IFRS 1 & IAS 27 Amendments International Accounting Standards Board 30 Cannon Street London ECAM 6XH 29 February 2008 Dear Sir/Madam, Re: Exposure Draft of proposed Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and IAS 27 Consolidated and Separate Financial Statements We have reviewed the above Exposure Draft issued in December 2007 and have attached our answers to the questions included in the invitation to comment section of this document. As stated in our comment letter on the initial proposed amendments to IFRS 1, we support the overall proposal to help companies in making the transition to IFRS for the first time. Certain companies (for example, subsidiaries, which themselves are also parent companies, of UK Groups) have been deterred from voluntary transition to IFRS for a number of reasons, some of which will be reduced if these amendments are published as they stand. In our comment letter on the first exposure draft of proposed amendments to IFRS 1 and IAS 27, we stated that we broadly supported the proposals but had some reservations about the proposals for determining deemed cost and the relief for pre and post acquisition reserves determination. We are pleased to see that the IASB has taken such comments on board and issued a proposal to remove some of the potential stumbling blocks for companies in the initial adoption, and ongoing application, of IFRS. The current proposals can be applied with reduced cost and effort on the part of companies which was one of the main concerns of the proposals issued in the original exposure draft in January 2007. We therefore agree that the proposals as outlined in the current exposure draft are an improvement on the original draft. However, we do have some remaining concerns over the practical application of the requirements. Our detailed responses are included in our attached responses, but our summary comments are as follows:
We agree with the proposed deemed cost options available to parent entities on transitioning to IFRS, and welcome the pragmatic approach adopted by the IASB. We also agree with the logic of allowing existing carrying values as cost in parent’s separate financial statements when a new parent entity is formed.
-2
We agree with the logic to extending the scope of the exemptions to investments in jointly controlled entities and associates on adoption of IFRS in parent entity accounts. As regards the removal of the cost definition in IAS 27 and the requirement to recognise dividends received as income in separate financial statements, the related impairment testing of investments whenever a dividend is received will still be a potential negative in moving to IFRS.
We hope that you find our comments useful and thank you for the opportunity to be able to comment on this matter. Yours Sincerely
D C POTTER Head of Finance and Accounting
Exposure Draft of Proposed Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and IAS 27 Consolidated and Separate Financial Statements
Question 1—Deemed cost The exposure draft proposes to allow an entity, at its date of transition to IFRSs in its separate financial statements, to use a deemed cost to account for an investment in a subsidiary, jointly controlled entity or associate. The exposure draft proposes that an entity may choose as the deemed cost of such investments either the fair value or the previous GAAP carrying amount of the investment at the entity’s date of transition to IFRSs (see paragraphs 23A and 23B of the draft amendments to IFRS 1 and paragraphs BC8–BC13 of the Basis for Conclusions). Question 1 Do you agree with the two deemed cost options as they are described in this exposure draft? If not, why?
We agree with the two deemed cost options as described in the exposure draft. Allowing companies in their separate financial statements to use a previous GAAP carrying amount as deemed cost for their investments in subsidiaries, jointly controlled entities or associates should reduce the cost and complexity in transitioning to IFRS.
-2Question 2—Change in scope The exposure draft proposes that the deemed cost option should be available for the initial measurement of investments in jointly controlled entities and associates when an entity adopts IFRSs in its separate financial statements (see paragraph BC14 of the Basis for Conclusions). Question 2 Do you agree with the proposal to allow the deemed cost option for investments in jointly controlled entities and associates? If not, why?
We agree with the proposal to allow the deemed cost option for investments in jointly controlled entities and associates, on the basis that similar issues would arise in respect of such investments as for investments in subsidiaries.
Questions 3 and 4—Cost method The exposure draft proposes to delete the definition of the ‘cost method’ from IAS 27. Additionally, the exposure draft proposes to amend IAS 27 to require an investor to recognise as income dividends received from a subsidiary, jointly controlled entity or associate in its separate financial statements. The receipt of this dividend requires the investor to test its related investment for impairment in accordance with IAS 36 Impairment of Assets (see paragraphs 4 and 37B of the draft amendments to IAS 27 and paragraphs BC15–BC20 of the Basis for Conclusions). Question 3 Do you agree with the proposal to delete the definition of the cost method from IAS 27? If not, why? Question 4 Do you agree with the proposed requirement for an investor to recognise as income dividends received from a subsidiary, jointly controlled entity or associate and the consequential requirement to test the related investment for impairment? If not, why?
As regards the proposal to delete the definition of the cost method from IAS 27 and require impairment testing whenever a dividend is received, this does avoid the costly, complex and potentially arbitrary analyses of subsidiaries’ reserves which was the implication of the original proposals. However, if companies are required to undertake an IAS36 impairment review everytime a dividend is received, then they will carefully consider the internal and audit implications of how this will be applied in practice. This will be a negative element in a company’s decision as to whether to change to IFRS, while increasing the workload for companies already on IFRS.
-3Question 5—Formation of a new parent The exposure draft proposes that in applying paragraph 37(a) of IAS 27 to the formation of a new parent, the new parent should measure cost using the carrying amounts in the separate financial statements of the existing entity at the date of the formation (see paragraph 37A of the draft amendments to IAS 27 and paragraphs BC21 and BC22 of the Basis for Conclusions). Question 5 Do you agree with the proposed requirement that, in applying paragraph 37(a) of IAS 27, a new parent should measure cost using the carrying amounts of the existing entity? If not, why?
We agree with the above proposal. Such reorganizations will predominantly occur within Group structures, and normally will not result in a change to the ownership interests of the existing entity or the assets, liabilities and equity of the Group. It therefore seems logical that the carrying value of the existing entity should be used as the cost value in the new parent in such reorganisations. Question 6—Transition The exposure draft proposes that the amendments to IFRS 1 and IAS 27 shall be applied prospectively. Question 6 Do you agree that prospective application of the proposed amendments to IFRS 1 and IAS 27 is appropriate? If not, why?
We agree with the prospective application of these amendments.
DCP/CRG/REP/IFRS1 & IAS27 AMENDMENTS
29 February 2008
