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| Home > Accounting Standards > Interpretations of Financial Reporting Standards 2003 > INT FRS 3 |
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Interpretation of Financial Reporting Standard
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INT FRS 3 |
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Elimination of Unrealised Profits and Losses on Transactions with Associates |
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| Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items. |
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| Reference: FRS 28, Accounting for Investments in Associates |
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ISSUE |
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- Although FRS 28.14 refers to consolidation procedures set out in FRS 27, it does not give explicit guidance on the elimination of unrealised profits and losses resulting from "upstream" or "downstream" transactions between an investor (or its consolidated subsidiaries) and associates. "Upstream" transactions are, for example, sales of assets from an associate to the investor (or its consolidated subsidiaries). "Downstream" transactions are, for example, sales of assets from the investor (or its consolidated subsidiaries) to an associate.
- The issue is to what extent an investor should eliminate unrealised profits and losses resulting from transactions between an investor (or its consolidated subsidiaries) and associates accounted for using the equity method.
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CONSENSUS |
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| 3. |
Where an enterprise adopts the Allowed Alternative Treatment, that treatment should be applied consistently to all borrowing costs that are directly attributable to the acquisition, construction or production of all qualifying assets of the enterprise. If all the conditions laid down in FRS 23.10 are met, an enterprise should continue to capitalise such borrowing costs even if the carrying amount of the asset exceeds its recoverable amount. However, FRS 23.18 explains that the carrying amount of the asset should be written down to recognise impairment losses in such cases. |
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| 4. |
Unrealised losses should not be eliminated to the extent that the transaction provides evidence of an impairment of the asset transferred. |
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BASIS FOR CONCLUSIONS |
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| 5. |
FRS 28.14 states that many consolidation procedures are similar for subsidiaries and associates. Regarding subsidiaries, FRS 27.16 requires that unrealised profits and losses resulting from intragroup transactions should be eliminated in full. However, unlike subsidiaries, associates are not under the control of the investor. |
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| 6. |
FRS 31.32 allows a venturer to report its interest in a jointly controlled entity using the equity method. FRS 31.39 and FRS 31.40 require the proportionate elimination of intercompany profits and losses resulting from transactions with a joint venture. The rationale of these provisions for entities under joint control regarding the elimination of intercompany profits and losses applies to entities under significant influence as well. In addition, the consistent application of the equity method requires that intercompany profits and losses resulting from transactions with joint ventures and with associates be treated in the same way. |
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| 7. |
FRS 31.39 and FRS 31.40 require the immediate recognition of any unrealised losses resulting from transactions between a venturer and a joint venture when they represent a reduction in the net realisable value of current assets or a decline, other than temporary, in the carrying amount of a long-term asset. The same rationale applies to transactions between an investor and an associate. |
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Effective Date: INT FRS 3 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40. |
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