BC14 Before Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate was issued in May 2008, IAS 27 described a 'cost method'. This required an entity to recognise distributions as income only if they came from post‑acquisition retained earnings. Distributions received in excess of such retained earnings were regarded as a recovery of investment and were recognised as a reduction in the cost of the investment. To apply that method retrospectively upon first‑time adoption of IFRSs in its separate financial statements, an investor would need to know the subsidiary's pre‑acquisition retained earnings in accordance with IFRSs.

BC15 Restating pre‑acquisition retained earnings would be a task tantamount to restating the business combination (for which IFRS 1 First‑time Adoption of International Financial Reporting Standards provides an exemption in Appendix C). It might involve subjective use of hindsight, which would diminish the relevance and reliability of the information. In some cases, the restatement would be time‑consuming and difficult. In other cases, it would be impossible (because it would involve making judgements about the fair values of the assets and liabilities of a subsidiary at the acquisition date).

BC16 Therefore, in Cost of an Investment in a Subsidiary, an exposure draft of proposed amendments to IFRS 1 (published in January 2007), the Board proposed to give first‑time adopters an exemption from restating the retained earnings of the subsidiary at the date of acquisition for the purpose of applying the cost method.