comprehensive income in the period in which the dividend is paid. However, it is the
net assets in the consolidated financial statements that are relevant, not those in the
subsidiary’s, joint venture’s or associate’s own financial statements, which may be
different if the parent acquired the subsidiary.
Testing assets for impairment is described in Chapter 20. There are particular problems
to consider in trying to assess the investments in subsidiaries, joint ventures and
associates for impairment. These are discussed in Chapter 20 at 12.4.
2.4.1.C Returns
of
capital
Returns of share capital are not usually considered to be dividends and hence they are
not directly addressed by IAS 27. They are an example of a ‘distribution’, the broader
term applied when an entity gives away its assets to its members.
At first glance, a return of capital appears to be an obvious example of something that
ought to reduce the carrying value of the investment in the parent. We do not think that
is necessarily the case. Returns of capital cannot easily be distinguished from dividends.
For example, depending on local law, entities may be able to:
• make repayments that directly reduce their share capital; or
• create reserves by transferring amounts from share capital into retained earnings
and, at the same time or later, pay dividends from that reserve.
Returns of capital can be accounted for in the same way as dividends, i.e. by applying the
impairment testing process described above. However, the effect on an entity that makes
an investment (whether on initial acquisition of a subsidiary or on a subsequent injection
of capital) and immediately receives it back (whether as a dividend or return of capital)
generally will be of a return of capital that reduces the carrying value of the parent’s
investment. In these circumstances there will be an impairment that is equal to the dividend
that has been received (provided that the consideration paid as investment was at fair
value). If there is a delay between the investment and the dividend or return of capital then
the impairment (if any) will be a matter of judgement based on the criteria discussed above.
2.4.2
Distributions of non-cash assets to owners (IFRIC 17)
Entities sometimes make distributions of assets other than cash, e.g. items of property,
plant and equipment, businesses as defined in IFRS 3, ownership interests in another
entity or disposal groups as defined in IFRS 5. IFRIC 17 has the effect that gains or losses
relating to some non-cash distributions to shareholders will be accounted for in profit
or loss. The Interpretation addresses only the accounting by the entity that makes a
non-cash asset distribution, not the accounting by recipients.
558 Chapter
8
2.4.2.A Scope
IFRIC 17 applies to any distribution of a non-cash asset, including one that gives the
shareholder a choice of receiving either non-cash assets or a cash alternative if it is
within scope. [IFRIC 17.3].
The Interpretations Committee did not want the Interpretation to apply to exchange
transactions with shareholders, which can include an element of distribution, e.g. a sale
to one of the shareholders of an asset having a fair value that is higher than the sales
price. [IFRIC 17.BC5]. Therefore, it applies only to non-reciprocal distributions in which
all owners of the same class of equity instruments are treated equally. [IFRIC 17.4].
The Interpretation does not apply to distributions if the assets are ultimately controlled by
the same party or parties before and after the distribution, whether in the separate,
individual and consolidated financial statements of an entity that makes the distribution.
[IFRIC 17.5]. This means that it will not apply to distributions made by subsidiaries but only to
distributions made by parent entities or individual entities that are not themselves parents.
In order to avoid ambiguity regarding ‘common control’ and to ensure that demergers
achieved by way of distribution are dealt with, the Interpretation emphasises that ‘common
control’ is used in the same sense as in IFRS 3. A distribution to a group of individual
shareholders will only be out of scope if those shareholders have ultimate collective power
over the entity making the distribution as a result of contractual arrangements. [IFRIC 17.6].
If the non-cash asset distributed is an interest in a subsidiary over which the entity
retains control, this is accounted for by recognising a non-controlling interest in the
subsidiary in equity in the consolidated financial statements of the entity, as required by
IFRS 10 paragraph 23 (see Chapter 7 at 4). [IFRIC 17.7].
2.4.2.B
Recognition, measurement and presentation
A dividend is not a liability until the entity is obliged to pay it to the shareholders.
[IFRIC 17.10]. The obligation arises when payment is no longer at the discretion of the
entity, which will depend on the requirements of local law. In some jurisdictions, the
UK for example, shareholder approval is required before there is a liability to pay. In
other jurisdictions, declaration by management or the board of directors may suffice.
The liability is measured at the fair value of the assets to be distributed. [IFRIC 17.11]. If an
entity gives its owners a choice of receiving either a non-cash asset or a cash alternative, the
entity estimates the dividend payable by considering both the fair value of each alternative
and the associated probability of owners selecting each alternative. [IFRIC 17.12]. IFRIC 17
does not specify any method of assessing probability nor its effect on measurement.
IFRS 5’s requirements apply also to a non-current asset (or disposal group) that is classified
as held for distribution to owners acting in their capacity as owners (held for distribution
to owners). [IFRS 5.5A, 12A, 15A]. This means that assets or asset groups within scope of
IFRS 5 will be carried at the lower of carrying amount and fair value less costs to distribute.
[IFRS 5.15A]. Assets not subject to measurement provisions of IFRS 5 are measured in
accordance with the relevant standard. In practice, most non-cash distributions of assets
out of scope of the measurement provisions of IFRS 5 will be of assets held at fair value
in accordance with the relevant standard, e.g. financial instruments and investment
Separate and individual financial statements 559
property carried at fair value. [IFRS 5.5]. Accordingly there should be little difference, if any,
between their carrying value and the amount of the distribution.
The liability is adjusted as at the end of any reporting period at which it remains
outstanding and at the date of settlement with any adjustment being taken to equity.
[IFRIC 17.13]. When the liability is settled, the difference, if any, between its carrying
amount and the carrying amount of the assets distributed is accounted for as a separate
line item in profit or loss. [IFRIC 17.14-15]. IFRIC 17 does not express any preference for
particular line items or captions in the income statement.
It is rare for entities to distribute physical assets such as property, plant and equipment
to shareholders, although these distributions are common within groups and hence o
ut
of scope of IFRIC 17. In practice, the Interpretation will have most effect on demergers
by way of distribution, as illustrated in the following example.
Example 8.5:
Non-cash asset distributed to shareholders
Conglomerate Plc has two divisions, electronics and music, each of which is in a separate subsidiary. On
18 December 2018 the shareholders approve a non-cash dividend in the form of the electronics division,
which means that the dividend is a liability when the annual financial statements are prepared as at
31 December 2018. The distribution is to be made on 17 January 2019.
In Conglomerate Plc’s separate financial statements at 18 December and 31 December, the investment in
Electronics Ltd, which holds the electronics division, is carried at €100 million; the division has consolidated
net assets of €210 million. The fair value of the electronics division at 18 December and 31 December is
€375 million, so is the amount at which the liability to pay the dividend is recorded in Conglomerate Plc’s
separate financial statements and in its consolidated financial statements, as follows:
Conglomerate Plc
Separate financial statements
Consolidated financial statements
€
€
€
€
Dr equity
375
Dr
equity
375
Cr
liability
375
Cr
liability
375
In Conglomerate’s separate financial statements its investment in Electronics Ltd of €100 million is classified as held
for distribution to owners. In the consolidated financial statements, the net assets of €210 million are so classified.
If the value of Electronics Ltd had declined between the date of declaration of the dividend and the period
end, say to €360 million (more likely if there had been a longer period between declaration and the period
end) then the decline would be reflected in equity and the liability recorded at €360 million. Exactly the same
entry would be made if the value were €375 million at the period end and €360 million on the date of
settlement (Dr liability €15 million, Cr equity €15 million).
The dividend is paid on 17 January 2019 at which point the fair value of the division is €360 million. There
was no change in the carrying value of the investment in the separate financial statements and of the net assets
in the consolidated financial statements between 31 December and distribution date. The difference between
the assets distributed and the liability is recognised as a gain in profit or loss.
Conglomerate Plc
Separate financial statements
Consolidated financial statements
€
€
€
€
Dr liability
360
Dr
liability
360
Cr profit or loss
260
Cr profit or loss
150
Cr asset held for sale
100
Cr disposal group
210
560 Chapter
8
The entity must disclose, if applicable:
(a) the carrying amount of the dividend payable at the beginning and end of the period: and
(b) the increase or decrease in the carrying amount recognised in the period as a result
of a change in the fair value of the assets to be distributed. [IFRIC 17.16].
If an entity declares a dividend that will take the form of a non-cash asset after the end
of a reporting period but before the financial statements are authorised the following
disclosure should be made:
(a) the nature of the asset to be distributed;
(b) the carrying amount of the asset to be distributed as of the end of the reporting
period; and
(c) the estimated fair value of the asset to be distributed as of the end of the reporting
period, if it is different from its carrying amount, and the information about the
method used to determine that fair value required by IFRS 13 – paragraphs 93(b),
(d), (g) and (i) and 99 (see Chapter 14 at 20.3). [IFRIC 17.17].
3 DISCLOSURE
An entity applies all applicable IFRSs when providing disclosures in the separate
financial statements. [IAS 27.15]. In addition there are a number of specific disclosure
requirements in IAS 27 which are discussed below.
3.1
Separate financial statements prepared by parent electing not to
prepare consolidated financial statements
When separate financial statements are prepared for a parent that, in accordance with
the exemption discussed at 1.1 above, elects not to prepare consolidated financial
statements, those separate financial statements are to disclose: [IAS 27.16]
(a) the fact that the financial statements are separate financial statements; that the
exemption from consolidation has been used; and the name and the principal place of
business (and country of incorporation, if different) of the entity whose consolidated
financial statements that comply with IFRS have been produced for public use and the
address where those consolidated financial statements are obtainable;
(b) a list of significant investments in subsidiaries, joint ventures and associates, including:
(i) the name of those investees;
(ii) the principal place of business (and country of incorporation, if different) of
those investees; and
(iii) its proportion of the ownership interest and, if different, proportion of voting
rights held in those investees; and
(c) a description of the method used to account for the investments listed under (b).
In addition to disclosures required by IAS 27, an entity also has to disclose in its separate
financial statements qualitative and quantitative information about its interests in
unconsolidated structured entities as required by IFRS 12. IFRS 12 does not generally apply
to an entity’s separate financial statements to which IAS 27 applies but if it has interests in
unconsolidated structured entities and prepares separate financial statements as its only
Separate and individual financial statements 561
financial statements, it must apply the requirements in paragraphs 24 to 31 of IFRS 12 when
preparing those separate financial statements (see Chapter 13 at 6). [IFRS 12.6(b)].
The disclosures in IFRS 12 are given only where the parent has taken advantage of the
exemption from preparing consolidated financial statements. Where the parent has not
taken advantage of the exemption, and also prepares separate financial statements, it
gives the disclosures at 3.3 below in respect of those separate financial statements.
3.2
Separate financial statements prepared by an investment entity
When an investment entity that is a parent (other than a parent electing not to prepare
consolidated financial statements) prepares separate financial statements as its only
financial statements, it discloses that fact. The investment entity also presents disclosures
relating to investment entities required by IFRS 12 (see Chapter 13 at 4.6). [IAS 27.16A].
3.3
Separate financial statements prepared by an entity other than a
parent electing not to prepare consolidated financial statements
&nb
sp; As drafted, IAS 27 requires the disclosures at (a), (b) and (c) below to be given by:
• a parent preparing separate financial statements in addition to consolidated financial
statements (i.e. whether or not it is required to prepare consolidated financial
statements – the disclosures in 3.1 above apply only when the parent has actually
taken advantage of the exemption, not merely when it is eligible to do so); and
• an entity (not being a parent) that is an investor in an associate or in a joint venture
in respect of any separate financial statements that it prepares, i.e. whether:
(i) as its only financial statements (if permitted by IAS 28), or
(ii) in addition to financial statements in which the results and net assets of
associates or joint ventures are included.
The relevance of certain of these disclosures to financial statements falling within (i)
above is not immediately obvious (see 3.3.1 below).
Where an entity is both a parent and either an investor in an associate or in a joint
venture, it should follow the disclosure requirements governing parents – in other
words, it complies with the disclosures in 3.1 above if electing not to prepare
consolidated financial statements and otherwise with the disclosures below.
Separate financial statements prepared by an entity other than a parent electing not to
prepare consolidated financial statements must disclose: [IAS 27.17]
(a) the fact that the statements are separate financial statements and the reasons why
those statements are prepared if not required by law;
(b) a list of significant investments in subsidiaries, joint ventures and associates,
including for each such investment its:
(i) name;
(ii) principal place of business (and country of incorporation, if different); and
(iii) proportion of ownership interest and, if different, proportion of voting power
held; and
(c) a description of the method used to account for the investments listed under (b).
562 Chapter
8
The separate financial statements must also identify the financial statements prepared
in accordance with the requirements of IFRS 10 (requirement to prepare consolidated
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 111
