International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 106
news, IASB Website (archive), 23 June 2014.
news, IASB Website (archive), 23 June 2014.
25 IFRIC Update, November 2006.
48 IASB Update, February 2017.
26 IFRIC Update, January 2012.
49 DP/2018/1, paras. 8.27-8.36.
27 Draft Interpretation (DI/2012/2) Put Options
Written on Non-controlling Interests, para. 7.
531
Chapter 8
Separate and individual
financial statements
1 SEPARATE AND INDIVIDUAL FINANCIAL STATEMENTS ............................ 535
1.1
Consolidated financial statements and separate financial
statements .............................................................................................................. 536
1.1.1
Separate financial statements and interests in associates
and joint ventures ................................................................................. 537
1.1.2
Separate financial statements and interests in joint
operations .............................................................................................. 539
1.1.3
Publishing separate financial statements without
consolidated financial statements or financial statements
in which investments in associates or joint ventures are
equity accounted ................................................................................. 540
1.2
Entities incorporated in the EU and consolidated and separate
financial statements .............................................................................................. 541
2 REQUIREMENTS OF SEPARATE FINANCIAL STATEMENTS ........................ 542
2.1
Cost method........................................................................................................... 543
2.1.1
Cost of investment ............................................................................... 543
2.1.1.A
Investments acquired for own shares or other
equity instruments ........................................................... 545
2.1.1.B
Investments acquired in common control
transactions ....................................................................... 545
2.1.1.C
Cost of investment in subsidiary, associate or
joint venture acquired in stages .................................... 546
2.1.1.D
Formation of a new parent ........................................... 548
2.1.1.E
Formation of a new parent: calculating the
cost and measuring equity .............................................. 551
2.1.2
Deemed cost on transition to IFRS ................................................... 553
2.2
IFRS 9 method ...................................................................................................... 553
2.3 Equity
method
.......................................................................................................
553
532 Chapter
8
2.3.1
First-time adoption of IFRS ............................................................... 554
2.4
Dividends and other distributions ..................................................................... 555
2.4.1
Dividends from subsidiaries, joint ventures or associates ............ 555
2.4.1.A
The dividend exceeds the total comprehensive
income ................................................................................ 555
2.4.1.B
The carrying amount exceeds the consolidated
net assets ............................................................................ 556
2.4.1.C
Returns of capital ............................................................. 557
2.4.2
Distributions of non-cash assets to owners (IFRIC 17) ................. 557
2.4.2.A
Scope .................................................................................. 558
2.4.2.B
Recognition, measurement and presentation ............ 558
3 DISCLOSURE ................................................................................................. 560
3.1
Separate financial statements prepared by parent electing not to
prepare consolidated financial statements ..................................................... 560
3.2
Separate financial statements prepared by an investment entity ............... 561
3.3
Separate financial statements prepared by an entity other than a
parent electing not to prepare consolidated financial statements .............. 561
3.3.1
Entities with no subsidiaries but exempt from applying
IAS 28 ..................................................................................................... 562
4 COMMON CONTROL OR GROUP TRANSACTIONS IN INDIVIDUAL
FINANCIAL STATEMENTS ............................................................................. 562
4.1
Introduction .......................................................................................................... 562
4.2 Recognition
............................................................................................................
565
4.3 Measurement
........................................................................................................
566
4.3.1
Fair value in intra-group transactions ............................................. 566
4.4
Application of the principles in practice .......................................................... 567
4.4.1
Transactions involving non-monetary assets ................................. 567
4.4.1.A
Sale of PP&E from the parent to the subsidiary
for an amount of cash not representative of
the fair value of the asset. .............................................. 568
4.4.1.B The
parent
exchanges PP&E for a non-
monetary asset of the subsidiary. ................................ 569
4.4.1.C
Acquisition and sale of assets for shares ..................... 571
4.4.1.D Contribution
and
distribution of assets ....................... 572
4.4.1.E Transfers
between subsidiaries ..................................... 573
4.4.2
Acquiring and selling businesses – transfers between
subsidiaries ............................................................................................. 574
4.4.2.A
Has a business been acquired? ...................................... 574
4.4.2.B
If a business has been acquired, how should it
be accounted for? ............................................................. 574
Separate and individual financial statements 533
4.4.2.C
Purchase and sale of a business for equity or
cash not representative of the fair value of the
business .............................................................................. 575
4.4.2.D
If the net assets are not a business, how should
/>
the transactions be accounted for? ............................... 575
4.4.3
Transfers of businesses between parent and subsidiary .............. 576
4.4.3.A
Distributions of businesses without
consideration – subsidiary transferring
business to the parent. .................................................... 576
4.4.3.B
Legal merger of parent and subsidiary ........................ 578
4.4.4
Incurring expenses and settling liabilities without
recharges ............................................................................................... 582
4.4.5
Financial instruments within the scope of IFRS 9 .........................583
4.4.5.A
Interest-free or non-market interest rate loans ........583
4.4.5.B
Financial guarantee contracts: parent
guarantee issued on behalf of subsidiary .................... 585
4.5
Disclosures ............................................................................................................ 586
List of examples
Example 8.1:
Cost of a subsidiary in separate financial statements when
the pooling of interest method is applied in consolidated
financial statements .............................................................................. 545
Example 8.2:
Cost of a subsidiary acquired in stages ............................................. 547
Example 8.3:
Formation of new parent that does not acquire all of
original parent’s ordinary shares ...................................................... 550
Example 8.4:
Formation of new parent, statutory share capital and
adjustments to equity ........................................................................... 552
Example 8.5:
Non-cash asset distributed to shareholders .................................... 559
Example 8.6:
Sale of PP&E at an undervalue ......................................................... 568
Example 8.7:
Exchange of assets with dissimilar values ....................................... 570
Example 8.8:
Transactions between subsidiaries ................................................... 573
Example 8.9:
Interest-free and below market rate loans within groups ........... 584
Example 8.10:
Financial guarantee contracts ............................................................ 585
534 Chapter
8
535
Chapter 8
Separate and individual
financial statements
1
SEPARATE AND INDIVIDUAL FINANCIAL STATEMENTS
This chapter deals with two aspects of the preparation of financial statements by
entities: their separate financial statements, which are defined by IFRS, and some of the
consequences of intra-group transactions for their individual financial statements,
where guidance in IFRS is limited and incomplete.
Under IFRS, ‘separate financial statements’ are defined in IAS 27 – Separate Financial
Statements – as ‘those presented by an entity in which the entity could elect, subject to
the requirements in this standard, to account for its investments in subsidiaries, joint
ventures and associates either at cost, in accordance with IFRS 9 – Financial
Instruments, or using the equity method as described in IAS 28 – Investments in
Associates and Joint Ventures.’ [IAS 27.4]. In other words, they are the unconsolidated
financial statements or financial statements in which the investments in subsidiaries are
not consolidated in accordance with IFRS 10 – Consolidated Financial Statements.
The IASB takes the view that the needs of users of financial statements are fully met by
requiring entities to consolidate subsidiaries and equity account for associates and joint
ventures. It is recognised that entities with subsidiaries, associates or joint ventures may
wish, or may be required by local law, to present financial statements in which their
investments are accounted for on another basis, e.g. as equity investments or under the
equity method. [IAS 27.2].
Accordingly, IFRS does not require the preparation of separate financial statements.
However, where an investor with subsidiaries, associates or joint ventures does prepare
separate financial statements purporting to comply with IFRS, they must be prepared in
accordance with IAS 27. [IAS 27.3].
It follows from this definition that the financial statements of an entity that does not have
a subsidiary, associate or joint venture are not ‘separate financial statements’. [IAS 27.7].
This chapter also addresses matters that are not exclusive to separate financial
statements but relate to any stand-alone financial statements prepared by any entity
within a group. We have called these ‘individual financial statements’, although they
may also be referred to (amongst other names) as ‘stand-alone’, ‘solus’ or ‘single-entity’
536 Chapter
8
financial statements. The term ‘individual financial statements’ for the purpose of this
chapter is a broader term than ‘separate financial statements’ as it covers separate
financial statements and financial statements of entities that do not have investments in
associates, joint ventures and subsidiaries.
Transactions often take place between a parent entity and its subsidiaries or between
subsidiaries within a group that may or may not be carried out at fair value. As a result
there may be uncertainty and ambiguity about how these transactions should be
accounted for. IAS 24 – Related Party Disclosures – requires only that these
transactions are disclosed and provides no accounting requirements.
Whilst such transactions do not influence the consolidated financial statements of the
ultimate parent (as they are eliminated in the course of consolidation), they can have a
significant impact on the individual financial statements of the entities concerned or on
the consolidated financial statements prepared for a sub-group.
These issues are discussed at 4 below.
1.1
Consolidated financial statements and separate financial
statements
A parent is an entity that controls one or more entities and any parent entity should
present consolidated financial statements in which the assets, liabilities, equity, income,
expenses and cash flows of the parent and its subsidiaries are presented as those of a
single economic entity. [IFRS 10.4, Appendix A].
A parent need not present consolidated financial statements if it meets all the
following conditions:
‘(i) it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity
and all 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;
(ii) its debt or equity instruments are not traded in a public market (a domestic or foreign
stock exchange or an over-the-counter market, including local and regional markets);
(iii) it did not file, nor is it in the process of filing, its financial statements with a
s
ecurities commission or other regulatory organisation for the purpose of issuing
any class of instruments in a public market; and
(iv) its ultimate or any intermediate parent produces financial statements that are available
for public use and comply with IFRSs, in which subsidiaries are consolidated or are
measured at fair value through profit or loss in accordance with this IFRS’. [IFRS 10.4(a)].
This exemption is discussed further in Chapter 6 at 2.2.1.
An entity that avails itself of the above exemption may, but is not required, to prepare
separate financial statements as its only financial statements. [IAS 27.8]. For example, most
intermediate holding companies take advantage of this exemption. If such an entity
prepares unconsolidated financial statements that are in accordance with IFRS, they
must comply with the provisions of IAS 27 for such statements and they will then be
separate financial statements as defined. The requirements for separate financial
statements are dealt with in 2 below.
Separate and individual financial statements 537
IFRS 10 includes an exception to the consolidation principle for a parent that meets
the definition of an investment entity. An investment entity measures its investments
in subsidiaries, other than those solely providing services that relate to its
investment activities, at fair value through profit or loss in accordance with IFRS 9
instead of consolidating those subsidiaries. The investment entity exception is
discussed in Chapter 6 at 10. Investment entities measure their investments in those
subsidiaries in the same way in their separate financial statements as required in the
consolidated financial statements. [IAS 27.11A]. As a result, IAS 27 clarifies that an
investment entity that is required, throughout the current period and all comparative
periods presented, to apply the exception to consolidation for all of its subsidiaries
in accordance with paragraph 31 of IFRS 10 presents separate financial statements
as its only financial statements. [IAS 27.8A]. An investment entity that prepares
separate financial statements as its only financial statements, discloses that fact and
presents the disclosures relating to investment entities required by IFRS 12 –
Disclosure of Interests in Other Entities – about its interests in subsidiaries.