(a) subsidiaries;
(b) joint
ventures;
(c) joint
operations;
(d) associates;
and
(e) unconsolidated structured entities. [IFRS 12.B4].
The standard requires that a reporting entity consider the level of detail necessary
to satisfy the disclosure objective and how much emphasis to place on each of the
requirements of IFRS 12. Disclosures can be aggregated or disaggregated so that
useful information is not obscured by either the inclusion of a large amount of
insignificant detail or the aggregation of items that have different characteristics.
[IFRS 12.4]. However, a reporting entity must disclose how it has aggregated its
interests in similar entities. [IFRS 12.B3].
886 Chapter
13
In determining whether to aggregate information, an entity shall consider qualitative
and quantitative information about the different risk and return characteristics of each
entity to the reporting entity. The entity must present the disclosures in a manner that
clearly explains to users of the financial statements the nature and extent of its interests
in those other entities. [IFRS 12.B5].
Examples of aggregation levels within classes of entities that the standard considers
appropriate are:
• nature of activities (e.g. a research and development entity, a revolving credit card
securitisation entity);
• industry classification; and
• geography (e.g. country or region). [IFRS 12.B6].
This guidance on aggregation implies latitude for entities to exercise their judgement in
determining the appropriate level of disclosure. However, the standard separately
requires summarised financial information for each material partly owned subsidiary,
each material joint venture and associate and requires minimum disclosures in respect
of unconsolidated structured entities.
2.2.2.A Subsidiaries
IFRS 10 defines a subsidiary as ‘an entity that is controlled by another entity’.
[IFRS 10 Appendix A]. IFRS 10 provides guidance as to the circumstances in which an entity
is controlled by another entity.
2.2.2.B Joint
arrangements
IFRS 11 defines a joint arrangement as ‘an arrangement in which two or more parties
have joint control’. Joint control is ‘the contractually agreed sharing of control of an
arrangement, which exists only when decisions about the relevant activities require the
unanimous consent of the parties sharing control’. A joint operation is ‘a joint
arrangement whereby the parties that have joint control of the arrangement have rights
to the assets, and obligations for the liabilities, relating to the arrangement’. A joint
venture is ‘a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement’. [IFRS 11 Appendix A]. IFRS 11
provides guidance as to the circumstances in which joint control exists and on the
characteristics of joint operations and joint ventures.
Interests in joint arrangements which are not structured entities and which do not result
in the reporting entity obtaining joint control or significant influence over the joint
arrangement are outside the scope of IFRS 12. See 2.2.3.C below.
2.2.2.C Associates
IAS 28 defines an associate as ‘an entity over which the investor has significant
influence’. [IAS 28.3]. IAS 28 provides guidance on the circumstances in which significant
influence is exercised.
2.2.2.D
Unconsolidated structured entities
‘Unconsolidated structured entities’ refers to all structured entities which are not
consolidated by a reporting entity. Therefore, the definition of ‘unconsolidated
Disclosure of interests in other entities 887
structured entity’ includes structured entities that are joint arrangements and
associates (unless specially excluded from the scope of the standard under 2.2.3
below), structured entities that are subsidiaries of parents that prepare separate
financial statements (unless consolidated financial statements are also prepared –
see 2.2.3.B below), and structured entities over which the reporting entity does not
have significant influence.
Where an unconsolidated structured entity is a joint venture or associate then the
disclosures required for unconsolidated structured entities at 6 below apply in addition
to the separate disclosures at 5 below for interests in joint ventures and associates. The
IASB concluded that an entity should capture most, and in some cases all, of the
disclosures required for interests in unconsolidated structured entities by providing the
disclosures for interests in joint ventures and associates. Accordingly, the IASB
considers that the requirement to make both sets of disclosures where applicable should
not result in a significant incremental increase in the amount of information that an
entity would be required to provide. [IFRS 12.BC77].
As discussed at 2.2.1.A above, the definition of a variable interest is widely drawn so that
a derivative issued to a structured entity may result in an interest in an unconsolidated
structured entity. This interest would require disclosures under IFRS 12 that would not
apply to an identical instrument issued to an entity which is not a structured entity.
Disclosures in respect of unconsolidated structured entities were not previously
required by IFRS. These disclosures have been added because the IASB was asked by
users of financial statements, regulators and others to improve the disclosure
requirements for what are often described as ‘off balance sheet’ activities.
Unconsolidated structured entities, particularly securitisation vehicles and asset-backed
financings, were identified as forming part of such activities. [IFRS 12.BC62].
In order to allay suspicions that these disclosures were added simply to cover a lack
of ‘robust’ consolidation requirements, the IASB asserts in the Basis for Conclusions
that the disclosure proposals were intended to complement the consolidation
criteria. The disclosures focus on an entity’s exposure to risk from interests in
structured entities that the entity rightly does not consolidate because it does not
control them. [IFRS 12.BC69]. However, no equivalent disclosures exist in respect of
unconsolidated entities that are not structured entities. As IFRS 10 does permit the
exercise of judgement, these additional disclosures are intended to help cover the
fact that different entities might come to different conclusions on consolidation of
structured entities on similar fact patterns.
In determining disclosures in respect of structured entities over which a reporting entity
does not have significant influence, the reporting entity should apply the general
concept of materiality. Materiality is defined by both IAS 1 – Presentation of Financial
Statements – and IAS 8 – Accounting Policies, Changes in Accounting Estimates and
Errors – and is discussed in Chapter 3 at 4.1.5.A.
2.2.3
Interests not within the scope of IFRS 12
Having included details of those interests within scope, the standard clarifies that certain
interests are
not within the scope of IFRS 12.
888 Chapter
13
2.2.3.A
Employee benefit plans
Post-employment benefit plans or other long-term employee benefit plans to which
IAS 19 – Employee Benefits – applies are not within the scope of IFRS 12. [IFRS 12.6(a)].
Without this exemption, some employee benefit plans might meet the definition of a
structured entity.
2.2.3.B
Separate financial statements
An entity’s separate financial statements to which IAS 27 applies are not within the
scope of IFRS 12. The purpose of this exemption is to prevent a parent duplicating
IFRS 12 disclosures in both its consolidated and separate financial statements.
However, an entity that has interests in unconsolidated structured entities and prepares
separate financial statements as its only financial statements is required to make the
disclosures required by paragraphs 24-31 of IFRS 12 in respect of unconsolidated
structured entities (see 6 below). In addition, an investment entity that prepares
financial statements in which all of its subsidiaries are measured at fair value through
profit or loss (i.e. an investment entity which has subsidiaries but does not prepare
consolidated financial statements) shall make the disclosures relating to investment
entities discussed at
4.6 below. [IFRS 12.6(b)]. As discussed at
2.2.2.D above,
unconsolidated structured entities include subsidiaries, joint ventures and associates
that are structured entities.
The financial statements of an entity that does not have an interest in a subsidiary,
associate or a joint venturer’s interest in a joint venture are not separate financial
statements. [IAS 27.7]. These financial statements are within the scope of IFRS 12.
2.2.3.C
Interests in joint arrangements that result in neither joint control nor
significant influence and are not interests in structured entities
An interest held by an entity that participates in, but does not have joint control of, a
joint arrangement is outside the scope of IFRS 12 unless that interest results in
significant influence in that arrangement or is an interest in a structured entity.
[IFRS 12.6(c)].
IFRS 11 states that an arrangement can be a joint arrangement even though not all of
the parties have joint control of the arrangement. It distinguishes between parties
that have joint control of a joint arrangement (joint operators or joint ventures) and
parties that participate in, but do not have joint control of, a joint arrangement.
[IFRS 11.11].
Determining whether an interest in a joint arrangement (which is not a structured entity)
results in neither joint control nor significant influence will be a matter of judgement
based on the facts and circumstances as explained in IFRS 11.
Disclosure of interests in other entities 889
2.2.3.D
Interests in other entities accounted for in accordance with IFRS 9
An interest in another entity accounted for under IFRS 9 is outside the scope of IFRS 12.
However, IFRS 12 applies to the following interests:
(i)
interests in associates or joint ventures measured at fair value through profit or loss
in accordance with IAS 28; or
(ii) interests in unconsolidated structured entities. [IFRS 12.6(d)].
In addition, IFRS 12 applies to unconsolidated subsidiaries of an investment entity accounted
for at fair value through profit and loss and requires specific disclosures. See 4.6 below.
Interests in unconsolidated structured entities which are not subsidiaries, joint
arrangements or associates would normally be measured in accordance with IFRS 9.
3
DISCLOSURE OF SIGNIFICANT ESTIMATES AND
JUDGEMENTS
IFRS 12 requires that an entity disclose information about significant judgements and
assumptions it has made (and changes to those judgements and assumptions) in determining:
(a) that it has control of another entity, i.e. an investee as described in paragraphs 5
and 6 of IFRS 10;
(b) that it has joint control of an arrangement or significant influence over another
entity; and
(c) the type of joint arrangement (i.e. joint operation or joint venture) when the
arrangement has been structured through a separate vehicle. [IFRS 12.7].
The significant judgements and assumptions disclosed in accordance with the
requirements above include those made by an entity when changes in facts and
circumstances are such that the conclusion about whether it has control, joint control
or significant influence changes during the reporting period. [IFRS 12.8].
In order to comply with the standard, an entity must disclose, for example, significant
judgements and assumptions made in determining that:
• it does not control another entity even though it holds more than half of the voting
rights of the other entity;
• it controls another entity even though it holds less than half of the voting rights of
the other entity;
• it is an agent or principal as defined by IFRS 10;
• it does not have significant influence even though it holds 20 per cent or more of
the voting rights of another entity;
• it has significant influence even though it holds less than 20 per cent of the voting
rights of another entity. [IFRS 12.9].
890 Chapter
13
The following extract from BP plc’s financial statements illustrates disclosure of the
significant judgements and assumptions used in determining significant influence with a
less than 20 per cent holding of voting rights.
Extract 13.1: BP p.l.c. (2017)
Notes on financial statements [extract]
1.
Significant accounting policies, judgements, estimates and assumptions [extract]
Interests in associates [extract]
Significant judgement: investment in Rosneft [extract]
Judgement is required in assessing the level of control or influence over another entity in which the group
holds an interest. For BP, the judgement that the group has significant influence over Rosneft Oil Company
(Rosneft), a Russian oil and gas company is significant. As a consequence of this judgement, BP uses the
equity method of accounting for its investment and BP’s share of Rosneft’s oil and natural gas reserves is
included in the group’s estimated net proved reserves of equity-accounted entities. If significant influence
was not present, the investment would be accounted for as an available-for-sale financial asset as described
under ‘Financial assets’ below and no share of Rosneft’s oil and natural gas reserves would be reported.
Significant influence is defined in IFRS as the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control of those policies. Significant influence is presumed
when an entity owns 20% or more of the voting power of the investee. Significant influence is presumed not
to be present when an entity owns less than 20% of the voting power of the investee.
BP owns 19.75% of the voting shares of Rosneft. The Russian federal government, through its investment
company JSC Rosneftegaz, owned 50% plus one share of the voting shares of Rosneft at 31 December 2017.
IFRS identifies several indicators that may provide evidence of significant influence, including
representation on the board of directors of the investee and participation in policy-making processes. BP’s
group chief executive, Bob Dudley, has been a member of the board of directors of Rosneft since 2013 and
he is chairman of the Rosneft board’s Strategic Planning Committee. A second BP-nominated director,
Guillermo Quintero, has been a member of the Rosneft board and its HR and Remuneration Committee since
2015. BP also holds the voting rights at general meetings of shareholders conferred by its 19.75% stake in
Rosneft. BP’s management consider, therefore, that the group has significant influence over Rosneft, as
defined by IFRS.
The following example illustrates disclosure of significant judgements and assumptions
made by an entity in determining whether a joint arrangement is a joint operation or a
joint venture.
Example 13.3: Disclosure of significant judgements and assumptions made in
determining the type of joint arrangement
The directors have determined that the Group’s investment in ABC Inc. should be accounted for as a joint
operation rather than a joint venture. Although the legal form of ABC Inc. and the contractual terms of the
joint arrangement indicate that the arrangement is a joint venture, sales to third parties by ABC Inc. are
expected to be uncommon and not material. In addition, the price of the output sold to the venturers is set by
all parties at a level that is designed to cover only the costs of production and administrative expenses incurred
by ABC Inc. On this basis, the directors consider that, in substance, the arrangement gives the venturers rights
to the assets, and obligations for the liabilities, relating to the arrangement and not rights to the net assets of
the arrangements and therefore is a joint operation.
Disclosure of interests in other entities 891
When a parent determines that it is an investment entity in accordance with IFRS 10,
the investment entity must disclose information about significant judgements and
assumptions it has made in determining that it is an investment entity. If the investment
entity does not have one or more of the typical characteristics of an investment entity
(as per IFRS 10), it must disclose the reasons for concluding that it is nevertheless an
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 175
