IASB Seeks Clarifications on Recognition of Unrealized Losses and Profits on Transactions between Investor and Associate
The IASB has issued an exposure draft, which has proposed to clarify when should the losses and profits that has been unrealized on transactions, taking place between an associate and an investor, be completely recognized.
The ED has proposed that both IFRS 10 Consolidated Financial Statements as well as International Accounting Standards 28-Investments in Associates and Joint Ventures should be amended. However, no amendments have been proposed to International Accounting Standards 27 and 28.
The issue that has been discussed in the limited scope amendment, which has been proposed by the IASB, arose as a result of the request made to the IFRS Interpretations Committee for clarifying the definition of ‘non monetary asset’ utilized in SIC 13 as well as International Accounting Standard 28.
The Committee considered this matter, which further helped it in taking note of the conflict between the needs of SIC 13 that require elimination of profits that have been unrealized on the contribution of joint venture assets as well as IFRS 10 and IAS 27 that requires full recognition of loss/gain on losing control over a subsidiary.
When it came to designing the amendment that has been proposed, the IASB and the Committee focused on the basis of the concept, considered at the time of developing the needs of IFRS 3 Business Combinations that considers losing or gaining control as major event, which triggers remeasurement and loss/gain recognition.
Since those needs were designed in connection with transactions that involve businesses, the amendments that have been proposed in the ED lay down proposals pertaining to the requirement of full loss or gain recognition for the transactions between associates and investors, only in cases where the selling of a contribution related to assets comprises a business.
The need of fully recognizing losses/gains in transactions that involves businesses will be applied irrespective of the legal based transactions, where there was a transfer of this type of business, for example, via selling a group of liabilities and assets or through the purchase and sale of an investment in a subsidiary. The present guide on ‘linked transactions’ included in International Financial Reporting Standard 10 will be extended to such kind of transactions too. The draft is available for comment till 23 rd April 2012.