IAS 27 Consolidated and Separate Financial Statements

This revised Standard supersedes IAS 27 (revised 2000) Consolidated Financial Statements and Accounting for Investments inSubsidiaries and should be applied for annual periods beginning on orafter 1 January 2005. Earlier application is encouraged.

Contents


Introduction IN1-IN14
International Accounting Standard 27 Consolidatedand Separate Financial Statements
Scope 1-3
Definitions 4-8
Presentation of consolidated financial statements 9-11
Scope of consolidated financial statements 12-21
Consolidation procedures 22-36
Accounting for investments in separate financialstatements 37-39
Disclosure 40-42
Effective date 43
Withdrawal of other pronouncements 44-45
Appendix: Amendments to Other Pronouncements
Approval of IAS 27 by the Board
Basis for conclusions
Dissenting opinion
Implementation guidance on IASs 27, 28 and 31
Table of concordance

International Accounting Standard 27 Consolidated and Separate Financial Statements (IAS 27)is setout in paragraphs 1-45 and the Appendix. All the paragraphs have equalauthority but retain the IASC format of the Standard when it was adopted by theIASB. IAS 27 should be read in the context of the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Framework for the Preparation and Presentation of Financial Statements.IAS 8 Accounting Policies, Changes in Accounting Estimates andErrors provides a basis for selecting and applying accounting policiesin the absence of explicit guidance.

Introduction


IN1. International Accounting Standard 27 Consolidated and Separate Financial Statements (IAS 27)replacesIAS 27 (revised 2000) Consolidated Financial Statements andAccounting for Investments in Subsidiaries and should be applied forannual periods beginning on or after 1 January 2005. Earlier application isencouraged. The Standard also replaces SIC-33 Consolidation andEquity Method-Potential Voting Rights and Allocation of Ownership Interests.

Reasons for Revising IAS 27
IN2. The International Accounting Standards Board developed this revised IAS 27 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.
IN3. For IAS 27 the Board's main objective was to reduce alternatives in accounting for subsidiaries in consolidated financial statements and in accounting for investments in the separate financial statements of a parent, venturer or investor. The Board did not reconsider the fundamental approach to consolidation of subsidiaries contained in IAS 27.
The Main Changes
IN4. The main changes from the previous version of IAS 27 are described below.

Scope
IN5. The Standard applies to accounting for investments in subsidiaries, jointly controlled entities and associates in the separate financial statements of a parent, a venturer or investor. Therefore, the title of the Standard was amended as shown in paragraph IN1.

Exemptions from Consolidating Investments in Subsidiaries
IN6. The Standard modifies the exemption from preparing consolidated financial statements. Paragraph 8 in the previous version of IAS 27 (now paragraph 10) was amended so that a parent need not present consolidated financial statements if:
(a) the parent is itself a wholly-owned subsidiary, or the parent 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 preparing consolidated financial statements;
(b) the parent's debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);
(c) 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
(d) 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 Standard clarifies the requirements for a parent exempted from preparing consolidated financial statements when the parent elects, or is required by local regulations, to present separate financial statements (see paragraphs IN13 and IN14).

Temporary control
IN7. The Standard does not require consolidation of a subsidiary acquired when there is evidence that control is intended to be temporary. However, there must be evidence that the subsidiary is acquired with the intention to dispose of it within twelve months and that management is actively seeking a buyer. In addition, the words "in the near future" were replaced with the words "within twelve months". When a subsidiary previously excluded from consolidation is not disposed of within twelve months it must be consolidated as from the date of acquisition unless narrowly specified circumstances apply.
IN8. The Standard stipulates that the requirement to consolidate investments in subsidiaries applies to venture capital organisations, mutual funds, unit trusts and similar entities. This was added for clarification.
IN9. An entity is not permitted to exclude from consolidation an entity it continues to control simply because that entity is operating under severe long-term restrictions that significantly impair its ability to transfer funds to the parent. Control must be lost for exclusion to occur.

Consolidation Procedures
Potential voting rights
IN10. The Standard requires an entity to consider the existence and effect of potential voting rights currently exercisable or convertible when assessing whether it has the power to govern the financial and operating policies of another entity. This requirement was previously included in SIC-33, which has been superseded.
Accounting policies
IN11. The Standard requires an entity to use uniform accounting policies for reporting like transactions and other events in similar circumstances. The previous version of IAS 27 provided an exception to this requirement when it was "not practicable to use uniform accounting policies".
Minority interests
IN12. This Standard requires an entity to present minority interests in the consolidated balance sheet within equity, separately from the parent shareholders' equity. Though the previous version of IAS 27 precluded presentation of minority interests within liabilities, it did not require presentation within equity.

Separate Financial Statements
IN13. The Standard prescribes the accounting treatment for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by local regulations, to present separate financial statements. It requires these investments to be accounted for at cost or in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
IN14. The Standard retains an alternative for accounting for these investments in an investor's separate financial statements. However, the Standard stipulates that when an entity accounts for investments in unconsolidated subsidiaries in accordance with IAS 39 in its consolidated financial statements, it must also do so in its separate financial statements.

Scope
1. This Standard shall be applied in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent.
2. This Standard does not deal with methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination (see IAS 22 Business Combinations).
3. This Standard shall also be applied in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by local regulations, to present separate financial statements.
Definitions
4. The following terms are used in this Standard with the meanings specified:
Consolidated financial statements are the financial statements of a group presented as those of a single economic entity.
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
The cost method is a method of accounting for an investment whereby the investment is recognised at cost. The investor recognises income from the investment only to the extent that the investor receives distributions from accumulated profits of the investee arising after the date of acquisition. Distributions received in excess of such profits are regarded as a recovery of investment and are recognised as a reduction of the cost of the investment.
A group is a parent and all its subsidiaries.
Minority interest is that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.
A parent is an entity that has one or more subsidiaries.
Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees.
A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent).
5. A parent or its subsidiary may be an investor in an associate or a venturer in a jointly controlled entity. In such cases, consolidated financial statements prepared and presented in accordance with this Standard are also prepared so as to comply with IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures.
6. For an entity described in paragraph 5, separate financial statements are those prepared and presented in addition to the financial statements referred to in paragraph 5. Separate financial statements need not be appended to, or accompany, those statements.
7. The financial statements of an entity that does not have a subsidiary, associate or venturer's interest in a jointly controlled entity are not separate financial statements.
8. A parent that is exempted in accordance with paragraph 10 from presenting consolidated financial statements may present separate financial statements as its only financial statements.

Presentation of Consolidated Financial Statements
9. A parent, other than a parent described in paragraph 10, shall present consolidated financial statements in which it consolidates its investments in subsidiaries in accordance with this Standard.
10. A parent need not present consolidated financial statements if and only if:
(a) 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;
(b) the parent's debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);
(c) 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
(d) the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.
11. A parent that elects in accordance with paragraph 10 not to present consolidated financial statements, and presents only separate financial statements, complies with paragraphs 37-42.

Scope of Consolidated Financial Statements
12. Consolidated financial statements shall include all subsidiaries of the parent.*
* If on acquisition a subsidiary meets the criteria to be classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, it shall be accounted for in accordance with that Standard.
Editorial note: Substituted by IFRS 5 with effect for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies the IFRS for a period beginning before 1 January 2005, it shall disclose that fact. Previously "Consolidated financial statements shall include all subsidiaries of the parent, except those referred to in paragraph 16.".
13. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is: [1]
(a) power over more than half of the voting rights by virtue of an agreement with other investors;
(b) power to govern the financial and operating policies of the entity under a statute or an agreement;
(c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or
(d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.
[1] See also SIC-12 Consolidation-Special Purpose Entities.

14. An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the entity voting power or reduce another party's voting power over the financial and operating policies of another entity (potential voting rights). The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another entity, are considered when assessing whether an entity has the power to govern the financial and operating policies of another entity. Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.
15. In assessing whether potential voting rights contribute to control, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential voting rights, except the intention of management and the financial ability to exercise or convert.
16. [...]
Editorial note: Deleted by IFRS 5 with effect for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies the IFRS for a period beginning before 1 January 2005, it shall disclose that fact. Previously "A subsidiary shall be excluded from consolidation when there is evidence that (a) control is intended to be temporary because the subsidiary is acquired and held exclusively with a view to its disposal within twelve months from acquisition and (b) management is actively seeking a buyer. Investments in such subsidiaries shall be classified as held for trading and accounted for in accordance with IAS 39 Financial Instruments: Recognition and Measurement.".