Consolidated and Separate Financial Statements (IAS 27)
7.2 SCOPE OF THE STANDARD This standard should be applied in:
■ the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent; and
■ accounting for investments in subsidiaries, associates, and joint ventures in the separate financial statements of the parent.
The standard does not address the initial accounting on acquisition of a subsidiary. This is addressed in IFRS 3 (see chapter 6).
7.3 KEY CONCEPTS
7.3.1 Consolidated financial statements are the financial statements of a group presented as the financial statements of a single economic entity.
7.3.2 Control is the power to govern the financial and operating policies of an entity to ob tain benefits from the entity’s activities. Control is generally evidenced by one of the following:
■ Ownership: The parent entity owns (directly or indirectly through subsidiaries) more than 50 percent of the voting power of another entity. Control is presumed to exist in such circumstances unless the contrary can be demonstrated.
■ Voting rights: The parent entity has power over more than 50 percent of the voting rights of another entity by virtue of an agreement with other investors.
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■ Policies: The parent entity has the power to govern the financial and operating policies of the other entity under a statute or agreement.
■ Board of directors: The parent entity has the power to appoint or remove the majority of the members of the board of directors.
■ Voting rights of directors: The parent entity has the power to cast the majority of votes at meetings of the board of directors.
7.3.3 A special purpose entity (or “SPE”) is an entity created to accomplish a narrow and well-defined objective. An SPE may take the form of an unincorporated entity. SPEs are con-solidated when the substance of the relationship between an SPE and another entity indicates that the SPE is controlled by that entity. The following circumstances indicate that an entity substantially controls an SPE:
■ Activities: The activities of the SPE are substantially conducted on behalf of the entity according to its specific business needs so that the entity obtains all the benefits from the operations.
■ Decisions and autopilot: The entity has the decision-making power to obtain the majority of the benefits from the SPE or has delegated these powers by setting up an autopilot mechanism.
■ Risks and rewards: The entity has rights to the majority of the benefits of the SPE and is also exposed to the risks incidental to the activities of the SPE.
■ Residual or ownership risk: In substance the entity retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain the majority of the benefits from these assets.
7.3.4 A group is a parent and all of the parent’s subsidiaries.
7.3.5 A parent is an entity that has one or more subsidiaries.
7.3.6 Non-controlling interest (previously called minority interest) is the equity in a sub-sidiary not attributable directly or indirectly to the parent.
7.3.7 Separate financial statements are those presented by a parent, an investor in an asso-ciate, or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees.
7.3.8 A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (the parent).
7.4 ACCOUNTING TREATMENT
7.4.1 A parent should present consolidated financial statements as if the group were a single entity.
Consolidated financial statements should include:
■ the parent and all its foreign and domestic subsidiaries (including those that have dissimilar activities);
■ special purpose entities if the substance of the relationship indicates control (see SIC 12);
■ subsidiaries that are classified as held for sale, although the subsidiary is classified as a disposal group held for sale and presented as such (refer to IFRS 5 in chapter 18); and
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■ subsidiaries held by venture capital entities, mutual funds, unit trusts, and similar enti-ties (the scope exemption that allows the recognition of associates or joint ventures at fair value is not applicable if the entity is a subsidiary).
7.4.2 Consolidated financial statements combine the financial statements of the parent and its subsidiaries on a line-by-line basis by adding together like items of assets, liabilities, equity, income, and expenses. The basic consolidation procedures include the following:
■ The carrying amount of the parent’s investment and its portion of equity of each subsidiary are eliminated in accordance with the procedures of IFRS 3.
■ Non-controlling interests in the net assets of consolidated subsidiaries are identified and presented separately as part of equity. Any losses made by the subsidiary are allo-cated between the parent and non-controlling interest in proportion to their interests held even if this results in the non-controlling interest having a deficit balance (that is, a debit balance on an equity item).
■ Non-controlling interests in the profit or loss of subsidiaries for the period are identified but are not deducted from profit for the period.
■ Intra-group balances, transactions, and income and expenses are eliminated in full, for example profit or losses from the intra-group sale of assets or inventory, or dividends declared and paid by the subsidiary.
■ Consolidated profits are adjusted for dividends on any cumulative preference shares of the subsidiary, whether or not dividends have been declared. The parent computes its share of profit or losses after these have been adjusted for these dividends.
7.4.3 Consolidated financial statements should be prepared using uniform accounting poli-cies for like transactions and events.
7.4.4 The reporting date of the parent and its subsidiaries should be the same. When the reporting dates of the parent and subsidiaries differ, the subsidiary prepares an additional set of financial statements at the parent’s reporting date, unless impracticable. If information on a different reporting date is used, adjustments are made for significant transactions or events that occur between those dates. The difference should be no more than three months.
7.4.5 Changes in the parent’s ownership in a subsidiary can result in either:
■ a loss of control of the subsidiary; or
■ control being retained.
Where control is retained, the transaction between the parent and the non-controlling inter-est is considered to be a transaction between the owners of the subsidiary in their capacity as owners. Such changes in interest are accounted for as equity transactions and therefore do not have any effect on profit or loss. Any difference that arises between the amount by which the non-controlling interest is adjusted and the fair value of any consideration paid or received should be recognized directly in equity and attributed to the parent, for example recognized through retained earnings. The same principle applies where the parent previ-ously held 100 percent interest in the subsidiary. The amount of non-controlling interest recognized should be initially measured as a percentage of the net asset value of the subsid-iary or at fair value with no effect on profit or loss.
7.4.6 Changes that result in the parent losing control of the subsidiary could result from the disposal of the entire interest held or only a portion of the interest held. In both cases the parent should do the following:
■ derecognize the entire goodwill balance as at disposal date;
■ derecognize the entire non-controlling interest carrying amount at disposal date;
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■ derecognize all the assets and liabilities of the subsidiary at their carrying amounts at disposal date;
■ recognize the fair value of any proceeds received;
■ recognize any retained investment in the former subsidiary at fair value at disposal date;
■ reclassify to profit or loss or transfer directly to retained earnings any amounts recog-nized by the subsidiary in other comprehensive income as if the parent has directly dis-posed of the item; and
■ recognize any resulting gain or loss from the above steps in profit or loss; that is, the proceeds received plus the fair value of any retained interest less the net asset value of the subsidiary, goodwill, and non-controlling interest at disposal date.
Change in interest Effect Accounting treatment
Financial asset becomes an associate or joint venture
Change in nature of investment.
Deemed disposal of previous investment at fair value with gain or loss recognized in profit or loss. The gain or loss is the difference between the carrying amount and fair value of the IAS 39 investment.
IAS 39 is applied until the date that significant influence or joint control is obtained.
Gain or loss is recognized in profit or loss.
Control is obtained, i.e., financial asset or associate or joint venture becomes a subsidiary
Change in nature of investment.
Deemed disposal of previous investment at fair value with gain or loss recognized in profit or loss. The gain or loss is the difference between the carrying amount and fair value of the financial asset, associate, or joint venture.
IFRS 3 and IAS 27 is applied from the date control is obtained.
Additional interest in an investment with no change in the nature of the investment
No deemed disposal of previous investment.
In the case of a subsidiary, the transaction is between equity holders with no effect on profit or loss.
In the case of an associate and joint venture, the transaction is treated as an increased investment
Increase the carrying amount of the investment.
In the case of a subsidiary, decrease the non-controlling interest and increase parent equity.
Recognize any gain or loss in equity per point 7.4.5 above.
Disposal of interest in subsidiary—no loss in control
Equity transaction. Increase non-controlling interest and decrease parent equity. Gain or loss on disposal recognized in equity per point 7.4.5 above.
Disposal of a subsidiary where control is lost; i.e., a subsidiary becomes an associate, joint venture, or financial asset
Deemed disposal and derecognition of entire investment and recognition of a new investment at fair value.
Gain or loss on disposal and recognition of new investment.
Derecognize goodwill, non-controlling interest, and net assets of subsidiary.
Recognize fair value of proceeds received.
Recognize retained investment at fair value.
Recognize any resulting difference as a gain or loss in profit or loss.
Associate or joint venture becomes a financial asset
Deemed disposal and derecognition of entire investment and recognition of a new investment at fair value.
Gain or loss on disposal and recognition of new investment.
Equity accounting or proportionate consolidation ceases.
Derecognize carrying amount of entire investment in associate or joint venture.
Recognize IAS 39 investment and any proceeds received at fair value.
Recognize any resulting gain or loss in profit or loss.
Disposal of a financial asset
No change in the nature of the investment. Apply requirements of IAS 39.
TABLE 7.1 Accounting Treatment of Changes in Ownership Interest
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7.4.7 A parent need not present consolidated financial statements if:
■ the parent is a wholly owned subsidiary or if its owners, including non-controlling interests, have been informed and do not object;
■ the parent’s debt or equity instruments are not traded in a public market;
■ the parent did not file, or is not in the process of filing, financial statements with a securities commission or other regulatory body for purposes of issuing instruments in the public market; and
■ the ultimate parent publishes IFRS-compliant consolidated financial statements that are available for public use.
7.4.8 Investments in subsidiaries, associates, and joint ventures should be accounted for in a parent entity’s separate financial statements either:
■ at cost; or
■ as financial assets in accordance with IAS 39.
The parent should recognize any dividends from these investments in profit or loss of its separate financial statements when the right to receive the dividend is established.
7.5 PRESENTATION AND DISCLOSURE
7.5.1 Consolidated financial statements should include the following disclosures:
■ the nature of the relationship when the parent does not own (directly or indirectly) more than 50 percent of the voting power;
■ the reason why the ownership of more than 50 percent of the voting power (directly or indirectly) of an investee does not constitute control.
■ the reporting date of the subsidiary if this is different to that of the parent and the reason for the difference;
Item Previous standard Revised standard Effect
Loss of control over a subsidiary
No specific requirements. Deemed disposal of entire investment at fair value and acquisition of new investment at fair value.
Gain or loss may be bigger or smaller due to effect of recognizing deemed disposal at fair value.
Change in interest with no loss of control in a subsidiary
No specific guidance but general practice to recognize transactions through profit or loss.
Equity transactions between owners recognized directly in equity. This is applicable for any change in interest where control is not lost, including where the parent initially holds 100% interest in the subsidiary.
No effect on profit or loss.
Losses of subsidiaries Non-controlling interests only participate in losses until zero carrying value, unless the non-controlling interests guaranteed certain losses.
Losses are carried in proportion to interests held, even if this results in a deficit carrying value of the non-controlling interest.
Can have negative non-controlling interest balance in equity. Less losses recognized by parent but previous excess losses carried cannot be reversed.
TABLE 7.2 Main Differences between Previous IAS 27 and the Revised IAS 27 (effective July 1, 2009)
84 Chapter 7 Consolidated and Separate Financial Statements (IAS 27)
■ the nature and extent of any significant restrictions on the ability of the subsidiary to transfer funds, such as cash dividends, or to repay loans or advances;
■ a schedule showing the effects of any changes in the parent’s ownership interest in a subsidiary that did not result in the loss of control; and
■ if control is lost, the gain or loss recognized, the line item in which this amount is included, and the portion of this amount that is attributable to the fair value of the investment retained in the former subsidiary.
7.5.2 If the parent does not present consolidated financial statements, the parent’s separate financial statements should include:
■ the fact that the exemption from publishing consolidated financial statements has been exercised;
■ the name and country of incorporation of the ultimate parent that publishes consoli-dated financial statements that comply with IFRS; and
■ a list of significant subsidiaries, associates, and joint ventures, including the names, countries of incorporation, proportions of interest, and voting rights.
7.5.3 In the parent’s separate financial statements, the following should be stated:
■ a list of subsidiaries, associates, and joint ventures (as per point 7.5.2);
■ the method used to account for investments in subsidiaries, associates, and joint ven-tures (either cost or IAS 39); and
■ the fact that the statements are separate and the reasons why they were prepared if not required by law.
7.5.4 Non-controlling interest should be presented separately within equity in the consoli-dated Statement of Financial Position. The balance should consist of the initial amount rec-ognized per IFRS 3 and the non-controlling interest’s share of changes in equity of the sub-sidiary since acquisition date.
7.6 FINANCIAL ANALYSIS AND INTERPRETATION (See also chapter 6, section 6.6)