IFRS vs ASPE – Investments in Subsidiaries: Acquisition Method and Reporting Options (ASPE 1591)

Acquisition method under IFRS and ASPE

• The acquisition method is used under both IFRS and ASPE; the process is the same under both.

ASPE 1591: Reporting options for subsidiaries

• Under ASPE 1591 Subsidiaries, the parent has a choice of methods to report its subsidiary:
  • acquisition method (consolidation) – discussed in this chapter
  • equity method
  • cost method (note that if the subsidiary's shares have a quoted price in an active market, then the FV through profit or loss (FVPL) method must be used, not cost)
• The equity method is discussed in detail in the Investments In Associates - In-Depth chapter, and the cost and FVPL methods are discussed in the Passive Investments In Financial Assets chapter.

Example: Jamelee Ltd and Salisbury Corp

• On 7/1, Year 5, Jamelee Ltd purchased 100% of the outstanding common shares of Salisbury Corp.
• Jamelee prepares its financial statements in accordance with ASPE.
• Salisbury's shares are traded on the Toronto Stock Exchange (TSX).
• Jamelee has the following options for accounting for its investment in Salisbury:
  • Consolidation (using the acquisition method)
  • By purchasing 100% of the outstanding common shares of Salisbury, Jamelee controls the company. Therefore, consolidation using the acquisition method is appropriate.
  • Equity method
  • Under ASPE, an entity may choose to account for its investment in another entity's common shares using the equity method when there is control. Jamelee may therefore use the equity method to account for its investment in Salisbury.
  • FV through profit or loss (FVPL) method
  • Regardless of whether there is control or not, entities reporting under ASPE can choose to account for an investment in a public entity's shares using the FVPL method.
• Note that as Salisbury is a public company, the cost method is not an option.

Key implications and connections

• The acquisition method is the standard approach for reporting investments in subsidiaries under both IFRS and ASPE; the process is the same across both frameworks.
• ASPE 1591 provides flexibility by allowing a choice among:
  • consolidation (acquisition method)
  • equity method
  • FVPL method for investments in public entities
• When the subsidiary’s shares have an active market price, the FVPL and not the cost method must be used (for public entities).
• The cost method is constrained by the market status of the subsidiary (publicly traded shares negate the cost method option).
• Cross-references:
  • Equity method discussions are in Investments In Associates - In-Depth chapter.
  • Cost and FVPL methods are discussed in the Passive Investments In Financial Assets chapter.

Practical takeaway

• For a parent that gains control of a subsidiary, consolidation via the acquisition method is the default and typically appropriate (as noted for Jamelee and Salisbury).
• For public subsidiaries or investments in public entities, FVPL is a viable alternative regardless of control, offering recognition of fair value changes through profit or loss.
• The choice of method affects the reported financial results and balance sheet presentation, with implications for stakeholders and decision-making.