Exemptions from the equity method

Learning objectives

• Identify the exemptions from applying the equity method (parent exempt from consolidation, cumulative conditions, election for venture capital organisations and similar entities).L2, L3
• Justify, from the facts of a case, whether or not an exemption applies.L3

Normative references

• IAS 28 §17An investor need not apply the equity method to its investment in an associate or a joint venture if it is a parent exempt from preparing consolidated financial statements under para. 4(a) of IFRS 10, or if all four conditions are met: (a) it is a wholly-owned subsidiary, or a partially-owned subsidiary whose other owners, including those not otherwise entitled to vote, have been informed and do not object; (b) its debt or equity instruments are not traded in a public market; (c) it did not file, and is not in the process of filing, its financial statements with a regulator for the purpose of issuing instruments in a public market; (d) its ultimate or any intermediate parent produces IFRS financial statements available for public use in which subsidiaries are consolidated or measured at fair value through profit or loss in accordance with IFRS 10 (alternative introduced by the December 2014 amendments, applicable since 1 January 2016, para. 45D).
• IAS 28 §18When an investment in an associate or a joint venture is held by, or indirectly through, a venture capital organisation, a mutual fund, a unit trust or a similar entity (including an investment-linked insurance fund), the entity may elect to measure it at fair value through profit or loss in accordance with IFRS 9; this election is made separately for each associate or joint venture, at initial recognition. Para. 19 permits the same election for the portion held by such an organisation only.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• Which statements about the exemptions from the equity method are correct? More than one answer is possible.L2
• Opale SA is 90% owned by Groupe Nacre; the other shareholders, who have been informed, do not object to its not preparing consolidated statements. Its securities are not traded in a public market, it has filed nothing with a regulator for a public issue, and Groupe Nacre publishes consolidated statements that comply with IFRS and are available for public use. Opale holds 30% of Brume SA, over which it has significant influence. Write a short note concluding on the equity method for Brume, distinguishing case facts, rule and professional judgement.L3