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IAS 27 – Separate Financial Statements

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IAS 27 – Separate Financial Statements

Description

IAS 27 describes the requirements for preparing separate financial statements of a Company which is also required to prepare or prepares consolidated financial statements as well i.e., a parent company which has one or more subsidiaries.

If an investor does not have any investment in subsidiaries but have investments in associates and joint ventures accounted for under equity method under IAS 28, then it may also prepare separate financial reports in accordance with this standard in which such investments may be shown at cost or under IFRS 9.

In this sense, separate financial statements are different from normal financial statements of a Company which does not have consolidation requirements.

Requirements for separate financial statements apply to investments in subsidiaries, associates and joint ventures. Other requirements to prepare separate financial statements remain similar to normal financial statements of a company which are not separate financial statements.

Overview

Consolidation requires a number of requirements for parent companies that prepare consolidated financial statements as a Group. There is not a mandatory requirement as per IASs for a parent company to prepare separate financial statements in addition to its consolidated financial reports.

However, local laws and regulations may require a parent company to prepare such separate financial statements in addition to its consolidated financial statements. This may be required for tax purposes in various regimes where consolidated financial statements are not considered for tax purposes.

Also, companies may prepare separate financial statements based on their own purposes.

The purpose of the standard is to make the requirements clear for separate financial statements in such cases. These requirements are simpler than the treatment of such accounts (investment in subsidiaries etc.) under consolidation accounting.

Scope

This standard is applicable to an Entity producing separate financial statements. Specifically, it mentions the treatment of investments in subsidiaries, joint ventures and associates while preparing separate financial statements.

Definitions (simplified and explained)

Consolidated Financial reports are financial statements prepared for the group as a whole (parent company with one or more subsidiary or subsidiaries). In these financial statements, items of income, expenses, assets, and liabilities are added together for all subsidiaries and presented in total. However, these are subject to a number of adjustments including adjustments for inter-company transactions and balances, goodwill recognition, investments in subsidiaries and equity adjustments etc.

Separate Financial Statements are those in which an Entity that has investments in subsidiaries, associates, or joint ventures to carry these either at cost, in accordance with IFRS 9 or using equity method. Any such Entity is required to prepare consolidated financial statements under IFRS 10 (subject to some exceptions). If it wishes to prepared separate financial statements, it will use the requirements under this standard.

Control of investee: When an investor is exposed to variable returns (in terms of profit, dividends and other benefits) from its involvement with the investee or has the rights to such returns, and it can affect those returns due to its power over the investee.

Group: A parent and its subsidiaries together are called a Group.

Investment Entity:

An Entity:

  1. Which invests in a large number of shares and other instruments on behalf of other people (who provide the funds for such investments) and it provides management services for such investments
  2. Whose purpose is to act as a trustee and helping the fund investors to earn gains by increase in value i.e., capital appreciation or by selling such instruments and
  3. Which values substantially all such investments at fair value to assess their performance.

Non-controlling Interests: Equity pertaining to the shareholders in a Group other than those who have the control.

Parent: An Entity that has the control over other Entities.

Subsidiary: An Entity that is controlled by another Entity.

Preparation of Separate Financial Statements

Except for the requirements for investments in subsidiaries, associates as well as joint ventures which are covered within this standard, an Entity shall use the requirements of other standards as applicable to prepare its financial statements and measure and account for other items of income, expenses, equity, assets and liabilities and the disclosures.

Under this standard, while preparing separate financial statements, an Entity has an option to account for its investments in associates, joint ventures and associates either:

  • At cost
  • In accordance with the requirements of IFRS 9
  • Using the equity method of accounting as per IAS 28

For each category of investments, an Entity shall apply a similar treatment. For example, all investments of one type can be either at cost or in accordance with IFRS 9 or accounted for under equity method.

If some of the investments meet the criteria for held for sale assets under IFRS 5, they will be classified and measured under IFRS 5. IFRS 5 requires such assets to be carried at the lower of fair value less costs to sell and the carrying amount.

However, investments under IFRS 9 are exempted from the measurement requirements under IFRS 5 and they continue to be measured under IFRS 9. Only the presentation i.e., classification as held for sale will change for any investments under IFRS 9 if they become held for sale.

Under IAS 28, investments in associates and joint ventures are accounted for under equity method. However, in case investment in an associate or joint venture is held by venture capital, mutual fund or unit trust, they have the option to elect to measure such investments under IFRS 9.

In the above case, the Entity will account for its investment in the same way as above for its separate financial statements i.e., under IFRS 9.

Similarly, under IFRS 10, Investment Entities are required to measure their investments under IFRS 9 (at fair value through statement of profit or loss). Such an Entity shall also account for its investments under IFRS 9 (at fair value through statement of profit or loss) while preparing its separate financial statements.

Accounting for when an Entity ceases to be an Investment Entity

When an Investment Entity ceases to be an Investment Entity (that is it no longer fulfills the definition of an Investment Entity as given above in the definition section) but still has one or more subsidiaries i.e., the control is not lost, it shall account for such investment in subsidiaries in accordance with this standard.

The fair value of such subsidiary at the date of change is considered as its initial value under this standard i.e., it could be deemed as cost or fair value based on which choice an investor will make to account for such subsidiary.

In such case, no gain or loss will arise on the initial recognition of such a subsidiary because it was carried at fair value when such an investor was an Investment Entity previously and also continues to be recorded at fair value upon change in accordance with this standard.

Example:

ABC was an Investment Entity in accordance with IFRS 10. It had one subsidiary that was recorded at fair value through profit or loss as per the requirements for such Investment Entities. However, on 1 March 2021, it ceased to be an Investment Entity but still has the control over the subsidiary and there is no change in the percentage ownership held in such subsidiary. The fair value of such subsidiary was AED 1,500,000 as at the date of such change. How will this subsidiary be accounted for in the separate financial statements of ABC in accordance with IAS 27 if the Entity plans to record such investment:

  • At cost
  • At fair value under IFRS 9
  • Under equity method

Treatment at cost:

ABC will pass the following entry in its books

Dr. Investment in subsidiary at cost 1,500,000
Cr. Investments under IFRS 9 (previously recorded as an Investment Entity) 1,500,000

Subsequently this amount will not change for any fair value changes. However, it will be assessed for impairment under IAS 36.

Treatment at fair value under IFRS 9:

Dr. Investments – carried at FVTPL 1,500,000
Cr. Investments under IFRS 9 (previously recorded as an Investment Entity) 1,500,000

In effect, above debits and credits are same. And hence no entry is needed on initial recognition.

Subsequently, at each reporting date, the adjustment will be made for the fair valuation of investment property and resulting gain or loss will go to profit or loss.

Treatment under equity method:

Dr. Investment in subsidiary 1,500,000
Cr. Investments under IFRS 9 (previously recorded as an Investment Entity) 1,500,000

Under the equity method, subsequently there will be no changes due to fair value effects. However, share of profit or loss of investee will be recorded in the cost of investment. Dividend will be deducted from the cost of investment. The closing value of investment in subsidiary will be assessed for impairment. Refer IAS 28 for further details on equity method.

Accounting for when an Entity becomes an Investment Entity

When an Entity becomes an Investment Entity by meeting the definition of Investment Entity under IFRS 10, it will record its investment in subsidiary that was recorded under this standard at fair value through profit or loss under IFRS 9.

The difference between the previous carrying amount and the new amount i.e., the fair vale under IFRS 9 will be recorded in profit or loss.

If there is any other comprehensive gain or loss previously recorded for such subsidiaries, it shall be treated in a similar way as if the Investment Entity had disposed of such subsidiaries at the date of change in status.

Example:

ABC had a subsidiary XYZ, that it carried at cost of AED 5,000,000. On 1 June 2021, ABC met the definition of an Investment Entity and needs to account for this investment in fair value through profit or loss. The fair value of subsidiary came out to AED 7,000,000. What will be the accounting treatment?

Accounting treatment:

Following entry will be passed

Dr .Investments – carried at FVTPL (under IFRS 9) 7,000,000
Cr. Investment in subsidiary 5,000,000
Cr. Gain (to be recorded in profit or loss) 2,000,000

Since the investment was carried at cost, there will be no amount appearing in OCI.

Example:

ABC had a subsidiary XYZ, that it carried at equity method and it’s carrying amount was AED 5,000,000. On 1 June 2021, ABC met the definition of an Investment Entity and needs to account for this investment at fair value through profit or loss. The fair value of subsidiary came out to AED 7,000,000. ABC had recorded amounts in OCI of AED 200,000 in prior years relating to this subsidiary and this portion of OCI cannot be reclassified to profit or loss subsequently. What will be the accounting treatment?

Following entry will be passed

Dr. Investments – carried at FVTPL (under IFRS 9) 7,000,000
Cr. Investment in subsidiary 5,000,000
Cr. Gain (to be recorded in profit or loss) 2,000,000

For OCI, since this amount cannot be reclassified to profit or loss, it will be transferred directly to retained earnings.

Dr. OCI – Reserve relating to subsidiary 200,000
Cr. Retained earnings 200,000

Treatment of Dividends

Dividends are recorded when the right to receive such dividends is established.

Treatment of dividends differs for investment in subsidiaries carried at cost / fair value and that carried under equity method as follows:

a) In case, if investment is carried at cost or fair value, dividends will not hit the cost of investment and rather will be recognized as income as follows:

Dr.   Cash / Dividend receivable                                                        

Cr.   Dividend income                                                                          

b) If an Entity carries investment in subsidiary under the equity method, dividend will be deducted from the carrying amount of investment and it will not be recorded as income. Because under equity method, income is recorded based on share of profit or loss of the investee.

So, the entry for dividend will be:

Dr.   Cash / Dividend receivable                                                        

Cr.   Investment in subsidiary                                                            

Reorganization that Establishes a New Parent

This topic is explained with the help of an example as given below:

Example:

ABC had three subsidiaries (together the group). ABC being the parent, reorganizes itself and makes a new company DEF and establishes it as its parent such that:

  1. DEF has now control over ABC i.e., DEF becomes new parent of the Group by issuing new equity instruments in exchange for existing equity instruments of ABC (i.e., it purchases the shares of ABC)
  2. There is no change in assets and liabilities of the Group (i.e., no new assets or liabilities arise or added, and none are disposed or derecognized) as part of the process of this arrangement
  3. Owners remain the same and their interest are same in the new group as they were in the old group (i.e., the same owners have simply organized a new company and obtained its share against their existing shares)

The carrying amount of share capital in the books of ABC amounts to AED 5,000,000 at the date of reorganization. Assume that DEF holds 90% share in ABC after reorganization.

What will be the treatment in the books of new parent (DEF) for this new investment in the old parent (ABC) in its separate financial statements in accordance with this standard?

The treatment for this arrangement will be:

DEF shall measure cost at the carrying amount of its share of the equity items shown in the separate financial statements of the DEF at the date of the reorganization.

Entry for this arrangement in the books of DEF will be:

Dr. Investment in subsidiary (5,000,000*90%) 4,500,000
Cr. Bank 4,500,000

If there is a difference between the amount paid and share of capital, the standard does not mention its treatment, but it is likely to be recorded in P&L as gain or loss.

Disclosure Requirements

All applicable IFRS will be consulted while preparing separate financial statements for disclosure requirements for specific areas covered under such IFRS. For example, disclosures for property, plant and equipment will be covered by IAS 16.

When a parent applies exemption for not preparing consolidated financial statements under IFRS 10, it shall disclose that fact. Also, it will disclose the name and principal place of business of the ultimate parent company which prepares consolidated financial statements under IFRS for public use and the address of such parent where such financial statements can be obtained.

Such parent shall also disclose the list of significant investments in subsidiaries, joint ventures and associates including their names, main place of business, ownership interest in such Entities and a description of the method it has used to account for such investments in its separate financial statements.

A parent which prepares consolidated financial statements and also prepares separate financial statements, such parent shall disclose in its separate financial statements:

  1. Why it has prepared separate financial statements if not required by law
  2. A list of significant investments in subsidiaries, joint ventures and associates including their names, main place of business, ownership interest in such Entities and a description of the method it has used to account for such investments in its separate financial statements.
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