IASB Clarifies the Fair Value Option Under IAS 28: What Companies Should Prepare For

DV Consulting Accounting and Financial Reporting Update 

The International Accounting Standards Board issued targeted amendments to IAS 28, Investments in Associates and Joint Ventures, clarifying which entities may elect to measure qualifying investments in associates and joint ventures at fair value through profit or loss.

The amendments are closely connected with IFRS 18, Presentation and Disclosure in Financial Statements, particularly its requirements for classifying income and expenses in the statement of profit or loss. They take effect when an entity first applies IFRS 18.

Why Was IAS 28 Amended?

IAS 28 generally requires an entity with significant influence over an associate—or joint control over a joint venture—to apply the equity method.

However, IAS 28 provides a fair value option for investments held directly or indirectly through certain types of entities, including:

• Venture capital organizations;

• Mutual funds;

• Unit trusts;

• Similar entities; and

• Investment-linked insurance funds.

Stakeholders reported different interpretations of which organizations qualify as “similar entities.” These differences became more significant as companies prepared to adopt IFRS 18 because the accounting method selected for an investment can affect where the related income and expenses appear in the statement of profit or loss.

The IASB introduced a narrow clarification to improve consistency without conducting a broader revision of IAS 28 or disrupting established accounting practices.

What Did the IASB Clarify?

The amendments clarify that “similar entities” under IAS 28 include entities whose specified main business activity is investing in particular types of assets, as described in IFRS 18.

The relevant asset categories may include:

• Investments in associates and joint ventures;

• Investments in unconsolidated subsidiaries;

• Cash and cash equivalents; and

• Other assets that generate returns individually and largely independently from the entity’s other resources.

An entity with this type of main business activity may therefore be eligible to elect the IAS 28 fair value option for qualifying investments in associates and joint ventures.

This clarification is particularly relevant to insurers, investment entities, fund managers and other organizations whose ordinary business activities involve earning returns from investments. However, the amendments are not limited to the insurance or financial-services sectors. Any entity that may qualify for the fair value option must assess the amended requirements based on its activities and circumstances.

Why Does the Accounting Method Matter Under IFRS 18?

IFRS 18 introduces defined categories in the statement of profit or loss, including:

• Operating;

• Investing;

• Financing;

• Income taxes; and

• Discontinued operations.

Income and expenses from associates and joint ventures accounted for using the equity method are classified in the investing category, even when the entity considers investing to be one of its main business activities.

In contrast, when an eligible entity uses the IAS 28 fair value option for investments connected with its main business activity of investing in assets, the related fair value gains, losses and other income and expenses may be presented in the operating category.

This difference can affect:

• Reported operating profit;

• Presentation of investment returns;

• Performance trends;

• Management reporting;

• Financial ratios; and

• Comparability with other companies.

The amendments seek to ensure that entities with similar activities apply the fair value eligibility requirements more consistently before IFRS 18 becomes mandatory.

The Amendment Does Not Automatically Permit Fair Value Accounting

The clarification should not be interpreted as a blanket permission for all holding companies, investment owners or entities with associates and joint ventures to use fair value through profit or loss.

An entity must still determine whether:

1. Investing in the relevant types of assets is genuinely one of its main business activities;

2. It falls within the eligible entity categories contemplated by IAS 28;

3. The particular investment qualifies for the IAS 28 election;

4. The election is made in accordance with the requirements of IAS 28; and

5. The investment can be measured under the applicable provisions of IFRS 9.

An entity must support its conclusion with evidence from its actual business activities—not merely its legal name, corporate purpose or management preference.

Determining Whether Investing Is a Main Business Activity

The assessment should consider the entity’s facts and circumstances. Relevant evidence may include:

• How management describes the business to investors and other stakeholders;

• How management evaluates financial performance;

• The nature and significance of investment income;

• How resources and personnel are allocated;

• Whether investment returns form a substantial part of operating results;

• Internal reports reviewed by senior management;

• Regulatory classifications;

• Compensation structures; and

• The relationship between the investments and the entity’s overall business strategy.

An entity may have more than one main business activity. Nevertheless, holding a significant investment does not, by itself, establish that investing in assets is a specified main business activity.

Management should document the basis for its conclusion because the assessment can directly affect both the measurement of the investment and the presentation of the related income and expenses.

Which Companies May Be Most Affected?

The amendments may be particularly relevant to:

Insurance Companies

Insurers often hold investments to support insurance liabilities, earn investment returns and satisfy regulatory or solvency requirements. Some insurers considered particular investments in associates and joint ventures part of their core investment activities but faced uncertainty about whether they qualified for the IAS 28 fair value option. The amendment directly addresses the interpretative diversity raised by the insurance industry.

Investment Entities and Fund-Like Organizations

Entities whose main activities involve acquiring, managing and disposing of investments should review whether the clarified scope affects their existing associates and joint ventures.

Financial Institutions and Investment Managers

Organizations providing investment-management services or maintaining substantial portfolios may need to reconsider how their activities align with IFRS 18’s specified-main-business-activity assessment.

Holding and Parent Companies

A holding company should not assume that it qualifies merely because it owns several subsidiaries, associates or joint ventures. It must establish that investing in the relevant assets constitutes a main business activity under IFRS 18.

Diversified Groups

Groups operating both investment and non-investment businesses may need to perform the assessment at the appropriate reporting-entity level. The conclusion for consolidated financial statements may differ from the conclusion for a parent company’s separate financial statements.

Effective Date

The amendments to IAS 28 apply in the first reporting period in which the entity applies IFRS 18, including when IFRS 18 is adopted early.

IFRS 18 is mandatory for annual reporting periods beginning on or after January 1, 2027, with earlier application permitted. The new standard replaces IAS 1, Presentation of Financial Statements.

Therefore, an entity applying IFRS 18 from January 1, 2027 will generally apply the IAS 28 clarification from the same reporting period.

For Philippine entities preparing statutory financial statements under Philippine Financial Reporting Standards, management should also confirm the timing and requirements of local adoption and any guidance issued by the appropriate Philippine standard-setting and regulatory authorities.

What Management Should Do Now

Entities with investments in associates and joint ventures should begin preparing before the adoption of IFRS 18.

1. Identify Relevant Investments

Prepare a complete inventory of investments in:

• Associates;

• Joint ventures;

• Unconsolidated subsidiaries; and

• Other investment assets relevant to the entity’s business model.

2. Review the Existing Accounting Treatment

Determine which investments are currently measured using:

• The equity method;

• Fair value through profit or loss;

• Cost in separate financial statements; or

• Another permitted measurement basis.

3. Assess the Entity’s Main Business Activities

Evaluate whether investing in particular types of assets constitutes a specified main business activity under IFRS 18.

The conclusion should be supported by operational, financial and governance evidence.

4. Reassess Eligibility for the Fair Value Option

Determine whether the amended IAS 28 requirements affect investments that are currently—or may become—eligible for fair value measurement.

5. Analyze the Financial Statement Impact

Management should model how the accounting treatment may affect:

• Operating profit;

• Investing-category results;

• Fair value gains and losses;

• Earnings volatility;

• Key financial ratios;

• Performance measures; and

• Financial statement disclosures.

6. Update Accounting Policies and Documentation

Accounting manuals, technical memoranda and financial reporting procedures should reflect the amended requirements and the entity’s judgments.

7. Review Systems and Reporting Processes

Systems must be able to separately capture:

• Fair value movements;

• Dividend income;

• Equity-accounted results;

• Impairment indicators;

• Acquisition or disposal activity; and

• Information required for IFRS 18 presentation and disclosure.

8. Coordinate With Auditors and Governance Bodies

Management should discuss significant judgments with the external auditor, audit committee and board before implementation. Early coordination can reduce late adjustments and disagreements during the year-end audit.

Key Questions for Management

Organizations should consider the following:

• Do we hold investments in associates or joint ventures?

• How are those investments currently measured?

• Is investing in these assets part of our main business activities?

• Do we meet the clarified eligibility requirements under IAS 28?

• Will the amendments change our accounting policy or only confirm our existing treatment?

• How will the treatment affect operating profit under IFRS 18?

• Are our internal systems capable of producing the necessary information?

• Have the relevant judgments been properly documented?

• Have we evaluated the effect on comparative financial information?

• Are management, the audit committee and external auditors aligned on the implementation approach?

  
  

More Consistent Reporting Ahead of IFRS 18

The IAS 28 amendments are narrow, but their effect may be significant for entities whose operating performance includes investment returns.

By clarifying which organizations may use the fair value option, the IASB aims to reduce inconsistent interpretations and support more comparable presentation when IFRS 18 takes effect.

Companies should not wait until the 2027 reporting period to begin their assessment. Eligibility conclusions, fair value processes, financial statement presentation and system changes may require substantial analysis and coordination.

How DV Consulting Can Help

DV Consulting supports businesses with financial reporting and accounting-standard implementation, including:

• Review of investments in associates and joint ventures;

• Assessment of IAS 28 accounting treatments;

• IFRS and PFRS technical accounting consultations;

• IFRS 18 readiness assessments;

• Preparation of technical accounting memoranda;

• Financial statement presentation and disclosure reviews;

• Fair value and equity-method accounting support;

• Accounting-policy documentation;

• Audit preparation and account reconciliation; and

• Training for accounting and finance teams.

  
  

Early assessment can help management identify potential financial reporting effects, address system limitations and prepare clear documentation before implementation.

DV Consulting Inc.

Email: sales@dvconsultingph.com

Contact Number: 0917 170 6734

Website: www.dvconsultingph.com

This article is provided for general informational purposes only and should not be treated as accounting, audit, legal or investment advice. The appropriate accounting treatment depends on the entity’s specific facts, business activities, reporting framework and applicable regulatory requirements.