Accounting for Investments (Separate Financial Statements)

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kenyin12
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Accounting for Investments (Separate Financial Statements)

Post by kenyin12 »

Hi All,

Our company wholly owns a subsidiary, Company B. Company B then owns Company C with 80% shareholding, and it was accounted as investment in subsidiary in Company B’s books. During the year, our company invested shares in Company C with 5% shareholding. How should we account the 5% investment in Company C in our books?

Our assessment is that since we have indirect control over Company A then we should account it as investment in subsidiary in our books. However, from our auditor’s view, the indirect control should be disregarded, and we should only consider the 5% direct investment. Since Company B is the one who has direct control over Company C, our auditor’s conclusion is to account the 5% investment in Company C at fair value through OCI (investment not held for trading) under FRS9 in our books.

Should we consider the indirect investment in determining the control in the separate/stand-alone financial statements or does it only apply to consolidated financial statements?

Any insights and related guidance will be greatly appreciated! Thanks!
JRSB
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Re: Accounting for Investments (Separate Financial Statements)

Post by JRSB »

Why didn't you pass funds to/invest in your sub to increase their investment to 85?

Yes I agree that in the standalone financial statements of the parent the 5% is nothing to do with the additional indirect holding. Different in group accounts of course.

Not sure how questions of control enter it with the %s you mention. What is the intention/reason for having the 5% separately? so the NCI doesn't benefit?
DJP
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Re: Accounting for Investments (Separate Financial Statements)

Post by DJP »

If entity A controls entity C, directly or indirectly, then entity C is a subsidiary of entity A (refer to IFRS 10 for the definition of control). When preparing the separate accounts of entity A you may choose to account for the direct investment in C at cost, according to IFRS 9 or using the equity method.

I don't really understand the auditor's assessment, unless there is information missing in your fact pattern.
kenyin12
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Re: Accounting for Investments (Separate Financial Statements)

Post by kenyin12 »

Hi DJP,

There's no missing information in my fact pattern.

From our auditor's view, we should disregard the indirect shareholding held through our subsidiary, Company B, in the separate financial statements on which we disagreed. Also, they highlighted that in IFRS 10 par 16, it is stated that there should be only one investor who has control over the investee (which they said in our case is Company B).

IFRS 10 par 16 extract:
"Although only one investor can control an investee, more than one party can share in the returns of an investee. For example, holders of non-controlling interests can share in the profits or distributions of an investee."

Our view is the same as yours. If we have control over B, then we should have control over C as well (although indirectly). We believe that whether it is separate or consolidated financial statements, the concept of subsidiary and control should be the same. Hence, we should account for the 5% investment as investment in subsidiary instead of FVOCI.
kenyin12
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Re: Accounting for Investments (Separate Financial Statements)

Post by kenyin12 »

JRSB wrote: 03 Nov 2021, 11:27 Why didn't you pass funds to/invest in your sub to increase their investment to 85?

Yes I agree that in the standalone financial statements of the parent the 5% is nothing to do with the additional indirect holding. Different in group accounts of course.

Not sure how questions of control enter it with the %s you mention. What is the intention/reason for having the 5% separately? so the NCI doesn't benefit?
In Company C’s jurisdiction, they only allowed the companies to be held by more than 2 shareholders. Prior to Company C’s restructuring, it was owned by 3 shareholders (55% by Company B and another 2 minority shareholders not within our group). One of the minority shareholders sold all of its shares to our group (25% to Company B and 5% to our company). Our company acquired the shares so that Company C will still have more than 2 shareholders.

Given that we have control over Company B which we account as investment in subsidiary, doesn’t it follow that Company C is also our subsidiary (indirectly) and we should account the 5% investment as investment in subsidiary in our standalone financials?
DJP
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Re: Accounting for Investments (Separate Financial Statements)

Post by DJP »

IFRS 10 applies to consolidated financial statements and it makes sense that only one company (the one who controls) prepares consolidated financial statements. But IAS 27 applies to separate financial statements, so I don't see how paragraph 16 of IFRS 10 has anything to do with it. In any case, a sub can also be accounted for as a financial asset according to IFRS 9 in the separate accounts, so you would end up having the same accounting treatment as advised by the auditors; unless of course you prefer to account for it at cost or using the equity method.

All in all, I do agree with your assessment.
Leo
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Re: Accounting for Investments (Separate Financial Statements)

Post by Leo »

If the mother company has 100% of control over entity A, B, C, D, E, F, G and each one of them has 10% of control over H.

If we follow the logic of the auditors, the total control is 70%, full consolidation method, but A, B, C, D, E, F, G, should recognise their investment in H at fair value through OCI? I can't imagine how difficult gonna be to consolidate in that case, any thoughts?
JRSB
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Re: Accounting for Investments (Separate Financial Statements)

Post by JRSB »

It's probably one of those where by the book it is a minority interest in a company, but in practice an explanatory note that it is a minority interest in an otherwise indirectly controlled entity means it is held at cost etc. I don't imagine there is any technical reference to this specific scenario but it's an interesting question. If the auditors are going hard by the book then fair value may be required..
Leo
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Re: Accounting for Investments (Separate Financial Statements)

Post by Leo »

If they stated the above for Kenyin12's case, they should be consistent and do the same for my case too, which is Kenyin12's case, extended.
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Marek Muc
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Re: Accounting for Investments (Separate Financial Statements)

Post by Marek Muc »

I agree with kenyin12 and DJP

Para IAS 27.5 refers to IFRS 10 when it comes to definition of a subsidiary, so I don't understand the basis on which you would restrict the definition to direct shareholding in separate financial statements

@kenyin12 - are your auditors members of a reputable global network, i.e. BIG4/TOP10?
kenyin12
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Re: Accounting for Investments (Separate Financial Statements)

Post by kenyin12 »

@Marek Yes, they are from Big 4 :lol:

From their point of view, for separate financial statements, only one investor has a control over the investee which is the immediate parent so they don't consider the indirect subsidiary as subsidiary in our company's separate financials. :roll:

@DJP Our accounting policy is to account the investment in subsidiaries at cost. Thank you very much for your insights!
DJP
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Re: Accounting for Investments (Separate Financial Statements)

Post by DJP »

The auditor's logic is a bit weird. Following that point of view, then only one entity could prepare consolidated financial statements.
JRSB
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Re: Accounting for Investments (Separate Financial Statements)

Post by JRSB »

I can see it to be honest (see above). Suppose you have 5% and another company, 15 tiers lower in the structure in another country it has 46%. For the standalone company they have 5% for whatever purpose and in theory they can direct the sub 15 tiers lower by appointing the directors they want down the chain but I suppose the point made is it's not their direct call. At the consol level is where you can dust all this off and look at the big picture
DJP
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Re: Accounting for Investments (Separate Financial Statements)

Post by DJP »

If you control the entity, then it is your direct call (even if you exercise that control via another entity).

Or we can see this from a different angle. When you are consolidating, the first step is to eliminate your investment in the subs against equity. Surely this "financial asset" investment would also have to be eliminated before you consolidate, otherwise you would be double counting it. If you are eliminating it, it is because it is an investment in a sub, not a financial asset (IFRS 9) investment.
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Marek Muc
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Re: Accounting for Investments (Separate Financial Statements)

Post by Marek Muc »

I've been thinking about this a bit and I guess the conclusion may differ depending on exact circumstances, e.g. local law. So JRSB has a valid point. So I would just take the specific scenario that you're dealing with and run in through IFRS 10 control criteria and determine whether indirect shareholding gives control from an 'stand-alone' point of view given specific facts and circumstances

https://ifrscommunity.com/knowledge-bas ... nk-control
kenyin12
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Re: Accounting for Investments (Separate Financial Statements)

Post by kenyin12 »

Hi everyone,

Thanks for all your insights :)

Just an update. After a long discussion and consultation with the auditors' technical team, our auditors have concluded that the same assessment of control at consolidation level would apply to separate financial statements as well. So the 5% shareholding will be accounted as investment in subsidiary (at cost) in our books.
Andreas Kyriacou
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Re: Accounting for Investments (Separate Financial Statements)

Post by Andreas Kyriacou »

Hello everyone,

In case Company A holds 35% in Company B and 2 of the UBO's of Company's A directly hold another 20% this makes Company B a subsidiary?

Is the direct ownership from UBO's affecting the assessment of control for Company A?
JRSB
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Re: Accounting for Investments (Separate Financial Statements)

Post by JRSB »

In my view no because the accounts consider the control of the group from parent company down, so slightly different to above example perhaps
Andreas Kyriacou
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Re: Accounting for Investments (Separate Financial Statements)

Post by Andreas Kyriacou »

I Agree. Thank u.
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