IFRS 12 - Disclosure of Interest in other Entities (detailed review)

Wednesday, April 9, 2014 Print Email

Objective

Viewers of financial statements require the disclosure of interests in other entities held by the reporting entity to assess the profit or loss and cash flows available to the reporting entity and determine the value of a current or future investment in the reporting entity.

The standard prescribes the disclosures which are to be provided by the entity in its financial statements in respect of its interest in other entities to enable the viewers of financial statements to evaluate:

a) The nature of interests in other entities held by the reporting entity along with the related risk with such interest in other entities and

b) The impact of those interests in other entities on the financial performance, financial position, and cash flows of the reporting entity

Meeting the Objective

The entity is required to disclose the following aspects to meet the objective of this standard:

a) The major assumptions and judgments made by the reporting entity in order to determine:

  • The nature of its interest in the other entity or arrangement;
  • The type of interest in joint arrangement
  • How the reporting entity meets the definition of an investment entity, if applicable

b) Information about the interests in other entities held by the reporting entity such interest in:

  • Subsidiaries
  • Associates and joint arrangements
  • Structured entities which are not under the control of the reporting entity i.e. (unconsolidated structured entities)

If in certain circumstances the disclosures required in this standard, in combination with disclosures requirements of the other IFRSs, do not meet the objective of this standard, the entity is required to disclose the additional details which is essential to meet that objective.

Scope

The requirements of this standard are applicable when the reporting entity has interest in the following:

  • Subsidiaries
  • Associates and joint arrangements
  • Structured entities which are not under the control of the reporting entity i.e. (unconsolidated structured entities)
  • Associates and joint arrangements which are measured at fair value through profit or loss as per the requirements of IAS 28

However the requirements of this standard are not applicable in case of the following:

  • Post employment benefit plans which are covered under IAS 26
  • For the interest held by the reporting entity in joint arrangements, but the entity does not have control in such arrangements
  • To the separate financial statements of the reporting entity for which IAS 27 is applicable
  • Interest in other entities which is covered under IFRS 9

Significant Assumptions and Judgment

The reporting entity is required to disclose major assumptions and judgments used by the entity along with any changes in such assumptions it had made in identifying:

  • Its control over another entity as defined in IFRS 10 Consolidated Financial Statements
  • Its joint control of an arrangement
  • Its significant influence over another entity
  • The nature of joint arrangement (i.e. joint venture or joint operation)

The reporting entity is also required to disclose the details about the following circumstances:

  • When it does not have control over the investee even if it owns more than 50% voting rights of the other entity.
  • When it controls the investee even if it owns less than 50% voting rights of the other entity
  • Either it is an agent or a principal as defined in IFRS 10
  • It has significant influence over the investee even if it owns less than 20% voting rights of another entity
  • When it does not have significant influence over the investee even if it owns 20% or more voting rights of another entity

 

Interest in Subsidiaries

The entity is required to disclose the following details to enable the users of its consolidated financial statements to understand and evaluate the following in respect of its interest in subsidiaries:

  • The formation and structure of the group; and
  • The interest of the non-controlling interests
  • The nature of risks relating to its interests in consolidated structured entities such as liquidity issues or obligation to provide financial assistance to subsidiary
  • Any contractual or legal restrictions on the ability of the parent to assess the use of assets and to settle the liabilities of its subsidiary such as restriction on dividend or transfer of cash from subsidiary
  • The protective rights held by non-controlling interest which restrict the ability of the parent to assess the use of assets and to settle the liabilities of its subsidiary
  • The effects of changes in its holding in a subsidiary which do not result in a loss of control and
  • The effects of losing control of a subsidiary during the accounting period
  • Any financial assistance provided to subsidiary and reasons for providing the support

Interest of Non-controlling Interest

The entity is required to disclose the following details in respect of non-controlling interest for each of its subsidiaries:

  • The name of the subsidiary
  • The location of business of the subsidiary
  • The proportion of non-controlling interest’s ownership interests
  • The proportion of non-controlling interest’s voting rights
  • The share of profit or loss relating to non-controlling interests in the current reporting period
  • The value of non-controlling interests at the end of the accounting period

 

Interest in Associates and Joint Arrangements

The entity is required to disclose the following details to enable the users of its financial statements to understand and evaluate the following in respect of its interest in associates and joint arrangements:

  • The type of its interests in associates and joint arrangements along with the financial effects of such interests
  • The nature of relationship with the other investors in respect of significant influence over, and joint control of, associates and joint arrangements
  • The nature of risks relating to its interests in associates and joint arrangements such as liquidity issues or obligation to provide financial assistance to associates and joint arrangements

Nature of interests in Associates and Joint Arrangements

The entity is required to disclose the following in respect of its interest in associates and joint arrangements and which will reflect the nature of interest in such arrangements:

  • The name of the associates and joint arrangements
  • The location of business of the associates and joint arrangements
  • The proportion of reporting entity’s ownership interests
  • The measurement basis used for interest in associates and joint arrangements such as equity method
  • The fair value of interest in joint arrangements and associates at the end of reporting period, if quoted price is available
  • Any contractual or legal restrictions on the ability of the joint venturer’s or party with the significant influence over, to assess the use of assets and to settle the liabilities of its joint arrangement and associate, such as restriction on dividend or transfer of cash from subsidiary

Investment Entity Status

If the parent is an investment entity as per IFRS 10 which applies the exception from consolidation of its subsidiaries and account for such investment in subsidiaries at fair value through profit or loss, it should disclose the details about major assumptions and judgments made in determination of its status as an investment entity.

The investment entity is required to disclose the following in respect of its all unconsolidated subsidiaries:

  • The name of the subsidiary
  • The location of business of the subsidiary
  • The proportion of investment entity’s ownership interest
  • The proportion of non-controlling interest’s ownership interests
  • Any contractual commitment to provide financial assistance to the unconsolidated subsidiary
  • Any financial assistance provided to the unconsolidated subsidiary by the investment entity, that it controls along with the related reasons, such as purchase of instruments issued by the unconsolidated subsidiary 
  • Any contractual or legal restrictions on the ability of the parent to assess the use of assets and to settle the liabilities of its subsidiary such as restriction on dividend or transfer of cash from subsidiary

When the investment entity is the parent of another investment entity, it should also provide the disclosures required in (a)–(g) in respect of investments which are controlled by its investment entity subsidiary

When the entity no more meets the definition of an investment entity, it should disclose such change in its status.

Interest in Unconsolidated Structured Entities

A structured entity is an entity that is designed in such a manner that voting rights are not the major factor in determination of control over the entity, such as when the voting rights in the entity relate to administrative tasks only and the relevant activities are decided on the basis of contractual arrangements.

In case of interest in unconsolidated structured entities, the entity is required to disclose the following:

  • The nature and extent of its interest in such entity
  • Any income received
  • Any financial assistance provided to the unconsolidated structured entity by the reporting entity along with the related reasons
  • The carrying values of assets and liabilities recognized related to such entity

Login to ReadyRatios

 

Have you forgotten your password?

Are you a new user?

Login As
You can log in if you are registered at one of these services: