Objectives of IAS 27

IAS 27 has the twin objectives of setting standards to be applied:

• in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent; and
• 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 enterprise 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 enterprise. Even when more than one half of the voting rights is not acquired, control may be evidenced by power: [IAS 27.13]

• over more than one half of the voting rights by virtue of an agreement with other investors; or
• to govern the financial and operating policies of the other enterprise under a statute or an agreement; or
• to appoint or remove the majority of the members of the board of directors; or
• to cast the majority of votes at a meeting of the board of directors.

Presentation of Consolidated Accounts

A parent is required to present consolidated financial statements in which it consolidates its investments in subsidiaries [IAS 27.9] – except in one circumstance: 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]

• There is no exemption for a subsidiary whose business is of a different nature from the parent's.

• 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.

• There is no exemption for a subsidiary that had previously been consolidated and that is now being held for sale. The parent must continue to consolidate such a subsidiary until it is actually disposed of. However, as a result of an amendment of IAS 27 by IFRS 5 in March 2004, there is an exemption for a subsidiary for which control is intended to be temporary because the subsidiary was acquired and is held exclusively with a view to its subsequent disposal in the near future. For such a subsidiary, if it is highly probable that the sale will be completed within 12 months then the parent should account for its investment in the subsidiary under IFRS 5 as an asset held for sale, rather than consolidate it under IAS 27.

Special purpose entities (SPEs) should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting enterprise. 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 enterprise. [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]

Consolidation Procedures

Intragroup balances, transactions, income, and expenses should be eliminated in full. Intragroup losses may indicate that an impairment loss on the related asset should be recognised. [IAS 27.24-25]

The financial statements of the parent and its subsidiaries used in preparing the consolidated financial statements should all be prepared as of the same reporting date, unless it is impracticable to do so. [IAS 27.26] If it is impracticable a particular subsidiary to prepare its financial statements as of the same date as its parent, adjustments must be made for the effects of significant transactions or events that occur between the dates of the subsidiary's and the parent's financial statements. And in no case may the difference be more than three months. [IAS 27.27]

Consolidated financial statements must be prepared using uniform accounting policies for like transactions and other events in similar circumstances. [IAS 27.28]

Minority interests should be presented in the consolidated balance sheet within equity, but separate from the parent's shareholders' equity. Minority interests in the profit or loss of the group should also be separately presented. [IAS 27.33]

Where losses applicable to the minority exceed the minority interest in the equity of the relevant subsidiary, the excess, and any further losses attributable to the minority, are charged to the group unless the minority has a binding obligation to, and is able to, make good the losses. Where excess losses have been taken up by the group, if the subsidiary in question subsequently reports profits, all such profits are attributed to the group until the minority's share of losses previously absorbed by the group has been recovered. [IAS 27.35]

Separate Financial Statements of the Parent or Investor in an Associate or Jointly Controlled Entity

In the parent's/investor's individual financial statements, investments in subsidiaries, associates, and jointly controlled entities should be accounted for either: [IAS 27.37]

• at cost; or
• in accordance with IAS 39.

Such investments may not be accounted for by the equity method in the parent's/investor's separate statements.

Disclosure

Disclosures required in consolidated financial statements: [IAS 27.40]

• the nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly through subsidiaries, more than half of the voting power;
• the reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control;
• the reporting date of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a reporting date or for a period that is different from that of the parent, and the reason for using a different reporting date or period; and
• the nature and extent of any significant restrictions on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances.

Disclosures required in separate financial statements that are prepared for a parent that is permitted not to prepare consolidated financial statements: [IAS 27.41]

• the fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and country of incorporation or residence 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, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held; and
• a description of the method used to account for the foregoing investments.

Disclosures required in the separate financial statements of a parent, investor in a jointly controlled entity, or investor in an associate: [IAS 27.42]

• 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, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held; and
• a description of the method used to account for the foregoing investments.