Even when one doesn’t care about the specific issues being discussed, the IFRS comment letter process is an informative case study in the diversity of human thought…

Take for example the recent exposure draft on the equity method of accounting, intended to “provide preparers with solutions to long-standing application difficulties.” I already commented that I don’t have much interest in the proposals, as the IASB’s better move would be to discontinue the equity method altogether (some respondents said much the same thing). But as it’s out there, it does provide a moderately interesting object of study. To illustrate, let’s take the basic issue of the cost of an associate or joint venture. The exposure draft proposes defining this as “Fair value of the consideration transferred, including the fair value of any previously held ownership interest (or any investment retained) in the associate or joint venture, measured at the date an investor obtains significant influence or a joint venturer obtains joint control.” In the IASB’s analysis, this proposed definition should address some of the diversity currently encountered in practice.

The proposal doesn’t address related transaction costs, but that seems to have been because the IASB didn’t think it was necessary, noting in a staff paper that IFRIC had previously considered the issue and decided not to add it to its agenda. The staff also noted in that paper: “the purpose of the project is to develop answers to application questions on applying the equity method. We reviewed the initial input from constituents and did not find questions about how to recognize acquisition-related costs.” Given this fact, and the absence of a “quick” answer in IFRS (because one’s view might differ depending on whether one analogizes with acquiring an asset or with acquiring a subsidiary, among other things), the exposure draft ended up being silent on the issue.

Some high-profile respondents, such as the UK Endorsement Board, simply supported the proposed definition without further elaboration. But some others, such as the Austrian Financial Reporting Advisory Committee, zoomed in on the transaction costs issue:

• The ED does not specify whether transaction costs should be included in the carrying amount of the investment. The treatment of transaction costs should be dependent on whether the equity method is considered as a measurement basis or as a one-line consolidation. If the equity method is seen as a measurement basis, transaction costs should be added to the cost of the underlying investment. Under the view of the equity method as pure consolidation approach, transaction costs should be treated according to the principles in IFRS 3 and accordingly should be immediately expensed in profit or loss. We recommend that the IASB clarifies which view should prevail. Clarifying the treatment of transaction costs would avoid creating a new source of diversity in practice. As transaction costs for investments in equity instruments are expensed under other standards, i.e. IFRS 9 and IFRS 3, we suggest that this treatment should also be used for investments under IAS 28.

PricewaterhouseCoopers also commented on that issue, and suggested an alternative way to go:

• To provide a practical solution to this question and to drive consistency of application, we think that the definition of “Cost of the associate or joint venture’ should include transaction costs. This would be consistent with the Conceptual Framework for financial reporting where the value of the costs incurred in acquiring an asset comprises the consideration paid plus transaction costs. In addition, we think that the Basis for Conclusions should include an explanation that this is a practical fix to drive consistency only, and it does not intend to answer the underlying conceptual question or suggest that the acquisition of an associate or joint venture should be considered the acquisition of an asset and not a business.

Many other respondents addressed the matter as well, some suggesting their preferred treatment (generally consistent with PWC’s suggestion), others only requesting that the issue be clarified one way or the other. But presumably many of those respondents had seen the staff paper cited above, or were otherwise well aware that the IASB hadn’t just overlooked the issue, and one wonders whether they were truly worried about the possible creation of (to quote the above) a new source of diversity in practice. After all, no financial statement analysis and resulting investment decision will ever remotely turn on whether or not the initial recognition amount of a newly-acquired associate included transaction costs. One wonders whether, in raising the issue, some of the respondents were primarily engaging in a form of self-branding, using the comment letter to flag to others (or maybe even to themselves) their thoroughness. Or alternatively (because I don’t merely mean to be cynical) it truly bothers them that IFRS, no matter how principle-based, should leave any pluggable hole unplugged. As I said, it’s an informative case study, for how even a relatively tiny issue can trigger a multiplicity of reactions…

The opinions expressed are solely those of the author.