FYI Article – Clarifying the Cost Method: Subsidiaries and Investments

November 2015

The Accounting Standards Board (AcSB) has heard you!

Stakeholders said that there is diversity in the application of the cost method. While private enterprises can choose to consolidate subsidiaries or use the cost or equity methods, the AcSB learned that more private enterprises choose the cost method than the alternatives.

As a result, in September 2015, the AcSB issued its Exposure Draft, “Subsidiaries and Investments.” The proposals aim to clarify the accounting for an interest in a subsidiary and an investment subject to significant influence when the cost method is used in accounting standards for private enterprises in Part II of the CPA Canada Handbook – Accounting.

Why Was This Project Undertaken?

Sections 1591, Subsidiaries, and 3051, Investments, provide a policy choice to use the cost method to account for interests in subsidiaries and investments subject to significant influence. However, Part II includes limited guidance on how the cost method should be applied.

Several issues in applying the cost method to an interest in a subsidiary were brought to the Board’s attention regarding whether and how Section 1582, Business Combinations, should be applied to a subsidiary that is accounted for using the cost method.

Who Will the Proposals Affect and What Is the Effect of the Proposals?

Private enterprises that account for interests in subsidiaries or investments subject to significant influence using the cost method may be affected. You will need to assess whether the proposals will affect how you apply the cost method.

Not-for-profit organizations are not affected as controlled organizations are consolidated (unless they hold a large number of immaterial organizations) and account for investments subject to significant influence using the equity method.

What Are the Key Features of the Proposals?

As an underlying principle, an interest in a subsidiary should initially be measured on a basis similar to other business combinations.  The proposals include the following:

  • cost would be measured at the acquisition-date fair value of the consideration transferred;
  • a bargain purchase gain on the purchase of a subsidiary would not be recognized;
  • a previously-held investment would not be remeasured in a step acquisition; and  
  • acquisition costs incurred would be recognized as an expense.

The proposals also include guidance on the subsequent measurement of an interest in a subsidiary.

Transitional Provisions and Effective Date

The proposed amendments would be applied prospectively to new acquisitions of subsidiaries and investments subject to significant influence from the date the amendments become effective. They would be effective from January 1, 2018, with earlier application permitted.

Comments Welcome

The Exposure Draft is open for comment until January 6, 2016. Comments, with specific reasons for the support or objection to the proposals, are especially appreciated.

As always, the AcSB will redeliberate the proposals in light of comments received. Part of the redeliberation process includes consultations with the Private Enterprise Advisory Committee

For additional information on this project, see the Subsidiaries and Investments project page.


Nicky Lahner, CPA, CA
Principal, Accounting Standards Board
Phone: +1(416)204-3348