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FEE agrees that there is diversity in practice as to how investors should recognise their share of the changes in the net assets of an investee that are not recognised in the profit or loss or other comprehensive income of the investee, and are not distributions received (investee’s other net asset changes). Therefore, FEE supports the IASB’s initiative to resolve this issue.
However, FEE does not support the proposed amendments to IAS 28 since they are inconsistent with some of the concepts of other IFRSs. For instance, IAS 1 on the Presentation of Financial Statements requires that owner changes be presented within a statement of changes in equity and non-owner changes in the statement of comprehensive income. On that basis, the investee’s other net asset changes should arguably be presented in the statement of comprehensive income of the investor, rather than in equity as proposed in the ED.
FEE disagrees with the Board’s conclusions that the investee’s other net asset movements should all be taken directly to equity. FEE further believes that it is inappropriate for amounts initially recognised directly to equity to subsequently be reclassified to P/L when the investor discontinues use of the equity method.
FEE is not convinced that a single treatment should be applied to all of an investee’s other net asset changes. The appropriate treatment of a change in net assets is likely to depend upon the nature of the underlying transaction. For instance, for a dilution through issuance of shares by an investee to a third party, it is difficult to understand why these should not be treated as partial disposals by the investor, with the resultant gain or loss taken to the investor’s P&L. Yet for other equity movements, for example granting of stock options to employees, inclusion in P&L of the credit side of the entry, may be inappropriate. Accordingly, there is a potential for complexity as well as scope for different opinions. Therefore, this issue merits further conceptual considerations before conclusion can be reached.
The proposed treatment also creates a new type of reclassification (‘equity recycled to profit or loss’). The conceptual basis for such reclassification is not established and the proposed treatment could introduce undue complexity in IFRSs. It is also likely to add confusion on the nature of items initially recognised outside of P&L that are subject to subsequent reclassification and the timing of such reclassification. This is undesirable and, consequently, FEE does not support the proposed amendments.
FEE thinks that the current ED illustrates rather than adequately addresses issues related to equity method of accounting. The Board should further consider conceptual solutions to the existing difficulties in the application of the equity method of accounting more broadly before final conclusion is reached.