International Accounting and Auditing / International Financial Reporting Standards / Ernst Young / International GAAP 2015 / (2013) Chapter 6

Consolidated financial statements (IAS 27) / 1 INTRODUCTION

(2013) Chapter 6 Consolidated financial statements

(IAS 27)
1 INTRODUCTION
1.1 Background
As indicated at 1.4 below, as a result of its consolidation project, in May 2011 the IASB
issued a package of new IFRSs that replace IAS 27 – Consolidated and Separate Financial
Statements – and SIC-12 – Consolidation – Special Purpose Entities, as well as IAS 28 –
Investments in Associates – and IAS 31– Interests in Joint Ventures. However, these new
standards are not mandatory until annual periods beginning on or after 1 January 2013.
Depending on an entity's regulator and jurisdiction, the date at which the entity applies the
new standards may vary from the date prescribed by the IASB; in such cases, the entity
could not state that it prepared financial statements in compliance with IFRS as issued by the
IASB.
Until the package of new IFRSs is applied, the above-mentioned standards continue to be
applicable.
Many entities conduct their business not only directly, but also through strategic investments
in other entities. IFRS broadly distinguishes between three types of such entities:

· entities controlled by the reporting entity (subsidiaries), including entities that,

although not necessarily owned by the reporting entity, are operating for its benefit
(special purpose entities). Until the new IFRSs are applied, such entities are to be
accounted for in accordance with IAS 27 (hereafter referred to as 'IAS 27 (2012)')
and SIC-12 using consolidated financial statements (which are addressed in the
remainder of this chapter);
· entities jointly controlled by the reporting entity and one or more third parties (joint
ventures). Until the new IFRSs are applied, such entities are to be accounted for in
accordance with IAS 31 (see Chapter 13); and
· entities that, while not controlled or jointly controlled by the reporting entity, are
subject to significant influence by it (associates). Until the new IFRSs are applied,
such entities are to be accounted for in accordance with IAS 28 (hereafter referred to
as 'IAS 28 (2012)') using equity accounting (see Chapter 12 at 11).

IAS 27 (2012) is based upon the version released in December 2003, [IAS 27.IN1 (2012)],
with subsequent amendments by other IFRSs. The most significant amendments affecting
consolidated financial statements were in January 2008, when the standard was amended as
part of the second phase of the business combinations project. These amendments primarily
changed the accounting for non-controlling interests and the loss of control of a subsidiary.
[IAS 27.IN2 (2012)]. It is this amended version of IAS 27 that is the focus of this Chapter.
Some entities may wish (or are legally required) to present additional financial statements in
which their investments in subsidiaries, joint ventures, and associates are accounted for on
some other basis, such as cost or fair value. Whilst IFRS does not require an entity to prepare
such additional financial statements (referred to as 'separate financial statements'), IAS 27
(2012) does prescribe the accounting treatment where they are prepared in compliance with
IFRS, [IAS 27.3 (2012)] (see Chapter 9). In May 2008, the IASB issued Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or Associate, which amended the then
IAS 27 with respect to the accounting for such entities in separate financial statements.

1.2 The objectives of consolidated financial statements under

IAS 27 (2012)
Printed 30 Nov 2015 Page 1 of 3
International Accounting and Auditing / International Financial Reporting Standards / Ernst Young / International GAAP 2015 / (2013) Chapter 6
Consolidated financial statements (IAS 27) / 1 INTRODUCTION

Consolidated financial statements extend the reporting entity to include other entities that
are subject to its control. A holding entity treats net assets and activities of controlled entities
as if they were part of the holding entity's own net assets and activities. The aim is to present
the financial position and results of operations of the holding entity and its subsidiaries
(referred to as a 'group') as if they were a single entity.
IAS 27 (2012) requires a parent (i.e. an entity with one or more subsidiaries) to present
consolidated financial statements in which all subsidiaries are included. [IAS 27.9, 12
(2012)]. The consolidation model in IAS 27 (2012) is based primarily on the legal and
contractual rights of shareholders, rather than on a pure 'ownership' model or 'economic
control' model. However, aspects of an 'economic control' model are also reflected in SIC-12.
1.3 How consolidated and separate financial statements under
IAS 27 (2012) are dealt with in Chapters 6, 8 and 9
This Chapter covers the definition of 'control', the requirement to prepare consolidated
financial statements, the scope of consolidated financial statements and the disclosure in
consolidated financial statements, as listed in the table of contents for this Chapter.
Chapter 8, principally at 6 deals with:

· consolidation procedures
· changes in ownership interests (other than business combinations and common
control transactions)
· non-controlling interests
· call and put options over non-controlling interests

Chapter 9 deals with:

· requirements of separate financial statements

· disclosure requirements for separate financial statements
· individual financial statements

The requirements of IFRS 3 – Business Combinations – and the accounting for common
control business combinations are discussed in Chapters 10 and 11, respectively.
Considerations for first-time adopters of IFRS are discussed in Chapter 5.

1.4 Consolidation project

In June 2003, the IASB added a project on consolidation to its agenda to issue a new IFRS to
replace the consolidation requirements in IAS 27 and SIC-12. Consequently, in May 2011, the
IASB issued an amended version of IAS 27 with a new title of Separate Financial Statements,
together with IFRS 10 – Consolidated Financial Statements – and IFRS 12 – Disclosure of
Interests in Other Entities. In addition, as a result of its project on joint ventures, the IASB
issued, at the same time, IFRS 11 – Joint Arrangements (to replace IAS 31) and an amended
IAS 28 – Investments in Associates and Joint Ventures. These new standards are mandatory
for annual periods beginning on or after 1 January 2013. The new standards may be adopted
early, but must be adopted as a package, that is, all as of the same date, except that an
entity may early adopt the disclosure provisions for IFRS 12 (without adopting the other new
standards).
Depending on an entity's regulator and jurisdiction, the date at which the entity applies the
new standards may vary from the date prescribed by the IASB; in such cases, the entity
could not state that it prepared financial statements in compliance with IFRS as issued by the
IASB.

Printed 30 Nov 2015 Page 2 of 3

International Accounting and Auditing / International Financial Reporting Standards / Ernst Young / International GAAP 2015 / (2013) Chapter 6
Consolidated financial statements (IAS 27) / 1 INTRODUCTION

IFRS 10 replaces the portion of IAS 27 (2012) that addresses the accounting for consolidated
financial statements. It also addresses the issues raised in SIC-12; therefore SIC-12 has
been withdrawn. What remains in the amended version of IAS 27 is limited to accounting for
investments in subsidiaries, jointly controlled entities and associates in separate financial
statements. IFRS 10 establishes a single control model that applies to all entities, including
'special purpose entities' ('structured entities' and 'variable interest entities' under the new
standards and US GAAP, respectively). The changes introduced by IFRS 10 will require
management to exercise significantly more judgement to determine which entities are
controlled, compared with the requirements that are in IAS 27 (2012). The application of
IFRS 10 may change which entities are required to be consolidated by a parent within a
group. The IASB made these changes, in part, in response to the financial crisis. There was
heavy criticism of accounting rules that permitted certain entities to remain off-balance
sheet. The requirements of IFRS 10 relating to the topics covered by this Chapter are
discussed in Chapter 7. The requirements of IFRS 10 dealing with consolidation procedures
and non-controlling interests are dealt with in Chapter 8.
IFRS 12 contains all disclosure requirements related to an entity's interests in subsidiaries,
joint arrangements, associates and structured entities, including a number of new
disclosures. There is now an explicit requirement in IFRS 12 for an entity to disclose
significant judgements that were made in determining whether it controls another entity.
Even if management concludes that it does not control an entity, the information used to
make that judgement will be transparent to users of the financial statements. The new
disclosures will also assist users of the financial statements to make their own assessment of
the financial impact were management to have reached a different conclusion regarding
consolidation – by providing more information about certain unconsolidated entities. IFRS 12
includes all of the disclosures that were included in IAS 27 (2012) related to consolidated
financial statements, as well as the disclosures that were included in IAS 31 and IAS 28
(2012). The requirements of IFRS 12 are dealt with in Chapter 15.

1.5 Future developments

The IASB is engaged in two projects that may affect the assessment of control and the
requirements relating to the preparation of consolidated financial statements:

· Exposure Draft (ED/2011/4) – Investment Entities; and

· Conceptual Framework for Financial Reporting: The Reporting Entity.

The possible implications of these projects are discussed further in Chapter 7 at 13.1 and
13.2 respectively.

Go To Document ID: (2013) IG Chapter 06

System ID: 261501175~1987133
Date: 13 Jan 2015

Printed 30 Nov 2015 Page 3 of 3