Uniqus Point of View

IASB Exposure Draft: Business Combinations—Disclosures, Goodwill, and Impairment

18, July 2024

OVERVIEW

IAS 28, Investments in Associates and Joint Ventures (‘the standard’ or ‘IAS 28’), stands as a pivotal element of IFRS that outlines how entities should account for their investments in associates and joint ventures, emphasizing the importance of accurately reflecting their financial involvement. The standard emphasizes the importance of faithfully representing the financial involvement of entities, ensuring alignment between financial reporting and the underlying economic relationships. At its core, the standard mandates the equity method—a technique that allows investors to recognize their share of the investee’s net assets and financial performance within their financial statements. By doing so, it aligns the financial reporting with the underlying economic relationship, which goes beyond mere ownership but also capturing the dynamic interaction and mutual influence between the investor and the investee.

The equity method is particularly relevant for investments when an investor exercises significant influence over the investee but does not have control, typically defined as holding between 20% and 50% of the voting rights. However, this influence is not merely a numerical threshold; it reflects a substantive ability to participate in key financial and operational decisions. The standard acknowledges that such relationships require nuanced accounting to portray the investor’s exposure to risks and rewards accurately. IAS 28 also accommodates real-world complexities, offering exemptions and special treatments in certain scenarios, such as when investments are held by venture capital organizations or similar entities. By requiring entities to continually adjust their investment’s carrying amount to reflect post-acquisition profits, losses, and distributions, IAS 28 ensures that the reported figures remain timely and relevant.

In September 2024, IASB published a draft update to IAS 28 to address specific application challenges related to the equity method. This exposure draft represents the culmination of a focused research project initiated in 2015, which prioritized resolving practical application issues rather than undertaking a comprehensive overhaul of the Standard.

The IASB initiated a research project in 2015 to explore potential improvements to the equity method. However, after careful consideration, the Board decided to focus on specific application questions rather than a comprehensive overhaul.

The proposed amendments address several key areas, including:

Changes in ownership interest: Guidance on accounting for ownership changes while retaining significant influence.
Recognition of losses: Enhanced clarity on recognizing losses when the investment’s carrying amount is reduced to zero.
Transactions with associates and joint ventures: Full recognition of gains and losses from upstream and downstream transactions.
Deferred taxes: Addressing the impact of deferred tax effects on initial recognition.
Contingent consideration: Clarifying the treatment of contingent consideration.
Impairment of investments: Streamlined procedures for assessing and accounting for impairments.

The proposed changes are poised to significantly affect entities applying the equity method, particularly those engaging in upstream or downstream transactions with associates or joint ventures. The draft requires full recognition of gains and losses from all such transactions, which could lead to more complex accounting. Additionally, the clarified guidance on loss recognition could necessitate adjustments to current practices, especially for entities with loss-making associates or joint ventures.

PROPOSED AMENDMENTS

The proposed amendments are designed to enhance the transparency and comparability of financial statements. By refining the application of the equity method and introducing more comprehensive disclosure requirements, these changes aim to provide investors, creditors, and other stakeholders with deeper insights into an entity’s financial performance and position. Additionally, the amendments address inconsistencies in accounting practices by offering clearer guidance on various aspects of equity method accounting. This improved specificity will promote uniformity in financial reporting across jurisdictions, facilitating easier comparison of financial information for investors.

Key amendments

Changes in Ownership Interest
Impairment of Investments
Contingent Consideration
Recognition of Losses
Transactions with Associates and Joint Ventures
Deferred Taxes

IASB’S EXPOSURE DRAFT QUESTIONS AND UNIQUS POINT OF VIEW

The IASB’s Exposure Draft (ED) on IAS 28 seeks to improve the equity method of accounting by addressing practical application challenges and enhancing clarity. The ED aims to resolve common application questions, reducing inconsistencies in how the equity method is applied across entities. This is expected to lead to more comparable, transparent, and user-friendly financial information.

Improved Disclosure: Introducing new disclosure requirements to provide more detailed insights into equity-accounted investments, enhancing the transparency and relevance of financial statements.
Reordered Framework: Restructuring the standard to improve its logical flow and ease of understanding, benefiting entities preparing both consolidated and separate financial statements.
Harmonization: By clarifying complex areas, the IASB intends to reduce diversity in practice, thereby aligning the treatment of equity method accounting globally.

These changes underscore a commitment to improving the consistency and usability of financial reporting standards while supporting preparers in meeting user expectations effectively.

Question 1 – Measurement of cost of an associate

The IASB is proposing an investor:

(a) measure the cost of an associate, on obtaining significant influence, at the fair value of the consideration transferred, including the fair value of any previously held interest in the associate.

(b) recognize contingent consideration as part of the consideration transferred and measure it at fair value. Thereafter:

Uniqus’ POV

We broadly support the IASB’s proposal to measure the cost of an associate upon obtaining significant influence at the fair value of the consideration transferred, including the fair value of any previously held interest. This approach aligns with IFRS 3’s treatment of step acquisitions in business combinations, promoting consistency across accounting standards. By revaluing previously held equity interest, the proposal reflects economic reality, recognizing gains or losses based on current fair value rather than historical costs. This methodology enhances transparency and comparability, particularly in transitions from financial asset classification (under IFRS 9) to significant influence (under IAS 28).

Question 2 – Measurement of change in ownership interest in an associate

The IASB is proposing an investor:

(a) Acquiring additional ownership interest – at the date of purchasing an additional ownership interest in an associate

(b) Disposing of Ownership Interest: at the date of disposing of an ownership interest

Uniqus’ POV

We agree with the IASB’s proposed amendments, which aim to provide explicit and practical guidance on accounting for changes in ownership interest in an associate while retaining significant influence. The clarity offered by these proposals is critical for enhancing consistency across entities

Question 3 – Recognition of the investor’s share of losses

The IASB is proposing an investor:

(a) on purchasing an additional ownership interest, not recognize its share of an associate’s losses that it has not recognized by reducing the carrying amount of the additional ownership interest.

(b) recognize and present separately its share of the associate’s profit or loss and its share of the associate’s other comprehensive income.

Uniqus’ POV

We generally support the IASB’s proposals regarding the recognition of the investor’s share of losses in an associate or joint venture. However, we believe there are areas where additional clarification or alternative approaches could enhance the practicality and relevance of the guidance.

Question 4 – Transactions with associates

The IASB is proposing to require that an investor recognize in full gains and losses resulting from all ‘upstream’ and ‘downstream’ transactions with its associates, including transactions involving the loss of control of a subsidiary.

Do you agree with this proposal? If you disagree, please explain why you disagree and your suggested alternative.

Uniqus’ POV

We believe the decision to apply the full gain or loss recognition approach (as per IFRS 10) ensures consistency with how gains and losses are treated when an investor loses control of a subsidiary or disposes of assets. By recognizing gains and losses in full, the standard reflects significant economic events, such as the loss of control of a transferred asset, in a transparent manner.

Question 5 – Impairment indicators (decline in fair value)

Paragraphs 41A–41C of IAS 28 describe various events that indicate the net investment in an associate could be impaired. Paragraph 41C of IAS 28 states that a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is objective evidence of impairment. One of the application questions asked whether an investor should assess a decline in the fair value of an investment by comparing that fair value to the carrying amount of the net investment in the associate at the reporting date or to the cost of the investment on initial recognition.

Uniqus’ POV

We broadly agree with the IASB’s proposal to amend the impairment requirements in IAS 28. The proposed changes, which aim to align the guidance on assessing impairment with IAS 36, are a step forward in promoting clarity and consistency in accounting practices. The replacement of the phrase ‘decline…below cost’ with ‘decline…to less than its carrying amount’ is particularly beneficial, as it reflects the economic reality more accurately by considering the carrying amount at the reporting date rather than the initial cost.

Question 6 – Investments in subsidiaries to which the equity method is applied in separate financial statements

Paragraph 10 of IAS 27 permits a parent entity to use the equity method in IAS 28 to account for investments in subsidiaries, joint ventures and associates in separate financial statements. The IASB is proposing to retain paragraph 10 of IAS 27 unchanged, meaning that the proposals in this Exposure Draft would apply to investments in subsidiaries to which the equity method is applied in the investor’s separate financial statements. Do you agree with this proposal?

Uniqus’ POV

We disagree with IASB’s decision to retain the option of applying the equity method to investments in subsidiaries, joint ventures, and associates in separate financial statements. We believe the approach adopted under Ind AS 27, which disallows the equity method in separate financial statements, is more aligned with the purpose of such statements and provides greater clarity and comparability for users.

Question 7 – Disclosure requirements

The IASB is proposing amendments to IFRS 12 in this Exposure Draft. For investments accounted for using the equity method, the IASB is proposing to require an investor or a joint venturer to disclose:

(a) gains or losses from other changes in its ownership interest;

(b) gains or losses resulting from ‘downstream’ transactions with its associates or joint ventures;

(d) a reconciliation between the opening and closing carrying amount of its investments.

Uniqus’ POV

The proposed amendments to IFRS 12 and IAS 27 enhance transparency by addressing user needs for detailed disclosures about equity-method investments.

These proposals reflect feedback from users of financial statements, who indicated a need for greater transparency to assess earnings quality, sustainability of transactions, and the timing and uncertainty of future cash flows. This is particularly beneficial as it improves the utility of financial statements for decision-making by investors and other stakeholders.

Question 8 – Transition

The IASB is proposing to require an entity:

(a) to apply retrospectively the requirement to recognize the full gain or loss on all transactions with associates or joint ventures;

(b) to apply the requirements on contingent consideration by recognizing and measuring contingent consideration at fair value at the transition date generally the beginning of the annual reporting period immediately preceding the date of initial application—and adjusting the carrying amount of its investments in associates or joint ventures accordingly; and

Uniqus’ POV

We broadly agree with the IASB’s proposed changes, as they aim to enhance comparability, transparency, and alignment with the principles of IFRS. However, we believe certain areas could be refined to balance the objectives of improved financial reporting and practical challenges faced by preparers. Below is our evaluation and recommendations:

Retrospective adjustments for gains or losses and contingent consideration may demand access to historical data that could be incomplete or unreliable. We recommend providing additional transition relief for retrospective application, such as using a simplified approach (e.g., estimating historical data based on available information) where detailed data is unavailable.

Question 9 – Expected effects of the proposals

We generally agree with the IASB’s analysis in paragraphs BC217–BC229 regarding the expected effects of the proposed amendments. The analysis demonstrates a balanced consideration of the likely benefits and costs of the proposals, which aim to address current inconsistencies, improve comparability, and enhance financial reporting quality. However, we highlight specific aspects where additional clarity or refinement would further strengthen the analysis and recommendations.

While the IASB anticipates minimal implementation costs for many entities, the need for fair value measurement of additional interests or previously held interests may pose challenges, particularly for entities with limited historical data or observable inputs.
Entities may face challenges in transitioning to new policies, such as the inclusion of deferred tax effects in the carrying amount of investments or applying fair value measurements for contingent consideration. The IASB’s expectation of lower ongoing costs may not materialize in all jurisdictions with varying levels of sophistication in financial reporting.
The requirement for a reconciliation of the carrying amount of investments, while useful, may impose additional costs on preparers, particularly smaller entities with limited resources. Allow proportional disclosures based on the materiality of investments, ensuring that the reporting burden is scalable to the size and complexity of the entity.

Authors

Jamil Khatri, Co-Founder & CEO

Sandip Khetan, Co-Founder, Global Head of Accounting & Reporting Consulting

Anu Chaudhary, Partner, Global Head of ESG Consulting

Ashish Gupta, Partner, Accounting & Reporting Consulting

Raghuram K, Partner, Accounting & Reporting Consulting

Sagar Lakhani, Partner, Accounting & Reporting Consulting

Sharad Chaudhry, Partner, Accounting & Reporting Consulting

Shashikant Shenoy, Partner, Accounting & Reporting Consulting

Purvi Shah, Director, Accounting & Reporting Consulting

Topics in this article

Accounting & Reporting Consulting

FRM Regulatory Pulse- August 2026

Executive Summary The second edition of the Uniqus "Regulatory Pulse" bulletin covers key regulatory developments and supervisory themes observed across India and the Middle East over the quarter ended June 2026. Consistent with the series, this publication focuses on banking...

Sustainability & Climate Pulse- August 2026

In the News Global Record Climate Finance by Multilateral Development Banks Reaches USD 163 Billion in 2025 In a significant boost for global climate action, multilateral development banks (MDBs) achieved a record climate finance total of USD 163 billion in...

FASB’s Proposed Accounting Standards Update

Executive Summary On June 10, 2026, the FASB issued a proposed Accounting Standards Update that would clarify the discount rate used to measure the benefit obligation under Subtopic 715-30, Compensation—Retirement Benefits—Defined Benefit Plans—Pension, for certain market-return cash balance plans. The...