AASB 2008-7 - Amendments to Australian Accounting Standards - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate - July 2008

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Legislation au F2008L03231 Not in force Legislative Instrument

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Explanatory Statement

 

 

Accounting Standard AASB 2008-7 Amendments to Australian Accounting Standards – Cost of an Investment in
a Subsidiary, Jointly Controlled Entity or Associate

 

 

 

 

 

 

 

 

 

 

July 2008

 

 

EXPLANATORY STATEMENT

Standards Amended by AASB 2008-7

This Standard makes amendments to the following Australian Accounting Standards:

  1. AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards;
  2. AASB 118 Revenue;
  3. AASB 121 The Effects of Changes in Foreign Exchange Rates;
  4. AASB 127 Consolidated and Separate Financial Statements (July 2004, as amended);
  5. AASB 127 Consolidated and Separate Financial Statements (March 2008, as amended); and
  6. AASB 136 Impairment of Assets.

These amendments arise from proposals included in Exposure Draft ED 160 “Exposure Draft of Proposed Amendments to AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards and AASB 127 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate”. [1]

Main Features of this Standard

Application Date

This Standard is applicable to annual reporting periods beginning on or after 1 January 2009, with early adoption permitted for annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009.

An entity adopting this Standard early is required to adopt the whole Standard early.


Main Requirements

This Standard:

(a)       amends AASB 1 to allow first-time adopters, in their separate financial statements, to use a deemed cost option for determining the cost of an investment in a subsidiary, jointly controlled entity or associate.  The deemed cost of such an investment can be either its:

(i)        fair value (determined in accordance with AASB 139 Financial Instruments: Recognition and Measurement) at the entity’s date of transition to Australian-equivalents-to-IFRSs; or

(ii)      previous GAAP carrying amount at that date.

A first-time adopter may choose either deemed cost option to measure its investment in each subsidiary, jointly controlled entity or associate that it elects to measure using a deemed cost;

(b) removes from AASB 118 the requirement to deduct dividends declared out of pre-acquisition profits from the cost of an investment in a subsidiary, jointly controlled entity or associate.  Therefore, all dividends from a subsidiary, jointly controlled entity or associate are recognised by the investor as income;

(c) amends AASB 127 to require, in particular circumstances, a new parent entity established in a group reorganisation to measure the cost of its investment at the carrying amount of the share of the equity items shown in the separate financial statements of the original parent at the date of the reorganisation.  The relevant circumstances include that the reorganisation involves:

(i) the new parent obtaining control of the original parent through an exchange of equity instruments;

(ii) no change to the group’s assets and liabilities; and

(iii) no change to the owners’ absolute and relative interests in the net assets; and

(d) amends AASB 136 to include recognising a dividend from a subsidiary, jointly controlled entity or associate, together with other evidence, as an indication that the investment in the subsidiary, jointly controlled entity or associate may be impaired.

Consultation Prior to Issuing AASB 2008-7

The AASB issued Exposure Draft ED 160 “Exposure Draft of Proposed Amendments to AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards and AASB 127 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate” in December 2007.  ED 160 reproduced the IASB proposals without amendment and invited comments from Australian constituents on the proposed amendments.

The AASB received ten submissions that were generally supportive of the proposals, although they raised some concerns regarding the practical application of some of the proposals.  In its submission to the IASB, the AASB supported the proposed amendments, noted the concerns of constituents and suggested alternate approaches that would alleviate the concerns.  The IASB addressed these concerns and made changes to the proposals in issuing its final Standard.

A Regulation Impact Statement has not been prepared in connection with the issue of AASB 2008-7 as the amendments made do not have a substantial direct or indirect impact on business or competition, are of a minor or machinery nature or clarify existing requirements.

 

[1]  The amendments follow the issuance of corresponding amendments by the International Accounting Standards Board in May 2008.

Overview

The Accounting Standard AASB 2008-7, enacted in 2008, was introduced to address specific gaps in the Australian accounting framework concerning the cost of investments in subsidiaries, jointly controlled entities, or associates. This amendment was made in response to the need for clarity and uniformity in the accounting treatment of such investments, particularly in the context of first-time adoption of Australian equivalents to International Financial Reporting Standards (IFRS). The amendments were proposed by the International Accounting Standards Board (IASB) and subsequently endorsed by the Australian Accounting Standards Board (AASB) with minor modifications to address local concerns. The AASB sought feedback on the proposed changes through Exposure Draft ED 160, receiving generally supportive responses with some concerns about practical implementation. The AASB supported the amendments while suggesting alternative approaches to alleviate concerns. The policy objective was to enhance the transparency and consistency of financial reporting by providing clear guidelines on the cost recognition and measurement of investments in subsidiaries, jointly controlled entities, or associates.

Scope and Application

The AASB 2008-7 Amendments to Australian Accounting Standards – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate applies to entities preparing financial statements in accordance with Australian Accounting Standards, particularly those that are first-time adopters of Australian-equivalents-to-International Financial Reporting Standards (IFRS). This includes corporations, unincorporated associations, and partnerships that are required to prepare consolidated and separate financial statements. The amendments are designed to align Australian standards with international practices, particularly those outlined by the International Accounting Standards Board. The standard applies to annual reporting periods beginning on or after 1 January 2009, although early adoption is permitted for periods starting from 1 January 2005. Entities must adopt the entire standard if they choose to adopt it early. The amendments address various aspects of accounting for investments, such as the deemed cost for first-time adopters, the treatment of dividends, the cost measurement for new parent entities in group reorganisations, and the indication of impairment for investments in subsidiaries, jointly controlled entities, or associates. The scope of the standard is confined to these specific accounting treatments and does not extend to other areas of financial reporting.

Key Provisions

The main operative sections of AASB 2008-7 pertain to amendments to various Australian Accounting Standards including AASB 1 (section 3(a)), AASB 118 (section 3(b)), AASB 127 (section 3(c)), and AASB 136 (section 3(d)). Section 3(a) allows first-time adopters to use a deemed cost option for determining the cost of an investment in a subsidiary, jointly controlled entity, or associate, either through fair value or the previous GAAP carrying amount at the transition date. Section 3(b) removes the requirement to deduct dividends from the cost of such an investment, ensuring all dividends are recognised as income. Section 3(c) mandates that in specific circumstances, a new parent entity must measure its investment cost based on the original parent’s equity items. Finally, section 3(d) includes recognising a dividend as an indication of potential impairment of the investment. Entities governed by these amendments must comply with the new requirements regarding the cost of investments in subsidiaries, jointly controlled entities, or associates. Specifically, first-time adopters must choose a deemed cost option for their investments, and all dividends must be recognised as income. In group reorganisations meeting certain criteria, the new parent must measure its investment based on the original parent's equity items. Additionally, entities must consider dividends, along with other factors, as potential indicators of impairment. There are no specific offences, penalties, or consequences outlined in the explanatory statement for non-compliance with these amendments. However, entities failing to adhere to these accounting standards could face scrutiny from regulatory bodies and may need to justify their accounting practices. This could potentially lead to reputational damage or require restatement of financial records, although no explicit financial penalties are mentioned in the text.

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