Showing posts with label Consolidated FS. Show all posts
Showing posts with label Consolidated FS. Show all posts

Friday, August 7, 2015

Determining whether an ENTITY is an INVESTMENT ENTITY (exception to Consolidation)

On 31 October 2012, the IASB published Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), providing an exception to the consolidation requirements in IFRS 10 for INVESTMENT ENTITIES.

The amendments define an investment entity and introduce an exception to consolidating particular subsidiaries for investment entities. These amendments require a parent that is an investment entity to measure those subsidiaries at FAIR VALUE through Profit or Loss in accordance with IFRS 9 Financial Instruments instead of consolidating those subsidiaries in its consolidated and separate financial statements. In addition, the amendments also introduce new disclosure requirements related to investment entities in IFRS 12 Disclosure of Interests in Other Entities and IAS 27 Separate Financial Statements.

Under IFRS 10 Consolidated Financial Statements, reporting entities were required to consolidate all investee that they control (i.e. all subsidiaries). Preparers and users of financial statements have suggested that consolidating the subsidiaries of investment entities does not result in useful information for investors. Rather, reporting all investments, including investments in subsidiaries, at fair value, provides the most useful and relevant information.

Para.27 of the amendments states that :

A parent shall determine whether it is an INVESTMENT ENTITY. An investment entity is an entity that :

  1. obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;
  2. commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and
  3. measures and evaluates the performance of substantially all of its investments on a fair value basis.

Para.28 further states that :

In assessing whether it meets the definition described in paragraph 27, an entity shall consider whether it has the following typical characteristics of an investment entity :

  1. it has more than one investment
  2. it has more than one investor
  3. it has investors that are not related parties of the entity; and
  4. it has ownership interests in the form of equity or similar interests

The absence of any of these typical characteristic does not necessarily disqualify an entity from being classified as an investment entity. An investment entity that does not have all of these typical characteristics provides additional disclosure required by paragraph 9A of IFRS 12 Disclosure of Interests in Other Entities.

In facts and circumstances indicate that there are changes to one or more of the three elements that make up the definition of an investment entity, as described in paragraph 27, or the typical characteristics of an investment entity, as described in paragraph 28, a parent shall reassess whether it is an investment entity.

A parent that either ceases to be an investment entity or become an investment entity shall account for the change in its status PROSPECTIVELY from the date at which the change in status occurred.

An Investment Entity shall not consolidate its subsidiaries. Instead, an investment entity shall measure an investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9 (HRD).

Friday, September 12, 2014

IASB Issued Narrow-scope Amendments to IFRS 10 & IAS 28

Previously, on 13 December 2012, IASB published for public comment ED/2012/6 Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture (Proposed Amendments to IFRS 10 and IAS 28) (click here for the document). This Exposure Draft proposed narrow-scope amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011) to address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28 (2011), in dealing with the sale or contribution of a subsidiary. The main consequence of the proposed amendments is that a full gain or loss would be recognized on the loss of control of a business (whether it is housed in a subsidiary or not), including cases in which the investors retains joint control of, or significant influence over, the investee.

Within the ED, it said that the IASB proposed to amend IAS 28 (2011) so that :

  1. the current requirements for the partial gain or loss recognition for transactions between an investor and its associate or joint venture only apply to the gain or loss resulting from the sale or contribution of assets that do not constitute a business, as defined in IFRS 3 Business Combinations; and
  2. the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture is recognized in full.

The IASB also proposed to amend IFRS 10 so that the gain or loss resulting from the sale or contribution of a subsidiary that does not constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture is recognized only to the extent of the unrelated investors’ interests in the associate or joint venture. The consequence is that a full gain or loss would be recognized on the loss of control of a subsidiary that constitutes a business, including cased in which the investor retains joint control of, or significant influence over, the investee.

Later, on 11 September 2014, IASB issued narrow-scope amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures (2011).

The amendments will be effective from annual periods commencing on or after 1 January 2016.

Subscribers to eIFRS can download the document of Sale or Contribution of Assets between an investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) from eIFRS

Thursday, August 14, 2014

AMENDMENTS to IAS 27 Separate Financial Statements

Current IAS 27 Separate Financial Statements requires an entity to account for its investments in Subsidiaries, Joint Ventures and Associates either at COST or in accordance with IFRS 9 Financial Instruments in the entity’s SEPARATE Financial Statements.

Prior to the revision in 2003 of IAS 27 Consolidated and Separate Financial Statements and IAS 28 Investments in Associates, the Equity method was one of the options available to an entity to account for its investments in subsidiaries and associates in the entity’s separate financial statements. In 2003, the Equity method was removed from the options and the IASB decided to require the use of COST or IAS 39 Financial Instruments : Recognition and Measurement for all investments in subsidiaries, jointly controlled entities and associates included in the separate financial statements.

Further, in their responses to the IASB’s 2011 Agenda Consultation, some respondents said that:

  1. the laws of some countries require listed companies to present separate financial statements prepared in accordance with local regulations;
  2. those local regulations require the use of the equity method to account for investments in subsidiaries, joint ventures and associates; and
  3. in most cases, the use of the equity method would be the only difference between the separate financial statements prepared in accordance with IFRSs and those prepared in accordance with local regulations.

Those respondents strongly supported the inclusion of the Equity method as one of the options for measuring investments in subsidiaries, joint ventures and associates in the separate financial statements of an entity.

In May 2012, the IASB decided to consider restoring the option to use the EQUITY method of accounting in separate financial statements.

Later, on 2 December 2013, the IASB published for public comment the Exposure Draft : Equity Method in Separate Financial Statements (Proposed amendments to IAS 27). The proposed amendments to IAS 27 would allow entities to use the Equity method to account for investments in subsidiaries, joint ventures and associates in their separate (parent only) financial statements.

Under the proposals, an entity would be permitted to account for its investments either :

  1. at Cost; or
  2. in accordance with IFRS 9; or
  3. using the Equity method.

And, finally, on 12 August 2014, IASB published Equity Method in Separate Financial Statements (Amendments to IAS 27). The amendments to IAS 27 will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements.

Subscribers to eIFRS can download the file from : eIFRS webpage

Saturday, August 28, 2010

When the entities NEED To and NEED NOT To present Consolidated Financial Statements ?

IAS 27, Consolidated and Separate Financial Statements shall be applied in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent. This standard shall also be applied in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by local regulations, to present separate financial statements. But this standard does not deal with methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination (refer to IFRS 3 Business Combinations).

As stated in para. 9 of IAS 27, a parent entity must present consolidated financial statements in which it consolidates its investments in subsidiaries [the standard defines a subsidiary as an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent)].

Following, para. 10 states that a parent need not present consolidated financial statements if all the following conditions apply :

(a) the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;

(b) the parent's debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);

(c) the parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and

(d) the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.

Under the provisions of IAS 27, when the above conditions are all satisfied and as a consequence the parent entity chooses not to present consolidated financial statements, but to instead present separate financial statements, then all investments in its subsidiaries, jointly controlled entities and associates that are consolidated, proportionally consolidated or accounted for under the equity method in consolidated financial statements prepared in accordance with the requirements of IAS 27 or in financial statements prepared in accordance with the requirements of IAS 31 Interest in Joint Ventures or IAS 28 Investments in Associates, must be accounted for either at cost, or as available-for-sale financial assets in accordance with IAS 39 Financial Instruments : Recognition and Measurement. The same method must be applied for each category of investments. In other words, if consolidated financial reporting if foregone, then equity method accounting or proportional consolidation is also precluded.

As stated in para. 38 of IAS 27, when an entity prepares separate financial statements, it shall account for investments in subsidiaries, jointly controlled entities and associates either : (a) at cost, or (b) in accordance with IFRS 9 Financial Instruments and IAS 39 Financial Instruments : Recognition and Measurement.

Further, it states that the entity shall apply the same accounting for each category of investments. Investments accounted for at cost shall be accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations when they are classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5. The accounting for investments in accordance with IFRS 9 and IAS 39 is not changed in such circumstances (HRD).

Friday, July 2, 2010

Several main features of IAS 27 - Consolidated and Separate Financial Statements

The objective of IAS 27 is to enhance the relevance, reliability and comparability of the information that a parent entity provides in its separate financial statements and in its consolidated financial statements for a group of entities under its control.

The Standard specifies :

  1. the circumstances in which an entity must consolidate the financial statements of another entity (being a subsidiary);
  2. the accounting for changes in the level of ownership interest in a subsidiary;
  3. the accounting for the loss of control of a subsidiary; and
  4. the information that an entity must disclose to enable users of the financial statements to evaluate the nature of the relationship between the entity and its subsidiaries

Presentation of consolidated financial statements. A parent must consolidate its investments in subsidiaries. There is a limited exception available to some non-public entities. However, that exception does not relieve venture capital organisations, mutual funds, unit trusts and similar entities from consolidating their subsidiaries.

Consolidation procedures. A group must use uniform accounting policies for reporting like transactions and other events in similar circumstances. The consequences of transactions, and balances, between entities within the group must be eliminated.

Non-controlling interests. Non-controlling interests must be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. Total comprehensive income must be attributed to the owners of the parent and to the non-controlling interests even if the results in the non-controlling interests having a deficit balance.

Changes in the ownership interests. Changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control are accounted for within equity.

When an entity loses control of a subsidiary, it derecognises the assets and liabilities and related equity components of the former subsidiary. Any gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is measured at its fair value at the date when control is lost.

Separate financial statements. When an entity elects, or is required by local regulations, to present separate financial statements, investments in subsidiaries. jointly controlled entities and associates must be accounted for at cost or in accordance with IAS 39 Financial Instruments : Recognition and Measurement.

Disclosure. An entity must disclose information about the nature of the relationship between the parent entity and its subsidiaries (Hrd) ***

Monday, March 3, 2008

The 2008 Revised of IFRS 3 and IAS 27

This article was taken from Deloitte IAS Plus January 2008 edition.

On 10 January 2008, the International Accounting Standards Board (IASB) issued IFRS 3 (revised 2008) Business Combinations and IAS 27 (revised 2008) Consolidated and Separate Financial Statements. The revised Standards are mandatory for business combinations in annual financial statements beginning on or after 1 July 2009, although limited earlier application is permitted. The revisions will result in a high degree of convergence between IFRSs and US GAAP, although some inconsistencies remain, which may result in significantly different financial reporting.

The revised Standards promise significant change, including :

1. A greater emphasis on the use of fair value, potentially increasing the judgment and subjectivity around business combination accounting, and requiring greater input by valuation experts;

2. Focusing on changes in control as a significant economic event – introducing requirements to re-measure interests to fair value at the time when control is achieved or lost, and recognizing directly in equity the impact of all transactions between controlling and non-controlling shareholders not involving a loss of control; and

3. Focusing on what is given to the vendor as consideration, rather than what is spent to achieve the acquisition. Transaction costs, changes in the value of contingent consideration, settlement of pre-existing contracts, share-based payments and similar items will generally be accounted for separately from business combinations and will generally affect profit or loss.

The revised Standards resolve many of the more contentious aspects of business combination accounting by restricting options or allowable methods. As such, they should result in greater consistency in accounting among entities applying IFRSs.

The two revised Standards are mandatory for accounting periods beginning on or after 1 July 2009. In the case of IFRS 3, this will apply to business combinations in those periods. Early adoption is permitted provided that :

1. Both Standards are applied together;

2. The revised IFRS 3 is not applied in an accounting period beginning before 30 June 2007; and

3. Early adoption is disclosed.

Source : Deloitte IAS Plus - January 2008

Another resources :

1.  IASB - The revised IFRS 3 and amended IAS 27

2.  IAS Plus - Summaries of IFRS 3 Business Combinations