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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 enterprise 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 enterprise. 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 other enterprise 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.
Presentation of Consolidated Accounts
A parent is required to present consolidated financial statements in which it consolidates its investments in subsidiaries [IAS 27.9] – except in one circumstance: 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. The parent must continue to consolidate such a subsidiary until it is actually disposed of. However, as a result of an amendment of IAS 27 by IFRS 5 in March 2004, there is an exemption for a subsidiary for which control is intended to be temporary because the subsidiary was acquired and is held exclusively with a view to its subsequent disposal in the near future. For such a subsidiary, if it is highly probable that the sale will be completed within 12 months then the parent should account for its investment in the subsidiary under IFRS 5 as an asset held for sale, rather than consolidate it under IAS 27.
Special purpose entities (SPEs) should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting enterprise. 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 enterprise. [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 presented. [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]
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.
Such investments may not be accounted for by the equity method in the parent's/investor's separate statements.
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.
January 2008: Revised IAS 27 issued
On 10 January 2008, the IASB published a revised IFRS 3 Business Combinations and related revisions to IAS 27 Consolidated and Separate Financial Statements. The amendments result from proposals that were in an Exposure Draft of Proposed Amendments to IFRS 3 published by the Board in June 2005. The table below highlights the most significant amendments to IFRS 3 and to IAS 27. Click for IASB Press Release (PDF 60k). The amendments are effective for annual periods beginning on or after 1 July 2009. Earlier application is permitted, but only back to an annual reporting period that begins on or after 30 June 2007.
| Some of the Significant Amendments to IFRS 3 |
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- Acquisition costs. Costs of issuing debt or equity instruments are accounted for under IAS 39. All other costs associated with the acquisition must be expensed, including reimbursements to the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include finder's fees; advisory, legal, accounting, valuation, and other professional or consulting fees; and general administrative costs, including the costs of maintaining an internal acquisitions department.
- Contingent consideration. If the amount of contingent consideration changes as a result of a post-acquisition event (such as meeting an earnings target), accounting for the change in consideration depends on whether the additional consideration is an equity instrument or cash or other assets paid or owed. If it is equity, the original amount is not remeasured. If the additional consideration is cash or other assets paid or owed, the changed amount is recognised in profit or loss. If the amount of consideration changes because of new information about the fair value of the amount of consideration at acquisition date (rather than because of a post-acquisition event) then retrospective restatement is required.
- Goodwill and noncontrolling interest. An option is added to IFRS 3 to permit an entity to recognise 100% of the goodwill of the acquired entity, not just the acquiring entity's portion of the goodwill, with the increased amount of goodwill also increasing the noncontrolling interest [new term for 'minority interest'] in the net assets of the acquired entity. This is known as the 'full goodwill method'. Such noncontrolling interest is reported as part of consolidated equity. The 'full goodwill' option may be elected on a transaction-by-transaction basis.
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Example: P pays 800 to purchase 80% of the shares of S. Fair value of 100% of S's identifiable net assets is 600. If P elects to measure noncontrolling interests as their proportionate interest in the net assets of S of 120 (20% x 600), the consolidated financial statements show goodwill of 320 (800 +120 - 600). If P elects to measure noncontrolling interests at fair value and determines that fair value to be 185, then goodwill of 385 is recognised (800 + 185 - 600). The fair value of the 20% noncontrolling interest in S will not necessarily be proportionate to the price paid by P for its 80%, primarily due to control premium or discount as explained in paragraph B45 of IFRS 3.
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- Step acquisition. Prior to control being obtained, the investment is accounted for under IAS 28, IAS 31, or IAS 39, as appropriate. On the date that control is obtained, the fair values of the acquired entity's assets and liabilities, including goodwill, are measured (with the option to measure full goodwill or only the acquirer's percentage of goodwill). Any resulting adjustments to previously recognised assets and liabilities are recognised in profit or loss. Thus, attaining control triggers remeasurement.
- 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 was obtained. This is accounted for as an equity transaction with owners (like acquisition of 'treasury shares'). Goodwill is not remeasured.
- Scope changes. The revised IFRS 3 applies to combinations of mutual entities and combinations without consideration (dual listed shares). These are excluded from the existing IFRS 3. The revised IFRS 3 does not apply to combinations of entities under common control. The IASB added to its agenda a separate agenda project on Common Control Transactions in December 2007.
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| Some of the Significant Amendments to IAS 27, IAS 28, and IAS 31 |
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- Partial disposals of subsidiaries. Items 5 and 6 above in changes to IFRS 3 are also changes in IAS 27.
- Partial disposals of associates and joint ventures. If an investor loses significant influence over an associate, it derecognises that associate and recognises in profit or loss the difference between the sum of the proceeds received and any retained interest, and the carrying amount of the investment in the associate at the date significant influence is lost. Similar treatment when an investor loses joint control over a jointly controlled entity.
- Attributing income to the NCI. Total comprehensive income is allocated to the noncontrolling interest (NCI) even if this results in the NCI having a deficit balance.
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The revised IFRS 3 and related changes to IAS 27 resulted from a joint project with the US Financial Accounting Standards Board. FASB issued a similar standard in December 2007 (SFAS 141(R)) – see our News Story of 5 December 2007. The revisions will result in a high degree of convergence between IFRSs and US GAAP in these areas, although some potentially significant differences remain. Among the differences: the FASB standard requires (rather than permits) the full goodwill method. There are also differences in scope, the definition of control, and how fair values, contingencies, and employee benefit obligations are measured, as well as several disclosure differences. A booklet of illustrative examples issued along with the revised IFRS 3 and IAS 27 includes a comparison with SFAS 141(R).
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).
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