What are Consolidated Financial Statements in IFRS 10

What are Consolidated Financial Statements in IFRS 10 and the relations with IFRS 11 IFRS 12 IAS 27 IAS 28 and disclosures for consolidation and investments.
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IAS 27 Separate Financial Statements, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 28 Investments in Associates and Joint Ventures and IFRS 12 Disclosures of Interest in Other Entities are all relating to or are otherwise intertwined with IFRS Types of Investments in (Consolidated) Financial Statements.

To better understand these 5 IFRS Standards and their interactions, co-relations, and maybe contradictions, here are all the important things summarised.

What are Consolidated Financial Statements in IFRS 10 What are Consolidated Financial Statements in IFRS 10 What are Consolidated Financial Statements in IFRS 10 What are Consolidated Financial Statements in IFRS 10

IAS 27 Separate Financial Statements

A parent of a group of companies may elect (or is required by local regulations) to prepare separate financial statements (in addition to the Consolidated Financial Statements (in IFRS 10)).

IAS 27 applies in accounting for investments in:What are Consolidated Financial Statements in IFRS 10

in such separate financial statements.

IAS 27 Valuation of subsidiaries, joint ventures and associates in separate financial statements is treated below.

Joint Operations (in IFRS 11) and Other Entities (in IFRS 12) are accounting for based on those standards.

What are Subsidiaries Joint Ventures and Associates in IAS 28 What are Subsidiaries Joint Ventures and Associates in IAS 28 What are Subsidiaries Joint Ventures and Associates in IAS 28 What are Subsidiaries Joint Ventures and Associates in IAS 28 What are Subsidiaries Joint Ventures and Associates in IAS 28 What are Subsidiaries Joint Ventures and Associates in IAS 28

IFRS 10 Consolidated Financial Statements

To establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

These other entities are (or may be) Subsidiaries (IFRS 10), Joint Operations (IFRS 11) and Consolidated Structured Entities (IFRS 12) – Note – Consolidated Structured Entities are also called subsidiaries.


The act of consolidation:

  • Consolidation–Combine assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiary. Offset (eliminate) the parent’s investment in each subsidiary with its portion of equity of the subsidiary. Eliminate in full all intra-group transactions and balances.
  • Parent and its subsidiaries must have and apply uniform accounting policies, if not, alignment adjustments must be quantified and posted
  • Consolidation begins from the date the investor gains control of an investee and ceases when the investor loses control of an investee
  • Reporting dates cannot vary by more than 3 months

Investment entity

An investment entity is defined as ‘an entity that

  • Obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services
  • Commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both
  • Measures and evaluates the performance of substantially all of its investments on a fair value basis’

An investment entity shall NOT consolidate its subsidiaries but rather measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9.

What are Separate Consolidated Financial Statements in IAS 27  What are Separate Consolidated Financial Statements in IAS 27 What are Separate Consolidated Financial Statements in IAS 27 What are Separate Consolidated Financial Statements in IAS 27 What are Separate Consolidated Financial Statements in IAS 27 What are Separate Consolidated Financial Statements in IAS 27

IFRS 11 Joint Arrangements

No single party controls the arrangement = Joint control (see below IAS 28)

A joint arrangement can be classified as a

  • Joint operation – a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement, or
  • Joint venture – a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement

Determination of this classification:

Judgement will need to be exercised when making this classification. In arriving at the classification, the rights and obligations of the parties to the arrangement must be assessed.

In making this assessment, the following shall be considered

  • Structure of the joint arrangement
  • When structured through a separate vehicle
    • Legal form of the separate vehicle
    • Terms agreed by the parties in the contractual arrangement, and
    • When relevant, other facts and circumstances

Consolidation replacement/alternative

Joint operation, the investor consolidates:

  • its share of any assets held jointly
  • its share of any liabilities incurred jointly
  • its share of the revenue arising from the joint operation
  • its share of the revenue from the sale of the output by the joint operation, and
  • its expenses, including its share of any expenses incurred jointly

Joint venture, the investor having joint control uses an one-line consolidation method, i.e. the equity method defined in IAS 28 or if exempted from using the equity method (see below) using IAS 27 (cost or fair value method).

A party that participates in, but does not have joint control of a joint venture is required to account for its interest in the arrangement in accordance with IFRS 9 Financial Instruments (fair value), unless it has significant influence over the joint venture, then it shall account for it in accordance with IAS 28 (equity method)

What are structured entities What are structured entities What are structured entities What are structured entities What are structured entities What are structured entities What are structured entities What are structured entities

IAS 28 Investments in Associates and Joint Ventures

Significant influence

Power to participate in financial and operating policy decisions of the investee.

Associate

An entity over which the investor has significant influence.

But not control (see below) or joint control over those policies.

Joint control

The contractually agreed sharing of control of an arrangement – decisions require the unanimous consent of the parties sharing control.

Joint arrangement

Arrangement of which two or more parties have joint control. This means in 9 out of 10 an investment in a non-legal entity (however, see above Determination of this classification).

Joint venture

A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. This means in 9 out of 10 an investment in a legal entity (however, see above Determination of this classification).

What are Consolidated Financial Statements in IFRS 10 What are Consolidated Financial Statements in IFRS 10 What are Consolidated Financial Statements in IFRS 10 What are Consolidated Financial Statements in IFRS 10 What are Consolidated Financial Statements in IFRS 10 What are Consolidated Financial Statements in IFRS 10

Types of control

Control

The control model – the parent/investor CONTROLS the investee IF and ONLY IF all the following three elements are met:

  1. Power over the investee – ‘Power’ is defined as ‘existing rights that give the current ability to direct the relevant activities’. Therefore, when assessing whether an investor has power, there are two critical concepts, existing rights and relevant activities, and
  2. Exposure or rights to variable returns – An investor is exposed or has rights to variable returns from its involvement with the investee. This refers to returns that are not fixed but rather vary depending on the performance of the investee, and
  3. Link between power and returns – The investor must have the ability to use its power to affect the amount of the investor’s returns from its involvement with the investee

9 out of 10 times the control model is clear, it is that 1 you need to worry about i.e. verify and completely understand.

Joint control

 

Joint control is defined as ‘the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control’

All the parties or a group of parties control the arrangement collectively when they act together to direct the relevant activities that significantly affect the returns of the arrangement

Judgement will need to be applied when assessing whether all the parties or a group of parties have joint control over a joint arrangement. This assessment shall be made by considering all facts and circumstances. If these facts and circumstances change, an entity shall reassess whether joint control of the arrangement still exists

Significant influence

 

The rebuttable presumption is that 20% – 50% shareholding gives rise to significant influenceWhat are Separate Consolidated Financial Statements in IAS 27

Evidenced in one or more of the following ways:

  • Representation on the board of directors or equivalent governing body of the investee
  • Participation in policy-making processes, including participation in decisions about dividends or other distributions
  • Material transactions between the investor and the investee
  • Interchange of managerial personnel
  • Provision of essential technical information.

 

Overview Determine control or….?

1 Identifying the investee, consideration of its purpose and design

As said before 9 out of 10 are evident – Investee controlled by means of equity instruments – An investor controls an investee when the investor holds majority of the voting rights and is able to exercise these rights to determine the investee’s operating and financing policies and no additional arrangements that alter this decision making are present.

The riskier 1 out of 10 – Where voting rights are not the dominant factor in determining control, the investor would need to consider the design of the investee in terms of:

  • The risks the investee will be exposed to;
  • The risk it will pass on to the parties involved with it; and
  • Whether the investor is exposed to some or all of that risk.

And more or less by definition risk exposure is with the investor (in court terms: the investor is by default guilty as investor unless certainly proven not to be guilty as investor) – By implication if the investee’s risk exposure is high, it passes part of it on to the investor and the investor is exposed to some of that risk, it is likely that the investee has been set up under the power of the investor.

2 Identifying the relevant activities of the investee

Relevant activities’ are defined as ‘activities of the investee that SIGNIFICANTLY affect the investee’s returns’.

Examples of relevant activities include, but are not limited to:What are Subsidiaries Joint Ventures and Associates in IAS 28

  • Selling and purchasing of goods or services
  • Managing financial assets during their life
  • Selecting, acquiring and disposing of assets
  • Researching and developing new products or processes
  • Determining a funding structure or obtaining funding

3 Identifying how decisions about the relevant activities are made

The definition of “power” requires consideration whether the investor has the current ability to direct the relevant activities, therefore it’s important that we consider how decisions about the relevant activities are made.

Examples of how decisions about relevant activities are made (not only limited to these);

  • Establishing operating and capital decisions of the investee, including budgets; and
  • Appointing and remunerating an investee’s key management personnel or service providers and terminating their services or employment.

Assessing whether the investor controls the investee

CONTINUOUS ASSESSMENT – An investor must continuously assess whether it controls an investee

Something else -   Assessment of investment entities
Determine control – in Detail….

CONTROL – 1 – Power over the investee

Power arises either individually or in combination, from substantive rights (not protective rights):

  • In the form of voting rights or potential voting rights;
  • To appoint, reassign, or remove members of an investee’s key management personnel or any other entity that has the ability to direct the relevant activities;
  • To direct the investee to enter into or veto any changes to transactions for the benefit of the investor; and
  • That give the holder the current ability to direct the relevant activities even if its rights to direct have yet to be exercised.
Substantive rights

A right is substantive when the holder of that right has the practical ability to exercise that right

Factors to consider when making this decision include (but are not limited to) whether

  • There are barriers that prevent the holder from exercising its rights, for example laws and regulations
  • There is a practical mechanism to facilitate multiple parties to collectively exercise their rights
  • The party(s) holding the rights would benefit from the exercise of those rights
  • The rights are exercisable when decisions about relevant activities need to be made
Protective rights

Is defined as ‘Rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate’.

Therefore an investor that only holds protective rights does not have power over an investee, neither can they prevent another party from having power over an investee.

Franchise agreements are generally considered to be protective rights.

Case – Protective rights and control

The board of directors of ABC Plc have decided to dispose of a major subsidiary that accounts for a significant portion of their revenues and assets as they have decided to restructure the entity.

For this decision to be passed, it will require the approval of 75% voting rights held by shareholders.

One of the shareholders of ABC Plc, CDEF Plc holds a 15% stake in the group and has a “golden vote” (deciding vote). CDEF Plc is unhappy with the proposed transaction.

CDEF Plc can veto/block the decision (it has protective rights), it cannot make an alternate suggestion, therefore this is representative of CDEF Plc having significant influence over ABC Plc but not control.

Power – voting rights

Power with a majority of the voting rights
  • Relevant activities are directed by a vote
  • Majority of the governing body members are appointed by a vote
Power without a majority of voting rights (‘De facto power’)

Power without a majority of voting rights can be exercised by ANY of the following:

Contractual arrangements with other vote holders

  • An investor can gain the right to exercise voting rights sufficient to give it power
  • Might ensure that the investor can direct other vote holders on how to vote to enable the investor to make decisions about relevant activities

Rights from other contractual arrangements

  • Voting rights in combination with other decision making rights, can give an investor the current ability to direct the relevant activities of the investee
  • Economic dependence of an investee on an investor does not automatically lead to the investor having power over the investee

The investor’s voting rights

The investor has the practical ability to direct the relevant activities unilaterally after considering all facts and circumstances such as

  • Relative size and dispersion of other vote holders
  • Potential voting rights held by other vote holders, other parties or the investor
  • Right from other contractual arrangements
  • Any additional facts or circumstances
Majority of voting rights but no power
  • Voting rights are not substantive
  • Relevant activities are not directed by vote
Potential voting rights
  • Only considered if they are substantive
  • Could arise from convertible instruments, options or forward contracts
  • The investor must consider the purpose and the design of the instrument
  • For an example refer to IFRS 10, application examples, example 9

Power – more than a passive interest

Sometimes there will be indications that an investor has more than simply a passive interest.IFRS Types of Investments in (Consolidated) Financial Statements

This may indicate that the investor has other related rights sufficient to give it power or provide evidence of existing power over an investee.

Examples that suggest that the investor has a more than passive interest:

  • The investee’s key management personnel who direct relevant activities are current or previous employees of the investor.
  • The investee’s operations are dependent on the investor.
  • A significant portion of the investee’s activities either involve or are conducted on behalf of the investor.
  • The investor’s exposure or rights to returns is disproportionally greater than its voting or other similar rights.

CONTROL – 2 – Exposure or rights to variability in returns

This refers to returns that are not fixed but rather vary depending on the performance of the investee. The basis of the investor’s assessment in determining this should focus on the substance of the arrangement and not on the legal form of returns.

Examples of variable returns

  • Dividends
  • Commissions
  • Royalties
  • Interest
  • Management fees
  • Other distributions of economic benefits
  • Change in value of an investment

An investor with decision making rights therefore has to determine whether it is a principal or an agent. An ‘agent’ is defined as ‘a party primarily engaged to act on behalf and for the benefit of another party or parties (the principal(s)) and therefore does not control the investee when it exercises its decision making authority’.

Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf of the principal. An investor that is an agent does not control an investee when it exercises decision making rights delegated to it.

Special CONTROL situations – Principal versus Agent

An investor with decision making rights therefore has to determine whether it is a principal or an agent. An ‘agent’ is defined as ‘a party primarily engaged to act on behalf and for the benefit of another party or parties (the principal(s)) and therefore does not control the investee when it exercises its decision making authority’.

Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf of the principal. An investor that is an agent does not control an investee when it exercises decision making rights delegated to it.

Special CONTROL situations – Principal versus Agent

To determine whether a decision maker is an agent, it shall consider the overall relationship between itself, the investee being managed and other parties involved with the investee.

ALL the following factors also need to be considered unless a single party holds substantive rights to remove the decision maker without cause.

Scope of decision making authority

  • The activities permitted by the decision making agreement and specified by law
  • The discretion available to the decision maker when making decisions
  • Purpose and the design of the investee
  • The risks the investee will be exposed to
  • The risk it will pass on to the parties involved with it, and
  • The level of involvement the decision maker had in the design of the investee

Rights held by other parties

Substantive rights may affect the decision maker’s ability to direct relevant activities

  • When a single party holds removal rights, this is sufficient to conclude that the decision maker is an agent
  • Substantive right to restrict activities of the decision maker – apply same treatment as removal rights

Remuneration

The greater the magnitude of and variability associated with the decision maker’s remuneration in relation to the returns expected, the more likely that the decision maker is a principal

A decision maker cannot be an agent unless the following conditions are present

  • The remuneration is commensurate with the services provided
  • The remuneration includes only terms, conditions or amounts that are customarily present for similar services and level of skills negotiated on an arm’s length basis

 

Decision maker’s returns from other interests in the investee

A decision maker shall consider its exposure to variability of returns from its other interests in the investee in assessing whether it is an agent, in doing this the following are considered

  • The greater the magnitude of, and variability associated with, its economic interests, considering its remuneration and other interests in aggregate, the more likely that the decision maker is a principal
  • Whether its exposure to variability of returns is different from that of the other investors and, if so, whether this might influence its actions

 

Example – Principal versus agent

Pluto owns 68% of Jupiter and the remaining 32% is owned by Mars.

Pluto appoints Mars which is a management company to run its investment entity Jupiter. Mars is paid fixed and performance fees in relation to the services provided. This, in combination with the return on investment creates exposure to variability in return.

Pluto has the right to remove Mars as the management company of Jupiter if it so wishes.

Pluto has power as Pluto has substantive rights to remove Mars if it so wishes therefore Mars is an agent and not a principal therefore Mars would not need to consolidate Jupiter.

For further principal versus agent examples, refer to IFRS 10, application examples, example 14.

Special CONTROL situations – Relationship with other parties (”de facto agents”)

When assessing control, an investor needs to consider the nature of its relationship with other parties. In doing so the investor must consider whether those other parties are acting on the investor’s behalf (i.e. they are ‘de facto agents’). Such a relationship need not have a contractual arrangement.

Examples of other parties that may act as “de facto agents” for the investor:

  • The investor’s related parties.
  • A party whose interest in the investee is through a loan from the investor.
  • A party that has agreed not to sell,transfer or encumber its interests in the investee without prior approval of the investor.
  • A party that cannot finance its operations without the investor’s subordinated financial support.
  • An investee for which the majority of its governing body or key management personnel are the same as that of the investor.
  • A party that has close business relationship with the investor.

Disclosure and accounting treatment of non-controlling interests

A parent must present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.

Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions.

Accounting treatment – loss of control

If the parent loses control of a subsidiary, the parent shall: IFRS Types of Investments in (Consolidated) Financial Statements

  • Derecognise the assets and liabilities of the former subsidiary.
  • Recognise any investment retained in the former subsidiary at its fair value when control is lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance with relevant IFRSs. That fair value shall be regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9 or, when appropriate, the cost on initial recognition of an investment in associate or joint venture (and subsequently the equity method or cost method).
  • Recognise the gain or loss associated with the loss of control in profit or loss.

IAS 27 Valuation of subsidiaries, joint ventures and associates in separate financial statements

An investor accounts for investments in subsidiaries, joint ventures and associates either in accordance with IAS 28 (equity method), in accordance with IFRS 9 (fair value), or in accordance with IFRS 12 (cost method (passive investment or unreliable other valuation methods)).

The entity is required to apply the same accounting for each category of investments. IFRS Types of Investments in (Consolidated) Financial Statements

Exemption valuations: IFRS Types of Investments in (Consolidated) Financial Statements

An entity that is exempt in accordance with IFRS 10 4(a) from consolidation or IAS 28 17 from applying the equity method may present separate financial statements as its only financial statements

Held for sale: IFRS Types of Investments in (Consolidated) Financial Statements

When investments are classified as held for sale or for distribution to owners (or included in a disposal group that is classified as held for sale or for distribution to owners), they are accounted for: IFRS Types of Investments in (Consolidated) Financial Statements

  • In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, if previously accounted for at cost
  • In accordance with IFRS 9, if previously accounted for in accordance with IFRS 9.

Investments in associates or joint ventures at fair value:

Investments in associates or joint ventures that are measured at fair value in accordance with IFRS 9 are required to be measured in the same way in the separate and consolidated financial statements (i.e. at fair value).

Dividends received: IFRS Types of Investments in (Consolidated) Financial Statements

Dividends received from subsidiaries, joint ventures, and associates are recognised when the right to receive the dividend is established and accounted for as follows:

  • in profit or loss, if the investment is accounted for at cost or at fair value;
  • as a reduction from the carrying amount of the investment, if the investment is accounted for using the equity method.

IAS 28 Exemption from equity method

If the entity is a parent that is exempt from preparing consolidated financial statements, as set out in IFRS 10 Consolidated Financial Statements paragraph 4(a), or if:

  • The investor is a wholly owned subsidiary and its owners have been informed about the decision
  • The investor’s debt or equity instruments are not publicly traded
  • The investor did not file its financial statements with a securities commission or other regulator for the purposes of issuing its shares to the public
  • The ultimate or intermediate parent of the investor produces consolidated financial statements that comply with IFRSs
  • The investments are held by venture capital organisations, mutual funds, unit trusts and similar entities for which the investor elects to account for at fair value through profit or loss.

IAS 28 Equity method

The investment is initially recognised at cost

Subsequently, the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition (IAS 28.10):

  • The investor’s share of the profit or loss of the investee is recognised in the investor’s profit or loss
  • Distributions received from an investee reduce the carrying amount of the investment
  • Adjustments to the carrying amount may also arise from changes in the investee’s other comprehensive income (OCI) (i.e. revaluation of property, plant and equipment and foreign exchange translation differences. The investor’s share of those changes is recognised in OCI of the investor
  • An investment in an investee that meets the definition of a ‘non-current asset held for sale’ should be recognised in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

The equity method is used from the date significant influence arises, to the date significant influence ceases.

IAS 28 Equity method – keep in mind

Potential voting rights are taken into account to determine whether significant influence exists, but equity accounting is based on actual interest only

Financial statements of the investor and investee used must not differ by more than 3 months in terms of the reporting date (the same as for IFRS 10)

The investors’ share in the investee’s profits and losses resulting from transactions with the investee are eliminated in the equity accounted financial statements of the parent

Use uniform accounting policies for like transactions and other events in similar circumstances

If an investor’s share of losses of an investee exceeds its interest in the investee, discontinue recognising share of further losses. The interest in an investee is the carrying amount of the investment in the investee under the equity method, and any long-term interests that, in substance, form part of the investor’s net investment in the investee. E.g., an item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an extension of the entity’s investment in that investee

If ownership interest is reduced, but equity method remains, the entity reclassifies to profit or loss the gain or loss that had previously been recognised in OCI.

IAS 28 Equity method – Discontinuation of the equity method

An entity is required to discontinue the use of the equity method from the date when its investment ceases to be an associate or a joint venture as follows:

  • If an investment becomes a subsidiary, the entity follows the guidance in IFRS 3 Business Combinations and IFRS 10
  • If any retained investment is held as a financial asset, the entity applies IFRS 9 Financial Instruments, and recognise in profit or loss the difference between:
    • The fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture
    • The carrying amount of investment at date equity method discontinued.
  • Account for all amounts recognised in OCI in relation to that investment on same basis as if investee had directly disposed of related assets and liabilities.

Impairment losses

Entities apply IFRS 9 Financial Instruments to determine whether an impairment loss with respect to its net investment in the investee NAGAAN

Goodwill that forms part of the carrying amount of an investment in an investee is not separately recognised and therefore not tested separately for impairment – instead the entire investment is tested as ‘one’ in accordance with IAS 36.

Something else -   Protective rights

IFRS 12 Disclosures of Interest in Other Entities

An entity shall present information separately for the following interests (i.e. aggregation is only allowed for remaining (non-material) interests)

  • Subsidiaries (including consolidated structured entities)
  • Joint ventures
  • Joint operations
  • Associates
  • Unconsolidated structured entities

Non-controlling interests in group activities and cash flows result in specific disclosure requirements.

Nature of risks in consolidated structured entities in respect of financial support and potential exposures

Nature and extent of significant restrictions in a parent, subsidiary relationship

Consequences of changes in a parent’s ownership interest in a subsidiary – 2 options: 1. loss of control and 2. no loss of control (see above)

IFRS 12 Parent of a Group of Companies – Disclosures for subsidiaries

An entity is required to disclose information that enables users of its consolidated financial statements to

Obtain sufficient understanding of:

  • The composition of the group; and
  • The interest that non-controlling interests have in the group’s activities and cash flows; and

In order to enable users to evaluate:

  • The nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of the group;
  • The nature of, and changes in, the risks associated with its interests in consolidated structured entities;
  • The consequences of changes in its ownership interest in a subsidiary that do not result in a loss of control; and
  • The consequences of losing control of a subsidiary during the reporting period.

Non-controlling interests in group activities and cash flows

For each of its subsidiaries that have a non-controlling interest that is material and shows interest in the group’s activities and cash flows, the reporting entity shall disclose the following

  • The name of the subsidiary
  • The principal place of business and country of incorporation of the subsidiary
  • The proportion of ownership interests held by non-controlling interests
  • The proportion of voting rights held by non-controlling interests, if different from the proportion of ownership interests held
  • The profit or loss allocated to non-controlling interests of the subsidiary during the reporting period
  • Accumulated non-controlling interests of the subsidiary at the end of the reporting period
  • Summarised financial information about the subsidiary

Refer to illustrative disclosure example that is presented below

Nature of risks in consolidated structured entities

When a parent, subsidiary relationship exists, the following is required to be disclosed in the group financial statements

  • Terms of any contractual arrangements that could require the parent or its subsidiaries to provide financial support to a consolidated structured entity, including events or circumstances that could expose the reporting entity to a loss
  • If during the reporting period, financial or other support is provided to a consolidated structured entity, without having a contractual obligation to do so – The type and amount of support provided
    • The reasons for providing the support
    • If financial or other support has been provided to a previously unconsolidated structured entity that resulted in control, an explanation of the relevant factors in reaching that decision
  • Any current intentions to provide financial or other support to a consolidated structured entity, including intentions to assist the structured entity in obtaining financial support

Non controlling interests disclosures 2

Non controlling interests disclosures

Nature and extent of significant restrictions

When a parent, subsidiary relationship exists, the following is required to be disclosed in the group financial statements

  • Significant restrictions on its ability to access or use assets and settle the liabilities of the group
  • The nature and extent to which protective rights of non-controlling interests can significantly restrict the entity’s ability to access or use the assets and settle the liabilities of the group
  • The carrying amounts in the consolidated financial statements of the assets and liabilities to which those restrictions apply

Consequences of changes in a parent’s ownership interest in a subsidiary

  • That does not result in a loss of control – The entity shall present a schedule that shows the effects on the equity attributable to owners of the parent of any changes in its ownership interest in a subsidiary
  • That does result in a loss of control
    • An entity shall disclose the gain or loss, if any, and
    • The portion of that gain or loss attributable to measuring any investment retained in the former subsidiary at its fair value at the date when control is lost
    • The line item/s in profit or loss in which the gain or loss is recognized

 

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IFRS 12 Investment entities – Interest in unconsolidated subsidiaries

An investment entity shall disclose the following for each unconsolidated subsidiary:

  • The name of the subsidiary;
  • The principal place of business and country of incorporation of the subsidiary; and
  • The proportion of ownership interests held by the investment entity and if different, the proportion of voting rights held.

The above disclosures shall also be provided by an investment entity parent for investments that are controlled by its investment entity subsidiary.

An investment entity shall also disclose:

  • The nature and extent of any significant restrictions on the ability of an unconsolidated subsidiary to transfer funds to the investment entity in the form of cash dividends, or to repay loans or advances made by the investment entity; and
  • Any current commitments or intentions to provide or assist in obtaining financial or other support to an unconsolidated subsidiary.

IFRS 12 Interest in Joint arrangements and Associates

Objective

An entity is required to disclose information that enables users of its financial statements to evaluate:

  • The nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates; and
  • The nature of, and changes in, the risks associated with its interests in joint ventures and associates.

Disclosure


Nature, extent and financial effects of an entity’s interests in joint arrangements and associates

An entity shall disclose

For each joint arrangement and associate that is material to the reporting entity

  • The name of the joint arrangement or associate
  • The nature of the entity’s relationship with the joint arrangement or associate
  • The principal place of business and country of incorporation of the joint arrangement or associate
  • The proportion of ownership interest or participating share held by the entity and if different, the proportion of voting rights held (if applicable)

Disclosures are for:

  1. Formally identifying the joint arrangement or associate,
  2. Providing an answer to – why does the investor do the investment? A strategic investment in new concepts, knowledge to see if it becomes useful, broaden a family business…

For each joint venture and associate that is material to the reporting entity

  • Whether the investment is measured using the equity method or fair value
  • Summarised financial information about the joint venture or associate as specified
  • If there is a quoted market price for the investment and the joint venture or associate is accounted for using the equity method, the fair value of its investment in the joint venture or associate

Financial information about the entity’s investments in joint ventures and associates that are not individually material

  • In aggregate for all individually immaterial joint ventures
  • In aggregate for all individually immaterial associates

Note: Joint ventures and Associates should be aggregated in two separate groups.

Disclosures are for:

  1. making sure the equity method is the method most used,
  2. provide market value (IFRS 9) as much as possible.

Nature, extent and financial effects of an entity’s interests in joint arrangements and associates

An entity shall also disclose

  • The nature and extent of any significant restrictions on the ability of joint ventures or associates to transfer funds to the entity in the form of cash dividends, or to repay loans or advances made by the entity
  • Where there is a difference in the reporting date or period of a joint venture or associate’s financial statements used in applying the equity method
    • The date of the end of the reporting period of that joint venture or associate and
    • The reason for using the different date or period
  • The unrecognised share of losses of a joint venture or associate, both for the reporting period and cumulatively, if the entity has stopped recognising its share of losses of the joint venture or associate when applying the equity method

Disclosures are for:

  1. providing information on risks especially on the investor’s exposure to provide guarantees or subordinated financing arrangements that could negatively affect the investor’s other investments/operations
  2. providing information as to how easy (or how difficult) these assets can be converted to cash
  3. ensuring the 3 months delay possibility is used with some more flexibility

Risks associated with an entity’s interest in joint ventures and associates

An entity shall disclose

  • Commitments that it has relating to its joint ventures separately from the amount of other commitments
  • In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, unless the probability of loss is remote, contingent liabilities incurred relating to its interest in joint venture or associates, separately from the amount of other contingent liabilities. This includes an entity’s share of contingent liabilities incurred jointly with other investors with joint control of, or significant influence over, the joint ventures or associates

IFRS 12 Interest in unconsolidated structures entities

Objective

An entity is required to disclose information that enables users of its financial statements to:

  • Understand the nature and extent of its interests in unconsolidated structured entities; and
  • Evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities.

Disclosure

The information below should be disclosed in a tabular format unless another format is more appropriate.

Nature of interest

An entity is required to disclose qualitative and quantitative information about its interests in unconsolidated structured entities. This includes but is not limited to the nature, purpose, size, activities and how the structured entity is financed.

If an entity has sponsored an unconsolidated structured entity for which it does not provide information required (for example, because it does not have an interest in the entity at the reporting date), it must disclose

  • how it has determined which structured entities it has sponsored
  • income from those structured entities during the reporting period, including a description of the types of income presented and
  • the carrying amount (at the time of transfer) of all assets transferred to those structured entities during the reporting period

Nature of risks

 

An entity is required to disclose

  • The carrying amounts of the assets and liabilities recognised in its financial statements relating to its interests in unconsolidated structured entities
  • The line items in the statement of financial position in which those assets and liabilities are recognized
  • The entity’s maximum exposure to loss from its interests in unconsolidated structured entities if determinable and how that exposure is determined A comparison of the carrying amounts of the assets and liabilities of the entity that relate to its interests in unconsolidated structured entities and the entity’s maximum exposure to loss from those entities

IAS 27 Disclosures in Separate Financial Statements

An entity is required to apply all applicable IFRSs when providing disclosures in its separate financial statements.

When a parent qualifies and elects not to prepare consolidated financial statements (IFRS 10

paragraph 4(a)) and instead prepares separate financial statements, it is required to disclose:

  • That the financial statements are separate financial statements
  • That the paragraph 4(a) exemption has been used
  • The name, principal place of business, address, and country of incorporation, of the entity whose IFRS compliant consolidated financial statements are publicly available
  • A list of significant investments in subsidiaries, joint ventures and associates, including:
    • The name of those investees
    • The investees principal place of business and country of incorporation
    • The proportion of the ownership interest and its proportion of the voting rights held in those investees.
  • A description of the method used to account for the investments listed under the previous bullet point.

When a parent (other than a parent using the consolidation exemption) or an investor with joint control of, or significant influence over, an investee prepares separate financial statements, it is required to disclose:

  • That the financial statements are separate financial statements
  • The reasons why the separate financial statements are prepared if not required by law
  • A list of significant investments in subsidiaries, joint ventures and associates, including:
    • The name of those investees
    • The investees principal place of business and country of incorporation
    • The proportion of the ownership interest and the proportion of voting rights held in those investees.
  • A description of the method used to account for the investments listed
  • The financial statements prepared in accordance with IFRS 10, IFRS 11, or IAS 28 to which they relate.

See also: IFRS Community

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