11 October 2012

EFRAG: Final comment letter on the draft interpretation put options written on non-controlling interests

The Draft Interpretation applies, in the parent’s consolidated financial statements, to put options that oblige the parent to purchase shares of its subsidiary that are held by a non-controlling-interest shareholder for cash or another financial asset (NCI puts). Specifically, it addresses how to account for changes in the measurement of the financial liability that is recognised for an NCI put.

EFRAG agrees that diversity in practice exists in accounting for the subsequent measurement of an NCI put that is recognised in a parent entity’s consolidated financial statements. EFRAG supports the Interpretations Committee’s efforts to develop a pragmatic short-term solution to address the issue, as financial reporting would benefit from greater comparability of information for those transactions. However, this might be at the expense of relevance of information for some of those transactions, particularly when they have different features and accounting for them in the same way might not reflect their economic substance.

In EFRAG's view, the subsequent measurement of an NCI put is just one element of a wider range of issues on the accounting for NCI puts. EFRAG notes that diversity in practice also arises in accounting for the initial recognition of the NCI put, in particular with regard to whether NCI is derecognised or another component of equity debited. This will also affect the respective allocation of profits to NCI and accounting for dividends paid by the subsidiary in the consolidated accounts of the parent entity. EFRAG believes that these issues should be addressed without delay by the Interpretations Committee and the Board as part of their responsibility towards maintaining IFRS.

The diversity in practice on subsequent measurement of NCI puts arises from a conflict in principles in IAS 27 'Consolidated and Separate Financial Statements' / IFRS 10 'Consolidated Financial Statements', which requires non-controlling interests (NCI) to be presented as owners and consequently transactions with NCI without transfer of control to be reflected in equity (in line with IAS 1 'Presentation of Financial Statements' and IFRIC 17 'Distributions of Non-Cash Assets to Owners'), while IAS 32 'Financial Instruments: Presentation' requires NCI puts to be measured as financial liabilities with subsequent remeasurement recognised in profit or loss in accordance with IAS 39 'Financial Instruments: Recognition and Measurement'.

The Interpretations Committee does not explain why it believes that IAS 32/IAS39 should take precedence over IAS 27/IFRS 10 and IFRIC 17, and particularly why it considers that those standards are not relevant when deciding that the correct interpretation of existing standards to address the issue is always the accounting set out in IAS 32 and IAS 39. If the Interpretations Committee decides to go ahead with the Draft Interpretation, EFRAG believes that the Interpretations Committee should explain clearly the rationale for its reasoning in the Basis for Conclusions.

EFRAG would like to highlight that its due process has indicated that the accounting for NCI puts in the consolidated accounts of an entity is a complex and controversial issue, with some arguing that a single measurement basis for NCI puts is not appropriate in all cases. EFRAG notes that there are strongly held views that the Draft Interpretation, if finalised, would lead to financial reporting for some transactions that lacks relevance.

Press release

Comment letter

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