EFRAG supports the clarification that the unit of account for investments is the investment in a subsidiary, joint venture or associate as a whole, rather than individual financial instruments included within that investment.
EFRAG is concerned that determining the fair value measurement of an investment in a subsidiary, joint venture or associate, quoted in active market as the product of the quoted price of the financial instrument (P) multiplied by the quantity (Q) of instruments held (i.e. P × Q) will not always result in relevant information. Where the unit of account is the investment in a subsidiary, joint venture or associate, the price paid may include control premiums or discounts and consequently differ from the mathematical product P × Q. The resulting financial information lacks relevance, may obscure the assessment of management stewardship and does not faithfully represent the substance of the transaction.
EFRAG notes that the proposed amendment was intended to eliminate divergent practices, with some issuers preparing estimates that were considered to provide relevant information consistent with the investment as a whole being the unit of account. The IASB has nevertheless justified its proposals on the basis that there would not be any better way available than the mathematical product P x Q to measure the fair value of an investment in a subsidiary, joint venture or associate quoted in an active market.
Before reaching such a conclusion, EFRAG believes that the IASB should analyse current practices in measuring the fair value of this type of quoted investment including premiums and discounts and reassess where to strike the balance between relevance and reliability.
EFRAG has understood from the EFRAG User Panel that users accept the proposed P x Q approach as a solution because it puts greater emphasis on reliability and verifiability. To serve this purpose, EFRAG thinks that the IASB should consider developing guidance to bring fair value estimates that are consistent with the unit of account of the investment to a reasonable level of reliability. The IASB could liaise with the International Valuation Standards Council to receive support to that purpose.
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© EFRAG - European Financial Reporting Advisory Group
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