Cost of investment
At its meeting in March, the Board added a project to its technical agenda to resolve issues relating to difficulties in restating the cost of an investment in a subsidiary in the separate financial statements of a parent on first time adoption of IFRSs.
At this meeting, the Board discussed potential amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards to provide relief from restating cost in accordance with IAS 27 Consolidated and Separate Financial Statements on transition to IFRSs.
The Board tentatively decided to amend IFRS 1 to allow a parent to use either
- the carrying amount of the net assets of a subsidiary (in accordance with IFRSs) or
- the fair value of a subsidiary at the date of the parent’s transition to IFRSs as its deemed cost in the separate financial statements of the parent on transition to IFRSs.
The cost method in IAS 27 states that ‘investors receive income from the investment only to the extent that the investor receives distributions from accumulated profits of the investee arising after the date of acquisition’. In order to determine whether distributions are from the accumulated profits arising after the date of acquisition, a parent would be required to restate the pre-acquisition accumulated profits under IFRSs for all subsidiaries acquired before the parent’s transition to IFRSs.
The Board tentatively decided to provide relief from these requirements so that:
- if a parent applies the relief from restating the cost of an investment in a subsidiary in accordance with IAS 27 on transition to IFRSs, all accumulated profits of the subsidiary at that date are deemed to be pre-acquisition profits for the purposes of applying the cost method in IAS 27 subsequently.
- if a parent does not use the relief from restating the cost of an investment in a subsidiary in accordance with IAS 27 on transition to IFRSs, the pre-acquisition accumulated profits of the subsidiary under the previous national GAAP at that date are deemed to be the pre-acquisition profits for the purpose of applying IAS 27.