Separate financial statements, governed by IAS 27, are distinct type of financial statements where investments in subsidiaries, joint ventures, and associates are accounted for either at cost, in accordance with IFRS 9, or using the equity method. IFRS do not mandate the preparation of separate financial statements, but IAS 27 becomes applicable when an entity chooses to, or is required to, prepare them in compliance with IFRS. This requirement often arises from local regulations and tax laws.
In many jurisdictions, separate financial statements hold significant importance. They provide a clearer link to the legal entity, whereas consolidated financial statements, though more relevant to investors, present a view of the group as a whole rather than an individual entity. Separate financial statements often serve as the basis for meeting legal requirements, such as those related to taxation, capital maintenance, dividend payments, and assessing insolvency or bankruptcy.
If an entity is exempted under IFRS 10.4(a) from consolidation or under IAS 28.17 from applying the equity method, it may present separate financial statements as its only financial statements (IAS 27.8). Entities without investments in subsidiaries, joint ventures, or associates do not prepare separate financial statements under IAS 27 (IAS 27.7). These statements are often called ‘individual’ financial statements. Another widely used term, ‘stand-alone’ financial statements, encompasses both separate and individual financial statements.
There may be instances where an entity is allowed, or even obliged, to apply local GAAP to separate financial statements, even while preparing consolidated financial statements in accordance with IFRS. In such scenarios, IAS 27 is not applicable. In all cases, the accounting framework to be applied is prescribed by local laws and regulations.
The IASB monitors the application of IFRS in approximately 170 jurisdictions globally, including whether IAS 27 is permitted or required for presenting separate financial statements.
Let’s dive in.
Preparation of separate financial statements
IAS 27.9 stipulates that separate financial statements must comply with all IFRS standards. This can present challenges regarding certain intra-group transactions.
--Too many IFRS updates? I know the feeling! That's why I created Reporting Period. It's a concise monthly summary of IFRS developments and Big 4 insights for accounting professionals. It's completely free, with zero spam, and you can unsubscribe anytime with one click. Interested? Leave your email below:
Investments in subsidiaries, joint ventures, and associates
IAS 27.10 sets out specific provisions for investments in subsidiaries, joint ventures, and associates. In separate financial statements, these investments should be accounted for using one of the following methods:
- At cost,
- In accordance with IFRS 9, or
- Using the equity method as outlined in IAS 28.
The chosen accounting method should be consistently applied to all investments within a given category. Regrettably, IAS 27 does not clarify what constitutes a ‘category’. Therefore, it is reasonable to argue that subsidiaries, joint ventures, and associates can be categorised further, given these subdivisions are clearly and objectively outlined in the entity’s accounting policies. For instance, a parent may classify subsidiaries into investment and non-investment entities, applying different measurement methods to each. However, entities that apply IFRS 9 to subsidiaries or associates in consolidated financial statements should maintain this approach in separate financial statements (IAS 27.11-11B).
Classifying financial instruments as part of the investment
IAS 27 does not specify which financial instruments issued by the investee are to be considered part of the investment by the parent and accounted for under IAS 27, and which fall under IFRS 9.
A common approach is to treat instruments classified as equity by the subsidiary under IAS 32 as part of the parent’s investment. However, some instruments classified as liabilities by the subsidiary might still be considered part of the investment by the parent. For example, non-redeemable preference shares with a mandatory preference dividend expressed as a percentage of profit would be classified as a liability by the subsidiary but could be part of the investment by the parent, as returns from this instrument are dependent on the investee’s financial performance, and its economic characteristics are similar to ordinary shares.
Entities must develop their accounting policy in line with IAS 8.10-12 and exercise judgement to determine which financial instruments, classified as liabilities by the subsidiary, should be accounted for as part of the investment by the parent under IAS 27. The primary factor in making this distinction should be the similarity to ordinary shares in terms of risks and returns.
Additionally, an insightful discussion on accounting for indirect control in separate financial statements can be found in this forums topic.
Measuring cost
IAS 27 does not define ‘cost’, so entities should develop their accounting policy based on IAS 8.10-12. The most relevant guidance available is found in the 2024 exposure draft proposing amendments to the equity method of accounting, which is discussed in more detail here.
Equity method
The equity method can be applied to subsidiaries, joint ventures, and associates in separate financial statements, as indicated in IAS 27.10(c). This alternative arises because laws in some countries mandate listed companies to present separate financial statements prepared in accordance with local GAAP, rather than IFRS. In certain instances, local GAAP require the use of the equity method to account for investments in subsidiaries, joint ventures, and associates. In such cases, using the equity method represents the only difference between the separate financial statements prepared in accordance with IFRS and local GAAP (IAS 27.BC10A).
Dividends
Dividends are defined in IFRS 9 as distributions of profits to holders of equity instruments, proportional to their holdings of a particular class of capital. The principle for recognising dividends in separate financial statements is set out in IAS 27.12. Dividends are recognised in profit or loss when the right to receive the dividend is established, except when the equity method is applied. IFRIC 17 Distributions of Non-cash Assets to Owners offers additional guidance on the timing of dividend recognition, clarifying that a dividend is recognised when authorised and no longer at the entity’s discretion. Furthermore, IFRS 9.5.7.1A stipulates that it must be probable that the economic benefits associated with the dividend will flow to the entity and the amount can be measured reliably.
In some cases, equity distributions that essentially are dividends may assume a different legal form. For instance, an entity might transfer retained earnings to other equity items, which are then returned to shareholders as capital repayments. Such repayments, if representing distribution of accumulated profits in substance, should be accordingly recognised as dividend income. Conversely, distributions from an investment that constitute repayment of previously paid-in capital should be deducted from the investment’s carrying amount with no impact on profit or loss, as they don’t qualify as distributions of profits according to the definition of dividends (refer also to IFRS 9.B5.7.1). Additionally, IAS 27 doesn’t mandate an investor to differentiate between pre-acquisition and post-acquisition profits – both are recognised in profit or loss (IAS 27.BC18).
Paragraph IAS 36.12(h) outlines the conditions where recognising a dividend might indicate impairment.
Accounting for joint operations
Interest in a joint operation must be accounted for under IFRS 11 in separate financial statements as well (IFRS 11.26(a)). Consequently, even if a joint operation is structured through a separate entity, joint operators should adopt the ‘look-through’ approach, as discussed in Accounting for joint operations.
Disclosure
As initially noted, separate financial statements should comply with all applicable IFRS, including disclosures. If the law doesn’t require the preparation of separate financial statements, entities should clarify the reason for their preparation (IAS 27.17(a)). These statements should also identify related consolidated financial statements prepared under IFRS 10, or financial statements prepared under IAS 28 or IFRS 11 (IAS 27.17). Other disclosure requirements are specified in paragraphs IAS 27.15-17.