Identification of a Subsidiary

Under IFRS 10 an investor shall determine if it is a parent by assessing whether it controls the investee. A subsidiary is defined as “an entity that is controlled by another entity” (IFRS 10 App A). An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The definition contains three requirements that must be present in order for control to exist:

• Power over the investee;
• Exposure, or rights, to variable returns; and
• The ability to use the power over the investee to affect the amount of returns.

The three requirements are interrelated. The ability to use power to affect the returns creates a link between the first two requirements. Only when the power could be used to affect the returns is the definition of control met. An investor must assess all facts and circumstances to determine whether it controls an entity. Appendix B to IFRS 10 contains the following factors that investors should use in order to determine if they control a subsidiary: (1) the purpose and design of the investee; (2) what the relevant activities are; (3) how decisions about those activities are made; (4) whether the rights of the investors give it the current ability to direct the relevant activities; (5) whether the investor is exposed, or has the rights to variable returns from its involvement with the investee; and (6) whether the investor has the ability to use its power over the investee to affect the amount of the investor's return.

These facts and circumstances should be continuously monitored, and if there are any changes to the facts or circumstances, control should be reassessed.

Power

Regarding the first requirement, an investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities that significantly affect the investee's returns. Returns will only be affected if the investor can control the activities that generate the returns.

Examples of activities that could, depending on the circumstances, be principal activities include: the purchase and sale of goods or services, the selection, acquisition or sale of assets, research and development for new products or procedures, and the establishment of finance structures or the procurement of funds. If two or more investors currently have the ability to manage the principal activities and these activities take place at different times, the investors must determine which of them has the ability to manage those activities that have the greatest effect on these returns.

Power arises from rights, and could arise in any of the following circumstances: (1) rights in the form of voting rights (or potential voting rights) of an investee; (2) rights to appoint, reassign or remove members of an investee's key management personnel who have the ability to direct the relevant activities; (3) rights to appoint or remove another entity that directs the relevant activities; (4) rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the investor; and (5) other rights that give the holder the ability to direct the relevant activates. The lower one moves down this hierarchy, the more complex the assessment becomes. In the assessment, all the rights of others must be considered. An investor assessing whether he has decision-making power is only assessing substantive rights. Consequently, an investor that only holds protective rights does not have the power to direct the activities. A right is substantive when the holder has the practical ability to exercise the right. This requires judgement, taking into account all facts and circumstances. The following factors can be used in the assessment:

• Whether there are barriers (economic or otherwise) that prevent the holder from exercising the rights.
• Financial penalties and incentives that would prevent (or deter) the holder from exercising the rights.
• Terms and conditions that make it unlikely that the rights would be exercised.
• The absence of an explicit, reasonable mechanism in the founding documents of an investee or in the applicable laws or regulations that would allow the holder to exercise the rights.
• The inability of the holder of the rights to obtain the information necessary to exercise the rights.
• Operational barriers or incentives that would prevent the holder from exercising the rights.
• Legal or regulatory requirements that prevent the holder from exercising the rights.

Usually the substantive rights need to be exercisable when the decision regarding the direction of the relevant activities needs to be made. Rights may, however, also be of a substantial nature even if they cannot be exercised at present. An example for rights which are currently not exercisable but are even then substantive is shown later in this chapter.

Majority of Voting Rights

Control is presumed if the majority of voting rights is held, unless other factors indicate that the majority of voting rights does not create control. Holding the majority of voting rights normally results in control if:

• The relevant activities are directed by the vote of the majority holder; or
• The holder of the majority of voting rights may appoint the majority of members of the governing body that directs the activities (for example, the board of directors).

For a majority of voting rights to result in control, those rights must be substantive. If another party, which is not an agent, has existing rights that provide the other party with the ability to direct the operating activities, the majority of voting rights presumption is rebutted. The test is to determine who has power over the activities.

Less than a Majority of Voting Rights

Control could also exist when a party has less than a majority of voting rights. The following are examples of instances where control could exist even though less than a majority of voting rights is held:

• A contractual arrangement between the investor and other parties that provides the investor with a right to direct the relevant activities.
• Rights arising from other contractual arrangements. Other decision-making rights together with voting rights might provide the party with the right to direct the relevant activities.
• The extent of the investor's voting rights. Although an investor may not hold the majority of the voting rights, the rights that are held could be so significant as to give it power to have the practical ability to direct the relevant activities unilaterally. This is referred to as de facto control.
• The investor may hold potential voting rights that are substantive. Potential voting rights are rights to obtain voting rights of an investee, such as convertible instruments and options. To be substantive, potential voting rights needs to be exercisable when decisions about the direction of the relevant activities need to be made. Usually they must be presently exercisable in order to be classified as substantial, although sometimes rights may be substantial even if they cannot be exercised at present. Example: An investor is the contracting partner in a forward contract for the acquisition of a majority holding in the associate company. The settlement value of the forward contract is due within 25 days. The existing shareholders cannot change the company's current policy with regard to its principal activities because extraordinary general meetings cannot be held in less than 30 days, at which time the forward contract will already have been fulfilled. By virtue of his possession of the forward contract, the investor is in a position to make decisions on the management of those principal activities. The investor's forward contract is a substantive right that gives him the ability to manage those principal activities now, before the forward contract is fulfilled.

Any combination of the above scenarios could result in an investor having control of an investee. In assessing de facto control, the size of the investor's holdings relative to size and dispersion of other investors are considered, together with the other considerations listed above.

Exposure, or Rights, to Variable Returns from an Investee

An investor is exposed, or has rights to, variable returns when the investor's returns from the involvement have the potential to vary as a result of the investor's performance, whether negative or positive. Variable returns can arise in various forms, for example:

• Dividends or other distributions of economic benefits from an investee and changes in the value of the investment.
• Remuneration for servicing an investee's assets or liabilities, fees and exposure to loss from providing credit or liquidity support, residual interests in the investee's assets and liabilities on liquidation of that investee, tax benefits, and access to future liquidity that an investor has from its involvement with an investee.
• Returns that are not available to other interest holders. For example, combining operating functions to achieve economies of scale, cost savings, sourcing scarce products, gaining access to proprietary knowledge or limiting some operations or assets to enhance the value of the investor's other assets.

Link between Power and Returns

An investor controls an investee if the investor not only has power over the investee and exposure or rights to variable returns from its involvement with the investee, but also has the ability to use its power to affect the investor's return from its involvement with the investee. Therefore, it is important to determine whether the investor is acting as an agent or the principal. If the investor acts as an agent, the investor does not control the investee. The investor will have been delegated power on behalf of another party or parties. An agent is a party primarily engaged to act on behalf or for the benefit of another party or parties (the principal). A decision maker must consider the overall relationship between itself, the investee being managed and other parties involved with the investee, and in particular the following factors to determine whether the decision maker is acting as an agent or principal:

• The scope of the decision-making authority. This is directly linked to the activities the decision maker can control. The scope is evaluated by considering (1) the activities that are permitted according to the decision-making agreement(s) and specified by law, and (2) the discretion that the decision maker has when making decisions about those activities. If, for example, a decision maker has a significant share in shaping the associate company (in determining the extent of decision-making authorities, for example), this may indicate that he has the opportunity and incentive to acquire rights that confer on the decision maker the ability to manage its principal activities.
• The rights held by other parties. Substantive removal or other rights may indicate that the person is only acting as an agent, since these rights could remove the power. Rights of others might restrict the decision-making power or discretion.
• Remuneration to which the decision maker is entitled in accordance with any remuneration agreement(s). In making this assessment, it is necessary to consider whether the remuneration is commensurate with the service rendered and whether the remuneration contract is based on similar arm's-length transactions. A full arm's-length remuneration contract in which the decision maker is compensated for services rendered would ordinarily indicate that the decision maker is acting as an agent.
• The decision maker's exposure to variability of returns from other interests that it holds in the investee. Holding an interest in an entity with variable returns might indicate that the decision maker is a principal. Based on the last two criteria, the more variable the returns are in relation to determining remuneration, the more likely that the decision maker is a principal.

Example of a Fund Manager

A decision maker founds, markets and manages a fund offering investment opportunities to a number of investors. The decision maker (fund manager) must make decisions in the interests of all investors and in accordance with the contracts that are most important to the fund. Nonetheless, the fund manager has a great deal of discretion where his decisions are concerned. For his services he receives a fee at the normal market level of 1% of assets under management plus 20% of the gains made by the fund once a specified level is reached. The fee is in reasonable proportion to the services provided.

Although the fund manager must make decisions in the interests of all investors, he enjoys wide decision-making authority in the management of the fund's principal activities. The fund manager receives fixed and variable fees at standard market levels. In addition, his remuneration has the effect of aligning the interests of fund managers and those of other investors in a rise in the fund's value. However, this imposes no risk arising from fluctuating returns from fund activities of such a magnitude that the remuneration, when viewed in isolation, might be seen as an indicator that the fund manager is the principal.

Other Arrangements

Control can also exist through other contractual arrangements. This would usually be the case with structured entities. 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 assessment of control in such instances is based on the normal principles discussed above as well as an assessment of the special arrangements and the size of the exposure regarding the variability in returns. In assessing the purpose and design of the structured entity, the risk that was created and passed on to the parties to the arrangement is considered to establish the party's exposure to some or all of the risks. A large exposure to variability in returns might also indicate that the party has power over the entity. Such risk and returns are, however, on their own not conclusive. All facts and circumstances must be considered.

The involvement of the parties and decisions made at the inception of the arrangement are considered to determine whether the transaction terms and features provide the investor with rights that are sufficient to create control. Both explicit and implicit decision-making rights embedded in the contractual arrangement that are closely linked to the investor must be considered. Further contractual rights such as call rights, put rights and liquidation rights are also considered.

Intercompany Transactions and Balances

In preparing consolidated financial statements an entity combines the items presented in the financial statements line by line, adding together like items of assets, liabilities, equity, income and expenses. In order to present financial information about the group as that of a single economic entity, the following procedures are followed:

• Like items of assets, liabilities, equity, income, expenses and cash flows of the parent are combined with those of the subsidiary.
• The carrying amount of the parent's investment in each subsidiary is eliminated (offset) against the parent's portion of equity of each subsidiary.
• Intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions of the entities in the group are eliminated. For example, a parent may sell merchandise to its subsidiary, at cost or with a profit margin added, before the subsidiary ultimately sells the merchandise to unrelated parties in arm's-length transactions. Furthermore, any balances due to or from members of the consolidated group at the end of the reporting period must also be eliminated. If assets have been transferred among the entities in the controlled group at amounts in excess of the transferor's cost, and they have not yet been further transferred to outside parties (e.g., inventories) or not yet consumed (e.g., plant assets subject to depreciation) by the end of the reporting period, the amount of profit not yet realised through an arm's-length transaction must be eliminated.

Non-Controlling Interests

When less than 100% of the shares of the acquired entity are owned by the acquirer, a complication arises in the preparation of consolidated statements, and a non-controlling interest must be determined and presented. According to IFRS 10.22, non-controlling interests must be presented in the consolidated statement of financial position within equity, separately from the equity of controlling interests (the owners of the parent). If a company holds non-controlling interests in several subsidiaries, the various non-controlling interests can be reported within a single position. This method complies with the economic unit concept that is employed in the world of Anglo-Saxon accounting. The profit or loss and each component of other comprehensive income to the owners of the parent and to the non-controlling interests must be attributed separately. This applies even if this allocation brings about a situation in which the non-controlling interests post or will in future post a negative equity balance. Not even the non-existence of an additional-funding obligation on the part of the non-controlling interests makes any difference to this allocation. In this event a negative share of the non-controlling interests must consequently be reported within equity.

The control concept of IFRS 10 and the economic unit concept can jointly lead to a situation where a parent company, even though it has a minority holding in an entity, controls the relevant activities of the subsidiary—by virtue of other agreements, for example—and hence also controls the subsidiary itself. Since shares in the equity and the profit or loss are determined on the basis of ownership interest (for which see below), this leads to a situation in which consolidation includes 100% of an entity's assets and liabilities while the majority of the equity must be allocated to non-controlling interests. In these cases IFRS 12 requires the disclosure of the nature of the relationship between a parent and a subsidiary when less than 50% of voting rights are owned.

Measurement of non-controlling interests. According to IFRS 3.19 entities have the choice to measure the non-controlling interests at either fair value or at its proportionate share in the recognised amounts of the acquiree's identifiable net assets. This choice can be made on a transaction-by-transaction basis. It is not required for entities to make an accounting policy choice. In the subsequent periods the non-controlling interest is not remeasured to fair value. But, the share of the profit or loss and each component of other comprehensive income is allocated to non-controlling interests as described above.

Changes in the Proportion of Non-Controlling Interests

In the consolidated statement of financial position, non-controlling interest is presented within equity, separately from the equity of the owners of the parent. Changes in a parent's interest in a subsidiary that do not result in the parent losing control are equity transactions and result in transfers to and from the owner's equity to non-controlling interest. The difference between the amount by which the non-controlling interest is adjusted and the fair value of the consideration paid or received is recognised directly in equity attributable to the parent.

Uniformity of Accounting Policies

There is a presumption that all the members of the consolidated group should use the same accounting principles to account for similar events and transactions. However, in many cases this will not occur, as, for example, when a subsidiary is acquired that uses cost for investment property while the parent has long employed the fair value method. IFRS 10 requires that the policies of the combining entities should be uniform and therefore appropriate adjustments should be made in the consolidated accounts. When a subsidiary of a corporate group is acquired and different accounting policies exist, the principles of IAS 8 permit the subsidiary to alter its accounting policy to that of the group in its individual financial statements. Alternatively the subsidiary may retain its previous principles in its individual financial statements. In this event the group should make appropriate adjustments in the consolidated accounts.

Measurement

Income and expenses of the subsidiary are included in the consolidated financial statements from the date control is obtained until the date when control is lost. The income and expenses are based on the amounts of assets and liabilities recognised at the acquisition date. The depreciation charges entered in the consolidated income statement after the date of acquisition, for example, are based on the fair value of the associated depreciable assets reported in the consolidated financial statements on the date of acquisition.

Reporting Date

A practical consideration in preparing consolidated financial statements is to have information on all constituent entities current as of the parent's year-end. If a subsidiary has a different reporting date, the subsidiary prepares additional financial information as of the date of the consolidated financial statements to enable the parent to consolidate the subsidiary, unless it is impracticable to do so.

If it is impracticable, the subsidiary is consolidated using the most recent financial statements of the subsidiary adjusted for the effect of significant transactions or events that occur between the date of those financial statements and the date of the consolidated financial statements. The difference between the date of the subsidiary's financial statements and the consolidated financial statements is limited to three months and must be applied consistently from period to period. Of course, if this option is elected, the process of eliminating intercompany transaction and balances may become a bit more complicated, since reciprocal accounts (e.g., sales and cost of sales) will be out of balance for any events occurring after the earlier fiscal year-end but before the later one.

Ownership Interest

In the preparation of consolidated financial statements there is usually a question mark over the share of the profit or loss or changes in the equity of the subsidiary that the parent company must take into account in the preparation of its own consolidated financial statements if, for example, potential voting rights or non-controlling interests exist. IFRS 10 B89 determines that the proportion of profit or loss and changes in equity allocated to the parent and non-controlling interests in preparing consolidated financial statements is determined solely on the basis of existing ownership interests, unless an entity has, in substance, an existing ownership interest as a result of a transaction that currently gives the entity access to the return associated with an ownership interest.

Indirect Interest

If a parent company has an indirect holding, the treatment of the non-controlling interests is more complicated than in a single-tiered group. Furthermore, the amount of potential goodwill to be reported is contentious. The non-controlling interests in the parent company's consolidated financial statements are calculated by multiplying the fractions applying to the various tiers of the group. The calculation for the purposes of consolidation can be carried out either in a single step, or first at the level of the indirect holding, then at that of the parent company with a corresponding adjustment of the indirect holding (multi-tier consolidation).

If goodwill was revealed in the first consolidation of S2 in S1 in the revaluation process, the question arises as to the level of goodwill that must be included in P's consolidated financial statements.

The treatment of goodwill at the level of P is contentious. On the one hand it is contended that here, too, goodwill should be reported at €30, and that the non-controlling interest is accordingly €4.5 higher (€30 × 15%). This is argued on the grounds that non-controlling shareholders in S1 were part of the S2 acquisition transaction.

The second view is based on net assets from the viewpoint of the group. This holds that P holds only 85% of the goodwill and may thus report only €25.5, while the remaining €4.5 are offset against the non-controlling interest, restoring this to the amount in the original example.

We prefer the second view, because this reflects the goodwill commercially acquired by the group shareholders at its correct level. Also this does not result in any blending with the full goodwill method as in the first view. If the full goodwill method is applied as per IFRS 3.32, accounting is unambiguous. At the level of S1, goodwill of €40 is detected (full goodwill = €30 (S1 goodwill)/75%). Of this, €10 are allocated to S2's non-controlling shareholders and €4.5 to those of S1. In total, non-controlling interests of €110.75 (equity share of €96.25 plus €14.5 as a share of goodwill) must be reported in P's consolidated financial statements.

Subsidiaries to be Disposed of or Acquired with a View to Resale

Subsidiaries that were acquired with a view to resale or are to be sold, where these meet the definition of an asset held for sale in accordance with IFRS 5, are not excluded from the consolidation. They must continue to be consolidated, and furthermore their results, assets and liabilities must be reported separately. These subsidiaries are presented in a single amount in the statement of comprehensive income comprising the total of:

• The post-tax profit or loss of discontinued operations; and
• The post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation.

The assets of the subsidiaries classified as held-for-sale must be separately presented from other assets in the statement of financial position. The same is true for the liabilities of the subsidiaries classified as held-for-sale.

The provisions of IFRS 5 are dealt with in detail in Chapter 13.

Changes in Ownership Interest Resulting in Loss of Control

If a parent company ceases to have a controlling financial interest in a subsidiary, the parent is required to deconsolidate the subsidiary as of the date on which its control ceased. Examples of situations that can result in a parent being required to deconsolidate a subsidiary include:

1. Sale by the parent of all or a portion of its ownership interest in the subsidiary resulting in the parent no longer holding a controlling financial interest.
2. Expiration of a contract that granted control of the subsidiary to the parent.
3. Issuance by the subsidiary of shares that reduces the ownership interest of the parent to a level not representing a controlling financial interest.
4. Loss of control of the subsidiary by the parent because the subsidiary becomes subject to control by a governmental body, court, administrator or regulator.

Should the parent's loss of controlling financial interest occur through two or more transactions, management of the former parent is to consider whether the transactions should be accounted for as a single transaction. In evaluating whether to combine the transactions, management of the former parent is to consider all of the terms and conditions of the transactions as well as their economic impact. The presence of one or more of the following indicators may lead to management concluding that it should account for multiple transactions as a single transaction:

1. The transactions are entered into simultaneously or in contemplation of one another.
2. The transactions form a single transaction designed to achieve an overall commercial effect.
3. The occurrence of one transaction depends on the occurrence of at least one other transaction.
4. One transaction, when considered on its own merits, does not make economic sense, but when considered together with the other transaction or transactions would be considered economically justifiable.

Obviously, this determination requires the exercise of sound judgement and attention to economic substance over legal form.

When control of a subsidiary is lost and a non-controlling interest is retained, consistent with the approach applied in step acquisitions, the parent should measure that retained interest at fair value and recognise, in profit or loss, a gain or loss on disposal of the controlling interest. The gain or loss is measured as follows:

If a parent loses control of a subsidiary, it must recognise all amounts that were previously reported for the relevant subsidiary in other comprehensive income. Recognition takes place on the same basis as would have been prescribed by the parent company for a direct disposal of the corresponding assets or liabilities. Example: Subsidiary X is sold by parent company A. The previous consolidated balance sheet contained other comprehensive income reserves pursuant to IFRS 9 and actuarial losses pursuant to IAS 19 resulting from subsidiary X. At the time of the loss of control of X, A must reclassify the reserve to profit or loss, and leave the remeasurements of the net defined benefit liability (asset) recognised in other comprehensive income under IAS 19 in the consolidated equity of A. This is because, under IAS 19.122, remeasurements shall not be reclassified to profit or loss in a subsequent period, and under IFRS 9 the reserve must be reclassified on the sale of the securities.

Definition

IFRS 10 requires a parent to determine whether it is an investment entity. An investment entity is defined as an entity that:

1. Obtains funds from one or more investors for the purpose of providing those investors with investment management services;
2. Commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both; and
3. Measures and evaluates the performance of substantially all of its investments on a fair value basis.

The standard explains that an investment entity will usually display the following typical characteristics, which entities should consider in determining whether the definition is met:

1. It will have more than one investment;
2. It will have more than one investor;
3. It will have investors that are not related parties of the entity; and
4. It will have ownership interests in the form of equity or similar interests.

Although these typical characteristics are not essential factors in determining whether an entity qualifies to be classified as an investment entity, the standard does require an investment entity that does not have all of these typical characteristics to provide additional disclosure regarding the judgement made in arriving at the conclusion that it is in fact an investment entity.

Investment Management Services

From the point of view of the IASB one of the essential activities of an investment entity is that it obtains funds from investors in order to provide those investors with investment management services. Even though detailed guidance is not given about the first criteria of the definition, the IASB notes that this provision differentiates investment entities from other entities.

Business Purpose

The purpose of an investment entity should be to invest solely for capital appreciation, investment income (such as dividends, interest or rental income) or both. This would typically be evident in documents such as the entity's offering memorandum, publications distributed by the entity and other corporate or partnership documents. Further evidence may include the manner in which the entity presents itself to other parties (such as potential investors or potential investees).

An investment entity may provide investment-related services (for example, investment advisory services, investment management, investment support and administrative services), either directly or through a subsidiary, to third parties as well as to its investors, even if those activities are substantial to the entity. However, such services should not be offered to investees, unless they are undertaken to maximise the entity's investment return. In addition, if these services to investees represent a separate substantial business activity or a separate substantial source of income to the entity, it would not be able to classify itself as an investment entity in the context of IFRS 10.

Exit Strategies

A common characteristic of investment entities is that they would not plan to hold investments indefinitely. The standard requires an investment entity to have an exit strategy documenting how the entity plans to realise capital appreciation from substantially all of its equity investments and non-financial asset investments. An investment entity would also be required to have an exit strategy for any debt instruments that have the potential to be held indefinitely, for example perpetual debt investments. Although it is not necessary to document specific exit strategies for each individual investment, an investment entity should at least be able to identify different potential strategies for different types or portfolios of investments, including a substantive time frame for exiting the investments. For the purposes of this assessment, it would not be sufficient to consider exit mechanisms that are only put in place for default events, such as breach of contract or non-performance.

Examples of exit strategies for private equity securities could include:

• An initial public offering;
• A private placement;
• A trade sale of a business;
• Distributions (to investors) of ownership interests in investees; and
• Sales of assets (including the sale of an investee's assets followed by a liquidation of the investee).

Examples of exit strategies for publicly trade equity securities could include:

• Selling the investment in a private placement or in a public market.

Examples of exit strategies for real estate investments include:

• Sale of the real estate through specialised property dealers or the open market.

Earnings from Investments

An entity would not be investing solely for capital appreciation, investment income or both, if the entity or another member of the group to which the entity belongs obtains, or has the objective of obtaining, other benefits from the entity's investments that are not available to other parties that are not related to the investee.

Examples of benefits which would usually result in disqualification from investment entity status include:

1. The acquisition, use, exchange or exploitation of the processes, assets or technology of an investee;
2. Joint arrangements or other agreements between the entity or another group member and an investee to develop, produce, market or provide products or services;
3. Financial guarantees or assets provided by an investee to serve as collateral for borrowing arrangements of the entity or another group member;
4. An option held by a related party of the entity to purchase, from that entity or another group member, an ownership interest in an investee of the entity;
5. Transactions between the entity or another group member and an investee that:
   1. Are on terms that are unavailable to entities that are not related parties of either the entity, another group member or the investee;
   2. Are not at fair value; or
   3. Represent a substantial portion of the investee's or the entity's business activity, including business activities of other group entities.

Can Select Biotechnology Fund be considered as an investment company? Although Select Biotechnology Fund has the business purpose to invest for capital appreciation and it provides investment management services to its investor, Select Biotechnology Fund is not an investment entity for two reasons: (1) Pharma Ltd., the parent of Select Biotechnology Fund, holds options to acquire investments in investees held by Select Biotechnology Fund if the assets developed by the investees would benefit the operations of Select Biotechnology Fund. This provides a benefit in addition to capital appreciation or investment income; and (2) the investment plans of Select Biotechnology Fund do not include exit strategies for its investments, which are equity investments. The options held by Pharma Ltd. are not controlled by Select Biotechnology Fund and do not constitute an exit strategy.

Fair Value Measurement

An essential element of the definition of an investment entity is that it measures and evaluates the performance of substantially all of its investments on a fair value basis. An investment entity would ordinarily be expected to provide investors with fair value information and measure substantially all of its investments at fair value in its financial statements whenever fair value is required or permitted in accordance with IFRS Standards. Investment entities would typically also report fair value information internally to the entity's key management personnel (as defined in IAS 24), who use fair value as the primary measurement attribute to evaluate the performance of substantially all of its investments and to make investment decisions. Areas where fair value would be expected to feature as the accounting policy of choice for accounting for investments include:

• Electing to account for any investment property using the fair value model in IAS 40, Investment Property;
• Electing the exemption from applying the equity method in IAS 28 for investments in associates and joint ventures; and
• Measuring financial assets at fair value using the requirements in IFRS 9.

These choices would be expected for all investment assets, but an investment entity would not be expected to measure any non-investment assets at fair value. Thus, there would be no requirement for non-investment assets (such as property, plant and equipment, or intangible assets) or liabilities to be measured at fair value.

In determining whether it meets the definition of an investment entity the following typical characteristics could be used. The absence of any of these characteristics may indicate that an entity does not meet the definition of an investment entity. If an entity does not meet one or more of the typical characteristics, additional judgement is necessary in determining whether an entity is an investment entity.

More than one Investment

An investment entity typically holds several investments to diversify risk and maximise returns. An investment entity may hold a portfolio of investments directly or indirectly, for example by holding a single investment in another investment entity that itself holds several investments. There may be times when the entity holds a single investment. However, holding a single investment does not necessarily prevent an entity from meeting the definition of an investment entity. For example, an investment entity may hold only a single investment when the entity is in its start-up period, or has not yet made other investments to replace those it has disposed of. In some cases, an investment entity may be established to pool investors' funds to invest in a single investment when that investment is unobtainable by individual investors (for example, when the required minimum investment is too high for an individual investor). In such a situation, the entity with a single investment could still meet the definition of an investment entity, but these circumstances would have to be explained in the judgements applied by management.

More than one Investor

An investment entity would typically have several investors who pool their funds to gain access to investment management services and investment opportunities that they might not have had access to individually. Having several investors would make it less likely that the entity, or other members of the group containing the entity, would obtain benefits other than capital appreciation or investment income. Alternatively, an investment entity may be formed by, or for, a single investor that represents or supports the interests of a wider group of investors (for example, a pension fund, government investment fund or family trust). The standard also explains that the entity's investors would typically be unrelated to one another, again making it less likely that there would be any other benefits to investors besides capital appreciation or investment income.

Unrelated Investors

An investment entity normally has various investors who are not related to the company or to other members of the company. The existence of unrelated parties is an indication that the companies or members of the company derive advantages from the investment mostly through increases in value or capital returns. Even if the investors are related to one another, however, the possibility of qualifying the company as an investment entity exists. An investment entity may, for example, set up a separate parallel fund for a group of its employees in order to reward them.

Change in Status

Since the determination of investment entity status is dependent on an assessment of the relevant facts and circumstances at a point in time, an entity's status may change over time. If facts and circumstances indicate changes to one or more of the three elements that qualify an entity to be an investment entity, a parent needs to reassess whether it is an investment entity. If an entity's status changes due to a change in circumstances, the effects of the change are accounted for prospectively. When an entity that was previously classified as an investment entity ceases to be an investment entity, it applies IFRS 3, Business Combinations, to any subsidiary that was previously measured at fair value through profit or loss. The date of the change of status is the deemed acquisition date for the purposes of applying the acquisition method, and the fair value of the subsidiary at the deemed acquisition date represents the transferred deemed consideration when measuring any goodwill or gain from a bargain purchase that arises from the deemed acquisition. The entity consolidates its subsidiaries with effect from the deemed acquisition date until control is lost.

If an entity becomes an investment entity, it deconsolidates its subsidiaries at the date of the change in status. The deconsolidation of subsidiaries is accounted for as though the investment entity has lost control of those subsidiaries at that date, and any difference between the fair value of the retained investment and the net asset value of the former subsidiary is recognised in profit or loss.

Basic Principles

The principle established in IFRS 11 is that joint operations should be accounted for by following the contractual arrangement established between the parties to the joint arrangement. In its own financial statements, a joint operator will account in accordance with IFRS 11.20 for the following:

• Its assets, including its share of any assets held jointly;
• Its liabilities, including its share of any liabilities incurred jointly;
• Its revenue from the sale of its share of the output arising from the joint operation;
• Its share of the revenue from the sale of the output by the joint operation; and
• Its expenses, including its share of any expense incurred jointly.

It is clear that in a joint operation, a joint operator could either have an interest in the assets or incur the liabilities or expenses, directly as its own assets, liabilities and expenses, or the joint operator could have a shared interest. If a shared interest exists, the terms of the contractual arrangement will determine each operator's share. Once a joint operator's direct or shared interest in the assets, liabilities, income and expenses is determined, the joint operator accounts for them by following the IFRS applicable in each instance.

Special guidelines are also provided for transactions, such as the sale, contribution or purchase of assets between the entity of the joint operator and the joint operations. The joint operator only recognises gains and losses resulting from sales and contributions to the joint operation to the extent of other parties' interest in the joint operations. Therefore, if a joint operator has a 40% interest in the joint operation it will only recognise 60% of the profit or losses on the transactions attributable to the other joint operators. The logic is that a portion of the profit has in fact been realised. As a further example, if venturers A, B and C jointly control joint operation D (each having a 1/3 interest), and A sells equipment having a book value of €40,000 to the operation for €100,000, only 2/3 of the apparent gain of €60,000 or €40,000 may be realised. However, if the transaction provides evidence of an impairment or reduction in the net realisable value of the assets sold or contributed, the joint operator must recognise the loss fully.

Similarly, if joint operators purchase assets from the joint operation, it may not recognise its share of gains and losses until the assets are resold to other parties. Again, if such transaction provides evidence of an impairment or reduction in the net realisable value of the assets purchased, the joint operator must recognise its full share of the losses.

A party to an arrangement that is a joint operation that does not have joint control, but has rights to the assets and obligations for the liabilities of the joint operation, accounts for its interest by following the principle established in IFRS 11. However, if the participating party does not have rights to the assets and obligations for the liabilities, it accounts for its interest in the joint operation by applying the applicable IFRS.

Accounting for Acquisitions of Interests in Joint Operations in which the Activity Constitutes a Business

In May 2014 the IASB issued the amendments to IFRS 11 “Accounting for Acquisitions of Interests in Joint Operations” ruling the accounting for acquisitions of interests in joint operations in which the activity constitutes a business. Those amendments, which are explained below, shall be applied prospectively in annual periods beginning on or after January 1, 2016. Earlier application is permitted. If an entity applies those amendments in an earlier period it shall disclose that fact. The IASB had noted that it was unclear how acquisitions of interests in joint operation, in which the activities constitute a business, were to be reported and thus the need for the amendment to IFRS 11. It has now been clarified that when an entity acquires an interest in a joint operation in which the activity of the joint operation constitutes a business, as defined in IFRS 3, it shall apply, to the extent of its share in the assets, liabilities in a joint operation, all of the principles on business combinations accounting in IFRS 3, and other IFRS, that do not conflict with the guidance in IFRS 11 and disclose the information that is required in those IFRS in relation to business combinations. This applies to the acquisition of both the initial interest and additional interests in a joint operation in which the activity of the joint operation constitutes a business. According to IFRS 11, the principles on business combinations accounting that do not conflict with the guidance in IFRS 11 include but are not limited to:

• Measuring identifiable assets and liabilities at fair value, other than items for which exceptions are given in IFRS 3 and other IFRS;
• Recognising acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with the exception that the costs to issue debt or equity securities are recognised in accordance with IAS 32 and IFRS 9;
• Recognising deferred tax assets and deferred tax liabilities that arise from the initial recognition of assets or liabilities, except for deferred tax liabilities that arise from the initial recognition of goodwill, as required by IFRS 3 and IAS 12 for business combinations;
• Recognising the excess of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, if any, as goodwill; and
• Testing for impairment a cash-generating unit to which goodwill has been allocated at least annually, and whenever there is an indication that the unit may be impaired, as required by IAS 36 for goodwill acquired in a business combination.

These principles also apply to the formation of a joint operation if, and only if, an existing business, as defined in IFRS 3, is contributed to the joint operation on its formation by one of the parties that participate in the joint operation. However, these principles do not apply to the formation of a joint operation if all of the parties that participate in the joint operation only contribute assets or groups of assets that do not constitute businesses to the joint operation on its formation. These principles also do not apply on the acquisition of an interest in a joint operation when the parties sharing joint control, including the entity acquiring the interest in the joint operation, are under the common control of the same ultimate parent. A joint operator might increase its interest in a joint operation in which the activity of the joint operation constitutes a business, as defined in IFRS 3, by acquiring an additional interest in the joint operation. In such cases, previously held interests in the joint operation are not remeasured if the joint operator retains joint control.

Basic Principles

The equity method permits an entity (the investor) controlling a certain share of the voting interest in another entity (the investee) to incorporate its pro rata share of the investee's operating results into its profit or loss. However, rather than include its share of each component of the investee's revenues, expenses, assets and liabilities into its financial statements, the investor will only include its share of the investee's profit or loss as a separate line item in its statement of profit or loss and comprehensive income. Similarly, only a single line in the investor's statement of financial position is presented, but this reflects, to a degree, the investor's share in each of the investee's assets and liabilities.

Initially under the equity method the investment in the associate or joint venture is recognised at cost, and the carrying amount is increased or decreased to include the investor's share of the profit or loss of the investee after the acquisition date. The investor's share of the profit or loss is recognised in the investor's profit and loss. The carrying amount is also adjusted for the investor's share of other comprehensive income, and the contra entry is recognised in other comprehensive income. Distributions received from the investee reduce the carrying amount of the investment.

When determining the entity's share in the associate or joint venture, potential voting rights or other derivatives containing potential voting rights are ignored. The entity's share is solely based on the existing ownership interest. However, if an entity has, in substance, existing ownership because a transaction currently gives it access to the returns associated with an ownership interest, this right to returns is taken into account to determine the entity's share in profits. Such instruments that are included in the determination of the entity's share in the associate or joint venture are specifically excluded from IFRS 9, even if they meet the definition of a derivative.

Many of the procedures applicable to equity accounting are similar to the consolidation procedures discussed above.

Accounting at Acquisition

The principles regarding the acquisition of business combinations (Chapter 15) are also adopted in the acquisition of associates and joint ventures.

The equity method starts from the date an associate or joint venture is acquired. On the acquisition date, any positive difference between the cost of the investment and the entity's share of the net fair value of the investee's identifiable assets and liabilities is identified as goodwill and included in the carrying amount of the investment. Amortisation of the goodwill is not allowed. Any excess of the entity's share of the net fair value of the investee's identifiable assets and liabilities over the cost of the investment is recognised as income and included in the entity's share of the associate's or joint venture's profit or loss for the year.

Adjustments are made to the entity's share of profit and losses of the associate or joint venture after acquisition to account for the effect of the fair value on acquisition, such as adjusted depreciation.

Intercompany Transactions between Investor and Investee

Transactions between the investor and the investee may require that the investor make certain adjustments when it records its share of the investee earnings. In terms of the concept that governs realisation of transactions, profits can be recognised by an entity only when realised through a sale to outside (unrelated) parties in arm's-length transactions (sales and purchases). Similar problems can arise when sales of property, plant and equipment between the parties occur. In all cases, there is no need for any adjustment when the transfers are made at carrying amounts (i.e., without either party recognising a profit or loss in its separate accounting records).

In preparing consolidated financial statements, all intercompany (parent-subsidiary) transactions are eliminated. However, when the equity method is used to account for investments, only the profit component of intercompany (investor-investee) transactions is eliminated. This is because the equity method does not result in the combining of all statement of comprehensive income accounts (such as sales and cost of sales) and therefore will not cause the financial statements to contain redundancies. In contrast, consolidated statements would include redundancies if the gross amounts of all intercompany transactions were not eliminated.

Only the percentage held by the investor is eliminated and this applies to unrealised profits and losses arising from both “upstream” and “downstream” transactions (i.e., sales from investee to investor, and from investor to investee), which should be eliminated to the extent of the investor's interest in the investee.

Elimination of the investor's interest in the investee, rather than the entire unrealised profit on the transaction, is based on the logic that in an investor-investee situation, the investor does not have control (as would be the case with a subsidiary), and thus the non-owned percentage of profit is effectively realised through an arm's-length transaction. For purposes of determining the percentage interest in unrealised profit or loss to be eliminated, a group's interest in an associate is the aggregate of the holdings in that associate by the parent and its subsidiaries (excluding any interests held by non-controlling interests of subsidiaries). Any holdings of the group's other associates (i.e., equity-method investees) or joint ventures are ignored for the purpose of applying the equity method. When an associate has subsidiaries, associates or joint ventures, the profits or losses and net assets taken into account in applying the equity method are those recognised in the associate's consolidated financial statements (including the associate's share of the profits or losses and net assets of its associates and joint ventures), after any adjustments necessary to give effect to the investor's accounting policies.

In the example above, the tax currently paid by Radnor Co. (34% × €25,000 taxable gain on the transaction) is recorded as a deferred tax benefit in 20XX-1 since taxes will not be due on the book gain recognised in the years 20XX through 20XX+4. Under provisions of IAS 12, deferred tax benefits should be recorded to reflect the tax effects of all deductible temporary differences. Unless Radnor Co. could demonstrate that future taxable amounts arising from existing temporary differences exist, this deferred tax benefit might be offset by an equivalent valuation allowance in Radnor Co.'s statement of financial position at year-end 20XX-1, because of the doubt that it will ever be realised. Thus, the deferred tax benefit might not be recognisable, net of the valuation allowance, for financial reporting purposes unless other temporary differences not specified in the example provided future taxable amounts to offset the net deductible effect of the deferred gain.

This is discussed more fully in Chapter 26. When downstream transactions provide evidence of a reduction in the net realisable value of asset to be sold or contributed, or of an impairment loss, the investor must recognise the full loss. Similarly, when upstream transactions provide evidence of a reduction in the net realisable value of the asset to be purchased, or of an impairment loss, the investor shall recognise its share in those losses.

Contribution of Non-Monetary Assets

If an investee makes a contribution of non-monetary assets that do not constitute a business, as defined in IFRS 3, to an associate or joint venture in exchange for an equity interest, the fair value of the asset is in principle capitalised as part of the investment. However, fair value gains and losses are only recognised by the investor to the extent of the unrelated investors' interest in the associate or joint venture. Any fair value profit or loss regarding the investee's share in the associate or joint venture is not recognised.

Loss of Significant Influence

Significant influence is lost when an investee loses the power to participate in the financial and operating policy decisions of the investee. The loss of significant influence does not always occur with a change in absolute or relative ownership levels. The associate may for instance be subjected to the control of a government, court, administrator or regulator. Contractual arrangements could also change significant influence.

Discontinuing the Equity Method

The equity method is discontinued from the date when the investment ceases to be an associate or joint venture. Different situations may arise. If the investment changes to a subsidiary, IFRS 3, Business Combinations, is applied for the initial recognition of the subsidiary (Chapter 15).

If the retained interest becomes a financial instrument (not classified as a subsidiary, joint arrangement or associate) the retained interest should be measured at fair value and the fair value change recognised in profit or loss. The fair value on the date of discontinuance of the equity method becomes the initial recognition value of the financial instrument. The profit or loss is the difference between:

• The fair value of the retained interest and any proceeds from the sale of a part of the interest; and
• The carrying value of the investment on the date the equity method is discontinued.

When the equity method is discontinued, any equity share of the associate or joint venture recognised in other comprehensive income must be removed by regarding this as part of the sale of the transaction. The effect is that the gain and loss previously recognised in other comprehensive income is reclassified (as a reclassification adjustment) to profit or loss.

If an associate changes to a joint venture or a joint venture changes to an associate, the equity method is continued without any remeasurement of the retained interest.

If the interest in an associate or joint venture is reduced, but the equity method is still applied, a profit and loss is calculated on the portion sold as the difference between the proceeds received and the carrying value of the portion sold. Any proportionate profit or loss recognised in other comprehensive income that relates to the portion of the investment sold must also be reclassified to profit or loss.

The gains (losses) from sales of investee equity instruments should be reported in the investor's profit or loss as a separate line item after the line of its share of those joint ventures or associated profit or loss from continuing operations.

Acquisition of an Associate in Stages

An entity may hold an investment in another entity's ordinary share that is below the level that would create a presumption of significant influence, which it later increases so that the threshold for application of the equity method is exceeded. The guidance of IAS 28 would suggest that when the equity method is first applied, the difference between the carrying amount of the investment and the fair value of the underlying net identifiable assets must be computed (as described earlier in the chapter). Even though IFRS 9's fair value provisions were being applied, there will likely be a difference between the fair value of the passive investment (gauged by market prices for publicly-traded instruments) and the fair value of the investee's underlying net assets (which are driven by the ability to generate cash flows, etc.). Thus, when the equity method accounting threshold is first exceeded for a formerly passively held investment, determination of the “goodwill-like” component of the investment will typically be necessary.

Increasing a Stake in an Associate While Continuing the Equity Method

When an entity increases its stake in an existing associate continuing to have significant influence but not gaining control, the cost of acquiring the additional stake (including any directly attributable costs) is added to the carrying value of the associate. Goodwill that arises from the purchase of the additional stake is calculated based on the fair value information at the date of the acquisition of the additional stake. The previously held interest may not be stepped up because the status of the investment has not changed. The same applies, for example, when existing stakes are reduced, thus resulting in an increased stake in an existing associate (e.g., where the investee purchases treasury shares from outside shareholders (i.e., owners other than the reporting entity)).

Dilution Losses

A stake in an associate or joint venture may decrease, for example, following a capital increase on the part of the investee in which the investor does not take part. This constitutes a partial disposal of an entity's interest in an associate. Investor accounting for investee capital transactions that dilute the share of the investor's investment is not addressed by IAS 28. Although due to IFRS 10.B96, changes in the proportion held by non-controlling interests shall be recognised directly in equity, we feel that this principle is not applicable in this instance as the investor only accounts for his stake in the investee in his equity accounting and has not entered into a transaction with the associate. Accounting adjustments such as these therefore do not constitute transactions with owners, and any profit or loss must be recognised in the income statement.

Separate Financial Statements

IAS 28 provides that in the separate financials of the investor, the investment in the associate or joint venture may be carried at either cost, in terms of IFRS 9, or using the equity method as described in IAS 27. This is an accounting policy choice that the investor must make and apply consistently across each category of investments.

Consistency of Accounting Policies

Financial statements should be prepared using uniform accounting policies. If the accounting policies of the associate or joint venture differ from the reporting entity, adjustments should be made to the financial statements of the associate or joint venture to conform to those of the reporting entity.

Coterminous Year-end Dates

The most recent available financial statements of the associate or joint venture are used to apply the equity method. If the reporting dates of the entity and the associate or joint venture differ, financial statements on the reporting date of the entity are prepared for the associate or joint venture, unless it is impracticable to do so. If the reporting dates differ, adjustments are required for the effect of significant transactions that occur between the dates. IAS 28 requires that a reporting date difference of no more than three months is permissible. The length of the reporting period and difference in reporting dates must be applied consistently from year to year.

Treatment of Cumulative Preferred Shares

If an associate has outstanding cumulative preferred shares, held by parties other than the investor that are classified as equity, the investor computes its share of the profits or losses after deducting dividends due to the preferred shareholders, whether or not declared.

Share of Losses Exceeding the Interest

If an entity's share of losses exceeds its interest in the associate or joint venture, the recognition of its share of future losses is discontinued. The interest in the associate or joint venture is the carrying amount of the equity accounted investment and other long-term interests that are regarded as part of the entity's net investment in the associate or joint venture. Long-term items for which settlement is neither planned nor likely to occur are deemed to be an extension of the investment. Losses incurred after the investment in the associate or joint venture is reduced to zero are applied to other interests in reverse order of seniority (i.e., priority in liquidation).

If the entity's interest is reduced to zero, any further losses are only recognised as a liability to the extent that the entity has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture is again profitable, the entity only resumes recognising its share of profits after the share of losses not recognised are eliminated.

Investment Entities

Although investment entities present separate financial statements as their only financial statements, the cost option is not available to investment entities, since these would have to measure their investments at fair value through profit or loss. When an entity ceases to be an investment entity, it is required to consolidate any subsidiaries under IFRS 10. Should it continue to present separate financial statements in addition to consolidated financial statements, the cost option or the equity method will become available to it as with any other entity, subject to the requirements discussed above. The date of the change of status shall be the deemed acquisition date. The fair value of any subsidiary at the date of change in status becomes the deemed consideration of the subsidiary in the separate financial statements, when accounting for the investments in accordance with the options shown above. If an entity becomes an investment entity, the difference between the previous carrying amount of the subsidiary and its fair value at the date of the change of status of the entity is recognised as a gain or loss in profit or loss. The cumulative amount of any gain or loss previously recognised in other comprehensive income in respect of those subsidiaries must be treated as if the investment entity had disposed of those subsidiaries at the date of change in status.

Disclosure in Separate Financial Statements

All applicable IFRS are applied in the separate financial statements. Additionally, when a parent (because of the exemption in IFRS 10) elects not to prepare consolidated financial statements and instead prepares separate financial statements, the following should be disclosed in those separate financial statements:

• The fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and principal place of business (and country of incorporation if different) of the entity whose consolidated financial statements that comply with IFRS have been produced for public use; and the address where those consolidated financial statements are obtainable;
• A list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, principal place of business (and country of incorporation if different), proportion of ownership interest and, if different, proportion of voting rights; and
• A description of the method used to account for the foregoing investments.

When a parent (other than a parent covered by the above-mentioned exemption) or an investor with joint control of, or significant influence over, an investee prepares separate financial statements, the parent or investor is required to identify the financial statements prepared in accordance with IFRS 10, IFRS 11 or IAS 28 to which they relate. The parent or investor must also disclose the following in its separate financial statements:

• The fact that the statements are separate financial statements and the reasons why those statements are prepared if not required by law;
• A list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, principal place of business (and country of incorporation if different), proportion of ownership interest and, if different, proportion of voting rights; and
• A description of the method used to account for the foregoing investments.

Main Objective

The objective of IFRS 12 is to require the disclosure of information that enables users of financial statements to evaluate:

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

Where the disclosures required by IFRS 12, together with the disclosures required by other IFRS, do not meet the above objectives, an entity is required to disclose whatever additional information is necessary to meet the objectives.

Significant Judgements and Assumptions

An entity discloses information about significant judgements and assumptions it has made (and changes in those judgements and assumptions) in determining whether:

• It controls another entity;
• It has joint control of an arrangement or significant influence over another entity;
• The type of joint arrangement (i.e., joint operation or joint venture) when the arrangement has been structured through a separate vehicle;
• It meets the definition of an investment entity, if applicable.

Interests in Subsidiaries

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

• Understand the composition of the group;
• Understand the interest that non-controlling interests have in the group's activities and cash flows;
• Evaluate the nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of the group;
• Evaluate the nature of, and changes in, the risks associated with its interests in consolidated structured entities;
• Evaluate the consequences of changes in its ownership interest in a subsidiary that do not result in a loss of control;
• Evaluate the consequences of losing control of a subsidiary during the reporting period.

Interests in Joint Arrangements and Associates

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

• The nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates;
• The nature of, and changes in, the risks associated with its interests in joint ventures and associates.

Interests in Unconsolidated Structured Entities

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

• Understand the nature and extent of its interests in unconsolidated structured entities;
• Evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities.

Investment Entities

An investment entity that measures all its subsidiaries at fair value should provide the IFRS 12 disclosures related to investment entities.

An investment entity is required to 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, it must disclose its reasons for concluding that it is nevertheless an investment entity. In addition, an investment entity is required to disclose the following information, in addition to any disclosures required by other standards (such as IFRS 7 or IAS 24):

• The effects of changes in investment entity status;
• The composition of the group;
• The nature and extent of any significant restrictions;
• Any current commitments or intentions to provide financial or other support to an unconsolidated subsidiary;
• Details of any sponsorship of unconsolidated subsidiaries;
• Terms of any contractual arrangements to provide support to unconsolidated subsidiaries.

Consolidations

At the date of initial application (the beginning of the annual period IFRS 10 is applied for the first time) no adjustments are required to the previous accounting for entities that are consolidated based on the old IAS 27 and, in terms of IFRS 10, will still be consolidated. Relief is also provided for an investor's interest in investees that were disposed of during the previous reporting period resulting in non-consolidation in terms of both the old IAS 27 and IFRS 10.

If the consolidation conclusion is different on the date of initial application, IFRS 10 clarifies how the retrospective application should be applied. If IFRS 10 results in the consolidation of an entity not previously consolidated, the retrospective application differs depending on whether the investee is a business (as defined for business combination purposes, see Chapter 15) or not. If the investee is a business, the assets, liabilities and non-controlling interest of the previously unconsolidated entity are measured by application of the acquisition method of IFRS 3 from the date control of the investee is obtained in terms of IFRS 10. The investor only retrospectively adjusts the immediately preceding reporting period. When the date on which control was obtained was before the beginning of the immediately preceding reporting period, equity at the beginning of the immediately preceding reporting period should be adjusted with the difference between the amount of assets, liabilities and non-controlling interest recognised and the previous carrying amount of the investor's investment.

If, however, the investee is not a business, no goodwill is recognised for the transaction in terms of IFRS 3. The immediately preceding reporting period is also retrospectively adjusted. When the date on which control was obtained was before the beginning of the previous reporting period, equity at the beginning of that period is adjusted with the difference between the amount of assets (excluding goodwill), liabilities and non-controlling interest recognised and the previous carrying amount of the investor's investment.

If it is impracticable to measure the investee's assets, liabilities and non-controlling interest, different guidance is also provided for businesses and non-businesses. In the case of a business, IFRS 3 is applied from the deemed acquisition date. The deemed acquisition date is the beginning of the earliest period the application of IFRS 3 is practicable, which could be the current period. The same principles apply for non-businesses, except that goodwill is not calculated. If the current period is the earliest period that the application of IFRS 3 is practicable, the adjustment to equity is only made at the beginning of the current period.

Application of IFRS 3 to account for the acquisition of control as described above depends on when control was obtained. If the acquisition date precedes the effective date of IFRS 3 (2008 version), the entity has the choice to apply either IFRS 3 (2004 version) or IFRS 3 (2008 version) to account for the business combination. If the acquisition date is after the effective date of IFRS 3 (2008), then that is the standard that must be applied. Refer to Chapter 15.

If IFRS 10 results in the non-consolidation of an entity that was previously consolidated, the investment in the investee is measured at the amount it should have been measured as if IFRS 10 was applicable at the date of acquisition of the investment or when control was previously lost. The results of the previous reporting period are adjusted retrospectively. If the date the investment was acquired or control was lost is before the beginning of the previous reporting period, equity is adjusted at the beginning of the previous reporting period as the difference between the previous carrying amount of the assets, liabilities and non-controlling interest and the recognised amount of the investment. The impracticability guidance discussed above is also applicable in this instance.

Joint Venture

When the accounting of a joint venture is changed from proportionate consolidation to the equity method, the investment is recognised from the beginning of the previous reporting period. On that date the investment is measured at the aggregate of the asset and liabilities (including goodwill) recognised in terms of the proportionate consolidation method. This becomes the deemed cost on initial recognition. The deemed cost should, however, be assessed for impairment, and any impairment loss adjusts the opening retained earnings at that date. If the aggregate of the assets and liabilities recognised in terms of proportionate consolidation results in a negative net asset, a corresponding liability shall only be recognised if the entity has a legal or constructed liability for such an amount. If not, retained earnings is adjusted and the non-recognition of the liability and the entity's share in the cumulative unrecognised losses of the joint venture must be disclosed. The entity also discloses the breakdown of the assets and liabilities aggregated into the one-line investment.

Joint Operation

When a joint operation is changed from the equity method to accounting for assets and liabilities, the entity derecognises the investment at the beginning of the previous reporting period and any other items that form part of its net investment in the joint operation. The entity's share of the assets and liabilities (including goodwill included in the equity investment) of the joint operation is recognised in accordance with the contractual arrangement and based on the information used for application of the equity method. Any difference between the assets and liabilities recognised and the net investment derecognised is first offset against goodwill, if it represents a credit balance. Any balance remaining or debit balance is recognised in retained earnings. A reconciliation should be provided between the investment derecognised and the assets and liabilities recognised, identifying the amount recognised in retained earnings.

An entity that previously accounted for its interest in a joint operation at cost in its separate financial statements is required to derecognise the investment and recognise its share of the assets and liabilities of the joint operation. Similarly, a reconciliation should be provided between the amounts by identifying the amount recognised in retained earnings.

Investment Entities

At the date of initial application of the amendments to IFRS 10, IFRS 12 and IAS 27, an entity must assess whether it is an investment entity on the basis of the facts and circumstances that exist at that date. If, at the date of initial application, an entity concludes that it is an investment entity, it will retrospectively measure its investment in each subsidiary at fair value through profit or loss as if the investment entity principles had always been effective.

Disclosure

The disclosure requirements of IFRS 12 are not required to be applied for any period presented before the immediately preceding reporting period. Comparative disclosures of unconsolidated structured entities are also not required for the immediately preceding period in the period of initial application.