07 April 2013

Deloitte commented on conflict between IFRS 10 and IAS 28 in relation to elimination of profits

Deloitte’s IFRS Global Office issued a letter on the IASB’s ED/2012/6 'Sale or Contribution of Assets between an Investor and its Associate or Joint Venture'. The proposals seek to address the conflict between the requirements IFRS 10 and IAS 28 (2011) in respect of the elimination of profits.

Deloitte welcomes the IASB’s initiative to address the conflict between the requirements of IAS 27(2008) and SIC-13 that has been incorporated into IFRS 10 and IAS 28(2011), and agrees that whether the subsidiary or assets sold or contributed constitute a business is a reasonable basis for distinguishing between a ‘downstream’ transaction, that should be subject to the requirements of IAS 28(2011), and a disposal, that should be subject to the requirements of IFRS 10. However, Deloitte notes that distinguishing between transactions on this basis, (as would also be the case under the proposals of ED 2012/7 Acquisition of an Interest in a Joint Operation), places additional emphasis on the definition of a business.

As such, Deloitte supports the work of the IFRS Interpretations Committee to produce additional guidance on the application of this concept as part of the IASB’s post implementation review of IFRS 3.

Deloitte recognises that the exposure draft proposes a pragmatic solution to the conflict and recommend that a fuller consideration of the conceptual basis for accounting for sales and contributions of assets between an investor and its associate or joint venture be incorporated into the fundamental assessment of the equity method of accounting planned as part of the IASB’s Technical Work Programme.

Deloitte agrees with the proposal to restrict the recognition of the gain, or loss on sale, or contribution of a subsidiary that does not constitute a business, to an associate or joint venture, as Deloitte believes that there is a difference between a normal ‘downstream’ transaction between an investor and its associate, or joint venture, and the significant economic event, (as described in the Basis for Conclusions of IFRS 10), of loss of control of a business.

Deloitte believes that whether the subsidiary sold or contributed constitutes a business is a reasonable basis for distinguishing between the two and provides an appropriate means of dealing with the current conflict between IFRS 10 and IAS 28(2011), pending the fundamental assessment of the equity method of accounting planned as part of the IASB’s Technical Work Programme, (as part of which the conceptual concerns noted in paragraph BC7 of the Basis for Conclusions of the exposure draft can be considered more fully). However, Deloitte notes that distinguishing between transactions on this basis places more emphasis on the definition of a business. Deloitte therefore supports the work of the IFRS Interpretations Committee to develop additional guidance on the application of this concept as part of the IASB’s post implementation review of IFRS 3 as this will assist in consistent application of the ED’s proposals.

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