Fair value option for investments in associates and joint ventures

Background

IAS 28 currently permits an investor to measure its investments in associates and joint ventures at FVTPL if the investment (or a portion thereof) “is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds”. Although there is evidence that the ability to use IAS 28’s FVTPL option is not interpreted consistently, the IASB has, until recently, decided not to embark on a project to address the resulting diversity in application. The catalyst for this has been concerns raised about how IAS 28 interacts with IFRS 18 Presentation and Disclosure in Financial Statements (IFRS 18), which is effective for periods beginning on or after 1 January 2027.

What does IFRS 18 require?

As a reminder, IFRS 18 introduces a formal structure to the profit and loss account, with separate categories for operating, investing and financing. Irrespective of whether the FVTPL option is taken, IFRS 18 requires an investor to present income from investments in associates and joint ventures in the investing section, unless it judges that it has a “specified main business activity” (SMBA) of investing in assets. If it does have such an SMBA, then income and expense from investments in associates are:

• still classified in the investing section if they are accounted for using the equity method; and
• classified in the operating section if the FVTPL option is applied.

What is the issue?

Some entities consider investments in associates and joint ventures to be part of their operating activities. Many companies, insurers in particular, would prefer to present income and expenses related to associates and joint ventures in the operating section once IFRS 18 becomes effective because of a potential mismatch from presenting income and expense related to issued insurance contracts, often linked to such investments, in the operating section of the profit and loss account. However, the issue is not solely relevant to insurance companies. Evidence suggests, inter alia, banks and investment management companies are also impacted.

From 2027, the requirements of IFRS 18 mean that it will only be permissible to present income from such investments in the operating section if an entity (i) judges that it has an SMBA of investing in assets and (ii) is able to apply the FVTPL option afforded by IAS 28. Consequently, there may be an increase in the number of entities that, rightly or wrongly, would decide to interpret the IAS 28’s FVTPL option more broadly to achieve presentation of income and expense on such investments in the operating section.

Therefore, the proposed amendment to IAS 28 seeks to address concerns raised and ensure IAS 28’s FVTPL option is interpreted consistently.

In what way is IAS 28 unclear?

Stakeholders consider that it is currently unclear if an insurer can only apply IAS 28’s FVTPL option to indirect investments in associates through a controlled insurance fund, or whether it also applies to direct investments in insurance funds over which the insurer has significant influence (or joint control). The lack of definitions and clear guidance also leads to questions about whether investments by asset management and private equity entities are eligible for the FVTPL option.

In addition, it is unclear if the example referenced of an “investment-linked insurance fund” means the FVTPL option applies only to investments linked to insurance contracts having direct participation features.

What exactly is proposed?

The IASB proposes to amend the wording in IAS 28 to clarify that the FVTPL option can be interpreted more broadly than it perhaps currently is, but not so broadly as to make the option available to all entities. This is to be achieved by permitting the FVTPL option when the investment in an associate or joint venture (or a portion thereof) “is held by, or is indirectly held through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities”, further clarifying that similar entities “include those that have a main business activity of investing in particular types of assets”. This, therefore, means the more specific referenced example of a similar entity, i.e. investment-linked insurance funds can be removed.

Note that the IASB is not proposing that an entity should be able to revoke the FVTPL option once it has been made (as some had lobbied for), nor is it changing IAS 28’s requirement that it must be made on initial recognition of the investment.

Next steps

Interested parties should consider whether the proposed amendment to IAS 28 addresses their concerns adequately. Importantly, given the ever-decreasing time before IFRS 18 becomes effective, the normal 3-month comment period is reduced and will end on 20 April 2026.

A link to the Exposure Draft is available from the IASB’s website here.