Summary of IAS 27
Objectives of IAS 27
IAS 27 has the twin objectives of setting standards to be applied:
o in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent; and
o in accounting for investments in subsidiaries, jointly controlled entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements.
Key definitions [IAS 27.4]
Consolidated financial statements: the financial statements of a group presented as those of a single economic entity.
Subsidiary: an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).
Parent: an entity that has one or more subsidiaries.
Control: the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Identification of subsidiaries
Control is presumed when the parent acquires more than half of the voting rights of the entity. Even when more than one half of the voting rights is not acquired, control may be evidenced by power: [IAS 27.13]
o over more than one half of the voting rights by virtue of an agreement with other investors, or
o to govern the financial and operating policies of the entity under a statute or an agreement; or
o to appoint or remove the majority of the members of the board of directors; or
o to cast the majority of votes at a meeting of the board of directors.
SIC-12 provides other indicators of control (based on risks and rewards) for Special Purpose Entities (SPEs). SPEs should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting entity. This may arise even where the activities of the SPE are predetermined or where the majority of voting or equity are not held by the reporting entity. [SIC-12]
Presentation of consolidated financial statements
A parent is required to present consolidated financial statements in which it consolidates its investments in subsidiaries [IAS 27.9] – with the following exception:
A parent is not required to (but may) present consolidated financial statements if and only if all of the following four conditions are met: [IAS 27.10]
1. the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;
2. the parent's debt or equity instruments are not traded in a public market;
3. the parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and
4. the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.
The consolidated accounts should include all of the parent's subsidiaries, both domestic and foreign: [IAS 27.12]
o There is no exemption for a subsidiary whose business is of a different nature from the parent's.
o There is no exemption for a subsidiary that operates under severe long-term restrictions impairing the subsidiary's ability to transfer funds to the parent. Such an exemption was included in earlier versions of IAS 27, but in revising IAS 27 in December 2003 the IASB concluded that these restrictions, in themselves, do not preclude control.
o There is no exemption for a subsidiary that had previously been consolidated and that is now being held for sale. However, a subsidiary that meets the IFRS 5 criteria as an asset held for sale shall be accounted for under that Standard.
Special purpose entities (SPEs) should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting entity. This may arise even where the activities of the SPE are predetermined or where the majority of voting or equity are not held by the reporting entity. [SIC-12]
Once an investment ceases to fall within the definition of a subsidiary, it should be accounted for as an associate under IAS 28, as a joint venture under IAS 31, or as an investment under IAS 39, as appropriate. [IAS 27.31]
Summary of IAS 27
Objectives of IAS 27
IAS 27 has the twin objectives of setting standards to be applied:
o in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent; and
o in accounting for investments in subsidiaries, jointly controlled entities, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements.
Key definitions [IAS 27.4]
Consolidated financial statements: the financial statements of a group presented as those of a single economic entity.
Subsidiary: an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).
Parent: an entity that has one or more subsidiaries.
Control: the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Identification of subsidiaries
Control is presumed when the parent acquires more than half of the voting rights of the entity. Even when more than one half of the voting rights is not acquired, control may be evidenced by power: [IAS 27.13]
o over more than one half of the voting rights by virtue of an agreement with other investors, or
o to govern the financial and operating policies of the entity under a statute or an agreement; or
o to appoint or remove the majority of the members of the board of directors; or
o to cast the majority of votes at a meeting of the board of directors.
SIC-12 provides other indicators of control (based on risks and rewards) for Special Purpose Entities (SPEs). SPEs should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting entity. This may arise even where the activities of the SPE are predetermined or where the majority of voting or equity are not held by the reporting entity. [SIC-12]
Presentation of consolidated financial statements
A parent is required to present consolidated financial statements in which it consolidates its investments in subsidiaries [IAS 27.9] – with the following exception:
A parent is not required to (but may) present consolidated financial statements if and only if all of the following four conditions are met: [IAS 27.10]
1. the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;
2. the parent's debt or equity instruments are not traded in a public market;
3. the parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and
4. the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.
The consolidated accounts should include all of the parent's subsidiaries, both domestic and foreign: [IAS 27.12]
o There is no exemption for a subsidiary whose business is of a different nature from the parent's.
o There is no exemption for a subsidiary that operates under severe long-term restrictions impairing the subsidiary's ability to transfer funds to the parent. Such an exemption was included in earlier versions of IAS 27, but in revising IAS 27 in December 2003 the IASB concluded that these restrictions, in themselves, do not preclude control.
o There is no exemption for a subsidiary that had previously been consolidated and that is now being held for sale. However, a subsidiary that meets the IFRS 5 criteria as an asset held for sale shall be accounted for under that Standard.
Special purpose entities (SPEs) should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting entity. This may arise even where the activities of the SPE are predetermined or where the majority of voting or equity are not held by the reporting entity. [SIC-12]
Once an investment ceases to fall within the definition of a subsidiary, it should be accounted for as an associate under IAS 28, as a joint venture under IAS 31, or as an investment under IAS 39, as appropriate. [IAS 27.31]
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