financial statements), IFRS 11 and IAS 28 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 or, as the case may be, financial statements in which the associates or joint
ventures are accounted for using the equity method.
The implication of this disclosure requirement is that an entity which publishes both
separate and consolidated financial statements under IFRS cannot issue the separate
financial statements before the consolidated financial statements have been prepared and
approved, since there would not be, at the date of issue of the separate financial statements,
any consolidated financial statements ‘to which they relate’. This is discussed at 1.1.3 above.
If the parent has issued consolidated financial statements prepared not in accordance
with IFRS but with its local GAAP, the parent cannot make reference to the financial
statements prepared in accordance with IFRS 10, IFRS 11 or IAS 28, therefore the
separate financial statements cannot be considered in compliance with IAS 27.
3.3.1
Entities with no subsidiaries but exempt from applying IAS 28
Entities which have no subsidiaries, but which have investments in associates or joint
ventures are permitted by IAS 28 to prepare separate financial statements as their only
financial statements if they satisfy the conditions described at 1.1.1 above.
IAS 27 requires such entities to make the disclosures in (a) to (c) above in 3.3. In addition,
the entity is supposed to identify the financial statements prepared in accordance with
IAS 28, [IAS 27.17], but in this situation, there are no such financial statements.
4
COMMON CONTROL OR GROUP TRANSACTIONS IN
INDIVIDUAL FINANCIAL STATEMENTS
4.1 Introduction
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.
Whilst such transactions do not affect the consolidated financial statements of the
parent as they are eliminated in the course of consolidation, they can have a significant
impact on the separate financial statements of the parent and/or subsidiaries and/or a
set of consolidated financial statements prepared for a sub-group. IAS 24 requires only
that these transactions are disclosed and provides no accounting requirements.
The IASB generally considers that the needs of users of financial statements are fully
met by requiring entities to consolidate subsidiaries, equity account for associates and
joint ventures. Accounting issues within individual financial statements are not a priority
and are usually only addressed when a standard affects consolidated and individual
statements in different ways, e.g. accounting for pensions or employee benefits.
We consider that it is helpful to set out some general principles in accounting for these
transactions that enhances the consistency of application of IFRS whether for the
separate financial statements of a parent, the individual financial statements of an entity
that is not a parent or the consolidated financial statements of a sub-group.
Separate and individual financial statements 563
Within this section whenever the individual financial statements are discussed it
encompasses also separate financial statements except for the legal merger discussion
at 4.4.3.B below that differentiates between the parent’s separate financial statements
and the individual financial statements of the parent that merges with its only subsidiary.
The considerations provided in this section in certain circumstances apply also to sub-
parent consolidated financial statements in relation to common control transactions
with entities controlled by the ultimate parent or ultimate controlling party or parties,
but that are outside the sub-parent group.
We have considered how to apply these principles to certain common types of
arrangement between entities under common control, which are described in more
detail at 4.4 below:
• sales, exchanges and contributions of non-monetary assets including sales and
exchanges of investments not within the scope of IFRS 9, i.e. investments in
subsidiaries, associates or joint ventures (see 4.4.1 below);
• transfers of businesses, including contributions and distribution of businesses
(see 4.4.2 and 4.4.3 below);
• incurring costs and settling liabilities without recharge (see 4.4.4 below);
• loans that bear interest at non-market rates or are interest free (see 4.4.5.A below); and
• financial guarantee contracts given by a parent over a subsidiary’s borrowings in
the financial statements of a subsidiary (see 4.4.5.B below).
Other arrangements that are subject to specific requirements in particular standards are
dealt with in the relevant chapters. These include:
• financial guarantee contracts over a subsidiary’s borrowings in the accounts of the
parent (see Chapter 45 at 3.3.3);
• share-based payment plans of a parent (see Chapter 30 at 12); and
• employee benefits (see Chapter 31 at 3.3.2).
In determining how to account for transactions between entities under common
control, we believe that the following two aspects need to be considered:
(a) Is the transaction at fair value? Is the price in the transaction the one that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants? It is necessary to consider whether the transaction is of a type
that market participants could or would enter into. It is also important to remember
that an arm’s length transaction includes the repayment terms that would be expected
of independent parties and this might not be the case in intra-group transactions.
(b) Is it a contractual arrangement and, if so, is the entity whose financial statements
are being considered a party to the contract?
If the transaction is at fair value and the entity is a party to the contract, we believe that
it should be accounted for in accordance with the terms of the contract and general
requirements of IFRS related to this type of transaction.
The principles for accounting for transactions between group entities that are not
transacted at fair value are presented in the following flowchart. Detailed comments of
the principles are provided further in 4.2 and 4.3 below.
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Group entities represent entities under common control of the same parent or the same
controlling party or parties. The flowchart therefore does not apply to transactions of
group entities with joint ventures or associates of any of the group entities.
RECOGNITION
Transaction between group
entities not at fair value
Is the entity a party to the
contract?
Yes
No
Is there a standard specifically
Recognise the related asset/
requiring that this transaction
liability/expense/income
is to be recognised?
No
Yes
Choice
Recognise the related asset/
liability/expense/income in
accordance with the sta
ndard
Don’t recognise the related
asset/liability/expense/
Recognise as an equity
income
transaction
MEASUREMENT
Is there a standard requiring
this to be measured initially
at fair value?
Yes
No
Choice
Initial measurement of
Initial measurement of
Measure in accordance
transaction at fair value
transaction at agreed
with the requirements of
consideration
the standard
Difference between
consideration and FV is an
equity transaction
Separate and individual financial statements 565
If there is more than one acceptable way of accounting for specific transactions and
therefore a choice of accounting policies, the entity should apply its chosen policy
consistently to similar arrangements and disclose it if it is material. However, not all
group entities need adopt the same accounting policy in their individual financial
statements or sub-group consolidated financial statements. Nor is there a requirement
for symmetrical accounting by the entities involved in the transaction.
4.2 Recognition
If an entity is a party to a contract under which it receives a right and incurs an
obligation, then on the assumption that there is substance to the transaction, it will be
recognised in the financial statements of the entity.
An entity may receive a right without incurring an obligation or vice versa without being
a party to a contract. There are many different types of arrangement that contain this
feature, either in whole or in part:
• Some arrangements are not contractual at all, such as capital contributions and
distributions, that are in substance gifts made without consideration.
• Some standards require transactions to which the entity is not a party to be
reflected in their financial statements. In effect, the accounting treatment is
representing that the subsidiary has received a capital contribution from the
parent, which the subsidiary has then spent on employee remuneration or vice
versa. IFRS 2 has such requirements (see Chapter 30 at 12).
• Some are contractual arrangements for the other party, e.g. a parent enters into a
contract to engage an auditor for the subsidiary, and pays the audit fees without
any recharge.
If an entity is not a party to a contractual relationship and there is no IFRS requiring
recognition then the entity may choose not to recognise the transaction at all.
If it chooses to recognise the transaction then recognition will depend on whether the
entity is a parent or a subsidiary, as well as the specific nature of the transaction. In some
circumstances a parent may treat a debit as either an addition to its investment in its
subsidiary or as an expense and a credit as a gain to profit or loss. It is not generally
possible for the parent to recognise gains in equity as these are usually transactions with
subsidiaries, not shareholders. A subsidiary can only treat the transaction as a credit or
debit to income (income or expense) or a debit to asset or credit to liability and an equal
and opposite debit or credit to equity (distribution of or contribution to equity).
One example where a subsidiary is required by an IFRS to record an expense when it is
not a party to a contractual arrangement is a share-based payment. If the employees of
a subsidiary are granted options by the parent company over its shares in exchange for
services to the subsidiary, the subsidiary must record a cost for that award within its
own financial statements, even though it may not legally be a party to it. The parent
must also record the share-based payment as an addition to the investment in the
subsidiary (see Chapter 30 at 12.2.4).
Although the entity not party to the contract might have a choice to either record the
transaction or not, the other entity within the group that might have entered into the
contract on behalf of the entity is required to recognise the transaction. Where a group
566 Chapter
8
entity is incurring expenses on behalf of another entity this group entity might be able to
capitalise the expenses as part of the cost of the investment (e.g. a parent is incurring
expenses of the subsidiary without recharging them), treat them as a distribution (e.g. a sister
company is incurring expenses of the entity without recharging them) or to expense them.
The principles apply equally to transactions between a parent and its subsidiaries and
those between subsidiaries in a group. If the transaction is between two subsidiaries,
and both of the entities are either required or choose to recognise an equity element in
the transaction, one subsidiary recognises a capital contribution from the parent, while
the other subsidiary recognises a distribution to the parent. The parent may choose
whether or not to recognise the equity transfer in its stand-alone financial statements.
4.3 Measurement
If a standard requires the transaction to be recognised initially at fair value, it must be
measured at that fair value regardless of the actual consideration. A difference between
the fair value and the consideration may mean that other goods or services are being
provided, e.g. the transaction includes a management fee. This will be accounted for
separately on one of the bases described below. If there is still a difference having taken
account of all goods or services, it is accounted for as an equity transaction, i.e. as either
a contribution to or distribution of equity.
In all other cases, where there is a difference between the fair value and the
consideration after having taken account of all goods or services being provided, there
is a choice available to the entity to:
(a) recognise the transaction at fair value, irrespective of the actual consideration; any
difference between fair value and agreed consideration will be a contribution to or
a distribution of equity for a subsidiary, or an increase in the investment held or a
distribution received by the parent; or
(b) recognise the transaction at the actual consideration stated in any agreement
related to the transaction.
Except for accounting for the acquisition of businesses where the pooling of interest
method can be considered (see 4.4.2 below), the transfer of businesses between a parent
and its subsidiary (see 4.4.3 below), and the acquisition of an investment in a subsidiary
constituting a business that is acquired in a share-for-share exchange (see 2.1.1.B above),
there is no other basis for the measurement of the transactions between entities under
common control other than those stated in (a) and (b) above. Therefore, predecessor values
accounting (accounting based on the carrying amounts of the transferor) cannot be applied.
4.3.1
Fair value in intra-group transactions
The requirements for fair value measurement included in IFRS 13 should be applied to
common control transactions. However, fair value can be difficult to establish in intra-
group transactions.
If there is more than one element to the transaction, this means in principle
identifying
all of the goods and services being provided and accounting for each element at fair
value. This is not necessarily straightforward: a bundle of goods and services in an arm’s
length arrangement will usually be priced at a discount to the price of each of the
Separate and individual financial statements 567
elements acquired separately and this is reflected in the fair value attributed to the
transaction. It can be much harder to allocate fair values in intra-group arrangements
where the transaction may not have a commercial equivalent.
As we have already noted, the transaction may be based on the fair value of an asset but
the payment terms are not comparable to those in a transaction between independent
parties. The purchase price often remains outstanding on intercompany account,
whereas commercial arrangements always include agreed payment terms. Interest-free
loans are common between group companies; these loans may have no formal
settlement terms and, while this makes them technically repayable on demand, they too
may remain outstanding for prolonged periods.
As a result, there can be a certain amount of estimation when applying fair values to
group arrangements.
Some IFRSs are based on the assumption that one entity may not have the information
available to the other party in a transaction, for example:
• a lessee may not know the lessor’s internal rate of return, in which case IFRS 16
– Leases – allows to substitute it with the lessee’s incremental borrowing rate
(see Chapter 24 at 5.2.2); similarly in IAS 17 – Leases – the lessee’s own
incremental borrowing rate could have been used in such case (see Chapter 23
at 3.4.5); and
• in exchanges of assets, IAS 16 and IAS 38 note that one party may not have
information about the fair value of the asset it is receiving, the fair value of the
asset it is giving up or it may be able to determine one of these values more easily
than the other (see Chapter 18 at 4.4 and 4.4.1.B below).
In an intra-group transaction it will be difficult to assume that one group company
knows the fair value of the transaction but the other does not. The approximations
allowed by these standards will probably not apply.
However, if a subsidiary is not wholly owned, such transactions are undertaken
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 112
