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IAS 21 — The Effects of Changes in Foreign Exchange Rates Summary of IAS 21 Objective of IAS 21 The objective of IAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency [IAS 21.1] The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements [IAS 21.2] Key definitions [IAS 21.8] Functional currency: the currency of the primary economic environment in which the entity operates (The term 'functional currency' was used in the 2003 revision of IAS 21 in place of 'measurement currency' but with essentially the same meaning.) Presentation currency: the currency in which financial statements are presented Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates Foreign operation: a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity Basic steps for translating foreign currency amounts into the functional currency Steps apply to a stand-alone entity, an entity with foreign operations (such as a parent with foreign subsidiaries), or a foreign operation (such as a foreign subsidiary or branch) the reporting entity determines its functional currency the entity translates all foreign currency items into its functional currency the entity reports the effects of such translation in accordance with paragraphs 20-37 [reporting foreign currency transactions in the functional currency] and 50 [reporting the tax effects of exchange differences] Foreign currency transactions A foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction (use of averages is permitted if they are a reasonable approximation of actual) [IAS 21.21-22] At each subsequent balance sheet date: [IAS 21.23] o foreign currency monetary amounts should be reported using the closing rate o non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction o non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined Exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were translated when initially recognised or in previous financial statements are reported in profit or loss in the period, with one exception [IAS 21.28] The exception is that exchange differences arising on monetary items that form part of the reporting entity's net investment in a foreign operation are recognised, in the consolidated financial statements that include the foreign operation, in other comprehensive income; they will be recognised in profit or loss on disposal of the net investment [IAS 21.32] As regards a monetary item that forms part of an entity's investment in a foreign operation, the accounting treatment in consolidated financial statements should not be dependent on the currency of the monetary item [IAS 21.33] Also, the accounting should not depend on which entity within the group conducts a transaction with the foreign operation [IAS 21.15A] If a gain or loss on a nonmonetary item is recognised in other comprehensive income (for example, a property revaluation under IAS 16), any foreign exchange component of that gain or loss is also recognised in other comprehensive income [IAS 21.30] Translation from the functional currency to the presentation currency The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy are translated into a different presentation currency using the following procedures: [IAS 21.39] o assets and liabilities for each balance sheet presented (including comparatives) are translated at the closing rate at the date of that balance sheet This would include any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as part of the assets and liabilities of the foreign operation [IAS 21.47]; o income and expenses for each income statement (including comparatives) are translated at exchange rates at the dates of the transactions; and o all resulting exchange differences are recognised in other comprehensive income Special rules apply for translating the results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy into a different presentation currency [IAS 21.42-43] Where the foreign entity reports in the currency of a hyperinflationary economy, the financial statements of the foreign entity should be restated as required by IAS 29 Financial Reporting in Hyperinflationary Economies, before translation into the reporting currency [IAS 21.36] The requirements of IAS 21 regarding transactions and translation of financial statements should be strictly applied in the changeover of the national currencies of participating Member States of the European Union to the Euro – monetary assets and liabilities should continue to be translated the closing rate, cumulative exchange differences should remain in equity and exchange differences resulting from the translation of liabilities denominated in participating currencies should not be included in the carrying amount of related assets [SIC-7] Disposal of a foreign operation When a foreign operation is disposed of, the cumulative amount of the exchange differences recognised in other comprehensive income and accumulated in the separate component of equity relating to that foreign operation shall be recognised in profit or loss when the gain or loss on disposal is recognised [IAS 21.48] Tax effects of exchange differences These must be accounted for using IAS 12 Income Taxes Disclosure o The amount of exchange differences recognised in profit or loss (excluding differences arising on financial instruments measured at fair value through profit or loss in accordance with IAS 39) [IAS 21.52(a)] o Net exchange differences recognised in other comprehensive income and accumulated in a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period [IAS 21.52(b)] o When the presentation currency is different from the functional currency, disclose that fact together with the functional currency and the reason for using a different presentation currency [IAS 21.53] o A change in the functional currency of either the reporting entity or a significant foreign operation and the reason therefor [IAS 21.54] When an entity presents its financial statements in a currency that is different from its functional currency, it may describe those financial statements as complying with IFRS only if they comply with all the requirements of each applicable Standard (including IAS 21) and each applicable Interpretation [IAS 21.55] Convenience translations Sometimes, an entity displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency simply by translating all amounts at end-of-period exchange rates This is sometimes called a convenience translation A result of making a convenience translation is that the resulting financial information does not comply with all IFRS, particularly IAS 21 In this case, the following disclosures are required: [IAS 21.57] o Clearly identify the information as supplementary information to distinguish it from the information that complies with IFRS o Disclose the currency in which the supplementary information is displayed o Disclose the entity's functional currency and the method of translation used to determine the supplementary information IAS — Presentation of Financial Statements Summary of IAS Objective of IAS The objective of IAS (2007) is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities IAS sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content [IAS 1.1] Standards for recognising, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations [IAS 1.3] Scope IAS applies to all general purpose financial statements that are prepared and presented in accordance with International Financial Reporting Standards (IFRSs) [IAS 1.2] General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs [IAS 1.7] Objective of financial statements The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions To meet that objective, financial statements provide information about an entity's: [IAS 1.9] • assets • liabilities • equity • income and expenses, including gains and losses • contributions by and distributions to owners (in their capacity as owners) • cash flows That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty Components of financial statements A complete set of financial statements includes: [IAS 1.10] • a statement of financial position (balance sheet) at the end of the period • a statement of profit or loss and other comprehensive income for the period (presented as a single statement, or by presenting the profit or loss section in a separate statement of profit or loss, immediately followed by a statement presenting comprehensive income beginning with profit or loss) • a statement of changes in equity for the period • a statement of cash flows for the period • notes, comprising a summary of significant accounting policies and other explanatory notes • comparative information prescribed by the standard An entity may use titles for the statements other than those stated above All financial statements are required to be presented with equal prominence [IAS 1.10] When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period Reports that are presented outside of the financial statements – including financial reviews by management, environmental reports, and value added statements – are outside the scope of IFRSs [IAS 1.14] Fair presentation and compliance with IFRSs The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation [IAS 1.15] IAS requires an entity whose financial statements comply with IFRSs to make an explicit and unreserved statement of such compliance in the notes Financial statements cannot be described as complying with IFRSs unless they comply with all the requirements of IFRSs (which includes International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations and SIC Interpretations) [IAS 1.16] Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material [IAS 1.18] IAS acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure [IAS 1.19-21] Going concern The Conceptual Framework notes that financial statements are normally prepared assuming the entity is a going concern and will continue in operation for the foreseeable future [Conceptual Framework, paragraph 4.1] IAS requires management to make an assessment of an entity's ability to continue as a going concern If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS requires a series of disclosures [IAS 1.25] Accrual basis of accounting IAS requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting [IAS 1.27] Consistency of presentation The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS [IAS 1.45] Materiality and aggregation Each material class of similar items must be presented separately in the financial statements Dissimilar items may be aggregated only if the are individually immaterial [IAS 1.29] However, information should not be obscured by aggregating or by providing immaterial information, materiality considerations apply to the all parts of the financial statements, and even when a standard requires a specific disclosure, materiality considerations apply [IAS 1.30A-31]* * Added by Disclosure Initiative (Amendments to IAS 1), effective January 2016 Offsetting Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS [IAS 1.32] Comparative information IAS requires that comparative information to be disclosed in respect of the previous period for all amounts reported in the financial statements, both on the face of the financial statements and in the notes, unless another Standard requires otherwise Comparative information is provided for narrative and descriptive where it is relevant to understanding the financial statements of the current period [IAS 1.38] An entity is required to present at least two of each of the following primary financial statements: [IAS 1.38A] • statement of financial position* • statement of profit or loss and other comprehensive income • separate statements of profit or loss (where presented) • statement of cash flows • statement of changes in equity • related notes for each of the above items * A third statement of financial position is required to be presented if the entity retrospectively applies an accounting policy, restates items, or reclassifies items, and those adjustments had a material effect on the information in the statement of financial position at the beginning of the comparative period [IAS 1.40A] Where comparative amounts are changed or reclassified, various disclosures are required [IAS 1.41] Structure and content of financial statements in general IAS requires an entity to clearly identify: [IAS 1.49-51] • the financial statements, which must be distinguished from other information in a published document • each financial statement and the notes to the financial statements In addition, the following information must be displayed prominently, and repeated as necessary: [IAS 1.51] • the name of the reporting entity and any change in the name • whether the financial statements are a group of entities or an individual entity • information about the reporting period • the presentation currency (as defined by IAS 21 The Effects of Changes in Foreign Exchange Rates) • the level of rounding used (e.g thousands, millions) Reporting period There is a presumption that financial statements will be prepared at least annually If the annual reporting period changes and financial statements are prepared for a different period, the entity must disclose the reason for the change and state that amounts are not entirely comparable [IAS 1.36] Statement of financial position (balance sheet) Current and non-current classification An entity must normally present a classified statement of financial position, separating current and non-current assets and liabilities, unless presentation based on liquidity provides information that is reliable [IAS 1.60] In either case, if an asset (liability) category combines amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts [IAS 1.61] Current assetsare assets that are: [IAS 1.66] • expected to be realised in the entity's normal operating cycle • held primarily for the purpose of trading • expected to be realised within 12 months after the reporting period • cash and cash equivalents (unless restricted) All other assets are non-current [IAS 1.66] Current liabilitiesare those: [IAS 1.69] • expected to be settled within the entity's normal operating cycle • held for purpose of trading • due to be settled within 12 months • for which the entity does not have an unconditional right to defer settlement beyond 12 months (settlement by the issue of equity instruments does not impact classification) Other liabilities are non-current When a long-term debt is expected to be refinanced under an existing loan facility, and the entity has the discretion to so, the debt is classified as non-current, even if the liability would otherwise be due within 12 months [IAS 1.73] If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach [IAS 1.74] However, the liability is classified as non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment [IAS 1.75] Line items The line items to be included on the face of the statement of financial position are: [IAS 1.54] (a) property, plant and equipment (b) investment property (c) intangible assets (d) financial assets (excluding amounts shown under (e), (h), and (i)) (e) investments accounted for using the equity method (f) biological assets (g) inventories (h) trade and other receivables (i) cash and cash equivalents (j) assets held for sale (k) trade and other payables (l) provisions (m) financial liabilities (excluding amounts shown under (k) and (l)) (n) current tax liabilities and current tax assets, as defined in IAS 12 (o) deferred tax liabilities and deferred tax assets, as defined in IAS 12 (p) liabilities included in disposal groups (q) non-controlling interests, presented within equity (r) issued capital and reserves attributable to owners of the parent Additional line items, headings and subtotals may be needed to fairly present the entity's financial position [IAS 1.55] When an entity presents subtotals, those subtotals shall be comprised of line items made up of amounts recognised and measured in accordance with IFRS; be presented and labelled in a clear and understandable manner; be consistent from period to period; and not be displayed with more prominence than the required subtotals and totals [IAS 1.55A]* * Added by Disclosure Initiative (Amendments to IAS 1), effective January 2016 Further sub-classifications of line items presented are made in the statement or in the notes, for example: [IAS 1.77-78]: • classes of property, plant and equipment • disaggregation of receivables Special requirements apply where an entity becomes, or ceases to be, an investment entity [IFRS 10:B100-B101] The exemption from consolidation only applies to the investment entity itself Accordingly, a parent of an investment entity is required to consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity [IFRS 10:33] Disclosure There are no disclosures specified in IFRS 10 Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required Applicability and early adoption Note: This section has been updated to reflect the amendments to IFRS 10 made in June 2012 and October 2012 IFRS 10 is applicable to annual reporting periods beginning on or after January 2013 [IFRS 10:C1] Retrospective application is generally required in accordance with IAS Accounting Policies, Changes in Accounting Estimates and Errors [IFRS 10:C2] However, an entity is not required to make adjustments to the accounting for its involvement with entities that were previously consolidated and continue to be consolidated, or entities that were previously unconsolidated and continue not to be consolidated at the date of initial application of the IFRS [IFRS 10:C3] Furthermore, an entity is not required to present the quantitative information required by paragraph 28(f) of IAS for the annual period immediately preceding the date of initial application of the standard (the beginning of the annual reporting period for which IFRS 10 is first applied) [IFRS 10:C2A-C2B] However, an entity may choose to present adjusted comparative information for earlier reporting periods, any must clearly identify any unadjusted comparative information and explain the basis on which the comparative information has been prepared [IFRS 10.C6A-C6B] IFRS 10 prescribes modified accounting on its first application in the following circumstances: • an entity consolidates an entity not previously consolidated [IFRS 10:C4-C4C] • an entity no longer consolidates an entity that was previously consolidated [IFRS 10:C5-C5A] • in relation to certain amendments to IAS 27 made in 2008 that have been carried forward into IFRS 10 [IFRS 10:C6] An entity may apply IFRS 10 to an earlier accounting period, but if doing so it must disclose the fact that is has early adopted the standard and also apply: • IFRS 11 Joint Arrangements • IFRS 12 Disclosure of Interests in Other Entities • IAS 27 Separate Financial Statements (as amended in 2011) • IAS 28 Investments in Associates and Joint Ventures (as amended in 2011) The amendments made by Investment Entities are applicable to annual reporting periods beginning on or after January 2014 [IFRS 10:C1B] At the date of initial application of the amendments, an entity assesses whether it is an investment entity on the basis of the facts and circumstances that exist at that date and additional transitional provisions apply [IFRS 10:C3B–C3F] IFRS 12 — Disclosure of Interests in Other Entities Summary of IFRS 12 Objective and scope The objective of IFRS 12 is to require the disclosure of information that enables users of financial statements to evaluate: [IFRS 12:1] • the nature of, and risks associated with, its interests in other entities • the effects of those interests on its financial position, financial performance and cash flows Where the disclosures required by IFRS 12, together with the disclosures required by other IFRSs, not meet the above objective, an entity is required to disclose whatever additional information is necessary to meet the objective [IFRS 12:3] IFRS 12 is required to be applied by an entity that has an interest in any of the following: [IFRS 12:5] • subsidiaries • joint arrangements (joint operations or joint ventures) • associates • unconsolidated structured entities Annual Improvements to IFRS Standards 2014–2016 Cycle clarified that the disclosures required in IFRS 12 (with the exception of B10-B16) also apply to interests held for sale and discontinued operations in accordance with IFRS [IFRS 12:5A] IFRS 12 does not apply to certain employee benefit plans, separate financial statements to which IAS 27 Separate Financial Statements applies (except in relation to unconsolidated structured entities and investment entities in some cases), certain interests in joint ventures held by an entity that does not share in joint control, and the majority of interests in another entity accounted for in accordance with IFRS Financial Instruments [IFRS 12:6] An investment entity that prepares financial statements in which all of its subsidiaries are measured at fair value through profit or loss presents the disclosures relating to investment entities required by IFRS 12 [IFRS 12:6]* * Added by Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) amendments, effective January 2016 Key definitions [IFRS 12:Appendix A] Refers to contractual and non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity An interest in another entity can be evidenced by, but is not limited to, the holding of equity or debt instruments as well as other forms of involvement such as the provision of funding, liquidity support, credit enhancement and guarantees It includes the means by which an entity has control or joint control of, or significant influence over, another entity An entity does not necessarily have an interest in another entity solely because of a typical customer supplier relationship An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements Disclosures required Important note: The summary of disclosures that follows is a high-level summary of the main requirements of IFRS 12 It does not list every specific disclosure required by the standard, but instead highlights the broad objectives, categories and nature of the disclosures required IFRS 12 lists specific examples and additional disclosures which further expand upon the disclosure objectives, and includes other guidance on the disclosures required Accordingly, readers should not consider this to be a comprehensive or complete listing of the disclosure requirements of IFRS 12 Significant judgements and assumptions An entity discloses information about significant judgements and assumptions it has made (and changes in those judgements and assumptions) in determining: [IFRS 12:7] • that it controls another entity • that it has joint control of an arrangement or significant influence over another entity • the type of joint arrangement (i.e joint operation or joint venture) when the arrangement has been structured through a separate vehicle Interests in subsidiaries An entity shall disclose information that enables users of its consolidated financial statements to: [IFRS 12:10] • understand the composition of the group • understand the interest that non-controlling interests have in the group's activities and cash flows • 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 not result in a loss of control • evaluate the consequences of losing control of a subsidiary during the reporting period Interests in unconsolidated subsidiaries [Note: The investment entity consolidation exemption referred to in this section was introduced by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after January 2014.] In accordance with IFRS 10 Consolidated Financial Statements, an investment entity is required to apply the exception to consolidation and instead account for its investment in a subsidiary at fair value through profit or loss [IFRS 10:31] Where an entity is an investment entity, IFRS 12 requires additional disclosure, including: • the fact the entity is an investment entity [IFRS 12:19A] • information about significant judgements and assumptions it has made in determining that it is an investment entity, and specifically where the entity does not have one or more of the 'typical characteristics' of an investment entity [IFRS 12:9A] • details of subsidiaries that have not been consolidated (name, place of business, ownership interests held) [IFRS 12:19B] • details of the relationship and certain transactions between the investment entity and the subsidiary (e.g restrictions on transfer of funds, commitments, support arrangements, contractual arrangements) [IFRS 12: 19D-19G] • information where an entity becomes, or ceases to be, an investment entity [IFRS 12:9B] An entity making these disclosures are not required to provide various other disclosures required by IFRS 12 [IFRS 12:21A, IFRS 12:25A] Interests in joint arrangements and associates An entity shall disclose information that enables users of its financial statements to evaluate: [IFRS 12:20] • the nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates • the nature of, and changes in, the risks associated with its interests in joint ventures and associates Interests in unconsolidated structured entities An entity shall disclose information that enables users of its financial statements to: [IFRS 12:24] • understand the nature and extent of its interests in unconsolidated structured entities • evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities Applicability and early adoption [IFRS 12: Appendix C] IFRS 12 is applicable to annual reporting periods beginning on or after January 2013 Early application is permitted The disclosure requirements of IFRS 12 need not be applied for any period presented that begins before the annual period immediately preceding the first annual period for which IFRS 12 is applied [IFRS 12:C2A] IAS 27 — Separate Financial Statements Summary of IAS 27 (as amended in 2011) The summary below applies to IAS 27 Separate Financial Statements, issued in May 2011 and applying to annual reporting periods beginning on or after January 2013 For earlier reporting periods, refer to our summary of IAS 27 Consolidated and Separate Financial Statements Objectives of IAS 27 IAS 27 has the objective of setting standards to be applied in accounting for investments in subsidiaries, jointly ventures, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements Key definitions [IAS 27(2011).4] Consolidated financial statements Separate financial statements Preparation of separate financial statements Requirement for separate financial statements IAS 27 does not mandate which entities produce separate financial statements available for public use It applies when an entity prepares separate financial statements that comply with International Financial Reporting Standards [IAS 27(2011).3] Financial statements in which the equity method is applied are not separate financial statements Similarly, the financial statements of an entity that does not have a subsidiary, associate or joint venturer's interest in a joint venture are not separate financial statements [IAS 27(2011).7] An investment entity that is required, throughout the current period and all comparative periods presented, to apply the exception to consolidation for all of its subsidiaries in accordance with of IFRS 10 Consolidated Financial Statements presents separate financial statements as its only financial statements [IAS 27(2011).8A] [Note: The investment entity consolidation exemption was introduced into IFRS 10 by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after January 2014.] Choice of accounting method When an entity prepares separate financial statements, investments in subsidiaries, associates, and jointly controlled entities are accounted for either: [IAS 27(2011).10] • at cost, or • in accordance with IFRS Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement for entities that have not yet adopted IFRS 9), or • using the equity method as decribed in IAS 28 Investments in Associates and Joint Ventures [See the amendment information below.] The entity applies the same accounting for each category of investments Investments that are accounted for at cost and classified as held for sale in accordance with IFRS Non-current Assets Held for Sale and Discontinued Operations are accounted for in accordance with that IFRS Investments carried at cost should be measured at the lower of their carrying amount and fair value less costs to sell The measurement of investments accounted for in accordance with IFRS is not changed in such circumstances If an entity elects, in accordance with IAS 28 (as amended in 2011), to measure its investments in associates or joint ventures at fair value through profit or loss in accordance with IFRS 9, it shall also account for those investments in the same way in its separate financial statements [IAS 27(2011).11] Investment entities [Note: The investment entity consolidation exemption was introduced into IFRS 10 by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after January 2014.] If a parent investment entity is required, in accordance with IFRS 10, to measure its investment in a subsidiary at fair value through profit or loss in accordance with IFRS or IAS 39, it is required to also account for its investment in a subsidiary in the same way in its separate financial statements [IAS 27(2011).11A] When a parent ceases to be an investment entity, the entity can account for an investment in a subsidiary at cost (based on fair value at the date of change or status) or in accordance with IFRS When an entity becomes an investment entity, it accounts for an investment in a subsidiary at fair value through profit or loss in accordance with IFRS [IAS 27(2011).11B] Recognition of dividends An entity recognises a dividend from a subsidiary, joint venture or associate in profit or loss in its separate financial statements when its right to receive the dividend in established [IAS 27(2011).12] (Accounting for dividends where the equity method is applied to investments in joint ventures and associates is specified in IAS 28 Investments in Associates and Joint Ventures.) Group reorganisations Specified accounting applies in separate financial statements when a parent reorganises the structure of its group by establishing a new entity as its parent in a manner satisfying the following criteria: [IAS 27(2011).13] • the new parent obtains control of the original parent by issuing equity instruments in exchange for existing equity instruments of the original parent • the assets and liabilities of the new group and the original group are the same immediately before and after the reorganisation, and • the owners of the original parent before the reorganisation have the same absolute and relative interests in the net assets of the original group and the new group immediately before and after the reorganisation Where these criteria are met, and the new parent accounts for its investment in the original parent at cost, the new parent measures the carrying amount of its share of the equity items shown in the separate financial statements of the original parent at the date of the reorganisation [IAS 27(2011).13] The above requirements: • apply to the establishment of an intermediate parent within a group, as well as establishment of a new ultimate parent of a group [IAS 27(2011).BC24] • apply to an entity that is not a parent entity and establishes a parent in a manner that satisfies the above criteria [IAS 27(2011).14] • apply only where the criteria above are satisfied and not apply to other types of reorganisations or for common control transactions more broadly [IAS 27(2011).BC27] Disclosure When a parent, in accordance with paragraph 4(a) of IFRS 10, elects not to prepare consolidated financial statements and instead prepares separate financial statements, it shall disclose in those separate financial statements: [IAS 27(2011).16] • the fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and principal place of business (and country of incorporation if different) 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, principal place of business (and country of incorporation if different), proportion of ownership interest and, if different, proportion of voting rights, and • a description of the method used to account for the foregoing investments When an investment entity that is a parent prepares separate financial statements as its only financial statements, it shall disclose that fact The investment entity shall also present the disclosures relating to investment entities required by IFRS 12 [IAS 27(2011).16A] [Note: The investment entity consolidation exemption was introduced into IFRS 10 by Investment Entities, issued on 31 October 2012 and effective for annual periods beginning on or after January 2014.] When a parent (other than a parent covered by the above circumstances) or an investor with joint control of, or significant influence over, an investee prepares separate financial statements, the parent or investor shall identify the financial statements prepared in accordance with IFRS 10, IFRS 11 or IAS 28 (as amended in 2011) to which they relate The parent or investor shall also disclose in its separate financial statements: [IAS 27(2011).17] • 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, principal place of business (and country of incorporation if different), proportion of ownership interest and, if different, proportion of voting rights, and • a description of the method used to account for the foregoing investments Applicability and early adoption IAS 27 (as amended in 2011) is applicable to annual reporting periods beginning on or after January 2013 [IAS 27(2011).18] IAS 28 — Investments in Associates and Joint Ventures (2011) Objective of IAS 28 The objective of IAS 28 (as amended in 2011) is to prescribe the accounting for investments in associates and to set out the requirements for the application of the equity method when accounting for investments in associates and joint ventures [IAS 28(2011).1] Scope of IAS 28 IAS 28 applies to all entities that are investors with joint control of, or significant influence over, an investee (associate or joint venture) [IAS 28(2011).2] Key definitions [IAS 28.3] Associate Significant influence Joint arrangement Joint control Joint venture Joint venturer Equity method Significant influence Where an entity holds 20% or more of the voting power (directly or through subsidiaries) on an investee, it will be presumed the investor has significant influence unless it can be clearly demonstrated that this is not the case If the holding is less than 20%, the entity will be presumed not to have significant influence unless such influence can be clearly demonstrated A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence [IAS 28(2011).5] The existence of significant influence by an entity is usually evidenced in one or more of the following ways: [IAS 28(2011).6] • representation on the board of directors or equivalent governing body of the investee; • participation in the policy-making process, including participation in decisions about dividends or other distributions; • material transactions between the entity and the investee; • interchange of managerial personnel; or • provision of essential technical information The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether an entity has significant influence In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and circumstances that affect potential rights [IAS 28(2011).7, IAS 28(2011).8] An entity loses significant influence over an investee when it loses the power to participate in the financial and operating policy decisions of that investee The loss of significant influence can occur with or without a change in absolute or relative ownership levels [IAS 28(2011).9] The equity method of accounting Basic principle Under the equity method, on initial recognition the investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investee after the date of acquisition [IAS 28(2011).10] Distributions and other adjustments to carrying amount The investor's share of the investee's profit or loss is recognised in the investor's profit or loss Distributions received from an investee reduce the carrying amount of the investment Adjustments to the carrying amount may also be necessary for changes in the investor's proportionate interest in the investee arising from changes in the investee's other comprehensive income (e.g to account for changes arising from revaluations of property, plant and equipment and foreign currency translations.) [IAS 28(2011).10] Potential voting rights An entity's interest in an associate or a joint venture is determined solely on the basis of existing ownership interests and, generally, does not reflect the possible exercise or conversion of potential voting rights and other derivative instruments [IAS 28(2011).12] Interaction with IFRS IFRS Financial Instruments does not apply to interests in associates and joint ventures that are accounted for using the equity method Instruments containing potential voting rights in an associate or a joint venture are accounted for in accordance with IFRS 9, unless they currently give access to the returns associated with an ownership interest in an associate or a joint venture [IAS 28(2011).14] Classification as non-current asset An investment in an associate or a joint venture is generally classified as non-current asset, unless it is classified as held for sale in accordance with IFRS Noncurrent Assets Held for Sale and Discontinued Operations [IAS 28(2011).15] Application of the equity method of accounting Basic principle In its consolidated financial statements, an investor uses the equity method of accounting for investments in associates and joint ventures [IAS 28(2011).16] Many of the procedures that are appropriate for the application of the equity method are similar to the consolidation procedures described in IFRS 10 Furthermore, the concepts underlying the procedures used in accounting for the acquisition of a subsidiary are also adopted in accounting for the acquisition of an investment in an associate or a joint venture [IAS 28.(2011).26] Exemptions from applying the equity method An entity is exempt from applying the equity method if the investment meets one of the following conditions: • • The entity is a parent that is exempt from preparing consolidated financial statements under IFRS 10 Consolidated Financial Statementsor or if all of the following four conditions are met (in which case the entity need not apply the equity method): [IAS 28(2011).17] o the entity is 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 not object to, the investor not applying the equity method o the investor or joint venturer's debt or equity instruments are not traded in a public market o the entity 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 o the ultimate or any intermediate parent of the parent produces financial statements available for public use that comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with IFRS 10 When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure investments in those associates and joint ventures at fair value through profit or loss in accordance with IFRS The election is made separately for each associate or joint venture on initial recognition [IAS 28(2011).18] When an entity has an investment in an associate, a portion of which is held indirectly through a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure that portion of the investment in the associate at fair value through profit or loss in accordance with IFRS regardless of whether the venture capital organisation, or the mutual fund, unit trust and similar entities including investment-linked insurance funds, has significant influence over that portion of the investment If the entity makes that election, the entity shall apply the equity method to any remaining portion of its investment in an associate that is not held through a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds [IAS 28(2011).19] Classification as held for sale When the investment, or portion of an investment, meets the criteria to be classified as held for sale, the portion so classified is accounted for in accordance with IFRS Any remaining portion is accounted for using the equity method until the time of disposal, at which time the retained investment is accounted under IFRS 9, unless the retained interest continues to be an associate or joint venture [IAS 28(2011).20] Discontinuing the equity method Use of the equity method should cease from the date that significant influence or joint control ceases: [IAS 28(2011).22] • If the investment becomes a subsidiary, the entity accounts for its investment in accordance with IFRS Business Combinations and IFRS 10 • If the retained interest is a financial asset, it is measured at fair value and subsequently accounted for under IFRS • Any amounts recognised in other comprehensive income in relation to the investment in the associate or joint venture are accounted for on the same basis as if the investee had directly disposed of the related assets or liabilities (which may require reclassification to profit or loss) • If an investment in an associate becomes an investment in a joint venture (or vice versa), the entity continues to apply the equity method and does not remeasure the retained interest [IAS 28(2011).24] Changes in ownership interests If an entity's interest in an associate or joint venture is reduced, but the equity method is continued to be applied, the entity reclassifies to profit or loss the proportion of the gain or loss previously recognised in other comprehensive income relative to that reduction in ownership interest [IAS 28(2011).25] Equity method procedures • Transactions with associates or joint ventures Profits and losses resulting from upstream (associate to investor, or joint venture to joint venturer) and downstream (investor to associate, or joint venturer to joint venture) transactions are eliminated to the extent of the investor's interest in the associate or joint venture However, unrealised losses are not eliminated to the extent that the transaction provides evidence of a reduction in the net realisable value or in the recoverable amount of the assets transferred Contributions of nonmonetary assets to an associate or joint venture in exchange for an equity interest in the associate or joint venture are also accounted for in accordance with these requirements [IAS 28(2011).28-30] • Initial accounting An investment is accounted for using the equity method from the date on which it becomes an associate or a joint venture On acquisition, any difference between the cost of the investment and the entity’s share of the net fair value of the investee's identifiable assets and liabilities in case of goodwill is included in the carrying amount of the investment (amortisation not permitted) and any excess of the entity's share of the net fair value of the investee's identifiable assets and liabilities over the cost of the investment is included as income in the determination of the entity's share of the associate or joint venture’s profit or loss in the period in which the investment is acquired Adjustments to the entity's share of the associate's or joint venture's profit or loss after acquisition are made, for example, for depreciation of the depreciable assets based on their fair values at the acquisition date or for impairment losses such as for goodwill or property, plant and equipment [IAS 28(2011).32] • Date of financial statements In applying the equity method, the investor or joint venturer should use the financial statements of the associate or joint venture as of the same date as the financial statements of the investor or joint venturer unless it is impracticable to so If it is impracticable, the most recent available financial statements of the associate or joint venture should be used, with adjustments made for the effects of any significant transactions or events occurring between the accounting period ends However, the difference between the reporting date of the associate and that of the investor cannot be longer than three months [IAS 28(2011).33, IAS 28(2011).34] • Accounting policies If the associate or joint venture uses accounting policies that differ from those of the investor, the associate or joint venture's financial statements are adjusted to reflect the investor's accounting policies for the purpose of applying the equity method [IAS 28(2011).35] • Application of the equity method by a non-investment entity investor to an investment entity investee When applying the equity method to an associate or a joint venture, a noninvestment entity investor in an investment entity may retain the fair value measurement applied by the associate or joint venture to its interests in subsidiaries The election is made separately for each associate or joint venture.[IAS 28(2011).36A] • Losses in excess of investment If an investor's or joint venturer's share of losses of an associate or joint venture equals or exceeds its interest in the associate or joint venture, the investor or joint venturer discontinues recognising its share of further losses The interest in an associate or joint venture is the carrying amount of the investment in the associate or joint venture under the equity method together with any long-term interests that, in substance, form part of the investor or joint venturer's net investment in the associate or joint venture After the investor or joint venturer's interest is reduced to zero, a liability is recognised only to the extent that the investor or joint venturer has incurred legal or constructive obligations or made payments on behalf of the associate If the associate or joint venture subsequently reports profits, the investor or joint venturer resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised [IAS 28(2011).38, IAS 28(2011).39] Impairment After application of the equity method an entity applies IAS 39 Financial Instruments: Recognition and Measurement to determine whether it is necessary to recognise any additional impairment loss with respect to its net investment in the associate or joint venture If impairment is indicated, the amount is calculated by reference to IAS 36 Impairment of Assets The entire carrying amount of the investment is tested for impairment as a single asset, that is, goodwill is not tested separately The recoverable amount of an investment in an associate is assessed for each individual associate or joint venture, unless the associate or joint venture does not generate cash flows independently [IAS 28(2011).40, IAS 28(2011).42, IAS 28(2011).43] Separate financial statements An investment in an associate or a joint venture shall be accounted for in the entity's separate financial statements in accordance with IAS 27 Separate Financial Statements (as amended in 2011) Disclosure There are no disclosures specified in IAS 28 Instead, IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required for entities with joint control of, or significant influence over, an investee