Chapter 2: Objectives and scope

Separate financial statements are defined as those presented by an entity in which the entity could elect to account for its investments in subsidiaries, joint ventures and associates either at cost, in accordance with IFRS 9, or using the equity method as described in IAS 28.

IAS 27 does not mandate which entities should produce separate financial statements. An entity might be required by local legislation, or it might elect, to present separate financial statements. If separate financial statements are prepared, IAS 27 should be followed.

Consolidated, ‘economic interest’, separate and ‘individual’ financial statements

The situations where consolidated, separate, ‘economic interest’ and ‘individual’ financial statements are required are summarised in the following diagram. Each of these is explained in the paragraphs below.

IFRS 10 specifies the circumstances in which an entity must prepare consolidated financial statements, which are those that present a parent and its subsidiaries as a ‘single economic entity’.

An entity that has investments in joint ventures or associates, but does not have investments in subsidiaries, must prepare financial statements in which these investments are equity accounted. These are referred to as ‘economic interest’ financial statements. ‘Economic interest’ financial statements are not separate financial statements of the investor.

All of the normal disclosure requirements of relevant IFRSs need to be included in the financial statements, including the requirements of IFRS 12 for joint ventures and associates.

Exemptions from the preparation of both consolidated and ‘economic interest’ financial statements are available for an entity (that is either a parent or an investor, or both) if:

1. the entity meets all of the following conditions:
2. the entity is itself a wholly owned subsidiary, or 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 entity not presenting consolidated or ‘economic interest’ financial statements;
3. the entity’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);
4. 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 d. the ultimate or any intermediate parent of the entity produces consolidated financial statements available for public use that comply with IFRSs in which subsidiaries are consolidated or are measured at fair value through profit and loss in accordance with IFRS 10; or
5. an entity that is a parent is an investment entity that measures all of its subsidiaries at fair value through profit or loss in accordance with paragraph 31 of IFRS 10; or

iii. an entity that is a parent is a post-employment benefit plan or other long-term employee benefit plan to which IAS 19 applies; or

9. an entity that is an investor in a venture capital organisation (or similar entity) which elects to measure investments in those associates and joint ventures at fair value through profit or loss in accordance with IFRS 9.

The term ‘separate financial statements’ refers to: An investor’s financial statements that are presented in addition to consolidated financial statements or ‘economic interest’ financial statements (either because the investor has elected to prepare them or is required to prepare them under local regulations).

An investor’s financial statements that are presented as the company’s only financial statements, because it has taken an exemption from preparing consolidated or ‘economic interest’ financial statements. This is often the case with intermediate parents and unlisted wholly or partly owned parents.

Financial statements prepared by an investment entity that is required to apply the consolidation exemption for all of its subsidiaries in both the current and comparative periods presented.

Preparation of ‘economic interest’ financial statements Entity A is a private limited company and is not an investment entity, a venture capital organisation or a similar entity. It has one associate, entity B. There is a local legal requirement, only for parent companies (those with investments in subsidiaries), to prepare separate financial statements in addition to consolidated financial statements. What kind of financial statements does entity A need to prepare? Entity A prepares ‘economic interest’ financial statements (that is, financial statements in which its equity accounts for its associate) as its only financial statements (it is not eligible for any of the exemptions). There is no legal requirement for an investor that has no subsidiaries to additionally prepare separate financial statements.

Exemption from the preparation of ‘economic interest’ financial statements Entity C is not an investment entity, a venture capital organisation or a similar entity. It is a 60% unlisted subsidiary of another entity that produces publicly available consolidated financial statements in accordance with IFRS. Entity C has an associate but no subsidiaries. Entity C has no plans to issue shares or debentures to the public. The other 40% shareholders of entity C have been informed of entity C’s intention not to produce ‘economic interest’ financial statements, and they have not objected. There is a local legal requirement, for parent companies and investors in associates, to prepare separate financial statements in addition to consolidated or ‘economic interest’ financial statements. What kind of financial statements does entity C need to prepare? Entity C is entitled to the exemption from preparing ‘economic interest’ financial statements (that is, equity accounting for its associate), because it meets all of the conditions set out in IAS 28 for exemption. However, it must prepare separate financial statements.

Preparation of ‘economic interest’ financial statements because exemption does not apply (example 1) Entity D is not an investment entity, a venture capital organisation or a similar entity. It is a 60% listed subsidiary of another entity that produces publicly available consolidated financial statements in accordance with IFRS. Entity D has an associate but no subsidiaries. There is a local legal requirement, for parent companies only (that is, investors in subsidiaries), to prepare separate financial statements in addition to consolidated financial statements. What kind of financial statements does entity D need to prepare? Entity D is not entitled to the exemption from equity accounting its associate (that is, preparing ‘economic interest’ financial statements), because its shares are listed. It prepares ‘economic interest’ financial statements as its only financial statements, because there is no local legal requirement for an investor that has no subsidiaries to prepare, in addition, separate financial statements.

Preparation of ‘economic interest’ financial statements because exemption does not apply (example 2) Entity E is not an investment entity, a venture capital organisation or a similar entity. It is a 60% unlisted subsidiary of another entity that produces publicly available consolidated financial statements in accordance with US GAAP. Entity E produces IFRS financial statements, and has an associate but no subsidiaries. There is a local legal requirement, for parent companies and investors with associates, to prepare separate financial statements in addition to consolidated or ‘economic interest’ financial statements. What kind of financial statements does entity E need to prepare? Entity E is not entitled to the exemption from preparing ‘economic interest’ financial statements, because the parent company’s consolidated financial statements do not comply with IFRS. It prepares ‘economic interest’ financial statements and separate financial statements.

Preparation of separate financial statements Entity F is not an investment entity, a venture capital organisation or a similar entity. It is 100% owned by entity X, which is listed. Entity X prepares consolidated financial statements in accordance with IFRS. Entity F has one subsidiary and one associate. There is a local legal requirement for parent companies to prepare separate financial statements. What kind of financial statements does entity F need to prepare? Entity F prepares separate financial statements as its only financial statements. Entity F is entitled to take advantage of the exemptions in IFRS 10 and IAS 28 and so it is not required to produce consolidated financial statements.

Preparation of consolidated and separate financial statements Entity G is not an investment entity, a venture capital organisation or a similar entity. It has numerous subsidiaries and four associates. There is a local legal requirement for parent companies to prepare separate financial statements in addition to consolidated financial statements. What kind of financial statements does entity G need to prepare? Entity G prepares consolidated financial statements, in which it consolidates its subsidiaries and equity accounts its associates. In addition, it prepares separate financial statements.

Investment in a structured entity and separate financial statements Entity H is not an investment entity, a venture capital organisation or a similar entity. It establishes an employee share ownership plan for all of its employees. The share plan is considered to be a structured entity under entity H’s control. The share plan is consolidated in entity H’s consolidated financial statements. There is a local legal requirement for parent companies to prepare separate financial statements in addition to consolidated financial statements. What kind of financial statements does entity H need to prepare? The structured entity is controlled by entity H, and so it meets the IFRS 10 definition of a subsidiary. Based on this, entity H prepares consolidated financial statements, in which it consolidates the share plan. The share plan is entity H’s subsidiary, and separate financial statements of entity H should also be prepared.

An entity that does not hold investments in subsidiaries, associates or joint ventures prepares ‘individual’ financial statements in accordance with all applicable IFRSs. The entity does not prepare separate or economic entity financial statements and is not within the scope of IAS 27.

Venture capital and investment entities exemptions

An entity that is a venture capital organisation might elect to account for its interests in associates and joint ventures at fair value through profit or loss (in accordance with IFRS 9) in its consolidated financial statements. Those interests should also be accounted for at fair value through profit or loss in the separate financial statements.

An investment entity does not prepare consolidated accounts unless it has a subsidiary providing services that relate to its investment activities.

Instead, an investment entity will measure its investments in subsidiaries, joint ventures and associates at fair value through profit or loss in its separate financial statements. An investment entity that uses the exemption from preparing consolidated financial statements for all of its subsidiaries prepares only separate financial statements.

Where an investment entity is required to prepare consolidated financial statements (due to the fact that it has a subsidiary providing services that relate to its investment activities), any separate financial statements that are also prepared should account for investments in subsidiaries, joint ventures and associates at fair value in accordance with IFRS 9.

IFRS Standards applicable for separate financial statements

When an entity presents separate financial statements that are described as complying with IFRS Standards, the requirements of all applicable IFRS Standards will apply to those financial statements.  The only exception is that specific requirements are imposed for the measurement of investments in subsidiaries, joint ventures and associates as set out in IAS 27.