International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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[IAS 27.16A]. The exemption from preparing consolidated financial statements, in
criterion (iv) above, is available to a parent entity that is a subsidiary of an
investment entity, even when the investment entity does not prepare consolidated
financial statements but measures its subsidiaries at fair value through profit or loss.
[IFRS 10.BC28A-28B].
The requirements to prepare consolidated and separate financial statements in
accordance with IFRS are very often subject to local jurisdictional rules. For
instance, for entities incorporated in the European Union, local law may exempt the
entity from preparing consolidated financial statements under local GAAP if it
applies ‘IFRS as adopted by the European Union’. However IFRS 10 provides
specific IFRS requirements which need to be considered when financial statements
are prepared on the basis of IFRS as issued by the IASB. For example, as discussed
in Chapter 6 at 2.2.4, in our view, consolidated financial statements must be
prepared by an entity that was a parent during the reporting period, even if that
entity is no longer a parent at the end of the reporting period (e.g. because it
disposed of all its subsidiaries). IFRS 10 requires a parent to consolidate a subsidiary
until the date on which the parent ceases to control the subsidiary. [IFRS 10.20]. This
means that if a parent does not prepare consolidated financial statements pursuant
to a concession in local law, the parent may not present separate financial
statements in compliance with IFRS. See 1.2 below regarding the interrelationship
between IFRS and local European law in respect of consolidated and separate
financial statements.
1.1.1
Separate financial statements and interests in associates and joint
ventures
IAS 28 must be applied by ‘all entities that are investors with joint control of, or
significant influence over, an investee’. [IAS 28.2]. IAS 28 requires that an investment in
an associate or a joint venture be accounted for in the entity’s separate financial
statements in accordance with paragraph 10 of IAS 27. [IAS 28.44].
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An entity that is an investor may present separate financial statements as its only
financial statements if it is a parent that is exempt from preparing consolidated financial
statements by the scope exemption in paragraph 4(a) of IFRS 10 (see above). If it does
not have subsidiaries it may still present separate financial statements as its only
financial statements if the same criteria as in (i)-(iv) above apply (they are replicated in
paragraph 17 of IAS 28) and all its other owners, including those not otherwise entitled
to vote, have been informed about, and do not object to, the entity not applying the
equity method to its investees.
A parent cannot prepare financial statements in purported compliance with IFRS in
which subsidiaries are consolidated, but associates and joint ventures are not accounted
for under IAS 28 but on some other basis (e.g. at cost). Financial statements prepared on
such a basis would be neither consolidated financial statements (because of the failure
to apply IAS 28) nor separate financial statements (because of the failure to account for
subsidiaries on the basis of the direct equity interest).
The conditions for exemption in paragraph 17 of IAS 28 mentioned above are the same
as those in IFRS 10. This means that:
• An entity that has subsidiaries and is exempt under IFRS 10 from preparing
consolidated accounts is automatically exempt in respect of its associates or joint
ventures as well, i.e. it does not have to account for them under IAS 28.
• An entity that has associates or joint ventures but no subsidiaries, and does not
meet all the exemption criteria in 1.1 above, is required to apply equity accounting
for its associates in its own (non-consolidated) financial statements. Such non-
consolidated financial statements include the investment in the associate or joint
venture on the basis of the reported results and net assets of the investment. Unless
the entity opts to account for associates or joint ventures using the equity method
in its separate financial statements (see 2.3. below) such non-consolidated financial
statements are not ‘separate financial statements’ as defined in IAS 27 (see
definition above) and therefore do not have to meet the additional measurement
and disclosure requirements required by IAS 27 for separate financial statements
that are described at 3 below in order to comply with IFRS. Most of these
disclosures would not be relevant to accounts that include the results of the
associate or joint venture as they are based on providing information that is not
otherwise given.
For example a wholly-owned subsidiary that has debt or equity instruments that
are traded in a public market must account for its interests in associates and joint
ventures in accordance with IAS 28 and the resulting financial statements are not
‘separate financial statements’ as defined in IAS 27 unless the option to use the
equity method in separate financial statements is taken.
This could be different to some national GAAPs, under which investors that have
no subsidiaries (and therefore do not prepare consolidated financial statements)
but have associates or joint ventures, are not permitted to account for their share
of the profits and net assets of associates or joint ventures in their individual
financial statements.
Separate and individual financial statements 539
An entity that has held interests in subsidiaries and disposed of any remaining
interest in the period is required to prepare consolidated financial statements at the
end of that period. This same principle applies to investments in associates and joint
ventures when these constitute the only investments of the investor and these
investments are sold during the period.
1.1.2
Separate financial statements and interests in joint operations
IFRS 11 – Joint Arrangements – differentiates between joint operations and joint
ventures. In the separate financial statements, joint ventures are accounted for at cost,
in accordance with IFRS 9, or using the equity method as required by paragraph 10 of
IAS 27. A joint operator applies paragraphs 20 to 22 of IFRS 11 to account for a joint
operation. [IFRS 11.26]. This means that regardless of the type of financial statements
prepared, the joint operator in a joint operation recognises in relation to the joint
operation its:
• assets, including its share of any assets held jointly;
• liabilities, including its share of any liabilities incurred jointly;
• revenue from the sale of its share of the output arising from the joint operation;
• share of the revenue from the sale of the output by the joint operation; and
• expenses, including its share of any expenses incurred jointly. [IFRS 11.20].
Similarly, in its individual financial statements, a party that participates in, but does not
have joint control of, a joint operation, accounts for its interest in the way outlined
above provided it has rights to the assets and obligations for the liabilities, relating to
the joint operation (see Chapter 12 at 6.4).
[IFRS 11.23].
In March 2015, the Interpretations Committee published a number of agenda
decisions relating to IFRS 11. Two of those are relevant to separate financial
statements.1 The first issue is the accounting by a joint operator in its separate financial
statements for its share of the assets and liabilities of a joint operation when it is
structured through a separate vehicle. The Interpretations Committee noted that
IFRS 11 requires the joint operator to account for its rights and obligations in relation
to the joint operation. It also noted that those rights and obligations, in respect of that
interest, are the same regardless of whether separate or consolidated financial
statements are prepared, by referring to paragraph 26 of IFRS 11. Consequently, the
same accounting is required in the consolidated financial statements and in the
separate financial statements of the joint operator.
The Interpretations Committee also noted that IFRS 11 requires the joint operator to
account for its rights and obligations, which are its share of the assets held by the entity
and its share of the liabilities incurred by it. Accordingly, the Interpretations Committee
observed that the joint operator would not additionally account in its separate or
consolidated financial statements its shareholding in the separate vehicle, whether at
cost or fair value.
The second issue relates to the accounting by a joint operation that is a separate vehicle
in its financial statements. This issue has arisen because the recognition by joint
operators in both consolidated and separate financial statements of their share of assets
and liabilities held by the joint operation leads to the question of whether those same
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assets and liabilities should also be recognised in the financial statements of the joint
operation itself. The Interpretations Committee decided not to add the issue to its
agenda, because sufficient guidance exists:2
(a) IFRS 11 applies only to the accounting by the joint operators and not to the
accounting by a separate vehicle that is a joint operation;
(b) the financial statements of the separate vehicle would therefore be prepared in
accordance with applicable Standards; and
(c) company law often requires a legal entity/separate vehicle to prepare financial
statements. Consequently, the reporting entity for the financial statements would
include the assets, liabilities, revenues and expenses of that legal entity/separate
vehicle. However, when identifying the assets and liabilities of the separate
vehicle, it is necessary to understand the joint operators’ rights and obligations
relating to those assets and liabilities and how those rights and obligations affect
those assets and liabilities.
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
IAS 27 does not directly address the publication requirements for separate financial
statements. In some jurisdictions, an entity that prepares consolidated financial
statements is prohibited from publishing its separate financial statements without also
publishing its consolidated financial statements.
However, in our view, IAS 27 does not prohibit an entity that prepares consolidated
financial statements from publishing its separate financial statements compliant with
IAS 27 without also publishing its consolidated financial statements, provided that:
(a) the separate financial statements identify the consolidated financial statements
prepared under IFRS 10 to which they relate. [IAS 27.17]. In other words, they must draw
attention to the fact that the entity also prepares consolidated financial statements and
disclose the address from where the consolidated financial statements are available,
for example, by providing contact details of a person or an e-mail address from which
a hard copy of the document can be obtained or a website address where the
consolidated financial statements can be found and downloaded; and
(b) the consolidated financial statements have been prepared and approved no later
than the date on which the separate financial statements have been approved.
Thus, it is not possible to publish the separate financial statements before the
consolidated financial statements have been finalised.
The same conditions should be applied by an entity having no subsidiaries that prepares
financial statements in which investments in associates or joint ventures are equity
accounted, but publishes its separate financial statements (in which the investments in
associates and joint ventures are not equity accounted) without also publishing its financial
statements in which investments in associates or joint ventures are equity accounted.
Separate financial statements of a parent entity can also be considered compliant with
IAS 27 when the exemption to present consolidated financial statements criteria in
paragraph 4(a) of IFRS 10 are met.
Separate and individual financial statements 541
IAS 27 requires a parent to identify the consolidated financial statements prepared
by the parent. [IAS 27.17]. Therefore, if the parent has not issued consolidated
financial statements prepared in accordance with IFRS at the date the separate
financial statements are issued, this requirement cannot be met and therefore the
separate financial statements cannot be considered to be in compliance with
IAS 27. This will also be the case if the consolidated financial statements are
prepared, but are not in accordance with IFRS (e.g. prepared in accordance with
local GAAP).
The matter of whether separate financial statements could be issued before the
respective consolidated financial statements was explicitly considered by the
Interpretations Committee in March 2006. The Interpretations Committee concluded
that separate financial statements issued before consolidated financial statements could
not comply with IFRS as issued by the IASB, because ‘separate financial statements
should identify the financial statements prepared in accordance with paragraph 9 of
IAS 27 to which they relate (the consolidated financial statements), unless one of the
exemptions provided by paragraph 10 is applicable’.3 Although IAS 27 has changed since
the Interpretations Committee has considered that issue, the current version of IAS 27
still requires separate financial statements to identify financial statements prepared in
accordance with IFRS 10, IFRS 11 or IAS 28. [IAS 27.17]. It therefore implies that
consolidated financial statements should be available before or at the same date as
separate financial statements. However, the situation may be different if local
requirements set specific rules relating to the timing of publication of financial
statements. This is for example, the case for an entity that is incorporated in the
European Union (EU), as described in 1.2 below.
1.2
Entities incorporated in the EU and consolidated and separate
financial statements
The EU Regulation on International Accounting Standards requires IFRS to be applied
by certain entities in their consolid
ated financial statements. As a result of the EU
endorsement mechanism, IFRS as adopted in the EU may differ in some respects from
the body of Standards and Interpretations issued by the IASB (see Chapter 1 at 4.2.1). In
some circumstances a difference between IFRS and IFRS as adopted by the European
Union may affect separate financial statements.
The Interpretations Committee had concluded that separate financial statements
issued before consolidated financial statements cannot comply with IFRS as issued
by the IASB. However, in January 2007 the European Commission stated that ‘the
Commission Services are of the opinion that, if a company chooses or is required to
prepare its annual accounts in accordance with IFRS as adopted by the EU, it can
prepare and file them independently from the preparation and filing of its
consolidated accounts – and thus in advance, where the national law transposing the
Directives requires or permits separate publication’.4 In other words, under ‘IFRS as
adopted by the EU’ it might be possible to issue separate financial statements before
the consolidated financial statements are issued. The details about differences
between scope of consolidation under IFRS 10 and European Union national
legislation are described in Chapter 6 at 2.2.5.
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2
REQUIREMENTS OF SEPARATE FINANCIAL STATEMENTS
In separate financial statements, investments in subsidiaries, associates and joint
ventures accounted for at cost or using the equity method that are classified as held for
sale (or included in a disposal group that is classified as held for sale) in accordance with
IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations – are
accounted for in accordance with IFRS 5, [IAS 27.10], i.e. at the lower of carrying amount
and fair value less cost to sell (see Chapter 4). Those investments that are accounted for
in accordance with IFRS 9 and classified as held for sale continue to be measured in
accordance with IFRS 9 (see Chapter 4 at 2.2.1).
Except for situations when IFRS 5 is applicable to investments in subsidiaries, associates
and joint ventures such investments are accounted for either at cost (see 2.1 below), in
accordance with IFRS 9 (see 2.2 below) or using the equity method as described in