FYI Article – Accounting For Investments: Are You Ready For the Changes?
Are you a private enterprise preparing financial statements for an annual period beginning on or after January 1, 2016? If so, you are required to apply Section 1591, Subsidiaries, and Section 3056, Interests in Joint Arrangements.
So what do you need to know?
Effective For Annual Periods Beginning on or After January 1, 2016:
Section 1591 replaces Section 1590, Subsidiaries, and Accounting Guideline AcG-15, Consolidation of Variable Interest Entities
Section 1591 includes additional guidance that requires the use of judgment to determine when control is obtained through means other than equity interests. This guidance includes a description of when an enterprise has control through contractual rights and circumstances an enterprise could consider when determining control while using professional judgment.
Section 3056 replaces Section 3055, Interests in Joint Ventures
Under Section 3055, an investor could choose to account for its interests in joint ventures (now called joint arrangements) using the proportionate consolidation, equity or cost method.
Section 3056 eliminates this free choice in accounting for joint arrangements.
Jointly controlled operations and jointly controlled assets
Section 3056 requires an investor with an interest in jointly controlled operations or jointly controlled assets to recognize its interest in the individual assets, obligations, revenues and expenses of the joint arrangement.
Jointly controlled enterprises
Section 3056 allows an investor to account for an interest in a jointly controlled enterprise using either the equity method or the cost method.
Section 3056 also permits, but does not require, the investor to undertake additional analysis of its interests in all jointly controlled enterprises. This determines whether the investor has an interest in net assets or in individual assets and liabilities.
Amendments to Section 3051, Investments
Section 3051 was amended to provide clearer guidance on how to account for between an entity and an equity accounted investee.
Gains and losses for interests in the net assets of a joint arrangement accounted for using the equity method should be recognized and measured consistently with other equity-accounted investments.
The scope of Section 3051 was clarified to specify that it includes investments subject to significant influence and certain other non-financial instrument investments, such as works of art and other tangible assets held for investment purposes. However, other investments, such as investments held by investment companies, are excluded from scope.
The scope was also amended to clarify that a different accounting policy choice can be made for each of the following types of investments:
- subsidiaries that are not consolidated;
- investments subject to significant influence; and
- interests in the net assets of a joint arrangement.
Transitional Provisions: A One-time Opportunity!
Section 1591 transitional guidance provides relief for enterprises that prepared consolidated financial statements previously, and those that choose to prepare consolidated financial statement for the first time, when applying the new standard. Private enterprises have a one-time opportunity in 2016 to take advantage of the transitional relief.
Enterprises that may benefit from the relief include those:
- using the cost method to account for their subsidiaries who choose to prepare consolidated financial statements for the first time when applying Section 1591; and
- preparing consolidated financial statements that may identify additional subsidiaries not previously consolidated.
Section 3056 includes specific transitional provisions for changes:
- from the proportionate consolidation method to the equity or cost method; and
- from the equity or cost method to accounting for the investor’s interests in the individual assets and liabilities of a joint arrangement.
Effective For Annual Periods Beginning on or After January 1, 2017:
Clarifications to Sections 1591 and 3056
These amendments clarify:
- that the transitional provisions may not be applied when an enterprise changes its accounting policy choice to consolidate its subsidiaries at any time in the future. This relief will only be available to enterprises transitioning to Sections 1591 and 3056 for the first time; and
- that an enterprise preparing non-consolidated financial statements is not required to assess whether contractual arrangements give rise to control.
Effective For Annual Periods Beginning on or After January 1, 2018:
Clarifications to Sections 1591 and 3056
This amendment clarifies the accounting for voting interests, if any, that an investor holds in a subsidiary controlled through a combination of voting rights and contractual arrangements.
Amendments to Sections 1591 and 3051, Investments
- further clarify the scope out of common control transactions;
- amend Section 1591 to clarify the requirements when there is contingent consideration outstanding or the initial accounting for the subsidiary is incomplete;
- amend Section 1500, First-time Adoption, to clarify that the amendments apply from the date of transition; and
- amend Sections 1506, Accounting Changes, and 1582, Business Combinations, to prohibit prospective application of the consequential amendments to these Sections.
Resources For Private Enterprises Applying the New Sections and Amendments:
- Webinar – Consolidations, Joint Arrangements and Investments – View the Accounting Standards Board (AcSB) webinar to understand the changes to the accounting for Subsidiaries and Joint Arrangements resulting from the issuance of Sections 1591 and 3056 in September 2014.
- Section 1591, Subsidiaries: Financial Reporting Alert – Learn about the new Section 1591 issued by the AcSB in September 2014 to replace Section 1590, Subsidiaries.
- Section 3051, Investments: Financial Reporting Alert – Learn about the amendments to Section 3051 issued by the AcSB in September 2014.
- ASPE Briefing: Accounting For Investments (Sections 1591, 3051, and 3056) – Accounting for investments under accounting standards for private enterprises can be complex. Many different types of investments exist and many different policy choices are available. Review this briefing for help in applying Sections 1591, 3051 and 3056.
- FYI Article – Subsidiaries and Interests in Joint Arrangements: Take Advantage of the Transitional Provisions in 2016 – This article highlights the availability of transitional provisions on initial transition to Sections 1591 and 3056.
- FYI Article – Clarifying the Cost Method: Subsidiaries and Investments – Read this overview of the cost method.
Michelle Thomas, CPA, CGA
Principal, Accounting Standards Board
Phone: +1 (416) 204-2979