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17 January 2014

EFRAG: The Equity Method - A measurement basis or one-line consolidation?

EFRAG has published the first paper in a new Short Discussion Series addressing topical and problematic issues in financial reporting. Views of constituents are welcomed and requested by 15 May, 2014.

The EFRAG Short Discussion Series addresses topical and problematic issues with the aim of helping the IASB to address a cross-cutting dilemma in financial reporting after having stimulated debate among European constituents and beyond.

This first paper in the series looks at the history of the equity method in IAS 28 'Investments in Associates and Joint Ventures'. It considers to what extent the equity method in IAS 28 is a measurement basis, a one-line consolidation or whether it perhaps has characteristics of both.

Over the years, the IFRS Interpretations Committee has received numerous requests to clarify various aspects of accounting under the equity method. The IASB has responded to these requests by proposing narrow-scope amendments to IAS 28 with the aim of reducing diversity in practice.

When responding to two of the proposals to amend IAS 28 EFRAG and other constituents expressed support for the IASB’s efforts to address diversity but expressed concerns that the proposals lacked a clear conceptual basis and were potentially inconsistent with each other. It was noted that the equity method in  IAS 28 contains elements of both consolidation techniques and a measurement basis; however, it is not always clear which of the two concepts should be applied to situations and issues that are not specifically addressed in IAS 28.

A better articulation and understanding of what the equity method aims to achieve is necessary to assist consistent application in practice while avoiding the development of ad hoc narrow scope guidance. The latter would move IFRS away from a principles-based set of standards. Clarity about the principles underlying the equity method could affect the way the IASB further develops it in the future. This paper intends to assist the IASB in its work and to stimulate debate in Europe and beyond. 

Press release

EFRAG-discussion series

© EFRAG - European Financial Reporting Advisory Group

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