(i) the nature of its interest in another entity or arrangement;
(ii) the type of joint arrangement in which it has an interest;
(iii) that it meets the definition of an investment entity if applicable; and
(b) information about its interests in:
(i) subsidiaries;
(ii) joint arrangements and associates; and
(iii) structured entities that are not controlled by the entity (unconsolidated
structured entities). [IFRS 12.2].
If the disclosures required by the standard, together with the disclosures required by
other IFRSs, do not meet the objective of IFRS 12, an entity must disclose whatever
additional information is necessary to meet that objective. [IFRS 12.3].
The standard provides no illustrative examples to support any of its disclosure
requirements. In addition, several of the terms used in the standard are undefined. This
may well lead to diversity in practice and application where the wording of a disclosure
requirement is ambiguous or otherwise unclear.
There is no explicit requirement for IFRS 12 disclosures in interim financial statements
presented in accordance with IAS 34 – Interim Financial Reporting. However, IAS 34
does require an entity to include an explanation of events and transactions that are
significant to an understanding of the changes in financial position and performance of
the entity since the end of the last annual reporting period. [IAS 34.15].
Disclosure of interests in other entities 881
2.2 Scope
IFRS 12 applies to any entity that has an interest in any of the following:
(a) subsidiaries;
(b) joint arrangements (i.e. joint operations or joint ventures);
(c) associates;
and
(d) unconsolidated structured entities. [IFRS 12.5].
2.2.1 Definitions
The following definitions from Appendix A to IFRS 12 are relevant to the scope of IFRS 12.
Income from a structured entity ‘includes, but is not limited to, recurring and non-
recurring fees, interest, dividends, gains or losses on the remeasurement or
derecognition of interests in structured entities and gains or losses from the transfer of
assets and liabilities to the structured entity’.
Interest in another entity refers to ‘contractual and non-contractual involvement that
exposes an entity to variability of returns from the performance of the other entity. An
interest in another entity can be evidenced by, but is not limited to, the holding of equity
or debt instruments as well as other forms of involvement such as the provision of
funding, liquidity support, credit enhancement and guarantees. It includes the means by
which an entity has control, or joint control of, or significant influence over, another
entity. An entity does not necessarily have an interest in another entity solely because
of a typical customer supplier relationship’.
A structured entity is an entity ‘that has been designed so that voting or similar rights
are not the dominant factor in deciding who controls the entity, such as when any voting
rights relate to administrative tasks only and the relevant activities are directed by
means of contractual arrangements’.
Appendix A to IFRS 12 provides a list of terms defined in IAS 27, IAS 28, IFRS 10 and
IFRS 11, which are used in IFRS 12 with the meanings specified in those IFRSs. The
terms include the following:
• associate;
• consolidated financial statements;
• control of an entity;
• equity method;
• group;
• investment entity; and
• joint arrangement.
2.2.1.A
Interests in other entities
An interest in another entity refers to contractual and non-contractual involvement that
exposes the reporting entity to variability of returns from the performance of the other
entity. Consideration of the purpose and design of the other entity may help the
reporting entity when assessing whether it has an interest in that entity and, therefore,
whether it is required to provide the disclosures in IFRS 12. That assessment must
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include consideration of the risks that the other entity was designed to create and the
risks that the other entity was designed to pass on to the reporting entity and other
parties. [IFRS 12.B7].
IFRS 10 defines ‘variability of returns’. IFRS 10 explains that variable returns are
returns that are not fixed and have the potential to vary as a result of the
performance of an investee. Variable returns can be only positive, only negative or
both positive and negative. An investor assesses whether returns from an interest
are variable and how variable these returns are, on the basis of the substance of the
arrangement and regardless of the legal form of the returns. For example, an investor
can hold a bond with fixed interest payments. The fixed interest payments are
variable returns for the purpose of IFRS 10 because they are subject to default risk
and they expose the investor to the credit risk of the issuer of the bond. The amount
of variability (i.e. how variable those returns are) depends on the credit risk of the
bond. Similarly, fixed performance fees for managing an investee’s assets are
variable returns because they expose the investor to the performance risk of the
investee. The amount of variability depends on the investee’s ability to generate
sufficient income to pay the fee. [IFRS 10.B56].
Thus, the definition of an ‘interest’ in IFRS 12 is much wider than the mere holding of
equity instruments in an entity. As IFRS 12 requires disclosures of interests that a
reporting entity holds in other entities, preparers will need to ensure that their reporting
systems and processes are sufficient to identify those ‘interests’.
IFRS 12 clarifies that a reporting entity is typically exposed to variability of returns from
the performance of another entity by holding instruments (such as equity or debt
instruments issued by the other entity) or having another involvement that absorbs
variability. [IFRS 12.B8]. This is illustrated in Example 13.1 below.
Example 13.1: Variability of returns arising from issue of credit default swap (1)
A reporting entity issues a credit default swap to a structured entity. The credit default swap protects the
structured entity from the default of interest and principal payments on its loan portfolio.
The reporting entity has an involvement in the structured entity that exposes it to variability of returns from
the performance of the structured entity because the credit default swap absorbs variability of returns of the
structured entity. [IFRS 12.B8].
Some instruments are designed to transfer risk from the reporting entity to another
entity. Such instruments create variability of returns for the other entity but do not
typically expose the reporting entity to variability of returns from the performance of
the other entity. [IFRS 12.B9]. This is illustrated in Example 13.2 below.
Example 13.2: Variability of returns arising from issue of credit default swap (2)
A reporting entity enters into a credit default swap with a structured entity. The credit default swap
gives the structured entity exposure to Entity Z’s credit risk.
The purpose of the arrangement is to give
the investors in the structured entity exposure to Entity Z’s credit risk (Entity Z is unrelated to any party
involved in the arrangement).
The reporting entity does not have involvement with the structured entity that exposes it to variable returns
from the structured entity because the credit default swap transfers variability to the structured entity rather
than absorbing variability of returns of the structured entity.
Disclosure of interests in other entities 883
Purchased call options and written put options (in each case unless the exercise
price is at fair value) would also be interests in other entities, because these
instruments typically absorb variability created by assets held in the entity. In
contrast, some derivative instruments such as interest rate swaps, can both create
and absorb variability and judgement will need to be exercised in determining
whether these derivatives are interests in other entities.
We believe that plain vanilla swaps and other derivatives that both create and absorb
variability, based on market rates or indices and which rank senior to the issued notes,
do not absorb the risks the entity was designed to pass on, and are not an exposure to
variable returns. They are therefore unlikely to be interests in other entities that would
require disclosure under IFRS 12. See Chapter 6 at 5.3.1.
An entity does not necessarily have an interest in another entity because of a typical
customer supplier relationship. However, as explained above, IFRS 10 states that fixed
performance fees for managing an investee’s assets create variable returns for the
investor. The fixed performance fees are ‘variable’ because they expose the investor to
the performance risk of the investee. [IFRS 10.B56]. Therefore, it would seem closer to the
spirit of IFRS 12 that investment management fees are treated as a variable interest
rather than a typical customer-supplier relationship in order to present fully the
reporting entity’s relationships with structured entities. The same principle applies to
other fees based on assets under management.
2.2.1.B Structured
entities
Whether an entity is a structured entity or not is important because additional
disclosures are required by IFRS 12 for interests in structured entities. These disclosures
are discussed at 4.4 and 6 below.
As defined at 2.2.1 above, a structured entity is an entity that has been designed so that
voting or similar rights are not the dominant factor in deciding who controls the entity,
such as when any voting rights relate to administrative tasks only and the relevant
activities are directed by means of contractual arrangements.
The guidance to IFRS 12 states that a structured entity often has some or all of the
following features or attributes:
(a) restricted
activities;
(b) a narrow and well-defined objective, such as:
(i) to effect a tax-efficient lease;
(ii) to carry out research and development activities;
(iii) to provide a source of capital or funding to an entity; or
(iv) to provide investment opportunities for investors by passing on risks and
rewards associated with the assets of the structured entity to investors.
(c) insufficient equity to permit the structured entity to finance its activities without
subordinated financial support; and
(d) financing in the form of multiple contractually linked instruments to investors that
create concentrations of credit or other risks (tranches). [IFRS 12.B22].
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The standard provides the following examples of entities that are regarded as structured
entities:
• securitisation vehicles;
• asset-backed financings; and
• some investment funds. [IFRS 12.B23].
The IASB’s rationale for including specific disclosures of investments in structured
entities is that users have requested such disclosures because they believed involvement
with these entities posed more risk than involvement with traditional operating entities.
The increased risk exposure arises because, for example, the structured entity may have
been created to pass risks and returns arising from specified assets to investors, or may
have insufficient equity to fund losses on its assets, if they arise.
The Basis for Conclusions explains that the type of entity the Board envisages being
characterised as a structured entity is unlikely to differ significantly from an entity that
SIC-12 – Consolidation – Special Purpose Entities – described as a special purpose
entity (SPE). SIC-12 described an SPE as an entity created to accomplish a narrow and
well-defined objective, listing as examples entities established to effect a lease, entities
established for research and development activities or entities established for the
securitisation of financial assets. [IFRS 12.BC82].
However, the IFRS 12 definition of a structured entity (i.e. an entity that has been
designed so that voting or similar rights are not the dominant factor in deciding who
controls the entity) is not the same as the SIC-12 definition of an SPE. The IFRS 12
definition implies that any entity which is not controlled by voting or similar rights is a
structured entity. Conversely, any entity controlled by voting or similar rights cannot be
a structured entity.
It is not clear what the IASB means by ‘similar’ (to voting) rights in the definition of
a structured entity. No illustrative examples are provided. It seems likely that this
will require the exercise of judgement by reporting entities and that there may be
diversity in practice about what constitutes a ‘similar’ right and therefore whether
an entity is a structured entity. One example of what the IASB may have had in mind
when referring to ‘similar’ rights is collective investment schemes where investors
can vote to remove the manager of the fund without cause as long as a certain
proportion of investors demand such a vote. The assessment of whether this right
(to remove the fund manager) could be considered substantive rather than
administrative, and therefore whether the collective investment scheme is a
structured entity, would depend on the number of investors who would need to
collaborate in order to force the vote.
IFRS 12 does not state whether the ‘features or attributes’ of structured entities
discussed above are determinative as to whether an entity is a structured entity or
whether the features or attributes should always be subordinate to the definition (i.e. if
the entity was controlled by voting or similar rights then the features or attributes would
be irrelevant). Our view is that the features and attributes are subordinated to the
definition. However, the implication from the Basis for Conclusions is that the IASB
considers that where some of the features or attributes are present in an entity then it is
unlikely that the entity is controlled by voting or similar rights.
Disclosure of interests in other entities 885
The IASB considered, but rejected, defining a structured entity in a way similar to a
variable interest entity (VIE) in US GAAP. That approach, in the IASB’s opinion, would
&nb
sp; have introduced complicated guidance solely for disclosure purposes that was not
previously in IFRSs. [IFRS 12.BC83]. US GAAP defines a VIE, in essence, as an entity whose
activities are not directed through voting or similar rights but with an additional
condition that the total equity in a VIE is not sufficient to permit the entity to finance its
activities without additional subordinated financial support. The IASB had two reasons
for not making the definition of a structured entity dependant on total equity at risk (as
in US GAAP). First, including insufficient equity at risk in the definition of a structured
entity would require extensive application guidance to help determine the sufficiency
of the equity, to which the IASB was opposed. Second, the IASB feared that some
traditional operating entities might be caught by this definition when it had no intention
of catching such entities. [IFRS 12.BC83-85].
The standard clarifies that an entity that is controlled by voting rights is not a structured
entity simply, because, for example, it receives funding from third parties following a
restructuring. [IFRS 12.B24]. However, such funding is likely to give the investee a variable
interest in the restructured entity that may still be a subsidiary as defined by IFRS 10.
2.2.1.C Interaction
of IFRS 12 and IFRS 5
The requirements in IFRS 12, except as described in paragraph B17, apply to an entity’s
interests listed in paragraph 5 (see 2.2 above) that are classified (or included in a disposal
group that is classified) as held for sale or discontinued operations in accordance with
IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations. [IFRS 12.5A].
An entity is not required to disclose summarised financial information, for its
interests in a subsidiary, a joint venture or an associate in accordance with paragraphs
B10-B16 of IFRS 12 when the entity’s interests in that subsidiary, joint venture or
associate (or a portion of its interest in a joint venture or an associate) is classified or
included in a disposal group that is classified as held for sale in accordance with
IFRS 5. [IFRS 12.B17].
2.2.2
Interests disclosed under IFRS 12
IFRS 12 requires that an entity must present information separately for interests in:
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 174
