January 20, 2025
Andreas Barckow, Chair
International Accounting Standards Board
Columbus Building
7 Westferry Circus
Canary Wharf
London, E14 4HD.
Sent via email [email protected]
RE: Exposure Draft Equity Method of Accounting — IAS 28 Investments in Associates and Joint Ventures
Dear Dr. Barckow:
The Virginia Society of CPAs (VSCPA) Accounting & Auditing Advisory Committee (Committee) has reviewed the Exposure Draft (ED) — Equity Method of Accounting — IAS 28 Investments in Associates and Joint Ventures. The VSCPA is the leading professional association in the Commonwealth of Virginia dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. The VSCPA membership consists of nearly 12,000 individual members who actively work in public accounting, private industry, government, and education.
The Committee broadly supports the objectives contained within the ED. Aside from the specific comments below, the Committee believes this ED will improve the application of the equity method of accounting for investors and their resultant financial reports. We have included details for each question below where we would like to add additional comments.
Question 1: Measurement of cost of an associate
The Committee agrees with the proposed changes, as they will add clarity to accounting for the cost basis of an associate. However, the Committee wishes to see more clarity regarding treatment of original transaction costs as it pertains to these transactions, as this treatment is still not clear and may result in differences in practice. For example, the Committee believes clarity on the treatment of due diligence costs incurred when originally obtaining significant influence will be helpful to reporting entities.
Question 9: Transition
The Committee proposes allowing entities an accounting policy election to apply a modified retrospective approach to transitioning to the new requirements contained in the ED, including relief from restating any additional prior periods presented (as proposed).
Specifically, the requirement to retrospectively recognize the full gain or loss on all transactions with associates and joint ventures may become impractical for investors that have not retained appropriate records under previous standards. Likewise, it is the Committee’s view that full retrospective application would not yield enough useful information to the users of the financial statements in exchange for the efforts required. The Committee therefore believes either a modified retrospective approach similar to the transition requirements for IFRS 15 or a prospective application is more appropriate and would not degrade the usefulness of the financial statements to their users.
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The VSCPA appreciates the opportunity to respond to this ED. Please direct any questions or concerns to VSCPA Vice President, Advocacy & Pipeline Emily Walker, CAE, at [email protected] or (804) 612- 9428.
Sincerely,
Michael Phillips, CPA
Chair 2024-2025
VSCPA Accounting & Auditing Advisory Committee
VSCPA Accounting & Auditing Advisory Committee 2024-2025
Michael Phillips, CPA —Chair
Daniel Martin, CPA — Vice Chair
Zach Borgerding, CPA
Joshua Keene, CPA
Nick Kinsler, CPA
Brian Minor, CPA
Elisa Obillo, CPA
Krisia Raya, CPA
Charles Valadez, CPA
Natalya Yashina, CPA
Attachment — Responses to Specific Questions
Question 1: Do you agree with the amendments in this proposed Update that would require entities involved in acquisition transactions effected primarily by exchanging equity interests when the legal acquiree is a VIE that meets the definition of a business to consider the factors in paragraphs 805-10-55-12 through 55-15 to determine which entity is the accounting acquirer? Would the proposed amendments provide decision-useful information and improve comparability? Are the proposed amendments clear and operable? Please explain why or why not.
Yes, we concur that entities involved in acquisition transactions effected primarily by exchanging equity interests when the legal acquiree is a VIE that meets the definition of a business should consider the factors in paragraphs 805- 10-55-12 through 805-10-55-15 to determine which entity is the accounting acquirer.
The current accounting guidance in Topic 805, as referenced, requires that when a VIE is acquired in a business combination, the primary beneficiary of that entity is always the accounting acquirer. Additionally, if the legal acquiree is a VIE, under the current guidance the transaction cannot be accounted for as a reverse acquisition, and uncertainty exists as to whether a business combination has occurred. This creates diversity in practice and can impact the comparability of financial statements for similar transactions.
Considering the proposed amendments would provide comparable accounting treatment for acquisition transactions with similar economics, we believe comparability would be improved. Nevertheless, whether the financial statements provide information relevant to decision-making will ultimately be decided by the users of the financial statements.
Moreover, the proposed amendments are not only clear but also operable. They effectively direct financial statement users to the existing guidelines in Topic 805. We believe these revisions will foster consistency in financial reporting and provide financial statement users with more useful information by reducing variability in practice and clearly defining the applicable guidance for these types of acquisitions.
Question 2: The proposed transition requirements would require entities to apply the proposed amendments on a prospective basis. Are the proposed transition requirements operable? If not, why not and what transition method would be more appropriate and why?
Yes, we believe the proposed transition method is operable and practical. We believe that an entity should apply this guidance prospectively to acquisition transactions primarily carried out by exchanging equity interests when the legal acquiree is a VIE that fits the definition of a business for all business combinations whose acquisition date falls on or after the date the proposed amendments are adopted. This provides users of the financial statements with pertinent and valuable information related to the types of acquisition transactions mentioned above. Further, implementing other transition methods, including the retrospective transition method, would be challenging and complex. Historical accounting records and fair value data would be required to complete such a transition and adjust one or more subsequent accounting periods, depending on when the acquisition transpired.
Question 3: How much time would be needed to implement the proposed amendments? Should the effective date for entities other than public business entities be different from the effective date for public business entities? Please explain why or why not.
Considering the proposed amendments would require organizations to follow the current guidance under Topic 805, which should not result in significant implementation costs, we believe that the effective date can be the same for both public and private business entities.
Generally, it is beneficial for private business entities to have more time to apply the transition changes and benefit from the interpretations of public business entities, which are typically ahead of the application of proposed amendments. However, considering the proposed amendments are currently used in practice for other acquisition transactions, we do not believe alternative effective dates are necessary.
Question 4: The proposed amendments would permit early adoption. If an entity early adopts the proposed amendments, should the entity be required to adopt those amendments as of the beginning of an annual reporting period? Please explain why or why not.
We believe that entities should be required to adopt the amendments at the beginning of the annual reporting period if they choose to adopt the proposed guidance early. This would improve the comparability and usefulness of financial statements.