There have been many controversies regarding the current IAS 28 ‘Investments in Associates and Joint Ventures.’  The current IAS 28 is criticized for not properly providing specific guidance in numerous cases, and even when the guidance is given, it is often vaguely stated.  As a result, diverse guidance has been executed by each major accounting firm on a case-by-case basis.  Consequently, there have been numerous requests and opinions on the need for more specific additional guidance for consistent application of the equity method.

This report presents issues that we believe should be addressed by the IASB on the equity method research project. 

First, the most fundamental application issue regarding the equity method is the vagueness of its underlying concept, i.e. whether it serves as one-line consolidation or measurement basis.  To facilitate the IASB’s further steps to address this issue, this paper uses a new dimension, “scope of equity-accounted group” and presents three alternative concepts of the equity method, as well as explains how the equity method accounting standard may vary under each of the three alternative concepts. 

Secondly, based on our experiences in Korea, this paper presents additional issues that we believe the IASB should consider in carrying out the equity method research project.  From 1998 to 2011, prior to the adoption of IFRS, Korean GAAP required the application of equity method in the stand-alone financial statements.  Therefore, Korea has accumulated extensive experience in resolving equity method-related issues, which could provide valuable insights to the IASB in amending IAS 28. 

Lastly, this paper reports the results of the empirical research regarding the value relevance of the equity method.  This research shows how much information users in the capital market actually value the information provided by the equity method.  It shows the importance of the equity method, not on a conceptual level but on an empirical and practical level. 

It should be noted that the purpose of this paper is not to provide a final version of a new standard on the equity method.  The purpose of this paper is to provide a starting point of discussions for developing a better standard for equity method.