IFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES

1 INTRODUCTION

IFRS 12 sets out the disclosure requirements for interests in subsidiaries, joint arrangements, associates or unconsolidated structured entities. In general, the standard only applies to the entity's consolidated financial statements (IFRS 12.6b). According to IFRS 12, the term “interest in another entity” refers to contractual and non-contractual involvement (e.g. through equity instruments) that exposes an entity to variability of returns from the performance of the other entity (IFRS 12.Appendix A and 12.B7).

The new standard has to be applied in the financial statements as at Dec 31, 2013 (if the entity's reporting periods start on Jan 01 and end on Dec 31). Earlier application is permitted by the IASB (IFRS 12.C1). However, in the European Union, new IFRSs have to be endorsed by the European Union before they can be applied. There has been no endorsement of IFRS 12 as yet.

The general objective of IFRS 12 is to require an entity to disclose information that enables evaluation of (IFRS 12.1):

• the nature of, and risks associated with, its interests in other entities, and
• the effects of those interests on its financial position, financial performance, and cash flows.

In order to meet the objective, an entity has to disclose (IFRS 12.2):

• the significant judgments and assumptions the entity has 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 (see Section 3.1), and
• information about its interests in:
  • subsidiaries (see Section 3.2),
  • joint arrangements (i.e. joint operations or joint ventures)1 and associates (see Section 3.3), and
  • unconsolidated structured entities (i.e. structured entities that are not controlled by the entity) (see Section 3.4).

2 THE TERM “STRUCTURED ENTITY”

IFRS 12 introduces the term “structured entity,” which is used in different sections of the standard. Hence, it is necessary to explain this term before discussing the individual disclosure requirements of IFRS 12. A structured entity is defined as 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) (IFRS 12.Appendix A and 12.B21). The relevant activities are the activities of the investee that significantly affect the investee's returns (IFRS 10.10 and 10.Appendix A).2

A structured entity often has some or all of the following characteristics (IFRS 12. B22):

• Restricted activities.
• A narrow and well-defined objective (e.g. to carry out research and development activities, effect a tax-efficient lease, provide a source of capital or funding to an entity or provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors).
• Insufficient equity to permit the structured entity to finance its activities without subordinated financial support.
• Financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches).

The following are examples of entities that are regarded as structured entities (IFRS 12. B23):

• Securitization vehicles.
• Asset-backed financings.
• Some investment funds.

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).

The IASB notes that the type of entity that is characterized by IFRS 12 as a structured entity is unlikely to differ significantly from an entity that SIC 12 described as a special purpose entity (SPE) (IFRS 12.BC82 and 12.BC84).3

3 THE INDIVIDUAL DISCLOSURE REQUIREMENTS OF IFRS 12

3.1 Significant Judgments and Assumptions

It is necessary to disclose information about significant judgments and assumptions the entity has made in determining (IFRS 12.7):

• that it has control of an investee according to IFRS 10,4

• that it has joint control of an arrangement according to IFRS 115 or significant influence over another entity according to IAS 28,6 and

• the type of joint arrangement according to IFRS 11 (i.e. joint operation or joint venture)7 when the arrangement has been structured through a separate vehicle.

In order to comply with these requirements, an entity has to disclose, for example, significant judgments and assumptions made in determining that (IFRS 12.9):

• it controls another entity even though it holds less than half of the voting rights of the other entity.
• it does not have significant influence even though it holds 20% or more of the voting rights of another entity.

3.2 Interests in Subsidiaries

It is necessary to disclose information that enables users of the entity's consolidated financial statements to understand the following (IFRS 12.10a):

• The composition of the group.
• The interest that non-controlling interests have in the group's activities and cash flows. For example, an entity is, among others, required to disclose the following for each of its subsidiaries that have non-controlling interests that are material to the reporting entity (IFRS 12.12):
  • The proportion of ownership interests and voting rights held by non-controlling interests.
  • The profit or loss allocated to non-controlling interests of the subsidiary during the reporting period.
  • Summarized financial information about the subsidiary (e.g. current assets, non-current liabilities, revenue, and total comprehensive income) which represents amounts before inter-company eliminations (IFRS 12.B10–12.B11).

It is also necessary to disclose information that enables users of the entity's consolidated financial statements to evaluate the following (IFRS 12.10b):

• The nature and extent of significant restrictions (e.g. contractual, statutory, and regulatory restrictions) on the entity's ability to access or use assets, and settle liabilities, of the group (e.g. 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) (IFRS 12.13).
• The nature of (and changes in) the risks associated with interests in consolidated structured entities. Among others, the entity has to 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 could expose the reporting entity to a loss (e.g. liquidity arrangements or credit rating triggers associated with obligations to purchase assets of the consolidated structured entity or provide financial support) (IFRS 12.14).
• The consequences of changes in its ownership interest in a subsidiary which do not result in losing control. In this context, a schedule has to be presented that shows the effects of these changes on the equity attributable to owners of the parent (IFRS 12.18).
• The consequences of a loss of control of a subsidiary during the reporting period. Among others, the gain or loss on deconsolidation8 (IFRS 10.25 and 10.B98) has to be disclosed, as well as the line item(s) in profit or loss in which it has been recognized (IFRS 12.19).

3.3 Interests in Joint Arrangements and Associates

IFRS 12 requires the disclosure of information that enables users of the entity's financial statements to evaluate the following (IFRS 12.20):

• The nature, extent, and financial effects of the entity's interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of joint arrangements, or significant influence over associates. Among others, the following disclosures are necessary in this respect:
  • For each joint arrangement and associate which is material to the reporting entity (IFRS 12.21a):
    • The proportion of ownership interest or participating share held by the entity and the proportion of voting rights held.
    • The nature of the entity's relationship with the associate or joint arrangement (by, for example, describing the nature of the activities of the associate or joint arrangement and whether they are strategic to the entity's activities).
  • For each joint venture and associate which is material to the reporting entity (IFRS 12.21b):
    • Summarized financial information about the joint venture or associate (including for example current assets, non-current liabilities, revenue, and total comprehensive income) (IFRS 12.B12–12.B13).
    • If the associate or joint venture is accounted for in accordance with the equity method, the fair value of its investment in the associate or joint venture, provided that there is a quoted market price for the investment.
  • The nature and extent of any significant restrictions on the ability of associates or joint ventures to transfer funds to the entity in the form of cash dividends, or to repay loans or advances made by the entity (IFRS 12.22a).
• The nature of (and changes in) the risks associated with the entity's interests in joint ventures and associates. Among others, it is necessary to disclose the following in this respect (IFRS 12.23):
  • Total unrecognized commitments the entity has made relating to its interests in joint ventures (including the 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).
  • In accordance with IAS 37 (unless the probability of loss is remote) contingent liabilities incurred relating to the entity's interests in associates or joint ventures (including the entity's share of contingent liabilities incurred jointly with other investors with joint control of the joint ventures, or significant influence over the associates), separately from the amount of other contingent liabilities.

3.4 Interests in Unconsolidated Structured Entities

IFRS 12 requires the disclosure of information that enables users of the entity's financial statements (IFRS 12.24):

• To understand the nature and extent of the entity's interests in unconsolidated structured entities. In this respect, it is necessary to disclose qualitative and quantitative information about the entity's interests in unconsolidated structured entities, including (but not limited to) the nature, purpose, activities, and size of the structured entity and how the latter is financed (IFRS 12.26).
• To evaluate the nature of (and changes in) the risks associated with the entity's interests in unconsolidated structured entities. This also includes information about the 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). Among others, a summary of the following has to be disclosed in tabular format (unless another format is more appropriate) (IFRS 12.29):
  • The carrying amounts of the assets and liabilities recognized in the entity's financial statements relating to its interests in unconsolidated structured entities, as well as the line items in its statement of financial position in which those assets and liabilities have been recognized.
  • The amount that best represents the entity's maximum exposure to loss from its interests in unconsolidated structured entities. If the entity cannot quantify this exposure, it has to disclose that fact and the reasons.
  • 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.

4 EXAMPLES WITH SOLUTIONS

1 See the chapter on IAS 31/IFRS 11, Section 3.

2 See the chapter on IAS 27/IFRS 10, Section 3.2.1.

3 See the chapter on IAS 27/IFRS 10, Section 2.1 with regard to special purpose entities.

4 See the chapter on IAS 27/IFRS 10, Section 3.2.

5 See the chapter on IAS 31/IFRS 11, Section 3.2.

6 See the chapter on IAS 28, Section 2.1.

7 See the chapter on IAS 31/IFRS 11, Section 3.3.

8 See the chapter on IAS 27/IFRS 10, Section 2.4.