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There are rules pertaining to how and if something is consolidated depending upon the position i.e. whether you do or do not control the entity. Sounds simple but it isn’t. And as you may know, we have entities that are classified as either joint ventures or associates each with their appropriate treatment.
Consolidated Financial Statements and Separate Financial Statements
4. The following terms, per IASB, are used in this Standard (IAS 27) with the meanings specified:
Consolidated financial statements are the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as a single economic entity.
Separate financial statements are those presented by an entity in which the entity could elect, subject to the requirements in this Standard, to account for its investments in subsidiaries, joint ventures and associates either at cost, in accordance with IFRS 9 Financial Instruments, or using the equity method as described in IAS 28 Investments in Associates and Joint Ventures.
Well, I suspect at this point that those of you who are still reading are slightly confused, trust me we all are. This is a complicated topic with lots of twists and turns and let’s not forget that IFRS 9 (financial instruments) is also involved. Though theoretically, consolidations are relatively straightforward the various IAS and IFRS statements that contribute to the accounting regulations, in this statement package’ are not exactly totally transparent and obvious. On top of that, there are rules pertaining to how and if something is consolidated depending upon the position i.e. whether you do or do not control the entity. Sounds simple but it isn’t. And as you may have noticed above, we have entities that are classified as either joint ventures or associates each with their appropriate treatment.
Photo: Benji Mellish
«These Simpler Statements»
Courtesy of IFRS Workbook 2017:
«IAS 27 has lost its rules on consolidated financial statements to IFRS 10 (and disclosure to IFRS 12). Separate Financial Statements remain in IAS 27.
These simpler statements are used either as a complement to consolidated financial statements, where legislation (or regulation) requires it or for intermediate holding companies. IAS 27 enables intermediate holding companies to avoid sub-consolidations if the parent presents consolidated financial statements and legislation allows.
Did I read above, «these simpler statements», yes it’s true it said that. At this juncture we should be reminded how critical it is to document each and every relationship, identifying the structure and determining according to IAS/IFRS how it should be classified. This, it should be noted, is a working document that has to be constantly and frequently updated as relationships and classifications are subject to constant change. Auditors, for example, have both a working and a permanent file. The working file is constantly updated from audit to audit whereas the permanent file only occasionally will be updated. It is also very important that legal is directly involved in maintaining the documentation. Thus besides accounting and legal any other departments that also are involved in developing or establishing relationships need to be parties to such documentation.
Investment, Consolidation, and Dilution Losses
Courtesy of PKF International (pp311)
The suite of five standards (IFRS 10, IFRS 11, IFRS 12, IAS 27 [amended] and IAS 28 [amended]) is applicable for periods beginning on or after January 1, 2013. Earlier application is permitted provided that the fact is disclosed and all five standards are applied simultaneously. These standards are applied retrospectively, except for the relief provided as discussed below. Entities are only required to provide disclosure of the quantitative information required by IAS 8 for the immediately preceding reporting period.
An entity preparing its separate financial statements may account for investments in subsidiaries, joint ventures and associates either:
- At cost; or
- In accordance with IFRS 9
Investment entities. At the date of initial application of the amendments to IFRS 10, IFRS 12 and IAS 27, an entity must assess whether it is an investment entity on the basis of the facts and circumstances that exist at that date. If at the date of initial application, an entity concludes that it is an investment entity, it will retrospectively measure its investment in each subsidiary at fair value through profit or loss as if the investment entity principles had always been effective.
Consolidations. At the date of initial application (the beginning of the annual period IFRS 10 is applied for the first time) no adjustments are required to the previous accounting for entities that are consolidated based on the old IAS 27 and, in terms of IFRS 10, will still be consolidated. Relief is also provided for an investor’s interest in investees that were disposed of during the previous reporting period resulting in consolidation in terms of both the old IAS 27 and IFRS 10.
Dilute the coffee. Photo: Chevanon Photography
An example, from PKF, of applying the ‘consolidations’ IFRS/IAS package:
Dilution losses. A stake in an associate or joint venture may decrease, for example, following a capital increase on the part of the investee in which the investor does not take part. This constitutes a partial disposal of an entity’s interest in an associate. Investor accounting for investee capital transactions that dilute the share of the investor’s investment is not addressed by IAS 28. Although due to IFRS 10.B96 changes in the proportion held by noncontrolling interests shall be recognized directly in equity, we feel that this principle is not applicable in this instance as the investor only accounts for his stake in the investee in his equity accounting and has not entered into a transaction with the associate.
Relative to the comments, courtesy of PKF above, they refer to the fact that an entity «must assess whether it is an investment entity on the basis of the facts and circumstances that exist at that date». The criticalness of documentation reviewed and ideally signed off by all supporting actors again emphasized. The suggestion of documentation being signed off is commonplace in the auditing profession and thus it should be construed as applicable when it pertains to such critical information.
Note IAS 27 has been superceded by IFRS 10.
Lucubrate Magazine, Issue 48, November 23th, 2018
The photo on top: Flamingo Images
- Accounting Series – Article No: 28
- Accounting Theory – Advanced Part 18 (IAS 27)
- by Peter Welch