A fast-track amendment to IAS 28 will allow the designation of investments in associates and joint ventures at fair value through profit or loss. The amendment comes in response to a distortion that exists under IFRS 18, whereby results arising from measuring investments in associates and joint ventures using the equity method — including those whose activity is synergistic and closely related to that of the holding company — would be classified in the statement of comprehensive income under the investment category rather than the operating category. The amendment, which was aimed at insurance companies, is a very significant positive development for income-producing real estate companies and additional companies, and we hope that it will be further extended to additional sectors going forward.
A proposed fast-track amendment to IAS 28 was published, designed to permit entities whose primary business activity is investing in assets to designate their investments in associates and joint ventures at fair value through profit or loss. Those entities can elect upon initial adoption of IFRS 18 to measure investments in associates and joint ventures at FVPL rather than applying the equity method.
The amendment comes in response to a distortion introduced by IFRS 18, under which “equity pick up” arising from investments in associates and joint ventures measured under the equity method- even where such investments are synergistic and closely related to the investor’s own operations- would be classified in the statement of comprehensive income under the investing category rather than the operating category. See here:
Inherent Distortion in IFRS 18: the Expected Impact on Operating Results of Companies Whose Main Business Activity Includes Investing in Associates and Joint Ventures Accounted for Using the Equity Method
Although the impetus for the change is, as noted, the prevention of the distortion created by IFRS 18, we believe that any amendment that effectively permits the election of fair value as a preferable accounting model over the equity method is a welcome development that enhances the relevance of financial statements. See here:
Missing Twist in the New Proposal for Amendments to IAS 28 on the Equity Method
In any event, the amendment represents a significant positive development for insurance companies, as well as for other entities that will fall within its scope — such as income-producing real estate companies— and it is hoped that its application will be extended to additional sectors as well.
(*) Written by Shlomi Shuv and Gil Katz, Partner, IFRS Technical Leader, Professional Practice Department, EY