Chapter 13
Disclosure of interests in other entities

List of examples

Chapter 13
Disclosure of interests in other entities

1 INTRODUCTION

IFRS 12 – Disclosure of Interests in Other Entities – is a disclosure standard. IFRS 12 was issued in May 2011. It includes all of the disclosure requirements related to interests in subsidiaries, joint arrangements, associates and consolidated and unconsolidated structured entities.

The recognition and measurement of subsidiaries, joint arrangements and associates are dealt with in IFRS 10 – Consolidated Financial Statements, IFRS 11 – Joint Arrangements, IAS 27 – Separate Financial Statements – and IAS 28 – Investments in Associates and Joint Ventures.

1.1 The development of IFRS 12

IFRS 12 was conceived by the IASB during consideration of the responses to ED 9 – Joint Arrangements – and ED 10 – Consolidated Financial Statements. The IASB observed that the disclosure requirements of the previous versions of IAS 27 – Consolidated and Separate Financial Statements – and IAS 28 – Investments in Associates – together with IAS 31 – Interests in Joint Ventures – overlapped in many areas. In addition, many respondents to ED 10 commented that its proposed disclosure requirements for interests in unconsolidated structured entities should not be located in a consolidation standard. [IFRS 12.BC7].

Consequently, the IASB combined the disclosure requirements for subsidiaries, joint ventures and associates within a comprehensive disclosure standard that would address a reporting entity's involvement with other entities when such involvement was not within the scope of IFRS 9 – Financial Instruments – or other standards. IFRS 12 also includes the disclosure requirements for joint operations and information that enables users of financial statements to evaluate the nature of, and risks associated with, structured entities that a reporting entity does not control.1

The effect of this was that IFRS 12 disclosure requirements replaced those contained in the previous versions of IAS 27, IAS 28 and IAS 31 except for the disclosure requirements that apply only when preparing separate financial statements, which remained in IAS 27. IFRS 12 also contains all disclosures that relate to consolidated financial statements (IFRS 10) and joint operations (IFRS 11). In addition, IFRS 12 includes disclosures related to unconsolidated structured entities (originally proposed to be within IFRS 10).

The IASB had stated that they have heard overwhelming support for the disclosure requirements of IFRS 12 and feel confident that they represent an improvement in the quality of financial reporting.2 At the time of writing the IASB staff is expected to start work on Post-implementation Review of IFRS 12 in 2019.

2 OBJECTIVE AND SCOPE OF IFRS 12

2.1 Objective

The stated objective of IFRS 12 is ‘to require an entity to disclose information that enables users of its financial statements to evaluate:

  1. the nature of, and risks associated with, its interest in other entities; and
  2. the effects of those interests on its financial position, financial performance and cash flows’. [IFRS 12.1].

To meet the objective of the standard, an entity must disclose:

  1. the significant judgements and assumptions it has made in determining:
    1. the nature of its interest in another entity or arrangement;
    2. the type of joint arrangement in which it has an interest;
    3. that it meets the definition of an investment entity if applicable; and
  2. information about its interests in:
    1. subsidiaries;
    2. joint arrangements and associates; and
    3. 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 lead to diversity in practice where the wording of a disclosure requirement is 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].

2.2 Scope

IFRS 12 applies to any entity that has an interest in any of the following:

  1. subsidiaries;
  2. joint arrangements (i.e. joint operations or joint ventures);
  3. associates; and
  4. 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 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’. As discussed in more detail in Chapter 6 at 5, 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 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.

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.

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, investment management fees and other fees based on assets under management are treated as variable interests.

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:

  1. restricted activities;
  2. a narrow and well-defined objective, such as:
    1. to effect a tax-efficient lease;
    2. to carry out research and development activities;
    3. to provide a source of capital or funding to an entity; or
    4. to provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors.
  3. insufficient equity to permit the structured entity to finance its activities without subordinated financial support; and
  4. financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches). [IFRS 12.B22].

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. This will require the exercise of judgement by reporting entities; therefore, there may be diversity in practice about what constitutes a ‘similar’ right and therefore whether an entity is a structured entity. One example of ‘similar’ rights is an investment fund for which 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, and therefore whether the investment fund is a structured entity, would depend on the number of investors who would need to collaborate in order to force the vote and other facts and circumstances. See Chapter 6 at 4 for additional guidance on identifying the significant activities of an entity, the rights to make decisions about those activities, and evaluating whether those rights are substantive.

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 features or attributes are often present in a structured entity.

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 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, whose total equity is not sufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity is structured with non-substantive voting rights. 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:

  1. subsidiaries;
  2. joint ventures;
  3. joint operations;
  4. associates; and
  5. 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].

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. See Chapter 6 for additional guidance.

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. See Chapter 12 for additional guidance.

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. See Chapter 11 for additional guidance.

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 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, depending on the purpose and design of the 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. 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].

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

The standard clarifies that certain interests are not within the scope of IFRS 12.

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. See Chapter 12 for more guidance on assessing joint control and Chapter 11 for guidance on assessing significant influence.

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:

  1. interests in associates or joint ventures measured at fair value through profit or loss in accordance with IAS 28; or
  2. 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. See Chapter 49 for more guidance on recognition and initial measurement of applying 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:

  1. that it has control of another entity, i.e. an investee as described in paragraphs 5 and 6 of IFRS 10;
  2. that it has joint control of an arrangement or significant influence over another entity; and
  3. 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].

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.

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.

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 investment entity. [IFRS 12.9A]. The definition of an investment entity is discussed in Chapter 6 at 10.1. The following extract from 3i Group plc's financial statements illustrates disclosure of these significant judgements and assumptions.

IAS 1 requires an entity to disclose the judgements that management has made in the process of applying the entity's accounting policies and that have the most significant effect on the amounts recognised in the financial statements. [IAS 1.122]. IFRS 12 adds to those general requirements by specifically requiring an entity to disclose all significant judgements and estimates made in determining the nature of its interest in another entity or arrangement, and in determining the type of joint arrangement in which it has an interest. The IASB's intention is that disclosure should be required for all situations in which an entity exercises significant judgement in assessing the nature of its interest in another entity. [IFRS 12.BC16].

There is no requirement for a reporting entity to disclose significant judgements and assumptions made in determining whether an entity in which it has an interest is a structured entity. Such a judgement or assumption affects disclosure only and not the determination of control, joint control or significant influence. However, where such judgements or assumptions have a significant impact on the volume of disclosures in the financial statements we believe that it would be useful for a reader of the financial statements for such judgements or assumptions to be disclosed, consistent with the requirements of IAS 1.

There is no requirement to disclose quantitative information to help assess the accounting consequences of an entity's decision to consolidate (or not consolidate) another entity. IFRS 3 – Business Combinations – already requires disclosures about the nature and effect of a business combination when an entity obtains control of another entity. Where an entity requires significant judgement to conclude that it does not control another entity, the IASB observed that the entity will often conclude that it has either joint control or significant influence over that other entity. IFRS 12 already requires disclosures of quantitative information about an entity's interests in joint ventures and associates and information about risk exposures to unconsolidated structured entities. Therefore, based on this, the IASB concluded that there was no need for a separate disclosure requirement. [IFRS 12.BC19].

4 DISCLOSURE OF INTERESTS IN SUBSIDIARIES

An entity must disclose information that enables users of its consolidated financial statements

  1. to understand:
    1. the composition of the group; and
    2. the interest that non-controlling interests have in the group's activities and cash flows; and
  2. to evaluate:
    1. the nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of the group;
    2. the nature of, and changes in, the risks associated with its interests in consolidated structured entities;
    3. the consequences of changes in its ownership interest in a subsidiary that do not result in loss of control; and
    4. the consequences of losing control of a subsidiary during the reporting period. [IFRS 12.10].

4.1 Disclosure about the composition of the group

IFRS 12 does not elaborate on what is meant by information that enables users ‘to understand’ the composition of the group. Judgement will therefore be required as to the extent of the disclosures made.

It may be helpful to users of the financial statements to illustrate the composition of the group via a diagram or group organisation chart.

The Basis for Conclusions implies that the IASB does not intend that entities should be required to disclose financial information about subsidiaries with immaterial non-controlling interests. Separate financial and non-financial disclosures are required for subsidiaries with material non-controlling interests (see 4.2 below). [IFRS 12.BC28].

In interpreting the requirement to disclose information that enables users to understand the composition of the group for subsidiaries with immaterial or no non-controlling interests, preparers might wish to refer to the non-financial disclosures required for subsidiaries with non-controlling interests that are material to the entity (see 4.2 below). Applying these disclosures to other material subsidiaries would mean disclosing:

    • the names of those entities;
    • the principal place of business (and country of incorporation, if different) of those entities; and
    • the proportion of ownership interest (and the proportion of the voting rights, if different) held in those entities.

Users of the financial statements might also benefit from a description of the nature of the operations and principal activities of each material subsidiary and an indication of the operating segment(s) to which each material subsidiary has been allocated. A description of the nature of the group's operations and its principal activities is required by IAS 1. [IAS 1.138(b)].

Where the financial statements of a subsidiary used in the preparation of the consolidated financial statements are as of a date or for a period that is different from that of the consolidated financial statements, an entity must disclose:

  • the date of the reporting period of the financial statements of that subsidiary; and
  • the reason for using a different date or period. [IFRS 12.11].

The following extract shows UBS AG's disclosure of individually significant subsidiaries.

4.2 Disclosure of interests of non-controlling interests

A reporting entity must disclose, for each of its subsidiaries that have non-controlling interests that are material:

  1. the name of the subsidiary;
  2. the principal place of business (and country of incorporation if different from the principal place of business) of the subsidiary;
  3. the proportion of ownership interests held by non-controlling interests;
  4. the proportion of voting rights held by non-controlling interests, if different to the proportion of ownership interests held;
  5. the profit or loss allocated to the non-controlling interests of the subsidiary during the reporting period;
  6. accumulated non-controlling interests of the subsidiary at the end of the reporting period; and
  7. summarised financial information about the subsidiary (see below). [IFRS 12.12].

The summarised financial information required to be disclosed is as follows:

  1. dividends paid to non-controlling interests; and
  2. summarised financial information about the assets, liabilities, profit or loss and cash flows of the subsidiary that enables users to understand the interest that non-controlling interests have in the group's activities and cash flows. The information might include but is not limited to, for example, current assets, non-current assets, current liabilities, non-current liabilities, revenue, profit or loss and total comprehensive income. [IFRS 12.B10]. The summarised financial information must be presented before inter-company eliminations. [IFRS 12.B11].

The IASB believes that these disclosures will help users when estimating future profit or loss and cash flows by identifying, for example, the assets and liabilities that are held by subsidiaries, the risk exposures of particular group entities (e.g. by identifying which subsidiaries hold debt) and those subsidiaries that generate significant cash flows. [IFRS 12.BC27]. From this, one could infer that the summarised financial information should disclose significant amounts of bank loans separately from other liabilities.

The IASB does not believe the requirement to provide information about subsidiaries with material non-controlling interests is particularly onerous on the grounds that an entity should have the information available in preparing its consolidated financial statements. [IFRS 12.BC29].

Non-controlling interest is equity in a subsidiary not attributable, directly or indirectly, to a parent. [IFRS 10 Appendix A]. This means that these disclosures do not apply to instruments that might have the legal characteristics of equity, but which are classified as financial liabilities under IFRS. This would also apply to instruments that are classified as equity in the separate financial statements of a subsidiary but classified as financial liabilities in the consolidated financial statements. Similarly, when a parent has concluded that it already has a present ownership interest in shares held by a non-controlling interest by virtue of call or put options in respect of those shares (see Chapter 7 at 6), then IFRS 12 disclosures in respect of those shares are not required by the parent because there is no non-controlling interest in the financial statements.

The standard is clear that this information is required only in respect of non-controlling interests that are material to the reporting entity (i.e. the group). A subsidiary may have a significant non-controlling interest in a lower tier subsidiary, but disclosure is not required if that interest is not material at group level. Similarly, these disclosures do not apply to non-controlling interests that are material in aggregate but not individually.

In January 2015, the Interpretations Committee discussed a request to clarify the level at which the financial information required by (e) to (g) above should be provided where a subsidiary has non-controlling interests that are material to the group. The issue was whether the information provided should be either:

  • at the subsidiary (i.e. entity) level based on the separate financial statements of the subsidiary; or
  • at a subgroup level for the subgroup of the subsidiary and based on either (i) the amounts of the subgroup included in the consolidated financial statements of the parent or, (ii) the amounts included in the consolidated financial statements of the subgroup. In both (i) and (ii), transactions and balances between the subgroup and other subsidiaries of the reporting entity outside the subgroup would not be eliminated.

The Interpretations Committee noted that the decision on which approach is used to present the disclosures required by (e) to (g) above should reflect the one that best meets the disclosure objective (see (a) at 4 above) in the circumstances.

In respect of (e) and (f), the Interpretations Committee observed that a reporting entity should apply judgement in determining the level of disaggregation of information about subsidiaries that have material non-controlling interest. That is, whether:

  • the entity presents this information about the subgroup of the subsidiary; or
  • whether it is necessary in achieving the disclosure objective to disaggregate the information further to present information about the individual subsidiaries that have material non-controlling interest within that subgroup.

In respect of (g) above, the Interpretations Committee observed that, in order to meet the overall disclosure requirement, information would need to be prepared on a basis that was consistent with the information included in the consolidated financial statements from the perspective of the reporting entity. This would mean, for example, that if the subsidiary was acquired in a business combination, the amounts disclosed should reflect the effects of the acquisition accounting (e.g. goodwill and fair value adjustments). The Interpretations Committee further observed that in providing the information, an entity would apply judgement in determining whether this information was presented at a subgroup level or whether further disaggregation was necessary about individual subsidiaries that have material non-controlling interest within that subgroup. However, the Interpretations Committee noted that the information supplied would include transactions between the subgroup/subsidiary and other members of the reporting entity's group without elimination, but that transactions within the subgroup would be eliminated.

On the basis of the above analysis, the Interpretations Committee concluded that neither an Interpretation nor an amendment to IFRS 12 was necessary and decided not to add the issue to its agenda.3

Robert Bosch Gesellschaft mit beschränkter Haftung's financial statements illustrate disclosure of summarised financial information in respect of subsidiaries that have material non-controlling interests. Similar information is also disclosed for 2017 that is not reproduced in the extract.

IFRS 12 does not address disclosure of non-controlling interests in the primary statements. IAS 1 requires disclosure of total non-controlling interests within equity in the statement of financial position, profit or loss and total comprehensive income for the period attributable to non-controlling interests and a reconciliation of the opening and closing carrying amount of each component of equity (which would include non-controlling interests) in the statement of changes in equity. [IAS 1.54, 81B, 106].

4.3 Disclosure of the nature and extent of significant restrictions

An entity must disclose:

  1. significant restrictions (e.g. statutory, contractual and regulatory restrictions) on its ability to access or use assets and settle the liabilities of the group, such as:
    1. those that restrict the ability of a parent or its subsidiaries to transfer cash or other assets to (or from) other entities within the group;
    2. guarantees or other requirements that may restrict dividends and other capital distributions being paid, or loans and advances being made or repaid, to (or from) other entities within the group;
  2. the nature and extent to which protective rights of non-controlling interests can significantly restrict the entity's ability to access or use the assets and settle the liabilities of the group (such as when a parent is obliged to settle liabilities of a subsidiary before settling its own liabilities, or approval of non-controlling interests is required either to settle the assets or settle the liabilities of a subsidiary); and
  3. the carrying amounts in the consolidated financial statements of the assets and liabilities to which the restrictions apply. [IFRS 12.13].

These requirements were included in IFRS 12 to clarify that information disclosed in respect of significant restrictions of subsidiaries to transfer funds should include the nature and extent to which protective rights of non-controlling interests can restrict an entity's ability to access and use the assets and settle the liabilities of a subsidiary. [IFRS 12.BC31].

The Basis for Conclusions clarifies that these disclosures are intended to be limited to information about the nature and effect of significant restrictions on an entity's ability to access and use assets or settle liabilities of the group. They are not intended, in the IASB's opinion, to require an entity to disclose, for example, a list of all the protective rights held by non-controlling interests that are embedded in law and regulation. [IFRS 12.BC32].

The IASB also considers that the restrictions required to be disclosed by IFRS 12 are those that exist because of legal boundaries within the group, such as restrictions on transferring cash between group entities. They are not, in the IASB's opinion, intended to replicate those in other IFRSs relating to restrictions such as those in IAS 16 – Property, Plant and Equipment – or IAS 40 – Investment Property. [IFRS 12.BC33].

Deutsche Bank AG makes the following disclosures about significant restrictions to access or use the group's assets:

4.4 Disclosure of the nature of the risks associated with interests in consolidated structured entities

IFRS 12 requires a number of disclosures in respect of financial or other support provided to consolidated structured entities. Essentially, the standard requires disclosure of certain intra-group transactions that are eliminated in consolidation and details of certain commitments by a group to itself. For groups with a number of structured entities, it is important that consolidation reporting packages capture the necessary information, as these transactions may have already been eliminated on consolidation.

The IASB concluded that it would help users of financial statements in understanding an entity's exposure to risks if the entity disclosed the terms of contractual arrangements that could require it to provide financial support to a consolidated structured entity, including events or circumstances that could expose the entity to a loss. [IFRS 12.BC34]. In determining how to meet this disclosure objective, we believe that the differing shares held by non-controlling interests in those subsidiaries and the profit and comprehensive income attributable to non-controlling interests should be considered.

For the same reasons, the IASB concluded that an entity should disclose its risk exposure from non-contractual obligations to provide support to both consolidated and unconsolidated structured entities. [IFRS 12.BC35].

The detailed disclosures that are required in respect of interests in consolidated structured entities are discussed at 4.4.1 to 4.4.4 below.

4.4.1 Terms of contractual arrangements to provide financial support to consolidated structured entities

An entity must disclose the terms of any contractual arrangements that could require the parent or its subsidiaries to provide financial support to a consolidated structured entity, including events or circumstances that expose the reporting entity to a loss (e.g. liquidity arrangements or credit rating triggers associated with obligations to purchase assets of the structured entity or provide financial support). [IFRS 12.14].

As discussed at 4.4 above, the IASB's intent seems to be to address circumstances in which differing shares held by non-controlling interests affect the profit and comprehensive income attributable to non-controlling interests.

The following extract from HSBC Holdings plc's financial statements illustrates disclosure of financial support to consolidated structured entities.

4.4.2 Financial or other support to consolidated structured entities with no contractual obligation

If, during the reporting period a parent or any of its subsidiaries has, without having any contractual obligation to do so, provided financial or other support to a consolidated structured entity (e.g. purchasing assets of or instruments issued by the structured entity), the entity must disclose:

  1. the type and amount of support provided, including situations in which the parent or its subsidiaries assisted the structured entity in obtaining financial support; and
  2. the reasons for providing the support. [IFRS 12.15].

The transactions requiring disclosure are intra-group transactions eliminated on consolidation.

‘Support’ is not defined in IFRS. A literal reading of ‘purchasing assets of or instruments issued’ is that any transfer of consideration to a structured entity in exchange for an asset is the provision of support requiring disclosure by the standard. The Basis for Conclusions explains that the IASB did not define ‘support’ because a definition of support would either be so broad that it would be an ineffective definition or invite structuring so as to avoid the disclosure. The IASB believes that support is widely understood as a provision of resources to another entity, either directly or indirectly. In the case of implicit agreements, the support is provided without having the contractual obligation to do so. However, in order to address respondents’ concerns about distinguishing the provision of financial support from any other commercial transaction, the IASB clarified that disclosure is required when an entity has provided non-contractual support to a consolidated or unconsolidated structured entity in which it previously had or currently has an interest. [IFRS 12.BC105‑106].

Examples of the type of support that the IASB envisages being disclosed for unconsolidated structured entities (see 6.3 below) are liquidity arrangements or credit rating triggers associated with obligations to purchase assets of the structured entity or provide financial support. These examples imply that the IASB does not intend transactions in the ordinary course of business to be caught by the requirement to disclose support provided to consolidated structured entities. By ‘asset purchase’, it is implied that they are referring to a ‘forced’ purchase caused by, for example, liquidity or credit rating triggers.

Interpreting financial or other support is therefore likely to involve judgement. One possible interpretation is that ‘support’ includes:

  • any transaction involving the gifting of funds;
  • an equity investment;
  • a long-term loan;
  • forgiveness of debt;
  • a transaction carried out on non-market terms resulting in a net outflow of resources from the reporting entity;
  • a transaction not made in the ordinary course of business; or
  • implicit or explicit guarantees of a structured entity's performance.

IFRS 12 does not explain what is meant by ‘other support’ and whether this extends to such non-financial support as the provision of human resources or management services outside of the ordinary course of business.

These disclosures are also required in respect of unconsolidated structured entities. See 6.2.2 and 6.3 below.

4.4.3 Financial or other support to unconsolidated structured entities which resulted in consolidation of those entities

If, during the reporting period, a parent or any of its subsidiaries has, without having a contractual obligation to do so, provided financial or other support to a previously unconsolidated structured entity and that provision of support resulted in the entity controlling the structured entity, the entity (i.e. the reporting entity) must disclose an explanation of the relevant factors in making that decision. [IFRS 12.16].

The comments at 4.4.2 above regarding the definition of ‘support’ apply here also.

4.4.4 Current intentions to provide financial or other support

An entity must disclose any current intentions to provide financial or other support to a consolidated structured entity, including intentions to assist the structured entity in obtaining financial support. [IFRS 12.17].

IFRS 12 does not define ‘intentions’. The Basis for Conclusions indicates that it means ‘the entity has decided’ to provide financial support (i.e. it has current intentions to do this). [IFRS 12.BC104]. This implies that a decision to provide support has been approved at an appropriately senior level at the entity. Judgement will be required by entities in interpreting this requirement and defining the meaning of ‘intention’ in this context. The wording in the Basis of Conclusions does not require any such ‘intention’ to have been communicated to the structured entity that will receive the support or that there has been established a constructive obligation as defined in IAS 37 – Provisions, Contingent Liabilities and Contingent Assets.

The comments at 4.4.2 above in respect of the definition of ‘support’ apply here also.

These disclosures are also required in respect of unconsolidated structured entities. See 6.2.2 below.

4.5 Disclosure of changes in ownership interests in subsidiaries

4.5.1 Changes that do not result in loss of control

An entity must present a schedule that shows the effects on the equity attributable to owners of the parent of any changes in its ownership interests in a subsidiary that do not result in loss of control. [IFRS 12.18]. This schedule must be presented in addition to the information required by IAS 1 in the statement of changes in equity.

IAS 1 requires an entity to present, for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from transactions with owners in their capacity as owners and changes in ownership interests with subsidiaries that do not result in loss of control. [IAS 1.106(d)].

Despite this existing disclosure requirement, the IASB decided to require that if a parent has equity transactions with non-controlling interests, it should disclose in a separate schedule the effects of those transactions on the equity of the owners of the parent. See Chapter 7 for more guidance on the accounting for equity transactions with non-controlling interests.

The IASB's rationale for this duplication is that many respondents to a 2005 exposure draft, which proposed amendments to a previous version of IAS 27, requested more prominent disclosure of the effects of transactions with non-controlling interests on the equity of the owners of the parent. In addition, a schedule showing the effects on the controlling interest's equity of changes in a parent's ownership interests in a subsidiary that do not result in loss of control is required by US GAAP. [IFRS 12.BC38‑39].

IFRS 12 does not prescribe a format for this additional schedule. An example of the type of disclosure required is illustrated below.

4.5.2 Changes that do result in loss of control

An entity must disclose the gain or loss, if any, resulting from the loss of control of a subsidiary calculated in accordance with paragraph 25 of IFRS 10, and:

  1. the portion of that gain or loss attributable to measuring any investment in the retained subsidiary at its fair value at the date that control is lost; and
  2. the line item(s) in profit or loss in which the gain or loss is recognised (if not presented separately). [IFRS 12.19].

See Chapter 7 at 3 for more guidance on the accounting the loss of control of a subsidiary under IFRS 10.

4.6 Disclosures required by investment entities

An investment entity that is required by IFRS 10 to apply the exception from consolidation and instead account for its investment in a subsidiary at fair value through profit or loss must disclose that fact. [IFRS 12.19A].

If an investment entity has a subsidiary that it consolidates because that subsidiary is not an investment entity and whose main purpose and activities are providing services to the investment entity's investment activities, the disclosure requirements in IFRS 12 apply to the financial statements in which the investment entity consolidates that subsidiary. [IFRS 12.BC61I].

4.6.1 Disclosures about the composition of the group

For each unconsolidated subsidiary, an investment entity must disclose:

  1. the subsidiary's name;
  2. the principal place of business (and country of incorporation if different from the principal place of business) of the subsidiary; and
  3. the proportion of ownership interest held by the investment entity and, if different, the proportion of voting rights held. [IFRS 12.19B].

If an investment entity is the parent of another investment entity, the parent must also provide the disclosures (a) to (c) above for investments that are controlled by its investment entity subsidiary. The disclosures may be provided by including, in the financial statements of the parent, the financial statements of the subsidiary that contain this information. [IFRS 12.19C].

We would expect preparers to apply judgement where the list of subsidiaries is extensive. There is no explicit requirement in IFRS 12 to disclose this information in respect of consolidated subsidiaries (see 4.1 above).

4.6.2 Disclosures required when investment entity status changes

When an entity becomes, or ceases to be, an investment entity it must disclose:

  • the change of investment entity status; and
  • the reasons for the change.

In addition, an entity that becomes an investment entity must disclose the effect of the change of status on the financial statements for the period presented, including:

  • the total fair value, as of the date of change of status, of the subsidiaries that cease to be consolidated;
  • the total gain or loss, if any, calculated in accordance with paragraph B101 of IFRS 10; and
  • the line item(s) in profit or loss in which the gain or loss is recognised (if not presented separately). [IFRS 12.9B].

The accounting effect of becoming or ceasing to become an investment entity is discussed in Chapter 6 at 10.3.1.

4.6.3 Disclosures required in respect of significant restrictions, commitments and financial and other support

An investment entity must disclose:

  • the nature and extent of any significant restrictions (e.g. resulting from borrowing arrangements, regulatory requirements or contractual arrangements) on the ability of an unconsolidated subsidiary to transfer funds to the investment entity in the form of cash dividends or to repay loans or advances made to the unconsolidated subsidiary by the investment entity; and
  • any current commitments or intentions to provide financial or other support to an unconsolidated subsidiary, including commitments or intentions to assist the subsidiary in obtaining financial support. [IFRS 12.19D].

If, during the reporting period, an investment entity or any of its subsidiaries has, without having a contractual obligation to do so, provided financial or other support to an unconsolidated subsidiary (e.g. purchasing assets of, or instruments issued by, the subsidiary or assisting the subsidiary in obtaining financial support), the entity must disclose:

  • the type and amount of support provided to each unconsolidated subsidiary; and
  • the reasons for providing the support. [IFRS 12.19E].

In addition, an investment entity must disclose the terms of any contractual arrangements that require the entity or its unconsolidated subsidiaries to provide financial support to an unconsolidated, controlled, structured entity, including events and circumstances that could expose the reporting entity to a loss (e.g. liquidity arrangements or credit rating triggers associated with obligations to purchase assets of the structured entity or to provide financial support). [IFRS 12.19F].

If during the reporting period an investment entity or any of its unconsolidated subsidiaries has, without having a contractual obligation to do so, provided financial or other support to an unconsolidated, structured entity that the investment entity did not control, and if that provision of financial support resulted in the investment entity controlling the structured entity, the investment entity must provide an explanation of the relevant factors in reaching the decision to provide that support. [IFRS 12.19G].

These disclosures are similar to those required for consolidated subsidiaries including consolidated structured entities discussed at 4.3, 4.4.1, 4.4.2 and 4.4.4 above – see the comments in these sections.

4.6.4 Valuation methodologies and nature of investing activities

IFRS 12 does not require any disclosure of fair value measurements made by investment entities. This information is already required by IFRS 7 – Financial Instruments: Disclosures – and by IFRS 13 – Fair Value Measurement – when reporting investments at fair value through profit or loss or other comprehensive income in accordance with IFRS 9. [IFRS 12.BC61C].

5 DISCLOSURE OF INTERESTS IN JOINT ARRANGEMENTS AND ASSOCIATES

An entity must disclose information that enables users of its financial statements to evaluate:

  1. the nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with other investors with joint control of, or significant influence over, joint arrangements and associates; and
  2. the nature of, and changes in, the risks associated with its interests in joint ventures and associates. [IFRS 12.20].

These requirements, explained in detail at 5.1 and 5.2 below, apply in full to both consolidated financial statements and individual financial statements of entities with joint arrangements and associates.

A reporting entity that prepares separate financial statements, even if it does not prepare consolidated financial statements, is only required to comply with disclosures (a)(i) and (iii) and (b)(i) at 5.1 below. [IAS 27.16(b), (c)].

IFRS 12 does not address the presentation of joint ventures and associates in the primary statements. IAS 1 requires separate presentation of investments accounted for using the equity method on the face of the statement of financial position, although it does not require a split of those investments between joint ventures and associates. [IAS 1.54]. IAS 1 also requires a reporting entity's post tax share of the profit or loss of associates and joint ventures accounted for using the equity method to be disclosed on the face of the statement of comprehensive income. [IAS 1.82].

5.1 Disclosure of the nature, extent and financial effects of interests in joint arrangements and associates

An entity must disclose:

  1. for each joint arrangement and associate that is material to the reporting entity:
    1. the name of the joint arrangement or associate;
    2. the nature of the entity's relationship with the joint venture or associate (by, for example, describing the nature of the activities of the joint arrangement or associate and whether they are strategic to the entity's activities);
    3. the principal place of business (and country of incorporation, if applicable and different from the principal place of business) of the joint arrangement or associate; and
    4. the proportion of ownership interest held by the entity and, if different, the proportion of voting rights held (if applicable).
  2. for each joint venture (but not a joint operation) and associate that is material to the reporting entity:
    1. whether the investment in the joint venture or associate is measured using the equity method or at fair value;
    2. summarised financial information about the joint venture or associate (see 5.1.1 below); and
    3. if the joint venture or associate is accounted for using the equity method, the fair value of the investment in the joint venture or associate, if there is a quoted market price for the investment.
  3. financial information (see 5.1.2 below) about the entity's investments in joint ventures and associates that are not individually material:
    1. in aggregate for all individually immaterial joint ventures and, separately;
    2. in aggregate for all individually immaterial associates. [IFRS 12.21].

Disclosures (b) and (c) are not required by an investment entity. [IFRS 12.21A].

In January 2015, the Interpretations Committee discussed a request to clarify the requirement described above to disclose summary financial information about material joint ventures and associates and its interaction with the aggregation principle of IFRS 12 (see 2.2.2 above). The issue was whether the summary financial information can be disclosed in aggregate for all material joint ventures and associates, or whether such information should be disclosed individually for each material joint venture or associate. The Interpretations Committee also discussed a request to clarify whether an investor should be excused from disclosing information related to a listed joint venture or associate if the local regulatory requirements prevented the investor from disclosing such information until the joint venture or associate has released its own financial statements. The Interpretations Committee noted that it expected the requirement to prepare summarised financial information about a joint venture or associate in IFRS 12 to lead to the disclosure of summarised information on an individual basis for each joint venture or associate that is material to the reporting entity. The Interpretations Committee observed that this reflects the IASB's intentions as described in the Basis for Conclusions to IFRS 12. The Interpretations Committee also noted that there is no provision in IFRS 12 that permits non-disclosure of this information (on the grounds of confidentially or local regulatory requirements) and that outreach performed indicated that there was no significant diversity observed in practice on this issue. Consequently, the Interpretations Committee determined that neither an Interpretation nor an amendment to a standard was necessary and decided not to add this issue to its agenda.4

Any entity must also disclose:

  1. the nature and extent of any significant restrictions (e.g. resulting from borrowing arrangements, regulatory requirements or contractual arrangements between investors with joint control of or significant influence over a joint venture or associate) on the ability of the joint ventures or associates to transfer funds to the entity in the form of cash dividends or to repay loans or advances made by the entity;
  2. when the financial statements of a joint venture or associate used in applying the equity method are as of a date or for a period that is different from that of the entity:
    1. the date of the end of the reporting period of the financial statements of that joint venture or associate; and
    2. the reason for using a different date or period.
  3. the unrecognised share of losses of a joint venture or associate, both for the reporting period and cumulatively, if the entity has stopped recognising its share of losses of the joint venture or associate when applying the equity method. [IFRS 12.22].

The implication from this wording is that these disclosures in respect of significant restrictions, reporting dates and unrecognised losses are required separately for each material joint venture or associate.

A summary of the disclosures required for individually material and, collectively for immaterial joint ventures and associates is shown in the table below.

Topic Material joint ventures and associates Individually immaterial joint ventures and associates
Accounting policy ✔ ×
Summarised financial information ✔ ✔
(in aggregate)
Fair value, if quoted market price is available ✔ ×
Restrictions on ability to transfer funds ✔ ✔
(in aggregate)
Date of financial statements, if different from entity ✔ ✔
(in aggregate)
Unrecognised share of losses ✔ ✔
(in aggregate)

5.1.1 Summarised financial information of individually material joint ventures and associates

The summarised financial information specified by (b)(ii) at 5.1 above for each material joint venture and associate is as follows:

  1. dividends received;
  2. summarised financial information for the joint venture or associate including, but not necessarily limited to:
    1. current assets;
    2. non-current assets;
    3. current liabilities;
    4. non-current liabilities;
    5. revenue;
    6. profit or loss from continuing operations;
    7. post-tax profit or loss from discontinued operations;
    8. other comprehensive income; and
    9. total comprehensive income. [IFRS 12.B12].

Additionally, for material joint ventures (but not associates) the following information must be disclosed:

  1. cash and cash equivalents included in current assets;
  2. current financial liabilities (excluding trade and other payables and provisions);
  3. non-current financial liabilities (excluding trade and other payables and provisions);
  4. depreciation and amortisation;
  5. interest income;
  6. interest expense; and
  7. income tax expense or income. [IFRS 12.B13].

The summarised financial information presented must be the 100 per cent amounts included in the IFRS financial statements of the joint venture or associate (and not the entity's share of those amounts). However, if the entity accounts for the joint venture or associate using the equity method:

  1. the amounts included in the IFRS financial statements of the joint venture or associate must be adjusted to reflect adjustments made by the entity when using the equity method, such as the fair value adjustments made at the time of acquisition and adjustments for differences in accounting policies (see Chapter 11 at 7); and
  2. the entity must provide a reconciliation of the summarised financial information presented to the carrying amount of its interest in the joint venture or associate. [IFRS 12.B14].

In January 2015, the Interpretations Committee discussed the basis on which an entity should prepare the required summarised financial information for joint ventures and associates. The Interpretations Committee observed that a reporting entity that has subsidiaries should present the summarised financial information required about a joint venture or associate that is material to the reporting entity based on the consolidated financial statements for the joint venture or associate. If it does not have subsidiaries, the presentation should be based on the financial statements of the joint venture or associate in which its own joint ventures or associates are equity-accounted. The Interpretations Committee noted that these views are consistent with paragraph 14 of IFRS 12, which requires that the amounts included in the financial statements of the joint venture or associate must be adjusted to reflect adjustments made by the reporting entity using the equity method (see (a) above). Consequently, the Interpretations Committee decided that neither an interpretation nor an amendment to a standard was necessary and decided not to add this issue to its agenda.5

The standard does not specify what components should be included in the reconciliation required by (b) above. As clarified by the Interpretations Committee, the amounts included in the IFRS financial statements of the joint venture or associate should be adjusted to reflect fair value and accounting policy adjustments per (a) above. The implication is that this should also include the reporting entity's goodwill attributable to the joint venture or associate. However, this is only the goodwill attributable to the reporting entity's share of the joint venture or associate. The goodwill attributable to the rest of the joint venture or associate is presumably not known. Care will therefore be needed in presenting any such goodwill and in adequately explaining how the summarised IFRS financial information reconciles to the carrying amount of the reporting entity's interest in the joint venture or associate. Any pre-existing goodwill in the books of the joint venture or associate at the time it became a joint venture or associate of the reporting entity should be eliminated from the amounts in (a) as a fair value adjustment.

An entity may present the summarised financial information required on the basis of the joint venture's or associate's financial statements if:

  1. the entity measures its interest in the joint venture or associate at fair value in accordance with IAS 28; and
  2. the joint venture or associate does not prepare IFRS financial statements and preparation on that basis would be impracticable or cause undue cost. In that case, the entity must disclose the basis on which the summarised financial information has been prepared. [IFRS 12.B15].

This implies that the summarised financial information of the joint venture or associate can be prepared on a non-IFRS basis in those circumstances where both conditions (a) and (b) are satisfied.

Where a joint venture or associate measured at fair value in accordance with IAS 28 does prepare IFRS financial statements, or where the preparation of IFRS financial information would not be impracticable or cause undue cost, the summarised financial information disclosed should be the unadjusted IFRS numbers of the joint venture or associate (as compared to the adjusted basis used where the equity method is applied).

In principle, the IASB concluded that the disclosure requirements for joint ventures and associates should be the same for all entities regardless of whether those entities are venture capital organisations, mutual funds, unit trusts or similar entities which are permitted by IAS 28 to hold investments in joint ventures and associates at fair value. [IFRS 12.BC60].

Nevertheless, the minimum line item disclosures required for material associates are less than those required for material joint ventures on the grounds that, in the IASB's opinion, an entity is generally more involved with joint ventures than with associates because joint control means that an entity has a veto over decisions relating to the relevant activities of the joint venture. Accordingly, the IASB considers that the different nature of the relationship between a joint venturer and its joint ventures from that between an investor and its associates warrants a different level of detail in the disclosures of summarised financial information. [IFRS 12.BC50‑51].

IFRS 12 requires that an entity should present the summarised financial information for each material joint venture on a ‘100 per cent’ basis and reconcile that to the carrying amount of its investment in the joint venture or associate. An alternative would be to present summarised financial information for each material joint venture on the basis of the reporting entity's proportionate interest in the joint venture. However, the IASB rejected that alternative approach on the grounds that it would be confusing to present the assets, liabilities and revenue of a joint venture or associate when the entity has neither rights to, nor obligations for, the assets and liabilities of the joint ventures or associates. [IFRS 12.BC49].

Summarised financial information is not required for material joint operations since assets and liabilities arising from joint operations are the reporting entity's own assets and liabilities and consequently are recognised separately in the entity's financial statements. They are accounted for in accordance with the requirements of applicable IFRSs, and are therefore subject to the disclosure requirements of those IFRSs. [IFRS 12.BC52]. See Chapter 12 at 6 for more guidance on the accounting for joint operations.

In the below extract, TOTAL S.A. disclose summarised financial information for the year 2018 for significant associates. Similar information is also provided for previous years 2017 and 2016 that is not reproduced in the extract.

5.1.2 Financial information of individually immaterial joint ventures and associates

An entity must disclose, in aggregate, the carrying amount of its interests in all individually immaterial joint ventures or associates that are accounted for using the equity method. An entity must also disclose separately the aggregate amount of its share of those joint ventures’ or associates’:

  1. profit or loss from continuing operations;
  2. post-tax profit or loss from discontinued operations;
  3. other comprehensive income; and
  4. total comprehensive income.

Separate disclosures are required for joint ventures and associates. [IFRS 12.B16].

IFRS 12 does not specifically require a reporting entity's share of (a) to (d) to be disclosed for material joint ventures or associates.

IFRS 12 clarifies that this financial information is not required when a joint venture or associate is held for sale in accordance with IFRS 5. [IFRS 12.B17].

In the below extract Bayer Aktiengesellschaft has provided a summary of aggregated information related to associates and joint ventures:

5.2 Risks associated with interests in joint ventures and associates

An entity must disclose:

  1. commitments that it has relating to its joint ventures separately from the amount of other commitments; and
  2. contingent liabilities (as defined in IAS 37) relating to its interests in joint ventures or associates (including its share of contingent liabilities incurred jointly with other investors with joint control of, or significant influence over, the joint ventures and associates) separately from the amount of other contingent liabilities.

5.2.1 Disclosure of commitments relating to joint ventures

IAS 24 – Related Party Disclosures – already requires aggregate commitments relating to joint ventures to be disclosed separately from other commitments. [IAS 24.18‑19]. IFRS 12 clarifies that the commitments required to be disclosed under IAS 24 include an entity's share of commitments made jointly with other investors with joint control of a joint venture. Commitments are those that may give rise to a future outflow of cash or other resources. [IFRS 12.B18].

IFRS 12 provides the following examples of unrecognised commitments that should be disclosed under IAS 24:

  1. unrecognised commitments to contribute funding or resources as a result of, for example:
    1. the constitution or acquisition agreements of a joint venture (that, for example, require an entity to contribute funds over a specific period);
    2. capital intensive projects undertaken by a joint venture;
    3. unconditional purchase obligations, comprising procurement of equipment, inventory or services that an entity is committed to purchasing from, or on behalf of, a joint venture;
    4. unrecognised commitments to provide loans or other financial support to a joint venture;
    5. unrecognised commitments to contribute resources to a joint venture, such as assets or services;
    6. other non-cancellable unrecognised commitments relating to a joint venture; and
  2. unrecognised commitments to acquire another party's ownership interest (or a portion of that ownership interest) in a joint venture if a particular event occurs or does not occur in the future. [IFRS 12.B19].

There is no requirement to disclose these commitments for individual joint ventures. However, IAS 24 requires disclosure of information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements. [IAS 24.18]. This implies that there should be separate disclosure of different types of significant commitments. IAS 24 does not require the names of any joint ventures to be disclosed.

In the below extract, Royal Dutch Shell plc has provided information about commitments made to joint ventures and associates:

5.2.2 Disclosure of contingent liabilities relating to joint ventures and associates

IFRS 12 requires separate disclosure of contingent liabilities relating to an entity's interests in joint ventures and associates from the amount of other contingent liabilities.

IAS 37 defines a contingent liability as an obligation that derives from an entity's actions where:

  1. by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and
  2. as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities. [IAS 37.10].

IAS 37 requires disclosure, for each class of contingent liability at the end of a reporting period, a brief description of the nature of the contingent liability and, where practicable:

  1. an estimate of its financial effect, measured under the requirements of the standard;
  2. an indication of the uncertainties relating to the amount or timing of any outflow; and
  3. the possibility of any reimbursement. [IAS 37.86].

IAS 37 further defines what is intended by ‘class’ and the circumstances in which aggregation of disclosures of contingent liabilities is appropriate.

Further detail on contingent liabilities is contained at Chapter 26.

6 DISCLOSURE OF INTERESTS IN UNCONSOLIDATED STRUCTURED ENTITIES

An entity must disclose information that enables users of its financial statements:

  1. to understand the nature and extent of its interests in unconsolidated structured entities; and
  2. to evaluate the nature of, and changes to, the risks associated with its interests in unconsolidated structured entities. [IFRS 12.24].

These disclosures are not required by an investment entity for an unconsolidated structured entity that it controls and for which it presents the disclosures required at 4.6 above. [IFRS 12.25A].

Disclosure requirements in respect of risks associated with interests in consolidated structured entities are discussed at 4.4 above.

As discussed at 2.2.2.D above, these disclosures also apply to interests in joint ventures and associates that are also structured entities, in addition to the disclosures required at 5 above for joint ventures and associates.

The information required by (a) and (b) above includes information about an entity's exposure to risk from involvement that it had with unconsolidated structured entities in previous periods (e.g. sponsoring the structured entity) even if the entity no longer has any contractual involvement with the structured entity at the reporting date. [IFRS 12.25].

Some of the disclosure requirements for unconsolidated structured entities overlap with those of IFRS 7, since many interests in unconsolidated structured entities are financial assets within the scope of IFRS 7. However, IFRS 12 disclosures describe an entity's risk exposures, but IFRS 7 requires disclosures about risks associated with financial instruments. IFRS 12 adopts a different perspective and requires an entity to disclose its exposure to risks from its interest in a structured entity. [IFRS 12.BC72].

6.1 Disclosure of the nature of interests in unconsolidated structured entities

6.1.1 Disclosure of the nature, purpose, size, activities and financing of structured entities

An entity must disclose qualitative and quantitative information about its interests in unconsolidated structured entities, including, but not limited to, the nature, purpose, size and activities of the structured entity and how the structured entity is financed. [IFRS 12.26].

The IASB concluded that this requirement should provide users with sufficient information about the assets held by structured entities and the funding of those assets without requiring specific disclosures of the assets of unconsolidated structured entities in which the entity has an interest in all circumstances. If relevant to an assessment of its exposure to risk, an entity would be required to provide additional information about the assets and funding of structured entities. [IFRS 12.BC96].

6.1.1.A Nature and purpose

Examples of the nature and purpose of a structured entity might include:

  • to manage balance sheet exposure and risk, including securitisation of assets;
  • to provide investors with a synthetic exposure to debt and equity instruments such as credit linked notes and equity linked notes;
  • to provide investors with a variety of investment opportunities through managed investment strategies; and
  • to obtain and facilitate funding.

Quilter plc discloses the nature, purpose and type of interest in unconsolidated structured entities in a tabular format as follows:

6.1.1.B Size

The requirement to disclose the size of a structured entity is often met by providing information about the total value of the assets of the entity. However, the Basis for Conclusions states that IFRS 12 does not require specific disclosure of the reported assets of unconsolidated structured entities in which the entity has an interest. [IFRS 12.BC96]. This suggests that other measures of size would be acceptable, including the notional value of securities issued by structured entities.

6.1.1.C Activities

When disclosing the activities of a structured entity, these activities should include the primary activities for which the entity was designed, which are the activities that significantly affect the entity's returns. See Chapter 6 at 3 and 4 for guidance on purpose and design of an investee and relevant activities, respectively, as described in IFRS 10.

For example, the activities described previously in SIC‑12, which we believe are still helpful, include:

  • providing a source of long-term capital to an entity or funding to support a reporting entity's ongoing major or central operations through issuing notes; or
  • providing a supply of goods and services that is consistent with a reporting entity's ongoing major or central operations which, without the existence of the structured entity, would have to be provided by the reporting entity itself.
6.1.1.D Financing

This disclosure requirement is not limited to financing provided by the reporting entity to the structured entity and would include financing received by the structured entity from unrelated third parties. It is also not limited to equity financing and includes all forms of financing that allow the structured entity to conduct its business activities.

Barclays Bank PLC's financial statements illustrate disclosures of financing of structured entities.

6.1.2 Disclosures of sponsored structured entities for which no interest is held at the reporting date

If an entity has sponsored an unconsolidated structured entity for which it does not disclose the risk information required by 6.2 below (e.g. because it does not have an interest in the entity at the reporting date), the entity must disclose:

  1. how it has determined which structured entities it has sponsored;
  2. income from those structured entities during the reporting period, including a description of the types of income presented; and
  3. the carrying amount (at the time of transfer) of all assets transferred to those structured entities during the reporting period. [IFRS 12.27].

The rationale for this disclosure requirement is that sponsoring a structured entity can create risks for a reporting entity, even though the entity may not retain an interest in the structured entity. The Basis for Conclusions states that ‘if the structured entity encounters difficulties, it is possible that the sponsor could be challenged on its advice or actions, or might choose to act to protect its reputation.’ [IFRS 12.BC87].

IFRS 12 does not define ‘sponsored’. However, SIC‑12 defined a sponsor as ‘the entity on whose behalf the SPE was created’. [SIC‑12.2]. An illustrative example in IFRS 10 uses the word ‘sponsors’ in a similar context when it states that ‘a decision maker (the sponsor) sponsors a multi-seller conduit’. In the IFRS 10 example, the sponsor establishes the terms of the conduit and manages the operations of the conduit for a market-based fee. [IFRS 10.B72 Example 16].

Determining whether the reporting entity is the sponsor of a structured entity will be a matter of individual facts and circumstances and may require judgement to be exercised. For example, a structured entity may have been created to achieve two possible objectives that could satisfy both the reporting entity and third party investors in the structured entity. Factors that may indicate that a reporting entity has sponsored a structured entity include:

    • the reporting entity established and set up the entity; and
    • the reporting entity was involved in the creation and design of the structured entity; or
    • the reporting entity is the majority user of the structured entity; or
    • the reporting entity's name appears in the name of the structured entity or on the products issued by the structured entity.

The information required by (b) and (c) above must be presented in a tabular format unless some other format is more appropriate and the sponsoring activities must be classified into relevant categories. [IFRS 12.28].

Many financial institutions define ‘sponsor’ for the purpose of their IFRS 12 disclosures as illustrated by this disclosure from HSBC Holdings plc's financial statements.

The information required by (a) and (b) above must be disclosed whether or not any assets were transferred to the structured entity during the reporting period. There is no time limit set for these disclosures so, in theory, they could continue indefinitely after the cessation of any interest in the structured entity. IFRS 12 does not specify whether (c) above refers to assets transferred to the structured entity by the reporting entity or to the total assets transferred to the structured entity irrespective of who the transferor may be. However, the Basis for Conclusions states that the IASB concluded that the asset information disclosed should refer not only to assets transferred by the sponsor but to all assets transferred to the structured entity during the reporting period. [IFRS 12.BC90].

Income received from structured entities would not be confined to the income derived from the reporting entity's ‘interest(s)’ as defined by IFRS 12, but would cover all types of income received and reported by the entity. The standard states that ‘income from a structured entity’ includes, but is not limited to:

  • recurring and non-recurring fees (structuring fees, management fees, placing agent fees, etc.);
  • interest;
  • dividends;
  • gains or losses on the remeasurement or derecognition of interests in structured entities; and
  • gains or losses from the transfer of assets or liabilities to the structured entity. [IFRS 12 Appendix A].

There is no requirement for a quantitative split of the fee income by type although it may be useful for users of the financial statements.

An illustrative example of the disclosures required by (a) to (c) above is shown below.

Aviva plc made the following disclosures in respect of investment management fees earned in respect of its asset management business.

6.2 Disclosure of the nature of risks of unconsolidated structured entities

The IASB decided that, although it agreed with the concept that an entity should generally be allowed to tailor its disclosures to meet the specific information needs of its users, disclosure requirements should contain a minimum set of requirements that should be applied by all entities. In making this decision, the IASB was convinced by comments from users who pointed out that without any specific disclosure requirements, comparability would be impaired and an entity might not disclose information that users find important. [IFRS 12.BC94].

These minimum disclosures are discussed at 6.2.1 and 6.2.2 below.

6.2.1 Disclosures of interests in structured entities and of the maximum exposure to loss from those interests

An entity must disclose, in a tabular form, unless another format is more appropriate, a summary of:

  1. the carrying amounts of the assets and liabilities recognised in its financial statements relating to its interests in unconsolidated structured entities;
  2. the line items in the statement of financial position in which those assets and liabilities are recognised;
  3. the amount that best represents the entity's maximum exposure to loss from its interests in unconsolidated structured entities, including how the maximum exposure to loss is determined. If an entity cannot quantify its maximum exposure to loss from its interests in consolidated structured entities it must disclose that fact and the reasons; and
  4. a comparison of the carrying amounts of the assets and liabilities of the entity that relate to its interests in unconsolidated structured entities and the entity's maximum exposure to loss from those entities. [IFRS 12.29].

Disclosure of an entity's maximum exposure to loss was considered necessary by the IASB as it was concerned that, if only information about expected losses was required, an entity might often identify a positive expected value of returns from its interests in unconsolidated structured entities and, as a consequence, would not disclose any loss exposure. [IFRS 12.BC97].

The IASB also decided to require an entity to disclose a comparison of the carrying amounts of the assets and liabilities in its statement of financial position and its maximum exposure to loss. This is because the information will provide users with a better understanding of the differences between the expected loss exposure and the expectation of whether it is likely that an entity will bear all or only some of the losses. The IASB reasoned that this information would help an entity explain why the maximum exposure to loss is unrepresentative of its actual exposure if that is the case. [IFRS 12.BC100].

IFRS 12 does not define maximum exposure to loss. The IASB decided not to provide such a definition of ‘loss’ but to leave it to the entity to identify what constitutes a loss in the particular context of that reporting entity. The entity should then disclose how it has determined maximum loss exposure. The IASB acknowledged that an entity might not always be able to calculate the maximum exposure to loss, such as when a financial instrument exposes an entity to theoretically unlimited losses. The IASB decided that when this is the case an entity should disclose the reasons why it is not possible to calculate the maximum exposure to loss. [IFRS 12.BC98‑99].

We believe that ‘maximum exposure to loss’ refers to the maximum loss that an entity could be required to record in its statement of comprehensive income as a result of its involvement with a structured entity. Further, this maximum possible loss must be disclosed regardless of the probability of such losses actually being incurred. IFRS 12 is silent on whether the maximum exposure is gross or net of collateral or hedging instruments held that would mitigate any loss. Consistent with the equivalent disclosures required by IFRS 7, we believe that the maximum exposure to loss should be disclosed gross of any collateral or hedging instruments and that separate disclosure should be made in respect of instruments held that would mitigate the loss on a net basis. [IFRS 7.36].

UBS AG makes the following disclosures in respect of its interests in unconsolidated structured entities.

6.2.2 Disclosures of actual and intended financial and other support to structured entities

If during the reporting period an entity has, without having a contractual obligation to do so, provided financial or other support to an unconsolidated structured entity in which it previously had or currently has an interest (for example, purchasing assets of or instruments issued by the structured entity), the entity must disclose:

  1. the type and amount of support provided, including situations in which the entity assisted the structured entity in obtaining financial support; and
  2. the reasons for providing the support. [IFRS 12.30].

An entity must also disclose any current intentions to provide financial or other support to an unconsolidated structured entity, including intentions to assist the structured entity in obtaining financial support. [IFRS 12.31].

See 4.4.2 and 4.4.4 above for discussion of these disclosure requirements.

Example 13.5 at 4.4.2 above is an illustrative disclosure of the provision of financial support to a structured entity.

6.3 Additional disclosures regarding the nature of risks from interests in unconsolidated structured entities

In addition to the requirements at 6.2 above, IFRS 12 also requires an entity to disclose additional information that is necessary to meet the disclosure objective to disclose information that allows users of a reporting entity's financial statements to evaluate the nature of, and changes to, the risks associated with its interests in unconsolidated structured entities. Examples of additional information that, depending on the circumstances, might be relevant to an assessment of the risks to which a reporting entity is exposed where it has an interest in an unconsolidated structured entity are:

  1. the terms of an arrangement that could require the entity to provide support to a unconsolidated structured entity (e.g. liquidity arrangements or credit rating triggers associated with obligations to purchase assets of the structured entity or provide financial support) including:
    1. a description of the events or circumstances that could expose the reporting entity to a loss;
    2. whether there are any terms that would limit the obligation;
    3. whether there are any other parties that provide financial support and, if so, how the reporting entity's obligation ranks with those of other parties;
  2. losses incurred by the entity during the reporting period relating to its interests in unconsolidated structured entities;
  3. the types of income the entity received during the reporting period from its interests in unconsolidated structured entities;
  4. whether an entity is required to absorb losses of an unconsolidated structured entity before other parties, the maximum limit of such losses for the entity and (if relevant) the ranking and amounts of potential losses borne by parties whose interests rank lower than the entity's interest in the unconsolidated structured entity;
  5. information about any liquidity requirements, guarantees or other commitments with third parties that may affect the fair value or risk of the entity's interests in unconsolidated structured entities;
  6. any difficulties an unconsolidated structured entity has experienced in financing its activities during the reporting period; and
  7. in relation to the funding of an unconsolidated structured entity, the forms of funding (e.g. commercial paper or medium term notes) and their weighted-average life. That information might include maturity analyses of the assets and funding of an unconsolidated structured entity if the structured entity has longer-term assets funded by shorter-term funding. [IFRS 12.B25‑26].

No prescriptive format is required for these disclosures. Therefore, a reporting entity will have to decide whether a tabular or narrative format is suitable depending on its individual circumstances. The examples above are not exhaustive.

The IASB does not intend each item in the list of examples above to apply in all circumstances. The IASB's intention regarding the disclosure of risk is that each entity should disclose information that is important when assessing that exposure but not to cloud the information with unnecessary detail that would be considered irrelevant. If an entity has a large exposure to risk because of transactions with a particular unconsolidated structured entity, then the Board would expect extensive disclosure about that exposure. In contrast, if the entity has very little exposure to risk, little disclosure would be required. Therefore, the list of additional information above is a list of examples of information that might be relevant and not a list of requirements that should be applied regardless of the circumstances. [IFRS 12.BC113‑114].

Given that this information is required in respect of structured entities that the reporting entity does not control, and over which it may not exercise significant influence, some of the disclosures suggested in respect of (d), (f) and (g) above may be difficult to provide. This is because they require current information about the activities of the structured entity, rather than information about the interests held by the reporting entity.

Comments on some of the suggested disclosures are at 6.3.1 to 6.3.7 below.

6.3.1 Disclosure of support

Example 13.5 above illustrates disclosure of a contractual arrangement that could require support to a structured entity.

Example 13.6 above illustrates disclosure of support provided to a structured entity where there is no contractual obligation to provide such support.

The meaning of ‘support’ is discussed at 4.4.2 above.

6.3.2 Disclosure of losses

The standard does not elaborate on ‘losses incurred’ but we believe that it refers to both realised and unrealised losses and losses recognised in both profit and loss and other comprehensive income. It may be informative to explain to users of the financial statements the line items in the primary statements in which the losses have been recognised. It would also be informative to disclose the aggregate losses incurred in respect of investments held at the reporting date as well as the losses incurred in the reporting period for those interests disposed of during the period.

6.3.3 Disclosure of types of income received

This disclosure is similar to the disclosure required at 6.1.2 above in respect of unconsolidated structured entities for which the reporting entity does not have an interest at the reporting date. However, (c) above refers only to the types of income received and does not refer to the need for a specific quantification of the income received.

‘Income from a structured entity’ includes, but is not limited to:

  • recurring and non-recurring fees (structuring fees, management fees, placing agent fees, etc.);
  • interest;
  • dividends;
  • gains or losses on the remeasurement or derecognition of interests in structured entities; and
  • gains or losses from the transfer of assets or liabilities to the structured entity. [IFRS 12 Appendix A].

6.3.4 Disclosure of ranking and amounts of potential losses

Disclosure is required of the maximum limit of losses for a reporting entity where a reporting entity is required to absorb losses of a structured entity before other parties. This requirement is likely to be relevant for reporting entities which hold notes in securitised structured entities or where the interests in the structured entity are held are in the form of multiple contractually linked or ‘tranched’ notes.

An example of the type of disclosure that could be made is shown below.

6.3.5 Disclosure of liquidity arrangements

This disclosure might include:

  • liquidity arrangements, guarantees or other commitments provided by third parties to the structured entity which affect the fair value or risk of the reporting entity's interests in the structured entity; and
  • liquidity arrangements, guarantees or other commitments provided by third parties to the reporting entity which affect the risks of the reporting entity's interests in the structured entity.

We do not believe that this disclosure is intended to include liquidity arrangements, guarantees or other commitments made by the structured entity to third parties as while an arrangement provided to a third party may itself qualify as an interest in a structured entity, it would not normally affect the fair value of an entity's interests in an unconsolidated structured entity.

6.3.6 Disclosure of funding difficulties

Disclosure of ‘any difficulties’ that a structured entity has experienced in financing its activities during a reporting period could potentially be wide-ranging. In practice, we believe that such a disclosure is likely to focus on issues of debt (including short-term commercial paper) and equity securities that have failed either in whole or in part.

6.3.7 Disclosure of the forms of funding of an unconsolidated structured entity

This disclosure appears to refer to the overall funding of the structured entity including forms of funding in which the reporting entity has not participated. A tabular presentation may be the most appropriate way of making this disclosure.

References

  1.   1 IASB Update, IASB, February 2010, pp.1‑2.
  2.   2 Effect analysis: IFRS 10 – Consolidated Financial Statements and IFRS 12 – Disclosure of Interests in Other Entities, IASB, September 2011, p.11.
  3.   3 IFRIC Update, January 2015, p.6.
  4.   4 IFRIC Update, January 2015, p.7.
  5.   5 IFRIC Update, January 2015, p.7.
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