How do equity accounting losses and IFRS 9 interact for long-term interests?
An amendment to IAS 28 Investments in associates and joint ventures will affect companies that finance such entities with preference shares or with loans for which repayment is not expected in the foreseeable future (referred to as long-term interests or ‘LTI’). This is common in the extractive and real estate sectors.
The amendment, which addresses equity-accounted loss absorption by LTI, involves the dual application of IAS 28 and IFRS 9 Financial instruments.
“This will promote consistency but at the expense of some complexity.”
Mike Metcalf, KPMG’s global IFRS business combinations leader
There has always been diversity in practice when accounting for the share of losses of an associate or joint venture after the equity interest has been reduced to nil. The share of further losses is required to be allocated to LTI, but how does that modify the financial instruments’ accounting requirement for such loans?
The introduction of new impairment requirements in IFRS 9 based on expected credit losses exacerbated the issue and prompted the IASB to find a solution before IFRS 9 becomes effective.
The amendment and accompanying example state that LTI are in the scope of both IFRS 9 and IAS 28 and explain the annual sequence in which both standards are to be applied. In effect, this is a three-step annual process:
The complexity is created by step 2. It will require careful application every year.
Acknowledging that applying two conceptually different standards to the same instrument is not straightforward, the IASB has published a six-page example to illustrate how to apply the amendment.
The amendment applies for annual periods beginning on or after 1 January 2019. Early adoption is permitted. There are transitional reliefs.