Chapter 3: Recognition and measurement of investments in subsidiaries, associates and joint ventures

Investments in subsidiaries, associates and joint ventures in an entity’s separate financial statements are accounted for:

• at cost;
• in accordance with IFRS 9; or
• using the equity method, as described in IAS 28.

The same accounting should be applied for each category of investments. For example, an entity might adopt a policy to carry subsidiaries at cost and associates using the equity method in accordance with IAS 28, or vice versa, in its separate financial statements.

Where an entity has elected to measure a category of investments at fair value but it has used cost for one or more specific investments, can it still use fair value for the remaining investments in that category? Where an entity has elected to measure a specific category of investments at fair value but, in accordance with IFRS 9, cost has been used for one or more specific investments in that category, this does not preclude the entity from using fair value for that category of investments. In the Basis for Conclusions to the Annual Improvements 2014–2016 cycle, the IASB noted that ‘category’ is not defined in the IFRSs. It is used in a number of standards; for example, IFRS 7 uses ‘category’ to refer to groupings of financial assets that are measured in different ways: financial assets measured at fair value through profit or loss is one category, and financial assets measured at amortised cost is another category. The IASB observed that paragraph 10 of IAS 27 should not be read to mean that, in all circumstances, all investments in associates are one ‘category’ of investment, and that all investments in joint ventures are one ‘category’ of investment.

Cost

Initial recognition and transaction costs

IAS 27 does not define ‘cost’. Cost, under the Conceptual Framework for financial reporting, is the value of the costs incurred in acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs.

The Conceptual Framework does not define which costs are transaction costs. They have normally been defined in particular standards as incremental costs, other than the transaction price, that would not have been incurred if the particular asset being measured had not been acquired.

Indemnifications

Determining the cost of an investment in a subsidiary, joint venture or associate in separate financial statements can be more complicated where the final amount of the consideration is not known at the date of acquisition. This can arise in situations where an indemnification is given by the seller or where there is contingent consideration.

Accounting for an indemnification in separate financial statements ABC Plc acquired 100% of the shares in DEF Ltd from XYZ Plc for C100 million in cash. DEF Ltd manufactures and sells widgets. At the time of acquisition, DEF Ltd is the defendant in a class action court case whereby a group of DEF Ltd.’s customers have alleged that its products are faulty. The claimants are suing DEF Ltd for damages of C30 million. XYZ Plc has indemnified ABC Plc for losses up to C20 million. The amount relating to damages has not been recognised as a provision by DEF Ltd, because it is not considered probable. ABC Plc itself does not have exposure to the claim on acquisition of DEF Ltd. How should ABC Plc’s management account for the indemnification acquired as part of the business combination in ABC Plc’s separate financial statements on the date of acquisition? According to IAS 27, investments in subsidiaries, jointly controlled entities and associates are accounted for either at cost, in accordance with IFRS 9, or using the equity method as described in IAS 28. Cost is not defined in IAS 27; however, according to the Conceptual Framework, it is the value of the costs incurred in acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs. Applying this principle, ABC Plc has recognised the investment in DEF Ltd at C100 million, being the value of the consideration paid, in its separate financial statements. The indemnification asset is not therefore recognised separately, which is in line with the IAS 37 requirement that an entity should not recognise a contingent asset unless the realisation of income is virtually certain. If the outcome of the litigation is that DEF Ltd has to settle the claim, ABC Plc would receive an indemnification pay-out from XYZ Plc. When it becomes virtually certain that an inflow of economic benefits from indemnification will arise, the asset is no longer a contingent asset, and it should be recognised in the period in which the change occurs. In the absence of specific guidance in IAS 27, there are two acceptable policy choices for the accounting of the indemnification pay-out: profit and loss approach – record the indemnification pay-out as a gain, and at the same time test the investment in DEF Ltd for impairment. This can be supported because, under IAS 27, investments accounted for at cost are not subsequently remeasured. Such investments are measured in the separate financial statements at the original cost of the investment until the investment is de-recognised or impaired. cost-based approach – record a reduction of the cost of the investment. This can be supported in an entity’s separate financial statements because the Conceptual Framework defines cost as the value of the costs incurred in acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs. It can be argued that indemnification is part of the investment’s cost. The indemnification asset can be analogised to contingent consideration.

Recognition of an indemnification asset arising from acquisition of a subsidiary in separate financial statements – example Entity A acquires 100 per cent of Entity B from Entity C. As part of the business combination, Entity C provides an indemnification to Entity A under which Entity C guarantees that if a specific liability of Entity B crystallises subsequent to the business combination, Entity C will reimburse Entity A for the amount payable. In the consolidated financial statements of Entity A, the indemnification asset is recognised at the same time and on the same measurement basis as the indemnified item both initially and subsequently in accordance with IFRS 3. At the acquisition date, the liability is measured at nil in the consolidated financial statements. In the following reporting period, the liability increases to CU2 million; consequently, at that time, an indemnification asset of CU2 million is recognised in the consolidated financial statements. In its separate financial statements, Entity A accounts for its investment in Entity B at cost in accordance with IAS 27. There are no specific requirements in IFRS Standards regarding the recognition and measurement of the indemnification asset in Entity A’s separate financial statements; the guidance in IFRS 3 on accounting for indemnification assets applies only in respect of consolidated financial statements. This issue is not specifically dealt with in IFRS Standards. IFRS 3 only addresses the appropriate accounting in the consolidated financial statements and, therefore, the guidance on accounting for indemnification assets in that Standard does not apply in the separate financial statements. Although the arrangement between Entity A and Entity C typically meets the definition of an insurance contract in IFRS 4 (because Entity C has accepted significant insurance risk from Entity A by agreeing to compensate Entity A if a specified uncertain future event adversely affects Entity A), the requirements of IFRS 4 are not relevant because they apply to the insurer (Entity C) and not to the holder of the insurance contract (Entity A). Because it arises from an insurance contract, the asset in the separate financial statements of Entity A is also excluded from the scope of IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39). IAS 37 is therefore the applicable Standard in respect of the recognition and measurement of the indemnification asset in Entity A’s separate financial statements; in particular, the guidance on contingent assets applies. IAS 37 requires that an asset should be recognised when the realisation of income is virtually certain. This may result in the recognition of the asset at different times in the separate and consolidated financial statements of Entity A, because the indemnification asset will be recognised in the consolidated financial statements at the same time and on the same basis as the liability to which it relates (no liability will be recognised in the separate financial statements of Entity A because the indemnified obligation relates to Entity B). There are two possible alternative treatments that could be applied on recognition of the indemnification asset in the separate financial statements of Entity A. The arrangement could be considered to represent reimbursement of part of the price paid for the investment in Entity B and to relate specifically to the outcome of a contingency that existed at the date of acquisition of that investment. It is therefore an acceptable accounting policy to recognise the indemnification asset by adjusting the cost of the investment in Entity B. Alternatively, Entity A might choose to reflect the recognition of the asset in profit or loss; this treatment is in line with the requirement of IAS 37 to recognise ‘related income’ upon recognition of a contingent asset. If this treatment is followed, it will be necessary to consider whether the investment in Entity B has been impaired. Whichever treatment is adopted by Entity A, it should be applied consistently as an accounting policy choice.

Contingent consideration

IAS 27 contains no specific guidance on how to account for contingent consideration in separate financial statements. An estimate of contingent consideration is included as part of the cost of acquisition of an interest in an associate or joint venture, as at the date of acquisition. However, there is a policy choice available for the accounting treatment of subsequent changes in the value of contingent consideration recognised as a liability or an asset. The acquirer should select an appropriate accounting policy and apply it consistently to all similar transactions.

Contingent consideration is classified either as equity or as a liability/asset. Contingent consideration classified as equity is not remeasured after initial recognition. Its subsequent settlement should be accounted for within equity.

Contingent consideration representing a non-financial liability or asset is rarely seen in practice. Contingent consideration classified as a financial liability or asset should be accounted for at fair value in accordance with IFRS 9 and subsequently remeasured.

There are two acceptable accounting policies for the subsequent changes in the value of contingent consideration that represents a financial liability or asset:

• subsequent remeasurement of the financial liability or asset through profit and loss under IFRS 9; or
• a cost-based approach, including changes in the financial liability or asset as part of the cost or a reduction of the cost of the investment.

Why are the two accounting policies supportable? There are two acceptable accounting policies for subsequent changes in the value of contingent consideration that represents a financial liability or asset: a) Subsequent remeasurement of the financial liability or asset through profit and loss under IFRS 9; such treatment would be consistent with the treatment required by IFRS 3 in the consolidated financial statements. b) A cost-based approach, including changes in the financial asset or liability as part of the cost or a reduction of the cost of the investment. This can be supported in an entity’s separate financial statements, because the Conceptual Framework defines cost as the value of the costs incurred in acquiring or creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs. This is consistent with the current practice of cost accumulation in respect of property, plant and equipment and investments in associates and joint ventures.

Change in fair value of contingent consideration for the acquisition of a subsidiary – separate financial statements of the acquirer – example Entity A acquires Entity B. The consideration is payable in two tranches: an immediate payment of CU1 million; and a further payment of CU500,000 after two years if cumulative profit before interest and tax for the two-year period following acquisition exceeds CU400,000. At the date of acquisition, the fair value of the contingent consideration (i.e. the amount payable if the specified profit target is met) is assessed as CU220,000. Consequently, at the date of acquisition, the investment in Entity B is recognised in Entity A’s separate financial statements at a cost of CU1,220,000. One year after acquisition, on the basis of a revised earnings forecast, the fair value of the contingent consideration has increased by CU80,000 to CU300,000. (In its consolidated financial statements, in accordance with IFRS 3, Entity A recognises the resulting loss in profit or loss.) The subsequent accounting for the contingent consideration in Entity A’s separate financial statements is determined under IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39). The contingent consideration should therefore be subsequently measured at fair value, with the resulting loss of CU80,000 recognised in profit or loss. It is not appropriate for Entity A to increase its cost of investment in Entity B to reflect the change in the fair value of the contingent consideration.

 Subsequent measurement

Investments accounted for at cost are not subsequently remeasured. Such investments are measured in the separate financial statements at the original cost of the investment until the investment is derecognised or impaired. For further guidance on impairment.

Step acquisitions from an associate or joint venture to a subsidiary

An entity might increase its investment in an associate, joint venture or subsidiary which is held at cost. The carrying value of the investment will be the accumulated cost. This approach is also applicable if the additional investment results in an associate or joint venture becoming a subsidiary, if both classes of investment are carried at cost.

Step acquisitions from a financial asset measured at fair value to a subsidiary

When an entity applies IFRS 9 in accounting for its initial equity investment in an investee and subsequently acquires an additional interest in the investee obtaining control – that is, the investee becomes a subsidiary which measures at cost. IAS 27 does not explicitly specify how an entity determines the cost of an investment in subsidiary acquired in stages. In March 2019, IFRIC issued an agenda decision relating to this matter. IFRIC considered that a reasonable reading of the requirements in IFRS Standards could result in the application of either:

1. fair value as deemed cost approach – the fair value of the initial interest at the date of obtaining control of the subsidiary, plus any consideration paid for the additional interest; or
2. accumulated cost approach – the consideration paid for the initial interest (original consideration), plus any consideration paid for the additional interest.

In applying the accumulated cost approach, any difference between the fair value of the initial interest at the date of obtaining control of the subsidiary and its original consideration is recognised in profit or loss, irrespective whether the initial interest measured at fair value through profit or loss or fair value through other comprehensive income.

Management needs to select an appropriate approach and apply it consistently to all such transactions.

IFRS 9

Initial recognition and transaction costs

An investor applying IFRS 9 to its investments in a subsidiary, associate or joint venture should initially and subsequently measure those investments at fair value. An entity has the ability to make an irrevocable election on initial recognition, on an instrument-by-instrument basis, to present subsequent changes in fair value in other comprehensive income (OCI) rather than profit or loss. If this election is made, all fair value changes, excluding certain dividends, will be reported in OCI. Dividends are recognised in profit and loss, unless they represent a recovery of part of the cost of an investment. There is no recycling of amounts from OCI to profit and loss (for example, on sale of an equity investment), nor are there any impairment requirements. However, the entity could transfer the cumulative gain or loss within equity.

Transaction costs are not included as part of the initial cost of an investment classified as ‘fair value through profit or loss.

Subsequent measurement

Investments measured in accordance with IFRS 9 are subject to the subsequent measurement guidance in that standard.

Accounting for employee share trusts in the separate financial statements of the sponsoring entity Depending on the nature of an employee share trust, it may be appropriate in separate financial statements either to adopt a ‘look-through’ approach (accounting for the trust as, in substance, an extension of the sponsoring entity), or to account for the employee share trust as a subsidiary. For example, a look-through approach may be appropriate when, as a result of its investment in the trust, the sponsoring entity’s only exposure is to the shares held by the trust. One such situation would be when the trust has been financed by the sponsoring entity with an interest-free loan, the trust acts solely as a warehouse for the sponsoring entity’s shares, any shares that are distributed are distributed directly to the sponsoring entity’s employees and shares held by the trust are under option to employees but have not vested yet. When a trust has external funding, the substance may also be that the trust is acting solely as a warehouse for the sponsoring entity’s shares (e.g. when the funding is entirely guaranteed by the sponsoring entity or the sponsoring entity provides the trust with the necessary contributions for the trust to be able to pay interest on the third party funding). The accounting implications of the look-through approach depend upon whether the trust holds the sponsoring entity’s shares or shares of another entity (typically the parent when the sponsoring entity is a subsidiary). Trust holds the sponsoring entity’s shares When the look-through approach is applied to a trust holding the shares of the sponsoring entity, the shares are treated as ‘treasury shares’ as in the consolidated financial statements. Trust holds shares of another entity When the look-through approach is applied to a trust holding the shares of another entity, the shares are treated as equity investments in the statement of financial position in accordance with IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39). When the trust creates additional risk exposures (e.g. it has other risk exposures such as unguaranteed loans or any other obligations, and hence creates exposures other than to the equity of the sponsoring entity), it may be that a look-through approach is not appropriate because, in substance, the sponsoring entity has an investment in another entity, which it should account for as an investment in a subsidiary. That investment will be accounted for in accordance with the entity’s accounting policy for investments in subsidiaries under IAS 27.

Subsidiary acquired in stages: measurement in separate financial statements when the initial interest is an associate – example Entity A holds a 30 per cent investment in Entity B (an associate) and subsequently acquires an additional 40 per cent interest, which gives it control over Entity B. In accounting for the business combination in its consolidated financial statements in accordance with IFRS 3, Entity A remeasures its previously held equity interest in Entity B to fair value and recognises the resulting gain or loss in profit or loss as if it had disposed directly of the previously held interest (including, when appropriate, amounts previously recognised in other comprehensive income and accumulated in equity). The requirements of IFRS 3 do not apply in the separate financial statements because those requirements focus on consolidated financial statements. The appropriate accounting treatment for the acquisition of the additional interest may depend on Entity A’s accounting policy for investments in associates and in subsidiaries in its separate financial statements (see 5.1 for available policy options). The recognition of the additional investment is straightforward if Entity A’s accounting policy for measuring investments in associates in its separate financial statements is the same as its accounting policy for investments in subsidiaries. In this case, the cost of the additional interest in Entity B will be added to the carrying amount of the existing investment and subsequently accounted for in accordance with the relevant accounting policy. If Entity A applies different accounting policies for its investments in associates and investments in subsidiaries, it will be necessary to develop an approach to convert the investment from one measurement basis to the other. If converting to the equity method of accounting then, , it is acceptable to treat the fair value of the previously held investment as its deemed cost for the purposes of commencing equity accounting. If the investment was previously measured at cost, the resulting adjustment to fair value on commencement of the equity method of accounting is recognised in profit or loss by analogy to the requirements of IFRS 9 for a reclassification from amortised cost to fair value through profit or loss (FVTPL). If converting to measurement in accordance with IFRS 9, in accounting for a change from either cost or carrying amount using the equity method to fair value, it is acceptable to apply by analogy the reclassification requirements of IFRS 9. Any change in carrying amount will then be presented in profit or loss if the investment is measured under IFRS 9 at FVTPL, or in other comprehensive income if the investment is measured at fair value through other comprehensive income. If converting to measurement at cost, it is acceptable to treat the previous carrying amount (either fair value in accordance with IFRS 9 or equity-method accounting value under IAS 28) as deemed cost. It is also acceptable to apply the accumulated cost approach described in the January 2019 IFRIC Update in the context of step acquisitions where the initial interest is accounted for under IFRS 9. Other methods may be acceptable. Whichever method is selected, it represents an accounting policy choice applicable to the separate financial statements of the acquirer, which should be applied consistently for all acquisitions of investments in subsidiaries achieved in stages and disclosed in accordance with IAS 1.

Subsidiary acquired in stages: measurement in separate financial statements when the initial interest is a financial asset in the scope of IFRS 9 The IFRS Interpretations Committee discussed a step acquisition under which a previously held interest in an investee is measured at fair value under IFRS 9 and the acquirer’s policy is to account for investments in subsidiaries at cost in its separate financial statements. As discussed in the January 2019 IFRIC Update, the IFRS Interpretations Committee concluded that the cost of investment in the subsidiary can be measured either at: the fair value of the previously held interest (‘initial interest’) at the date of obtaining control of the subsidiary, plus any consideration paid for the additional interest (‘the fair value as deemed cost approach’); or the consideration paid for the initial interest (‘original consideration’), plus any consideration paid for the additional interest (‘the accumulated cost approach’). If the accumulated cost approach is applied, any difference between the fair value (and, therefore, carrying amount under IFRS 9) of the initial interest and the original consideration is recognised in profit or loss (applying IAS 1) regardless of the classification of the initial interest under IFRS 9. Whichever method is selected, it represents an accounting policy choice applicable to the separate financial statements of the acquirer, which should be applied consistently to all acquisitions of investments in subsidiaries achieved in stages and disclosed in accordance with IAS 1.

Acquisition costs When an entity prepares separate financial statements, IAS 27 allows an accounting policy choice, such that investments in subsidiaries (other than those falling within the scope of IFRS 5) may be accounted for at cost, or in accordance with IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39), or using the equity method as described in IAS 28. Except for subsidiaries accounted for in the entity’s separate financial statements at fair value through profit or loss, directly attributable acquisition-related costs should be included within the initial measurement of the investment. The specific requirements for each category of investment are set out in the table below. Investment accounted for under IFRS 9 (or IAS 39) at fair value through profit or loss Initial measurement at fair value. Investments accounted for under IFRS 9 (or IAS 39) other than at fair value through profit or loss Initial measurement at fair value plus transaction costs that are directly attributable to the acquisition. Investments accounted for at cost IAS 27 does not define ‘cost’. Therefore, the determination of that amount is not specified. In accordance with IAS 8, it is appropriate to apply IFRS 9 (see above) by analogy. Therefore, directly attributable transaction costs should be included in the initial measurement of an investment accounted for at cost under IAS 27. Investments accounted for using the equity method The general principles of IAS 28 should be applied. As discussed, the cost of an investment in an equity-method investee at initial recognition comprises the purchase price for the investment and any directly attributable expenditure necessary to acquire it.

Cost of new intermediate shell company in parent’s separate financial statements When a new intermediate parent is introduced into an existing group through an exchange of shares, the ultimate parent has exchanged an investment in one or more subsidiaries for an investment in the new intermediate parent. The question arises as to what carrying amount should be attributed to the new intermediate parent in the separate financial statements of the ultimate parent. When the new intermediate parent has no other assets or liabilities, and the exchange is for shares, the exchange does not have commercial substance. Moreover, the disposal of the shares previously owned directly by the ultimate parent would not meet the derecognition criteria of IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39) in the separate financial statements of the ultimate parent. Accordingly, the ultimate parent’s investment in the new intermediate parent should be initially recognised at the previous carrying amount of the assets given in exchange. For example, Company A originally acquired 100 per cent of Company B for cash consideration of CU1,000. Some time later, when the fair value of Company B had increased to CU9,000 and the total equity reported in Company B’s separate financial statements was CU4,000, a new intermediate parent, Company C, was inserted into this structure. Company C issued 500 × CU1 shares (being the whole of its share capital) to Company A in exchange for all of the shares in Company B. Company C has no other assets or liabilities. Company B has never paid any dividends to Company A. Both Company A and Company C apply a policy under IAS 27:10 of accounting for investments in subsidiaries at cost. From the perspective of Company A, the exchange of shares in Company B for shares in Company C does not have commercial substance; the underlying interests of Company A have not changed. Accordingly, the cost of Company C in the separate financial statements of Company A should be CU1,000 (the original cost of Company B), and not CU9,000. Although IAS 27 are written in the context of a new parent being established, IAS 27 clarifies that IAS 27 also apply to reorganisations that establish a new intermediate parent within a group. Therefore, from the perspective of Company C: if the criteria in IAS 27 are met, the cost of Company B in the separate financial statements of Company C will be CU4,000 (being the carrying amount of Company C’s share of the equity items shown in the separate financial statements of Company B); otherwise, the cost of Company B in the separate financial statements of Company C will be determined in accordance with Company C’s accounting policy for such transactions.

Application of the requirements for group reorganisations In the straightforward scenario in which the original parent becomes a wholly-owned subsidiary of the new parent, the cost shown in the new parent’s separate financial statements will simply be the total equity (assets less liabilities) of the original parent shown in the separate financial statements of the original parent at the date of the reorganisation. IAS 27 does not address the appropriate accounting if the original parent has net liabilities. Consistent with the general accounting for investments in subsidiaries in separate financial statements, the investment should be recognised at nil. However, this treatment would only be appropriate to the extent that the transferee does not assume a liability beyond the cost of the shares at the time of the transfer. If the new parent does not acquire all of the equity instruments of the original parent, care will be needed in assessing whether condition (c) is met. But, provided that all three conditions in IAS 27 are met, the cost shown in the new parent’s separate financial statements will be its share of the total equity (assets less liabilities) of the original parent at the date of the reorganisation. Note that the treatment specified under IAS 27 is not a choice; it is required if the specified conditions are met.

Cost for new parent in group reorganisation – example Company S has one class of equity instruments, 70 per cent of which are held by Company P. A new company, Company X, is created and it issues equity instruments to Company P in exchange for Company P’s 70 per cent interest in Company S. Company X therefore becomes Company P’s wholly-owned subsidiary. Company X has no other assets or liabilities. At the time of this reorganisation, the total equity (assets less liabilities) of Company S as reported in its separate financial statements is CU10,000. Although IAS 27 do not directly address the circumstances in which the new parent (Company X) does not acquire 100 per cent of the equity instruments of the old parent (Company P), IAS 27 clarifies that IAS 27 apply to such reorganisations if the criteria set out in those paragraphs are met. In the circumstances described, the requirements of IAS 27 are met, in that: Company X has obtained control of Company S by issuing equity instruments to Company P in exchange for existing equity instruments of Company S; the assets and liabilities of the Company X group and Company S are the same immediately before and after the reorganisation; and the owners of Company S before the reorganisation have the same absolute and relative interests in the net assets of Company S and the Company X group immediately before and after the reorganisation. If Company X accounts for its investment in Company S at cost in its separate financial statements, cost is measured at the carrying amount of Company X’s share of the equity items shown in the separate financial statements of Company S at the date of the reorganisation, i.e.: Cost = 70% × CU10,000 = CU7,000 Note that, provided that the requirements of IAS 27 are met, the calculation of cost is the same irrespective of whether Company S is itself a parent.

Cost of investment in the separate financial statements of the new intermediate parent in a ‘one-to-many’ group reorganisation The IFRS Interpretations Committee considered the issue of ‘one to many’ group reorganisations during 2011 in the context of the requirements of the previous version of IAS 27 (i.e. IAS 27 as revised in 2008). Because the relevant IAS 27(2008) requirements have been carried forward in IAS 27 when it was revised, the conclusion continues to apply as follows (see September 2011 IFRIC Update): the condition in IAS 27 that the assets and liabilities of the new group and the original group (or original entity) are the same before and after the reorganisation is not met in reorganisations that result in the new intermediate parent having more than one direct subsidiary and, therefore, these paragraphs in IAS 27 do not apply to such reorganisations; IAS 27 cannot be applied to reorganisations that result in the new intermediate parent having more than one direct subsidiary by analogy, because this guidance is an exception to the normal basis for determining the cost of an investment in a subsidiary under IAS 27; and for reorganisations that result in a new intermediate parent having more than one direct subsidiary, the normal basis for determining the cost of an investment in a subsidiary under IAS 27 should be applied. For example, Subsidiaries 1, 2 and 3 are wholly-owned subsidiaries of Parent P. A group reorganisation is carried out, as follows. A new intermediate parent (Newco X) is formed. Newco X issues equity instruments to Parent P in exchange for Parent P’s interest in Subsidiary 1. A new intermediate parent (Newco Y) is formed. Newco Y issues equity instruments to Parent P in exchange for Parent P interests in Subsidiaries 2 and 3. Consequently, Subsidiary 1 becomes a wholly-owned subsidiary of Newco X, and Subsidiaries 2 and 3 become wholly-owned subsidiaries of Newco Y. Newco X and Newco Y have no other assets or liabilities. Newco X and Newco Y will account for their investments in the subsidiaries at cost in their separate financial statements in accordance with IAS 27. In its separate financial statements, Newco X should measure the cost of its investment in Subsidiary 1 in accordance with IAS 27. In the case of Newco Y, however, the reorganisation does not meet the criteria in IAS 27; consequently, Newco Y is not permitted to measure the cost of its investments in Subsidiaries 2 and 3 in accordance with IAS 27. The reorganisations establishing Newco X and Newco Y are evaluated under the provisions of IAS 27, which is applicable in this scenario because the entities being acquired by Newco X (i.e. Subsidiary 1) and Newco Y (i.e. Subsidiaries 2 and 3) are not themselves parent entities. In the case of Newco X, the criteria in IAS 27, which are derived from the criteria established in IAS 27, are met in that: Newco X obtains control of Subsidiary 1 by issuing equity instruments to Parent P in exchange for Parent P’s interest in that subsidiary; the assets and liabilities of the Newco X subgroup immediately after the reorganisation are the same as the assets and liabilities of Subsidiary 1 immediately before the reorganisation; and Parent P has the same relative and absolute interests in the net assets of Subsidiary 1 immediately before and after the reorganisation. Consequently, in its separate financial statements, Newco X should measure the cost of its investment in Subsidiary 1 at the carrying amount of its share (100 per cent) of the equity items shown in the separate financial statements of Subsidiary 1 at the date of the reorganisation. Note that, for Newco X, this treatment is not optional; it is required because the criteria in IAS 27 are met. In the case of Newco Y, the criteria in IAS 27 are not met because the assets and liabilities of the Newco Y subgroup immediately after the reorganisation are not the same as the assets and liabilities of either Subsidiary 2 or Subsidiary 3 immediately before the reorganisation (i.e. the requirements of IAS 27 are not met). It is not appropriate to apply the measurement basis in IAS 27 by analogy to the Newco Y reorganisation. Consequently, in its separate financial statements, Newco Y should determine the cost of its investments in Subsidiaries 2 and 3 in accordance with its usual accounting policy for such transactions (generally cost or fair value, subject to jurisdictional requirements).