The exposure draft proposes to allow an entity, at its date of transition to IFRSs in its separate financial statements, to use a deemed cost to account for an investment in a subsidiary, jointly controlled entity or associate. The exposure draft proposes that an entity may choose as the deemed cost of such investments either the fair value or the previous GAAP carrying amount of the investment at the entity’s date of transition to IFRSs (see paragraphs 23A and 23B of the draft amendments to IFRS 1 and paragraphs BC8-BC13 if the Basis for Conclusions).

Do you agree with the two deemed cost options as they are described in this exposure draft? If not, why?

Yes. The proposed approach is a reasonable and pragmatic way to facilitate implementation of the requirements. However, it is unclear whether the fair value, if used, is determined at the acquisition date or at the date of transition to IFRSs.

The G100 believes that the anomaly in which the ‘cost’ concession has only previously been made available to entities upon initial adoption of IFRS should be removed. If the concession were to be made available prospectively, it would create a situation where entities in jurisdictions yet to transition to IFRS may still take advantage of it, whereas entities in jurisdictions which recently transitioned to IFRS (such as Australia) are not allowed access to this accounting treatment for internal reconstructions during the two-year period since transition to Australian equivalents to IFRSs. This difference in approach creates an unacceptable inconsistency in accounting for internal reconstructions undertaken since the transition and those occurring before the transition.
 

The exposure draft proposes that the deemed cost option should be available for the initial measurement of investments in jointly controlled entities and associates when an entity adopts IFRSs in its separate financial statements (see paragraph BC14 of the Basis for Conclusions).

Do you agree with the proposal to allow the deemed cost option for investments in jointly controlled entities and associates? If not, why?

Yes. The proposed changes achieve consistency in accounting for investments of different types.

 

Cost Method

The exposure draft proposed to delete the definition of the ‘cost method’ from IAS 27. Additionally, the exposure draft proposes to amend IAS 27 to require an investor to recognize as income dividends received from a subsidiary, jointly controlled entity or associate in its separate financial statements. The receipt of this dividend requires the investor to test its related investment for impairment in accordance with IAS 36 ‘Impairment of Assets’ (see paragraphs 4 and 37B of the draft amendments to IAS 27 and paragraphs BC15-BC20 of the Basis for Conclusions).

Do you agree with the proposal to delete the definition of the cost method from IAS 27? If not, why?

Yes.

Do you agree with the proposed requirement for an investor to recognize as income dividends received from a subsidiary, jointly controlled entity or associate and the consequential requirement to test the related investment for impairment? If not, why?

Yes, in respect of the recognition of dividends received as income.

The G100 is strongly opposed to the proposed requirement to perform an impairment test upon the payment of each dividend. We believe that this requirement would be onerous and burdensome and imposes a rule which overrides the requirements in IAS 36 ‘Impairment of Assets’. For example, the conduct of such tests applies notwithstanding the indicators of impairment in IAS 36 and will be particularly burdensome in company groups having a large number of subsidiaries.

The Exposure Draft does not provide a compelling explanation of why it is necessary to mandate an impairment test in these circumstances. The G100 suggests that the indicators of impairment in IAS 36 be reviewed to incorporate circumstances where dividends paid by subsidiaries are, for example, greater than current earnings.
 

The exposure draft proposes that in applying paragraph 37(a) of IAS 27 to the formation of a new parent, the new parent should measure cost using the carrying amounts in the separate financial statements of the existing entity at the date of the formation (see paragraph 37A of the draft amendments to IAS 27 and paragraphs BC21 and BC22 of the Basis for Conclusions).

Do you agree with the proposed requirement that, in applying paragraph 37(a) of IAS 27, a new parent should measure cost using the carrying amounts of the existing entity? If not, why?

The G100 strongly supports this proposal. However, as it is unclear whether the proposals will operate at any level within a group or only where a new ultimate parent entity is created clarification is required.

As the proposals stand there are likely to be implementation issues around the application of the proposed paragraph 37(a) in relation to the restrictive effect of the use of the term ‘wholly owned subsidiary’. This requirement is likely to be interpreted as meaning that the only restructures that qualify for this treatment are those involving entities with ordinary shares and thus may preclude entities having other types of equity from applying the requirements. For example, preference shareholders with a capped equity claim may exist in the existing parent but for a variety of reasons, including legal, taxation, regulatory, they are not transferred to the new parent even though their legal rights and economic interests are retained.
 

The exposure draft proposes that the amendments to IFRS 1 and IAS 27 shall be applied prospectively.

Do you agree that prospective application of the proposed amendments to IFRS 1 and IAS 27 is appropriate? If not, why?

Yes. The G100 considers that amendments to Standards should be applied prospectively and that entities should be able to early-adopt such changes.