Basis for conclusions on IFRS 12 interests in subsidiaries

Basis for conclusions on IFRS 12 interests in subsidiaries

IFRS 12 requires an entity to disclose information that enables users of financial statements

• to understand:
  • the composition of the group; and
  • the interest that non-controlling interests have in the group’s activities and cash flows; and
• to evaluate:
  • the nature and the effect of significant restrictions on its ability to access and use assets of the group, 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 the parent’s 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

Basis for conclusions on IFRS 12 interests in subsidiaries

Consolidated financial statements present the financial position, comprehensive income and cash flows of the group as a single entity. They ignore the legal boundaries of the parent and its subsidiaries. However, those legal boundaries could affect the parent’s access to and use of assets and other resources of its subsidiaries and, therefore, affect the cash flows that can be distributed to the shareholders of the parent.

Basis for conclusions on IFRS 12 interests in subsidiaries

IAS 1 provides some of the information necessary to perform the  valuations by requiring an entity to present:

• in the statement of financial position, the non-controlling interest within equity;
• in the statement of comprehensive income, profit or loss and total comprehensive income for the period attributable to the non-controlling interest; and
• in the statement of changes in equity, a reconciliation between the non-controlling interest at the beginning of the period and the end of the

Basis for conclusions on IFRS 12 interests in subsidiaries

Restrictions on assets and liabilities

IAS   27   required   disclosures   about   the   nature   and   extent   of   significant restrictions on the ability of subsidiaries to transfer funds to the parent. Users of financial statements noted that, in addition to legal requirements, the existence of non-controlling interests in a subsidiary might restrict the subsidiary’s ability to transfer funds to the parent or any of its other subsidiaries. However, the disclosure requirement in IAS 27 regarding significant restrictions did not refer explicitly to non-controlling interests.

Accordingly, the Board decided to amend the requirement in IAS 27  to disclose restrictions in order to clarify that the information disclosed should include the nature and extent to which protective rights of non-controlling interests can restrict the entity’s ability to access and use the assets and settle the liabilities of a subsidiary.

Basis for conclusions on IFRS 12 interests in subsidiaries

The Board added a project on consolidation to its agenda to deal with divergence in practice in applying IAS 27 and SIC-12. For example, entities varied in their application of the control concept in circumstances in which a reporting entity controls another entity but holds less than a majority of the voting rights of the entity, and in circumstances involving agency relationships.

In addition, a perceived conflict of emphasis between IAS 27 and SIC-12 had led to inconsistent application of the concept of control. IAS 27 required the consolidation of entities that are controlled by a reporting entity, and it defined control as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. SIC-12, which interpreted the requirements of IAS 27 in the context of special purpose entities, placed greater emphasis on risks and rewards.

The global financial crisis that started in 2007 highlighted the lack of transparency about the risks to which investors were exposed from their involvement with ‘off balance sheet vehicles’ (such as securitisation vehicles), including those that they had set up or sponsored. As a result, the G20 leaders, the Financial Stability Board and others asked the Board to review the accounting and disclosure requirements for such ‘off balance sheet vehicles’.

Basis for conclusions on IFRS 12 interests in subsidiaries

The International Financial Reporting Standards Foundation, or IFRS Foundation, is a nonprofit accounting organization. Its main objectives include the development and promotion of the International Financial Reporting Standards (IFRSs) through the International Accounting Standards Board (IASB), which it oversees.^[1][3]

The foundation was formerly named the International Accounting Standards Committee (IASC) Foundation until a renaming on 1 July 2010, and as of 2012 is governed by a board of 22 trustees.

The IFRS Foundation also develops and maintains the IFRS Taxonomy, which is the representation of the IFRSs in eXtensible Business Reporting Language (XBRL), via its XBRL team. The team is supported by the XBRL Advisory Council and the XBRL Quality Review Team, which respectively provide strategic advice and reviews developed taxonomies.Additionally, in 2012 the foundation issued a call for industry participants in a project to develop “common industry practice concepts” for the taxonomy.

XBRL provides a “common, electronic format for business and financial reporting”, which will contribute to the global convergence of accounting standards towards IFRS; the director of XBRL activities at the IFRS Foundation, Olivier Servais, hopes that “everybody will be using it” in future.As of March 2012, the IFRS Taxonomies have “considerably fewer” tags than GAAP taxonomies, and the Security and Exchange Commission has not approved the IFRS Taxonomy for use in XBRL filings in the United States.

Basis for conclusions on IFRS 12 interests in subsidiaries

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