Disclosure of Interests in Other Entities (IFRS 12)

IFRS 12 stands as a comprehensive standard governing the disclosure requirements associated with interests in other entities. Its primary aim is to mandate entities to provide information in their financial statements that aids users in assessing the nature and risks of its interests in other entities, as well as the implications of these interests on their financial statements.

Entities subject to IFRS 12 are those with interests in (IFRS 12.5-5A):

  • Subsidiaries;
  • Joint arrangements (joint operations or joint ventures);
  • Associates;
  • Unconsolidated (i.e., not under control) structured entities.

This also extends to interests classified as held for sale under IFRS 5.

IFRS 12 does not apply to separate financial statements prepared under IAS 27 (with certain exceptions). Other scope exemptions are detailed in IFRS 12.6.

Notably, IFRS 12 emphasises that, even if not directly specified within the standard, entities must disclose all information necessary to achieve its objectives (IFRS 12.3).

Identifying interest in another entity

For IFRS 12’s purposes, interest in another entity signifies either contractual or non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity. Such interests might arise from holding equity or debt instruments and can extend to liquidity support, credit enhancement, and guarantees (IFRS 12.B7-B9).

Structured entities

IFRS 12 introduces the concept of a structured entity and sets out specific disclosure requirements for them. These entities are designed in a way that control isn’t primarily determined by voting or similar rights, especially when such rights are confined to administrative tasks. Instead, control is usually established through contractual arrangements. Common characteristics of structured entities include limited activities, narrow and well-defined objectives, and a necessity for subordinate financial backing. They may be commonly known as ‘special purpose entities/vehicles’ (SPE/SPV) or ‘variable interest entities’ (VIE) (IFRS 12.B22-B23).


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Aggregation of disclosures

Given that certain groups might have interests spanning across numerous entities, IFRS 12 provides a structured approach for consolidating disclosures in such scenarios. An entity must determine the level of detail and emphasis in its financial statements to meet user needs without overloading with details or losing clarity through excessive summarisation. It should disclose its rationale for aggregating similar interests, ensuring transparency about its subsidiaries, joint ventures, associates, and unconsolidated entities.

Considerations for aggregation include the varied risk profiles and the significance of each entity’s impact on the consolidated financial statements. Disclosures should be clear and informative regarding the entity’s interests in different ventures, potentially categorised by activity, industry, or location (IFRS 12.4 and B2-B6).

Significant judgements and assumptions

Entities must disclose information about significant judgements and assumptions they’ve made, along with any changes to those. This is in relation to determining (IFRS 12.7, 9A):

  • Control over another entity,
  • Joint control of an arrangement or significant influence over another entity,
  • The type of joint arrangement (i.e. joint operation or joint venture) if the arrangement is structured through a separate vehicle,
  • Investment entity status.

Control of another entity

Determining control might involve judgements about ‘de facto control‘, or situations where owning over 50% of the voting rights doesn’t translate to control (IFRS 12.9). There’s also a necessity for judgement in establishing whether an entity acts as an agent or a principal.

Significant influence over another entity

IFRS 12.9 explicitly mandates disclosure of key judgements and assumptions regarding the significant influence over another entity, especially in cases where a stake of at least 20% doesn’t indicate significant influence, or vice versa.

Joint arrangements

Judgements are essential when determining if an entity has joint control over an arrangement or when classifying a joint arrangement structured via a separate vehicle as either a joint operation or joint venture. Entities must disclose the reasoning behind such classifications.

Investment entity status

Investment entities must disclose significant judgements and assumptions used in confirming their status under IFRS 10.27. If an entity identifies as an investment entity but lacks its typical characteristics detailed in IFRS 10.28, IFRS 12.9A requires them to justify their conclusion. Additionally, IFRS 12.9B details disclosure requirements when an entity either gains or loses its investment entity status.

Interests in subsidiaries

Entities must provide information enabling users of consolidated financial statements to understand (IFRS 12.10(a)):

  • The group’s composition,
  • The interest that non-controlling interests (NCI) have in the group’s activities and cash flows.

Furthermore, they should disclose information to help users evaluate (IFRS 12.10(b)):

  • Restrictions on accessing or using the group’s assets and settling its liabilities,
  • Risks associated with interests in consolidated structured entities,
  • Consequences of changes in ownership in a subsidiary without losing control,
  • Consequences of losing control of a subsidiary during the reporting period.

Group composition

IFRS 12 mandates disclosure about the group’s composition. For expansive groups, it’s infeasible to detail every subsidiary. Typically, major subsidiaries or sub-groups are disclosed based on aggregation criteria. Local securities regulations might also prescribe specific disclosure obligations.

Non-controlling interests

Detailed disclosures are mandated for subsidiaries with NCIs significant to the group (IFRS 12.12, B10-B11). Subsidiaries with immaterial or no NCI are exempt (IFRS 12.BC28-BC29). According to the IFRS Interpretations Committee, whether disclosures per IFRS 12.12(e)-(g) apply to individual subsidiaries or subgroups depends on specifics. Personally, I believe subgroup disclosures offer more value, as they factor in inter-company eliminations within the subgroup. Such disclosures should present figures from the reporting parent’s viewpoint, inclusive of goodwill and acquisition-related fair value adjustments.

The IASB has clarified that IFRS 12 doesn’t demand a comprehensive list of all protective rights of NCIs stemming from applicable laws nor replicate other IFRS disclosure requirements (IFRS 12.BC32).

Restrictions on assets and liabilities

Entities must disclose significant limitations on their ability to utilise assets or settle group liabilities, along with the value of these assets and liabilities (IFRS 12.13). These limitations may arise from statutory, contractual, regulatory, or other constraints. For instance, restrictions can include the inability to transfer cash between group entities or distribute dividends. Additionally, protective rights of non-controlling interests might lead to such restrictions (IFRS 12.13(b)).

Interests in consolidated structured entities

An entity must disclose the conditions of any contracts that may oblige it or its subsidiaries to support financially a consolidated structured entity, detailing possible events that might incur losses, such as liquidity agreements or credit rating triggers necessitating asset purchases or additional support. Disclosures should also cover any actual support provided without a contractual obligation, specifying the nature and value of such aid, why it was given, and any assistance in securing further funding for the structured entity.

Moreover, if such voluntary support to an unconsolidated entity leads to control, this shift and the rationale behind it must be explained. Finally, the entity should reveal any plans to offer future support to a consolidated structured entity, including help in acquiring financial support (IFRS 12.14-17). The term ‘support’ for a structured entity remains broad and is not strictly defined by IFRS 12 (IFRS 12.BC105-BC106).

Changes in subsidiary ownership

If the ownership interest in a subsidiary changes without losing control, IFRS 12.18 mandates the presentation of a schedule detailing the impact on equity attributable to the parent’s owners. Remember, changes in a parent’s stake in a subsidiary that doesn’t cause loss of control are equity transactions. Such changes won’t affect profit or loss, recognised assets (including goodwill) or liabilities (IFRS 10.23, B96).

In cases where control over a subsidiary is lost, any gain or loss calculated as per IFRS 10 should be disclosed along with (IFRS 12.19):

  • Gain or loss attributable to measuring any retained investment in the former subsidiary at its fair value upon losing control.
  • The specific line(s) in profit or loss where this gain or loss is presented.

Moreover, IAS 7.39+ outlines additional disclosure guidelines for changes in ownership interests in subsidiaries or other businesses.

Differing reporting dates

If a subsidiary has a reporting period differing from its parent, IFRS 10.B92 necessitates that the subsidiary produces additional financial data aligning with the group’s financial statement date. In cases where this isn’t feasible (refer to IFRS 10.B93), this should be disclosed with reasons provided (IFRS 12.11).

Interests in joint arrangements and associates

Entities should present information enabling financial statement users to assess (IFRS 12.20):

  • The nature, extent and financial effects of interests in joint arrangements and associates. This includes details of relationships with other major investors exerting joint control or significant influence.
  • The nature of and changes in risks linked to interests in joint ventures and associates.

Nature, extent and financial effects of interests

For every material joint arrangement and associate, entities need to share basic details, like the entity’s name, its operations, and ownership stakes (IFRS 12.21(a)).

Summarised financial information

Entities must give a summarised financial information for associates and joint ventures as specified in IFRS 12.22(b). Joint ventures require more extensive details than associates, as IFRS 12.B13 specifically pertains to joint ventures. This summarised data is presented in entirety (not just the entity’s share) with a reconciliation to the carrying amount of the interest shown in the statement of financial position (IFRS 12.B14). Moreover, the IFRS Interpretations Committee clarified that the summarised financial details should be based on an associate/joint venture’s consolidated financial statements. Each material joint venture or associate necessitates specific disclosure. For immaterial interests, a simplified aggregate information will be sufficient (IFRS 12.B16).

Such disclosures might pose confidentiality issues for certain joint ventures set up for specific projects. Hence, all stakeholders should be notified about these disclosures in advance. Additionally, revealing an associate’s or joint venture’s summarised financial data before its financial statements release might violate stock exchange regulations if the entity is listed.

Note that the aforementioned requirements don’t apply to joint operations. This is because entities incorporate their share of assets, liabilities, and profits from a joint operation in their financial statements. Thus, other relevant IFRSs outline the disclosure requirements (as mentioned in IFRS 12.BC52).

If associates and joint ventures are classified as held for sale, there’s no need for summarised financial information disclosure (IFRS 12.B17).

Restrictions on transfers

As per IFRS 12.22(a), entities must disclose the nature and extent of any significant restrictions on joint ventures or associates. This refers to their ability to transfer funds to the entity, whether as cash dividends or for repaying loans and advances from the entity. Such limitations may arise from lending agreements, regulatory stipulations, or contracts amongst investors who exert joint control over, or have a significant influence on, a joint venture or associate.

Differing reporting dates

Should the financial statements of a joint venture or associate, as used in applying the equity method, differ in date or period from the entity’s, IFRS 12.22(b) mandates additional disclosure involving:

  • Specifying the reporting date for that joint venture or associate’s financial statements.
  • Clarifying the reasons for using a different date or reporting period.

Unrecognised share of losses

In line with IFRS 12.22(c), entities must disclose any unrecognised share of losses incurred by equity-accounted investees, both for the reporting period and cumulatively.

Risks and commitments

Entities must provide details as stated in IFRS 12.23:

  • About any commitments tied to their joint ventures, distinct from other commitments.
  • Concerning any contingent liabilities linked to interests in joint ventures or associates. This includes the entity’s share of contingent liabilities shared with other investors, again separate from other contingent liabilities.

IFRS 12.B19 gives examples of unrecognised commitments associated with joint ventures. These might encompass commitments leading to future operational, investment or financial cash outflows, or any other resource outflows in connection with interests in joint ventures (refer also to IFRS 12.BC56).

It’s worth noting that, much like summarised financial information, the disclosure mentioned above isn’t necessary for joint operations (IFRS 12.BC55 and BC58).

Interests in unconsolidated structured entities

The requirement to disclose interests in unconsolidated structured entities emerged chiefly due to the 2007 financial crisis. During this period, financial institutions held interests in securitisation vehicles and asset-backed financings, which were not reflected in their balance sheets, nor were any disclosures made in their financial statements. Although some disclosures in IFRS 12 have similarities with IFRS 7, the IASB believes they complement each other.

It’s worth noting that both joint ventures and associates are ‘unconsolidated’. Hence, all disclosure requirements for unconsolidated structured entities are also applicable to associates and joint ventures, provided they fit the definition of a structured entity (IFRS 12.BC77).

IFRS 12 aims to ensure that the users of financial statements (IFRS 12.24) can:

  • Understand the nature and extent of entity’s interests in unconsolidated structured entities.
  • Evaluate the risks linked to these interests and their subsequent changes.

Identifying interest in an unconsolidated structured entity

Identifying what qualifies as an ‘interest’ in an unconsolidated structured entity can be complex. Nevertheless, the IASB refrained from offering specific guidance, opting for a the general definition (IFRS 12.BC78-BC81). A notable point from IASB is that exposure to variability of returns might stem from earlier involvement with the unconsolidated structured entity. Remarkably, IFRS 12 does not lay out specific disclosure requirements about significant judgements made in identifying interests in an unconsolidated structured entities. However, disclosures about such judgements should be provided under IAS 1.122.

Nature and extent of interests

IFRS 12.26 mandates the disclosure of both qualitative and quantitative details about an entity’s interests in unconsolidated structured entities. This encompasses the nature, purpose, size, activities, and financing of the structured entity. If a reporting entity hasn’t any interest in an unconsolidated structured entity but has sponsored it in some manner, it still must adhere to the disclosures stipulated in IFRS 12.27. This is due to the potential risks, like reputational or legal risks, linked with sponsoring. A classic example is when a financial institution establishes an investment fund and collects management fees from it.

Nature of risks

IFRS 12.29 summarises the disclosure requirements concerning risks associated with interests in unconsolidated structured entities, with detailed examples available in IFRS 12.B26. Furthermore, IFRS 12.30 defines the disclosure requirements if an entity provided financial or other support to an unconsolidated structured entity without having a contractual obligation to do so. This pertains to unconsolidated structured entities where the reporting entity had or currently has an interest. As mentioned earlier, IFRS 12 intentionally leaves the term ‘support’ unspecified, implying a broad interpretation (IFRS 12.BC105-BC106).

Investment entities: Interests in unconsolidated subsidiaries

IFRS 10 grants investment entities an exemption from consolidation, requiring these entities to measure all subsidiaries at fair value through profit or loss under IFRS 9. IFRS 12.19A-19G outline the disclosure requirements for investment entities concerning their interests in unconsolidated subsidiaries.

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