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The IASB is expected to shortly publish amendments to IAS 28 Investments in Associates and Joint Ventures that were originally exposed in ED/2012/3 Equity Method: Share of Other Net Asset Changes (Proposed amendments to IAS 28) in November 2012. EFRAG, and the majority of other respondents to the IASB’s due process, did not support the proposals when they were originally exposed and EFRAG still has concerns.
The amendments would introduce requirements for how investors should recognise their share of the changes in the net assets of an equity-accounted investee that are not recognised in profit or loss or other comprehensive income of the investee, and that are not distributions received (‘other net asset changes’).
Investors would be required to recognise other net asset changes directly in equity. This conflicts with a fundamental principle of IAS 1 Presentation of Financial Statements that only transactions with equity holders impact equity directly. It will also result in economically similar transactions (direct and indirect acquisitions and disposals) being accounted for differently and allows deferral of losses as reductions in the carrying value of the investee due to dilution will only be recognised in profit or loss when the investor ceases to apply the equity method. Finally it would require modifying the prevailing practice in Europe.
The alternative accounting model identified by EFRAG (largely based on the recommendations made by the IFRS Interpretations Committee to the IASB) does not have these problems and EFRAG believes the IASB should consider it before the amendments are published.