Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value

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1 Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value Proposed amendments to IFRS 10, IFRS 12, IAS 27, IAS 28 and IAS 36 and Illustrative Examples for IFRS 13 Exposure Draft ED/2014/4, issued by the International Accounting Standards Board (IASB) in September 2014 Comments from ACCA 16 January 2015 ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer businessrelevant, first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We support our 170,000 members and 436,000 students in 180 countries, helping them to develop successful careers in accounting and business, with the skills needed by employers. We work through a 1

2 network of 91 offices and centres and more than 8,500 Approved Employers worldwide, who provide high standards of employee learning and development. Through our public interest remit, we promote appropriate regulation of accounting, and conduct relevant research to ensure that accountancy continues to grow in reputation and influence. Further information about ACCA s comments on the matters discussed here may be obtained from the following: Paul Cooper Corporate Reporting Manager, ACCA paul.cooper@accaglobal.com ACCA welcomes the opportunity to provide comments on the above Exposure Draft (ED). Our Global Forum for Corporate Reporting has considered the questions raised, and its views are reflected in the following general and specific comments. 2

3 GENERAL COMMENTS ACCA concurs with a number of these proposals to clarify existing Standards. We have also expressed some reservations, which are detailed below in our response to Question 2. These reservations might not have arisen, had the IASB explained more fully the issues reported to it, and which have resulted in the clarifications proposed in the ED. SPECIFIC COMMENTS We now comment on the specific questions raised in the ED, as follows: Question 1 The unit of account for investments in subsidiaries, joint ventures and associates The IASB concluded that the unit of account for investments within the scope of IFRS 10, IAS 27 and IAS 28 is the investment as a whole rather than the individual financial instruments included within that investment (see paragraphs BC3 BC7). Do you agree with this conclusion? If not, why and what alternative do you propose? 3

4 ACCA response We agree that, as explained in para. BC6 of the ED, the nature of the relationship with the investee is the relevant characteristic when considering the unit of account for investments in subsidiaries, joint ventures and associates. This is how these investments will be considered in practice by preparers and users of the financial statements (as well as determining the main Standard which would apply to them, such as IFRS 10). Consequently, the unit of account is best reflected by considering the investment as a whole, and not the individual instruments of which it is comprised. Question 2 Interaction between Level 1 inputs and the unit of account for investments in subsidiaries, joint ventures and associates The IASB proposes to amend IFRS 10, IFRS 12, IAS 27 and IAS 28 to clarify that the fair value measurement of quoted investments in subsidiaries, joint ventures and associates should be the product of the quoted price (P) multiplied by the quantity of financial instruments held (Q), or P Q, without adjustments (see paragraphs BC8 BC14). Do you agree with the proposed amendments? If not, why and what alternative do you propose? Please explain your reasons, including commenting on the usefulness of the information provided to users of financial statements. 4

5 ACCA response The IASB proposes to confirm that quoted investments and cashgenerating units should be measured in accordance with the quoted price. As the title of the ED indicates, this method will apply to a wide range of ownership interests, from a small percentage to one which confers control over the investee. Many preparers are familiar with the concepts of control premia (for larger stakes in an investee) or valuation discounts (where there is less than significant influence). However, it is clear that paras. 69 and 80 of IFRS 13 rule out the use of such adjustments to quoted prices. The changes proposed in the ED can therefore be seen as consistent with the existing provisions in IFRS 13. The clarifications furthermore support objective and verifiable information through the P x Q method. However, we do not view the P x Q method as being necessarily realistic, and our support for this method is based only on the simplicity and ease of application it offers. This method entails ignoring any control premium, which will vary over time, but by doing so, the P x Q method is liable to create an impairment on the first day of the acquisition of a stake. Investments held for operational purposes are also inaccurately reflected through a mechanical fair value methodology of this type. 5

6 Notwithstanding the limited effects of this confirmation that the P x Q method should be applied (including because of its adoption in practice already as explained in para BC12 (b) of the ED), we therefore understand the concern expressed in the Alternative View included in the ED. The P x Q valuation method (Qu. 2) is inconsistent with the view that the investment as a whole should be seen as the unit of account (Qu. 1). This may be due to different reasoning within the IFRS underlying the IASB s proposals how an entity views the unit of account (e.g. IFRS 10, IAS 28: Qu. 1) and the required method of applying fair value (IFRS 13: Qu. 2). The IASB may need to consider why this difference has arisen, and whether it should be allowed to persist without planned amendment. Question 3 Measuring the fair value of a CGU that corresponds to a quoted entity The IASB proposes to align the fair value measurement of a quoted CGU to the fair value measurement of a quoted investment. It proposes to amend IAS 36 to clarify that the recoverable amount of a CGU that corresponds to a quoted entity measured on the basis of fair value less costs of disposal should be the product of the quoted price (P) multiplied by the quantity of financial instruments held (Q), or P Q, without adjustments (see paragraphs BC15 BC19). To determine fair value less costs of disposal, disposal costs are deducted from the fair value amount measured on this basis. 6

7 Do you agree with the proposed amendments? If not, why and what alternative do you propose? ACCA response We concur with the IASB view that para 80 of IFRS 13 is relevant to the calculation of the fair value of a quoted CGU, and that the proposal has the advantages of relevance and verifiability which come with the use of Level 1 inputs. Our reservation expressed in response to Qu. 2 above is also applicable to Qu. 3. However, it is likely to have less of an impact in respect of impairment, which requires Value In Use to be calculated and taken into account as well. Question 4 Portfolios The IASB proposes to include an illustrative example to IFRS 13 to illustrate the application of paragraph 48 of that Standard to a group of financial assets and financial liabilities whose market risks are substantially the same and whose fair value measurement is categorised within Level 1 of the fair value hierarchy. The example illustrates that the fair value of an entity s net exposure to market risks arising from such a group of financial assets and financial liabilities is to be measured in accordance with the corresponding Level 1 prices. 7

8 Do you think that the proposed additional illustrative example for IFRS 13 illustrates the application of paragraph 48 of IFRS 13? If not, why and what alternative do you propose? ACCA response Notwithstanding the reservations already expressed, we agree that the proposed example does adequately illustrate how Level 1 inputs should be applied to the portfolio exception in para. 48 of IFRS 13, thereby clarifying that the fair value methodology is appropriate to this off-setting exception. In view of the amendments to other Standards proposed above, we also agree that an example is sufficient, as opposed to an amendment to IFRS 13 being necessary. Question 5 Transition provisions The IASB proposes that for the amendments to IFRS 10, IAS 27 and IAS 28, an entity should adjust its opening retained earnings, or other component of equity, as appropriate, to account for any difference between the previous carrying amount of the quoted investment(s) in subsidiaries, joint ventures or associates and the carrying amount of those quoted investment(s) at the beginning of the reporting period in 8

9 which the amendments are applied. The IASB proposes that the amendments to IFRS 12 and IAS 36 should be applied prospectively. The IASB also proposes disclosure requirements on transition (see paragraphs BC32 BC33) and to permit early application (see paragraph BC35). Do you agree with the transition methods proposed (see paragraphs BC30 BC35)? If not, why and what alternative do you propose? ACCA response We consider that the transition provisions, as set out and explained in the ED, represent an appropriate balance between compliance and practicality. In the former respect, we agree that regard is needed to the prohibition on the subsequent reversal of an impairment loss in para. 124 of IAS 36 (para BC33 (a)). 9