IFRS 12 Disclosure of Interests in Other Entities
Scope: this standard brings together disclosure requirements previously contained in several different standards. These new requirements are far more extensive than those which they replace.
The standard is long and detailed and includes many pages of Application Guidance.
IFRS 12 applies to any entity that has an interest in any of the following:
b Joint arrangements
Joint ventures c Associates
d Uncontrolled structured entities (SPVs)
Objective of the standard
The objective of IFRS 12 is to require disclosure of information that will enable users of financial statements to evaluate:
a the nature of, and risks associated with, its interests in other entities; and b the effects of those interests on its financial position, performance and cash flows.
An entity should disclose information about significant judgements and assumptions made (as well as changes to these) in determining the following:
- that it has control of another entity;
- that it has joint control of an arrangement or significant influence over another entity;
- the type of joint arrangement (joint operation or joint venture when the arrangement has been structured through a separate vehicle).
Interests in subsidiaries
The entity should 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;
- 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.
Quite a list of disclosures, and the standard also requires disclosures regarding subsidiaries whose year-end is different from that of the consolidated financial statements.
Interests in joint arrangements and associates
The entity should 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 effect of its contractual relationships with other investors with joint control of, or significant influence over, joint arrangements and associates;
- evaluate the nature of, and changes in the risks associated with, its interests in joint ventures and associates.
Interests in unconsolidated structured entities
This is an extremely complex area which is likely to affect only specialist entities such as:
- securitization vehicles;
- asset-backed financings;
- some investment funds.
The standard gives examples of features or attributes of structured entities and generally there is concern that reality could be hidden by clutter:
An entity shall consider the level of detail necessary to satisfy the disclosure objectives and how much emphasis to place on each of the requirements in this IFRS. It shall aggregate of disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have different characteristics.
The point of these illustrations and extracts from accounting standards is that whatever the motives are to structure groups and accept or deny control, freedom to adopt a 'strategy' of your choice may be severely restricted in the future.