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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 thins summarised.

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:

• Subsidiaries (in IFRS 10)
• Joint ventures (in IFRS 11/IAS 28)
• Associates (in IAS 28)

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.

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.

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
  

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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)

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).

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 influence

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:

• 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

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.

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 – more than a passive interest

Sometimes there will be indications that an investor has more than simply a passive interest.

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

CONTROL – 3 – Link between power and returns

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.

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.

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.

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

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

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.

IAS 27 Disclosures in Separate Financial Statements

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