How an impairment assessment of an underlying indefinite-lived intangible asset of an equity method investment should be performed
3 How an equity method investee’s issue of shares should be accounted for
4 How to account for a change in an investment from the equity method to the cost method.
The IFRIC noted that IAS 28 Investments in Associates provides explicit guidance on issues 2 and 4. Therefore, the IFRIC does not expect divergence in practice and [decided] not to add these issues to its agenda. The IFRIC asked the staff to carry out additional research and analysis of issues 1 and 3 for consideration at a future IFRIC meeting.
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2. November 2006 - SIC-12 Consolidation—Special Purpose Entities – Relinquishment of Control
Issue:
The IFRIC considered an issue concerning the relative weight to be given to the various indicators in paragraph 10 of SIC-12 Consolidation—Special Purpose Entities in determining who should consolidate a special purpose entity (SPE). The issue focused on a situation in which all the decisions necessary for the ongoing activities of the SPE had been predetermined by its creator and in which the majority of the ‘equity interest tranche’ had been transferred to a third party. The question was whether in such a situation the benefits and risks factors specified in paragraph 10(c) and (d) of SIC-12 took precedence over the factors in paragraph 10(a) (activities of the SPE conducted in accordance with specific business needs of one party) and paragraph 10(b) (one party has decision-making powers or has delegated them by setting up an ‘autopilot’ mechanism).
IFRIC Decision:
The IFRIC noted that, under IAS 27 Consolidated and Separate Financial Statements, control, which is the basis for consolidation, has two components: power to govern and rights to obtain benefits.
The IFRIC noted that the factors set out in paragraph 10 of SIC-12 are indicators only and not necessarily conclusive. The IFRIC believed that this approach was deliberate, in acknowledgement of the fact that circumstances vary case by case. In the IFRIC’s view, SIC-12 requires that the party having control over an SPE should be determined through the exercise of judgement and skill in each case, after taking into account all relevant factors. For this reason, the IFRIC decided not to take the issue onto the agenda.
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3. January 2007 - Financial Instruments puttable at an amount other than Fair Value
Issue:
The IFRIC received a submission regarding the classification in the financial statements of the holders of financial instruments puttable at the option of the holders at an amount other than fair value (the puttable instruments). The submission noted that the issuer’s contractual obligation to deliver cash requires the issuer to recognise financial liabilities in its financial statements in accordance with IAS 32 Financial Instruments: Presentation. The issues are:
- how the puttable instruments should be accounted for in the financial statements of the holders, in particular, whether the accounting for the instruments in the financial statements of the holders should be symmetrical with that in the financial statements of the issuer
- whether an entity that has control over an entity that has no equity instruments in issue is required to present consolidated financial statements in accordance with IAS 27 Consolidated and Separate Financial Statements as well as to recognise goodwill in accordance with IFRS 3 Business Combinations.
IFRIC Decision:
Regarding the first issue, the IFRIC noted that IAS 32 and IAS 39 do not directly address whether the accounting for financial instruments in the financial statements of the holders should be symmetrical with that in the financial statements of the issuer. However, the IFRIC noted that the issuer of a financial instrument is required to classify it in accordance with IAS 32, whereas the holder is required to classify and account for it in accordance with IAS 39.
The IFRIC noted that IAS 39 requires the holder to identify embedded derivatives of hybrid financial instruments. IAS 39 also requires the holder to account for the embedded derivatives separately if all the conditions in IAS 39 paragraph 11 are met. These requirements apply to the holder regardless of whether any embedded derivatives are accounted for separately in the financial statements of the issuer. In the light of the existing guidance in IAS 39, the IFRIC decided that the first issue should not be taken onto the agenda.
Regarding the second issue, the IFRIC noted that the control of a subsidiary, and the resulting requirement for a parent to present consolidated financial statements in accordance with IAS 27 (including the requirement to recognise goodwill in accordance with IFRS 3) does not necessarily depend on the parent’s owning equity instruments of the subsidiary. The IFRIC, therefore, decided not to take the second issue onto the agenda.
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4. March 2006 - Separate financial statements issued before consolidated financial statements
Issue:
The IFRIC considered a comment letter that had been received objecting to the draft reasons for not taking this onto IFRIC’s agenda. The comment letter argued that it is possible to interpret IAS 27 as permitting separate accounts to be published when there is a reasonable expectation that consolidated accounts will be published shortly. IFRIC members rejected this approach based on the current text of the standard and reaffirmed the following text, previously published, of its reasons for not taking the item onto its agenda.
The IFRIC considered whether separate financial statements issued before consolidated financial statements could be considered to comply with IFRSs.
IFRIC Decision:
The IFRIC noted that IAS 27 requires that separate financial statements should identify the financial statements prepared in accordance with paragraph 9 of IAS 27 to which they relate (the consolidated financial statements), unless one of the exemptions provided by paragraph 10 is applicable.
The IFRIC decided that, since the Standard is clear, it would not expect diversity in practice and would not take this item onto its agenda
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5. April 2003 - Equity method application
Issue:
Whether the presumption in the Exposure Draft to improve IAS 28 Accounting for Investments in Associates that an investor has “significant influence” over the operations of an investee if it holds directly or indirectly through subsidiaries, 20 per cent or more of the voting power of the investee is met. The examples fell into two main categories:
(a) When the investor has a subsidiary that is less than wholly-owned, and the subsidiary holds 20 per cent of the voting power of the investee; and
(b) When the investor holds 20 per cent or more of the voting power of the investee through associates or joint ventures (rather than subsidiaries).
IFRIC decision:
In the examples that fell under:
(a) the presumption was met.
(b) in one case, the conclusion that equity accounting would be applied was based on the mechanics of equity accounting rather than using the 20 per cent presumption, and in another case, it was unclear as to whether the presumption was met.
The IFRIC agreed to pass this issue to the Improvements project to clarify the wording in IAS 28. Paragraph 6 of the revised IAS 28 was revised to address this issue (paragraph 4 of the exposure draft).
References
Improvements Exposure Draft IAS 28 paragraph 4:
“If an investor holds, directly or indirectly through subsidiaries, 20 per cent or more of the voting power of the investee, it is presumed that the investor has significant influence....” [emphasis added]
Improvements Standard IAS 28 paragraph 6:
“If an investor holds, directly or indirectly (eg through subsidiaries),...
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6. November 2002 - Possible amendment to SIC-12
Issue:
The IASB, at its October 2002 meeting, requested that the IFRIC explore whether, an appropriate interim solution would be for the IFRIC to make a limited amendment to SIC-12 Consolidation - Special Purpose Entities, in the light of the fact that the Board’s project on consolidation policies and practices (including their application to SPEs) is unlikely to result in a new Standard in the near future.
The amendment would clarify that a “majority” of benefits or risks is intended to refer to exposure to the majority of the variability of expected economic outcome, rather than the absolute economic outcome. One aim of making such an amendment would be convergence towards the FASB’s approach in developing its project on SPEs.
IFRIC Decision:
IFRIC decided not to recommend such an amendment to SIC-12. Reasons included:
- SIC-12 is not interpreted in practice as referring to absolute economic outcome, so the limited amendment proposed would likely have little, if any, practical effect;
- There are difficult issues about exactly what is meant by variability of outcome (as well as other issues about the interpretation of SIC-12), that the IFRIC believes are best resolved by the Board in its project; and
- As the FASB’s approach was still being finalised, the IFRIC considered it premature to amend SIC-12 in any partial manner. The IFRIC’s analysis was reported to the Board at its December meeting.
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7. August 2002 - The effects of rights of veto on control
Issue:
The IFRIC discussed an issue relating to the effect of rights of veto given to a third party on the assessment of whether an owner of more than half of the voting rights in an enterprise has control.
IFRIC Decision:
The IFRIC agreed not to add this issue to its agenda, because the Board is expected to address this issue in the near future as part of its project on Consolidation and Special Purpose Entities.
At the February 2004 meeting, the Board tentatively agreed that holders of veto rights may negate apparent power even if
- those rights are limited to the ability to block actions if:
- those veto rights relate to operating and financing policies; and
- those veto rights relate to decisions in the ordinary course of business and not
- only to fundamental changes in the organisation (such as disposal of business units or acquisition of significant assets).
The Board will continue to discuss this issue as part of the Consolidation and Special Purpose Entities project.
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8. August 2002 - Reciprocal interests
Issue:
The IFRIC considered circumstances in which A owns an interest in B, and B concurrently owns an interest in A. Those investments are known as reciprocal interests (or ‘cross-holdings’). The issue was whether the IFRIC should provide guidance as to the appropriate accounting:
(a) when the cross-holdings are accounted for using the equity method under IAS 28 Accounting for Investments in Associates (considered in August 2002)
(b) when a control relationship exists, and holdings are accounted for under IAS 27 Consolidated and Separate Financial Statements (considered in April 2003)
IFRIC Decision:
Regarding (a), the IFRIC agreed not to require publication of an Interpretation on this issue because paragraph 20 of IAS 28 (revised 2003) requires elimination of reciprocal interests (through application of consolidation concepts).
Regarding (b), the IFRIC decided to wait until the amendments to improve IAS 27 are finalised (as part of the Business Combinations Phase II project) before considering whether to take this issue onto the agenda.
The IFRIC is expected to reconsider these issues once the Business Combinations Phase II project is finalised, as expected in 2005.
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9.February 2002 - Investments in associates – investments after discontinuing equity accounting
Issue:
How an investor should account for an additional investment made in an associate when the equity method of accounting has been discontinued because the investor’s share of the associate’s post-acquisition losses is such that the carrying amount of the investment is nil.
IFRIC Decision:
The IFRIC decided not to add this issue onto its agenda because it does not meet IFRIC’s agenda criterion of having practical and widespread relevance.
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