Other group standards: IAS 27 and IFRS 12

A parent company has two sets of books to think about. The group statements treat everything as one business. But the parent is also a legal company in its own right, and it may have to publish its own statements, where its shares in subsidiaries appear as investments.

Separately, readers of group statements need to know how the group is built: who the subsidiaries are, who owns the rest, what restricts the movement of cash, and what risks sit in entities that are not consolidated.

This topic covers separate financial statements under International Accounting Standard (IAS) 27, the exemption from the equity method in IAS 28, and the disclosures required by International Financial Reporting Standard (IFRS) 12. The previous topics covered consolidation, associates and disposals. The next topic starts foreign currency.

Key terms in plain English

Syllabus check

IAS 27 and IFRS 12 are examinable under syllabus area C. This topic covers:

• the purpose of separate statements, the measurement choices and their disclosures;
• the IFRS 12 disclosures for subsidiaries, joint arrangements, associates and structured entities, including significant judgements.

CAMA 2020, separate and group statements

The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow IFRS and give a true and fair view.

IAS 27: separate financial statements

Separate statements are presented in addition to consolidated statements (or to statements that use the equity method). If an entity is exempt from consolidating or from the equity method, its separate statements are its only statements. IAS 27 does not say which entities must prepare separate statements. That is decided by the law of each country.

Measurement

• Investments in subsidiaries, joint ventures and associates are accounted for either (a) at cost, (b) under IFRS 9, or (c) using the equity method (IAS 28).
• The same accounting is applied to each category of investment. A parent can, for example, hold all subsidiaries at cost and all associates under the equity method.
• Investments at cost that are classified as held for sale follow IFRS 5. Those under IFRS 9 stay under IFRS 9.
• Dividends are recognised in profit or loss when the right to receive them is established.
• All applicable IFRS apply to separate statements.

Disclosure

The fact that they are separate statements, and a list of significant investments (name, principal place of business and country of incorporation if different, ownership interest and voting rights if different) with the method used.

A parent that is exempt from consolidating and elects not to consolidate also discloses that it has used the exemption, the name and principal place of business of the entity that publishes IFRS consolidated statements for public use. The address where they can be obtained.

The exemption from the equity method (IAS 28)

An investor need not use the equity method if it is a parent exempt from preparing consolidated statements, or if all of these apply:

1. It is a wholly owned subsidiary, or a partly owned one whose other owners know of and do not object to it not using the equity method.
2. Its securities are not publicly traded.
3. It is not in the process of issuing securities in public markets.
4. Its ultimate or intermediate parent publishes IFRS consolidated statements.

An investment held by a venture capital organisation, mutual fund or unit trust that is measured at fair value under IFRS 9 is also outside the equity method. An associate cannot be left out because of severe long-term restrictions on moving funds to the investor.

The equity method stops when significant influence is lost. The retained interest is then measured at fair value under IFRS 9 (its fair value is the initial carrying amount of the financial asset).

IFRS 12: disclosure of interests in other entities

The objective is to let users evaluate the nature of, and risks from, the entity’s interests in other entities and the effects of those interests on its financial position, performance and cash flows. It applies to interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. Extra information is given if the minimum is not enough.

Significant judgements and assumptions

Disclose the judgements (and changes in them) used to decide that the entity has control, joint control or significant influence, and the type of joint arrangement. Examples: it does not control an entity even though it holds more than half of the votes; it controls an entity with less than half; it does not have significant influence at 20% or more; or it has significant influence at less than 20%.

Interests in subsidiaries

• The composition of the group, and the NCI’s interest in the group’s activities and cash flows.
• For each subsidiary with a material NCI: name, place of business, the NCI’s ownership and voting percentages, profit or loss allocated to the NCI, accumulated NCI, and summarised financial information.
• Significant restrictions on accessing or using group assets and settling liabilities (for example limits on dividends and loans), and the carrying amounts of the assets and liabilities affected.
• Changes in ownership that do not lead to loss of control, and the gain or loss on loss of control, with the line item in which it appears.
• The reporting date and the reason, if a subsidiary has a different reporting date.
• Terms of any contract that could require financial support to a consolidated structured entity, and any support given without a contract.

Interests in joint arrangements and associates

• For each material one: name, nature of the relationship, place of business, ownership and voting rights.
• Whether it is equity-accounted or at fair value, summarised financial information, and (if equity-accounted and quoted) the fair value of the investment.
• Aggregate information for those that are not individually material, for joint ventures and associates separately.
• Significant restrictions on transfers of funds, different reporting dates, and unrecognised share of losses.
• Risks: commitments to joint ventures (separately from other commitments) and contingent liabilities, unless the chance of loss is remote.

Unconsolidated structured entities

Information that lets users understand the nature and extent of the interests and evaluate the risks, including the purpose and financing of the entity, the carrying amount of the interest, the maximum exposure to loss (including guarantees), support given, and any intention to support.

The rules in more depth

Why separate statements exist

The legal company, not the group, pays dividends and owes its creditors. Its own position is shown in the separate statements.

Why the same method for each category

It stops an entity from choosing cost for investments that have fallen in value and fair value for those that have risen.

Why disclose judgements

Control and influence depend on facts and opinion. Users need to see where management’s choice moved the answer.

Why structured entities need special disclosure

An entity can be set up so that risk sits outside the group’s statements, but the group is still exposed through guarantees. The disclosures show that.

Effect on analysis

Analysts use the restrictions and the summarised information to see how much of the group’s cash is really available and how much debt sits outside it.

Worked examples

1. Alpha is a cost-measured investment, so IFRS 5 applies. Held for sale at the lower of the carrying amount (₦480m) and the fair value less costs to sell (₦540m) = ₦480m. No impairment. Dr asset held for sale 480; Cr investment in Alpha 480 (shown as a current asset).
2. On completion: Dr cash 550; Cr asset held for sale 480; Cr gain on disposal 70.
3. Beta stays on the equity method and Gamma at fair value under IFRS 9. The policy for each category is not changed by the sale of Alpha.

1. The right to receive is established on 28 December. Dr dividend receivable ₦10m; Cr dividend income (profit or loss) ₦10m in that year.
2. The dividend is not deducted from the cost of the investment, unless it is a return of pre-acquisition profit that indicates an impairment.
3. In the group statements, the dividend is eliminated.

1. All four conditions are met, so Mid need not use the equity method. It may account for Rear at cost or under IFRS 9 in its own statements.
2. If Mid’s own debt were listed on the exchange, the second condition would fail and the exemption would not apply.

1. Theta: name, place of business, the NCI’s 40% ownership and voting rights, profit allocated to the NCI, accumulated NCI, summarised financial information, and any significant restrictions on assets and dividends.
2. Omega: the nature of the relationship, place of business, 25% interest, the equity method, summarised financial information, the fair value if quoted, and restrictions on transfers of funds.
3. Phoenix: the purpose and financing, the nature and carrying amount of Delta’s interest, the maximum exposure to loss (including the ₦40m guarantee), income from the entity, support given or intended, and how a funding trigger could require more support.

1. Power: Epsilon appoints three of five directors, who decide by simple majority, so it can direct the relevant activities even though it holds less than 50% of the shares.
2. Returns: the shareholding and the supply contract expose it to variable returns.
3. Link: the board majority lets it use its power to affect the returns.
4. Conclusion: Epsilon controls Zeta and consolidates it. The convertible shares support this, but are not needed, and because Epsilon controls the board that approves conversion they are substantive.
5. Disclose the judgements: control with less than half of the votes, reliance on board representation, the dispersion of other holders, the potential voting rights, and how it will monitor changes.

1. Holding most of the votes usually gives power. But if the votes do not let Gamma direct the relevant activities (for example the directors are chosen by others or another party has the decisive rights), it may not have power.
2. Analyse who directs the relevant activities, whether Gamma’s rights are substantive and not only protective, and its exposure to returns.
3. Whatever the conclusion, it is a significant judgement that IFRS 12 requires to be disclosed.

How to score full marks

• For separate statements, state the three choices, the consistency rule and the dividend rule.
• For an investment held for sale, state whether the investment is at cost (IFRS 5) or under IFRS 9.
• For the exemption, test all four conditions in turn.
• For IFRS 12, group the disclosures under clear headings and name the numbers that must be shown.
• For a control judgement, use the three parts of the test and cite the facts.
• State the judgements that must be disclosed.

Common mistakes in the exam

• Choosing a different measurement basis for each investment within one category.
• Treating a dividend from a subsidiary as a reduction in the investment in the group statements.
• Missing one of the conditions for the equity method exemption.
• Giving a list of IFRS 12 headings without the amounts.
• Forgetting the maximum exposure to loss for a structured entity.
• Leaving out the disclosure of judgements.

Quick revision

• Separate statements: cost, IFRS 9 or equity method, by category. Dividends when the right is established.
• Cost investments held for sale: IFRS 5.
• Equity method exemption: four conditions.
• IFRS 12: judgements; subsidiaries (NCI, restrictions); joint arrangements and associates; structured entities.
• CAMA 2020: ss. 377(1), 378, 379 to 381, 374(1), 385, 404(7).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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