An Executive Guide to IFRS: Content, Costs and Benefits to Business

Equity investments

If an equity investment is not accounted for as a subsidiary, nor as an associate, and not as a joint arrangement, and it is not being held for disposal, then it is a financial instrument. Here too the financial arrangements are in the middle of change. IAS 39, which deals with the accounting for financial instruments, is being progressively replaced by IFRS 9, which has an effective date of 1 January 2013 (with earlier adoption possible).

Under IAS 39 all equity investments in shares that are listed on a stock exchange are valued at fair value, with changes in fair value going through profit and loss. However, shares that are not quoted on a stock market can be accounted for at historical cost, with dividends going to profit and loss. This exception has been removed by IFRS 9, which specifies that all equity investments must be at fair value.

There was a good deal of opposition to this requirement because it was pointed out that estimating fair values was extremely difficult in any but the most developed markets because of the absence of transactions. The IASB refused to give way on the principle but added application guidance as follows:

in limited circumstances, cost may be an appropriate estimate of fair value. That may be the case if insufficient more recent information is available to determine fair value, or if there is a wide range of possible fair value measurements and cost represents the best estimate of fair value within that range.

(IFRS 9, Appendix ...