IASB Changes IAS 27 to Again Allow Application of the Equity Method in Separate Financial Statements

The investment in shares of other companies may be categorized in one of the three categories: investment in subsidiary, investment in associate, investment in joint venture or simply investment in shares. This categorization depends upon the level of control over the investee which is, most of the times, derived from the size of investment.

Before 2005, International Accounting Standards (IAS) 27, 28 and 31 contained the requirements for accounting of investment in subsidiaries, investment in associates and interests in joint ventures respectively in the separate financial statement of investors. The requirements in these standards allowed the preparer of separate financial statements to use one of the three options to account for investments. These methods included the cost method, the equity method or as available for sale investment as per requirements of IAS 39. Later, in the development process, the requirements relating to accounting of investments in separate financial statements were combined and included in IAS 27. The standard was renamed as ‘Consolidated and separate financial statements’. In the process the equitymethod was disallowed for use to account for investments in separate financial statements.

Recently International Accounting Standards Board (IASB) has introduced revisions in IAS 27. The change has again allowed the use of the equity method as a choice to account for investments in subsidiaries, investment in associates and interests in joint ventures in separate financial statements by investors. The revisions are available for implementation from 1 January 2016 with an option of early compliance.

Earlier the option was disallowed to avoid the duplication of information provided. However after later feedbacks and assessment the revision was introduced in IAS 27 and equity method was re-allowed as an option for accounting of investments is separate financial statements.

Separate financial statements are not the requirements of accounting standards. Normally separate financial statements are required by local laws or users of financial statements. In some territories’ Company law entails the use of equity method which is now align with the requirements of accounting standards.

IASB has also introduced revisions to assure that the separate financial statements are those that are issued other than consolidated financial statements or additional financial statements of investor having investment in associates or joint ventures.