IFRS 12 is a comprehensive standard that covers all disclosure requirements relating to interests in other entities. The objective of IFRS 12 is to require an entity to disclose information that enables users of its financial statements to evaluate the nature of, and risks associated with, its interests in other entities and the impact of these interests on financial statements.
IFRS 12 applies to an entity that has interest in any of the following: subsidiaries, joint arrangements, associates, unconsolidated (i.e. not controlled) structured entities, including those classified as held for sale under IFRS 5 (IFRS 12.5-5A).
Scope exemptions are set out in paragraph IFRS 12.6.
IFRS 12 has a general disclaimer stating that an entity should disclose whatever information is necessary to meet the objective of IFRS 12 even if such information is not explicitly required by IFRS (IFRS 12.3).
Interest in another entity
Interest in another entity is defined for the purpose of IFRS 12 as contractual or non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity. Interest can be evidenced by holding of equity or debt instruments, but also liquidity support, credit enhancement and guarantees (IFRS 12.Appendix A).
See paragraphs IFRS 12.B7-B9 for more discussion on interest in another entity (including examples).
IFRS 12 introduces a notion of a structured entity and specifies disclosure requirements relating to them. A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements (IFRS 12.Appendix A). Structured entities often have restricted activities, a narrow and well-defined objective and need subordinated financial support (see paragraphs IFRS 12.B22-B23 for more discussion on structured entities). They are sometimes referred to as ‘special purpose entities/vehicles’ (SPE/SPV) or ‘variable interest entities’ (VIE).--
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Some groups have interests in tens, hundreds or even thousands entities. Paragraphs IFRS 12.4,B2-B6 provide an important framework for aggregating disclosures in such instances.
Significant judgements and assumptions
Overview of requirements for disclosure of significant judgements and assumptions
An entity shall disclose information about significant judgements and assumptions it has made (and changes to those judgements and assumptions) in determining (IFRS 12.7;9A):
- that it has control of another entity,
- that it has joint control of an arrangement or significant influence over another entity; and
- the type of joint arrangement (i.e. joint operation or joint venture) when the arrangement has been structured through a separate vehicle.
- that it is an investment entity
Control of another entity
Significant judgements relating to control of another entity may relate to ‘de facto control’ or, conversely, instances where more than 50% of the voting rights do not give control (IFRS 12.9). Judgement is also needed when assessing whether an entity is an agent or a principal.
Assessment of control is covered in IFRS 10.
Significant influence over another entity
Assessment of significant influence is covered in IAS 28. IFRS 12.9 specifically requires to disclose significant judgements and assumptions made in determining that and entity does not have significant influence despite holding at least 20% of the voting rights of another entity (or, conversely, that it has significant influence despite holding less than 20% of the voting rights of another entity). The 20% threshold relates to a presumption of significant influence included in IAS 28.
Significant judgements and assumptions in the area of joint arrangements may relate to determining whether an entity has joint control over an arrangement.
Judgement is also needed when determining whether a joint arrangement structured through a separate vehicle is a joint operation or a joint venture. Significant judgements and assumptions that led to the conclusion about such a classification should also be disclosed.
Investment entity status
The investment entity shall disclose information about significant judgements and assumptions it has made in determining that it is an investment entity in accordance with paragraph IFRS 10.27. IFRS 12 specifically requires (IFRS 12.9A) an investment entity to state its reasons for concluding that it is an investment entity if it does not have the typical characteristics of it set out in paragraph IFRS 10.28.
Additionally, paragraph IFRS 12.9B provides disclosure requirements when an entity becomes, or ceases to be, an investment entity.
Interests in subsidiaries
Overview of requirements for disclosure relating to subsidiaries
An entity should disclose information that enables users of its consolidated financial statements to understand (IFRS 12.10(a)):
- the composition of the group; and
- the interest that non-controlling interests have in the group’s activities and cash flows
Additionally, an entity should also disclose information that enables the users to evaluate (IFRS 12.10(b)):
- the nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of the group;
- the nature of, and changes in, the risks associated with its interests in consolidated structured entities;
- the consequences of changes in its ownership interest in a subsidiary that do not result in a loss of control; and
- the consequences of losing control of a subsidiary during the reporting period.
The composition of the group
IFRS 12 requires disclosure of information that enables users of financial statements to understand the composition of the group. It is impractical for a large group to list all of its subsidiaries in financial statements and it is widely accepted that only major subsidiaries or sub-groups are disclosed based on aggregation criteria discussed above.
Keep in mind that local securities law may also impose some obligations in this respect.
The interest that NCI have in activities and cash flows
Rather extensive disclosures are required for each subsidiary that has non-controlling interest that is material to the group. Those requirements are specified in paragraphs IFRS 12.12,B10-B11.
Note that these disclosures are not required for subsidiaries with immaterial NCI or no NCI at all (IFRS 12.BC28-BC29).
January 2015 IFRIC update includes a discussion on whether the requirements in paragraph IFRS 12.12(e)-(g) should be disclosed for a single subsidiary or for a subgroup for which the material subsidiary is a parent. IFRIC noted that it depends. In my opinion, a disclosure for a subgroup will be more useful to users of financial statements. Such a disclosure would include amounts after inter-company eliminations within the sub-group, but before inter-company eliminations with the entities outside the sub-group. IFRIC noted also that the amounts should be presented from a perspective of a reporting parent, i.e. include goodwill and fair value adjustments made on acquisition of the subsidiary (sub-group) in question.
IASB clarified that a list of all the protective rights held by non-controlling interests that are embedded in law and regulation is not required (IFRS 12.BC32). IFRS 12 is not also intended to replicate disclosure requirements relating to restrictions included in other IFRS, e.g. IAS 16 or IAS 40.
Significant restrictions on assets and liabilities
Significant restrictions on the entity’s ability to access or use the assets and settle the liabilities of the group should be disclosed together with the value of those assets and liabilities (IFRS 12.13). Those can result from statutory, contractual, regulatory and other restrictions. Examples of restrictions are the inability to transfer cash between group entities or pay dividends. Restrictions may also result from protective rights of non-controlling interests (IFRS 12.13(b)).
Interests in consolidated structured entities
Paragraphs IFRS 12.14-17 set out disclosure requirements relating to consolidated structured entities. The effect of these requirements is that consolidated financial statements will provide disclosure with respect to intra-group transactions that were eliminated on consolidation.
What constitutes ‘support’ to a structured entity is deliberately not specified by IFRS 12 and should be understood broadly (IFRS 12.BC105-BC106).
Changes in ownership interest in a subsidiary (incl. losing control)
When ownership interest in a subsidiary changes, but the control is retained, IFRS 12.18 requires entities to present a schedule that shows the effects of such a change on the equity attributable to owners of the parent. As a reminder, changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions, i.e. without any impact on profit or loss, recognised assets (including goodwill) or liabilities (IFRS 10.23,B96).
When control of a subsidiary is lost, the gain or loss calculated according to IFRS 10 requirements should be disclosed together with (IFRS 12.19):
- the portion of that gain or loss attributable to measuring any investment retained in the former subsidiary at its fair value at the date when control is lost; and
- the line item(s) in profit or loss in which the gain or loss is recognised (if not presented separately).
Additionally, paragraphs IAS 7.39+ include some substantial disclosure requirments relating to changes in ownership interests in subsidiaries and other businesses.
Different reporting dates
Paragraph IFRS 10.B92 requires a subsidiary whose end of the reporting period is different from that of a parent, to prepare additional financial information as of the same date as the financial statements of the group. If it is impracticable to do so (see paragraph IFRS 10.B93) that fact should be disclosed with reasons given (IFRS 12.11).
Interests in joint arrangements and associates
Overview of disclosure requirements relating to interests in joint arrangements and associates
An entity shall disclose information that enables users of its financial statements to evaluate (IFRS 12.20):
- the nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates; and
- the nature of, and changes in, the risks associated with its interests in joint ventures and associates.
Nature, extent and financial effects of the interests
For each material joint arrangement and associate, entities are required to provide basic information as set out in IFRS 12.21(a), such as name of the entity, nature of its activities, ownership interest and voting rights.
Summarised financial information
For associates and joint ventures, IFRS 12.22(b) requires to provide summarised financial information as specified in IFRS 12.B12-B15. Note that more detail is needed for joint ventures than for associates, as paragraph IFRS 12.B13 concerns joint ventures only. Summarised financial information is presented in full amounts, (i.e. not the entity’s share of those amounts) with a reconciliation of the summarised financial information presented to the carrying amount of the interest in the joint venture or associate presented in the statement of financial position (IFRS 12.B14). Additionally, IFRIC update from January 2015 clarified that the disclosure of summarised financial information is made on the basis of consolidated financial statements of an associate/joint venture.
This disclosure may raise confidentiality concerns for some joint ventures that were established for a specific project, so make sure that all the interested parties within the project are aware that such a disclosure will be made. Similarly, when an entity being a material associate or joint venture is a company listed on a stock exchange, the disclosure of summarised financial information of such an entity before its financial statements are released may infringe the relevant stock exchange laws.
Note that the requirement relating to summarised financial information does not concern joint operations. This results from the fact that the entity, with respect to a joint operation, includes in financial statements its share in assets, liabilities and P/L and other IFRS applicable to those items set out relevant disclosure requirements (IFRS 12.BC52).
For associates and joint ventures classified as held for sale, the disclosure of summarised financial information is not required (IFRS 12.B17).
Specific disclosure is required for each material joint venture or associate. For immaterial interests, simplified aggregate information is required as set out in paragraph IFRS 12.B16.
IFRS 12.22(a) requires disclosure of the nature and extent of any significant restrictions on the ability of joint ventures or associates to transfer funds to the entity in the form of cash dividends, or to repay loans or advances made by the entity. These restrictions can stem from borrowing arrangements, regulatory requirements or contractual arrangements between investors with joint control of or significant influence over a joint venture or an associate.
Different reporting dates
When the financial statements of a joint venture or associate used in applying the equity method are as of a date or for a period that is different from that of the entity, additional disclosure is required as follows (IFRS 12.22(b)):
- the date of the end of the reporting period of the financial statements of that joint venture or associate; and
- the reason for using a different date or period.
Unrecognised share of losses
Requirements relating to equity accounting for a loss making associate or joint venture are covered in IAS 28. Paragraph IFRS 12.22(c) requires the disclosure of unrecognised share of losses for the reporting period and cumulatively.
Risks associated with its interests in joint ventures and associates
An entity should disclose IFRS 12.23:
- commitments that it has relating to its joint ventures separately from the amount of other commitments and
- contingent liabilities relating to its interests in joint ventures or associates (including its share of contingent liabilities incurred jointly with other investors), separately from other contingent liabilities.
Paragraph IFRS 12.B19 provides examples of unrecognised commitments relating to interests in joint ventures that should be disclosed. Those include wide array of commitments that could result in future operating, investing or financing cash outflows, or in any other type of outflow of resources from the entity in relation to its interests in joint ventures (IFRS 12.BC56).
Similarly to summarised financial information, the separate disclosure set out above is not required for joint operations (IFRS 12.BC55,BC58).
Interests in unconsolidated structured entities
Overview of disclosure requirements relating to interests in unconsolidated structured entities
Disclosure of interests in unconsolidated structured entities was introduced mainly as a response to the financial crisis that started in 2007, when financial institutions had interest in securitisation vehicles and asset-backed financings that were kept off balance sheet without any disclosures included in their financial statements. Some disclosures in IFRS 12 overlap with IFRS 7 requirements, but the IASB concluded that they will complement each other.
Note that a joint venture or associate is also ‘unconsolidated’, therefore all the disclosure requirements relating to unconsolidated structured entities apply also to associates and joint ventures if they meet the definition of an unconsolidated structured entity (IFRS 12.BC77).
Disclosure requirements in IFRS 12 should enable users of its financial statements (IFRS 12.24):
- to understand the nature and extent of its interests in unconsolidated structured entities; and
- to evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities.
Interest in an unconsolidated structured entity
For unconsolidated structured entity, it may be particularly challenging to determine what constitutes an ‘interest’ in such an entity. However, the IASB did not decide to provide specific guidance and therefore general definition applies (IFRS 12.BC78-BC81). IASB noted that exposure to variability of returns relating to unconsolidated structured entity may arise from previous involvement with it. Interestingly, IFRS 12 does not contain any specific disclosure requirements regarding significant judgements and assumptions made in determining whether an entity in which it has interest is a structured entity.
IFRS 12 does not include analogous disclosure requirements for interests in entities that do not meet the definition of a structured entity.
Nature and extent of interests
Disclosure of qualitative and quantitative information about an entity’s interests in unconsolidated structured entities is required by paragraph IFRS 12.26. This includes the nature, purpose, size and activities of the structured entity and how the structured entity is financed.
When a reporting entity has no interest in an unconsolidated structured entity, but it has sponsored it in some way, there are still disclosure requirements in paragraph IFRS 12.27 to be met. These result from the fact that sponsoring a structured entity can create risks for an entity, e.g. reputational risk or legal risk. The typical example of an entity being a sponsor is when entity was involved in establishing the structured entity and/or is a major beneficiary of its activities, e.g. when a financial institution established an investment fund and collects management fees from it.
Nature of risks
Paragraph IFRS 12.29 provides a summary of disclosures relating to nature of risks resulting from interests in unconsolidated structured entities. More detailed examples of disclosures are given in paragraph IFRS 12.B26.
Paragraph IFRS 12.30 specifies disclosure requirements when an entity provided financial or other support to an unconsolidated structured entity without having a contractual obligation to do so. This relates to unconsolidated structured entities in which the reporting entity previously had or currently has an interest. What constitutes ‘support’ is deliberately not specified by IFRS 12 and should be understood broadly (IFRS 12.BC105-BC106).
Investment entities: Interests in unconsolidated subsidiaries
IFRS 10 provides an exemption from consolidation for investment entities. Such entities are required to measure all of its subsidiaries at fair value through profit or loss in accordance with IFRS 9. Paragraphs IFRS 12.19A-19G set out disclosure requirements for investment entities in relation to their interests in unconsolidated subsidiaries.