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IAS 27 — Consolidated and Separate Financial Statements (2008)

Overview

IAS 27 Consolidated and Separate Financial Statements outlines when an entity must consolidate another entity, how to account for a change in ownership interest, how to prepare separate financial statements, and related disclosures. Consolidation is based on the concept of 'control' and changes in ownership interests while control is maintained are accounted for as transactions between owners as owners in equity.

IAS 27 was reissued in January 2008 and applies to annual periods beginning on or after 1 July 2009, and is superseded by IAS 27 Separate Financial Statements and IFRS 10 Consolidated Financial Statements with effect from annual periods beginning on or after 1 January 2013.

History of IAS 27

September 1987 Exposure Draft E30 Consolidated Financial Statements and Accounting for Investments in Subsidiaries
April 1989 IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries
1 January 1990 Effective date of IAS 27 (1989)
1994 IAS 27 was reformatted
December 1998 IAS 27 was amended by IAS 39 Financial Instruments: Recognition and Measurement effective 1 January 2001
18 December 2003 Revised version of IAS 27 issued by the IASB
1 January 2005 Effective date of IAS 27 (2003)
25 June 2005 Exposure Draft of Proposed Amendments to IFRS 3 and IAS 27
10 January 2008 Revised IAS 27 (2008) issued
22 May 2008 IAS 27 amended for Cost of a Subsidiary in the Separate Financial Statements of a Parent on First-time Adoption of IFRSs
22 May 2008 IAS 27 amended for Annual Improvements to IFRSs 2007 relating to measurement of investments held for sale under IFRS 5 in separate financial statements
1 January 2009 Effective date of the two May 2008 amendments
1 July 2009 Effective date of IAS 27 (2008). Deloitte has published a Special Edition of our IAS Plus Newsletter dealing with the January 2008 revisions to IFRS 3 and IAS 27 (PDF 123k).
6 May 2010 IAS 27 amended for Annual Improvements to IFRSs 2010
1 July 2010 Effective date of May 2010 amendment to IAS 27
12 May 2011 IAS 27 (2008) is superseded by IAS 27 Separate Financial Statements (2011) and IFRS 10 Consolidated Financial Statements effective 1 January 2013

Related Interpretations

  • IFRIC 17 Distributions of Non-cash Assets to Owners
  • SIC-12 Consolidation – Special Purpose Entities
  • IAS 27 (revised 2003) supersedes SIC-33 Consolidation and Equity Method – Potential Voting Rights and Allocation of Ownership Interest

Summary of IAS 27

Objectives of IAS 27

IAS 27 has the twin objectives of setting standards to be applied:

  • in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent; and
  • in accounting for investments in subsidiaries, jointly controlled entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements.

Key definitions [IAS 27.4]

Consolidated financial statements: the financial statements of a group presented as those of a single economic entity.

Subsidiary: an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).

Parent: an entity that has one or more subsidiaries.

Control: the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Identification of subsidiaries

Control is presumed when the parent acquires more than half of the voting rights of the entity. Even when more than one half of the voting rights is not acquired, control may be evidenced by power: [IAS 27.13]

  • over more than one half of the voting rights by virtue of an agreement with other investors, or
  • to govern the financial and operating policies of the entity under a statute or an agreement; or
  • to appoint or remove the majority of the members of the board of directors; or
  • to cast the majority of votes at a meeting of the board of directors.

SIC-12 provides other indicators of control (based on risks and rewards) for Special Purpose Entities (SPEs). SPEs should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting entity. This may arise even where the activities of the SPE are predetermined or where the majority of voting or equity are not held by the reporting entity. [SIC-12]

Presentation of consolidated financial statements

A parent is required to present consolidated financial statements in which it consolidates its investments in subsidiaries [IAS 27.9] – with the following exception:

A parent is not required to (but may) present consolidated financial statements if and only if all of the following four conditions are met: [IAS 27.10]

  1. 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;
  2. the parent's debt or equity instruments are not traded in a public market;
  3. 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
  4. the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.

The consolidated accounts should include all of the parent's subsidiaries, both domestic and foreign: [IAS 27.12]

  • There is no exemption for a subsidiary whose business is of a different nature from the parent's.
  • There is no exemption for a subsidiary that operates under severe long-term restrictions impairing the subsidiary's ability to transfer funds to the parent. Such an exemption was included in earlier versions of IAS 27, but in revising IAS 27 in December 2003 the IASB concluded that these restrictions, in themselves, do not preclude control.
  • There is no exemption for a subsidiary that had previously been consolidated and that is now being held for sale. However, a subsidiary that meets the IFRS 5 criteria as an asset held for sale shall be accounted for under that Standard.

Special purpose entities (SPEs) should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting entity. This may arise even where the activities of the SPE are predetermined or where the majority of voting or equity are not held by the reporting entity. [SIC-12]

Once an investment ceases to fall within the definition of a subsidiary, it should be accounted for as an associate under IAS 28, as a joint venture under IAS 31, or as an investment under IAS 39, as appropriate. [IAS 27.31]

Consolidation procedures

Intragroup balances, transactions, income, and expenses should be eliminated in full. Intragroup losses may indicate that an impairment loss on the related asset should be recognised. [IAS 27.24-25]

The financial statements of the parent and its subsidiaries used in preparing the consolidated financial statements should all be prepared as of the same reporting date, unless it is impracticable to do so. [IAS 27.26] If it is impracticable a particular subsidiary to prepare its financial statements as of the same date as its parent, adjustments must be made for the effects of significant transactions or events that occur between the dates of the subsidiary's and the parent's financial statements. And in no case may the difference be more than three months. [IAS 27.27]

Consolidated financial statements must be prepared using uniform accounting policies for like transactions and other events in similar circumstances. [IAS 27.28]

Minority interests should be presented in the consolidated balance sheet within equity, but separate from the parent's shareholders' equity. Minority interests in the profit or loss of the group should also be separately disclosed. [IAS 27.33]

Where losses applicable to the minority exceed the minority interest in the equity of the relevant subsidiary, the excess, and any further losses attributable to the minority, are charged to the group unless the minority has a binding obligation to, and is able to, make good the losses. Where excess losses have been taken up by the group, if the subsidiary in question subsequently reports profits, all such profits are attributed to the group until the minority's share of losses previously absorbed by the group has been recovered. [IAS 27.35]

Partial disposal of an investment in a subsidiary

The accounting depends on whether control is retained or lost:

  • Partial disposal of an investment in a subsidiary while control is retained. This is accounted for as an equity transaction with owners, and gain or loss is not recognised.
  • Partial disposal of an investment in a subsidiary that results in loss of control. Loss of control triggers remeasurement of the residual holding to fair value. Any difference between fair value and carrying amount is a gain or loss on the disposal, recognised in profit or loss. Thereafter, apply IAS 28, IAS 31, or IAS 39, as appropriate, to the remaining holding.

Acquiring additional shares in the subsidiary after control is obtained

Acquiring additional shares in the subsidiary after control was obtained is accounted for as an equity transaction with owners (like acquisition of 'treasury shares'). Goodwill is not remeasured.

Separate financial statements of the parent or investor in an associate or jointly controlled entity

In the parent's/investor's individual financial statements, investments in subsidiaries, associates, and jointly controlled entities should be accounted for either: [IAS 27.37]

  • at cost, or
  • in accordance with IAS 39.

The parent/investor shall apply the same accounting for each category of investments. Investments that are classified as held for sale in accordance with IFRS 5 shall be accounted for in accordance with that IFRS. [IAS 27.37] Investments carried at cost should be measured at the lower of their carrying amount and fair value less costs to sell. The measurement of investments accounted for in accordance with IAS 39 is not changed in such circumstances. [IAS 27.38] An entity shall recognise a dividend from a subsidiary, jointly controlled entity or associate in profit or loss in its separate financial statements when its right to receive the dividend is established. [IAS 27.38A]

Disclosure

Disclosures required in consolidated financial statements: [IAS 27.40]

  • the nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly through subsidiaries, more than half of the voting power,
  • the reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control,
  • the reporting date of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a reporting date or for a period that is different from that of the parent, and the reason for using a different reporting date or period, and
  • the nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances.

Disclosures required in separate financial statements that are prepared for a parent that is permitted not to prepare consolidated financial statements: [IAS 27.41]

  • the fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and country of incorporation or residence of the entity whose consolidated financial statements that comply with IFRS have been produced for public use; and the address where those consolidated financial statements are obtainable,
  • a list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held, and
  • a description of the method used to account for the foregoing investments.

Disclosures required in the separate financial statements of a parent, investor in a jointly controlled entity, or investor in an associate: [IAS 27.42]

  • the fact that the statements are separate financial statements and the reasons why those statements are prepared if not required by law,
  • a list of significant investments in subsidiaries, jointly controlled entities, and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held, and
  • a description of the method used to account for the foregoing investments.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.