IFRS 12, ‘Disclosure of interests in other entities’, contains disclosure requirements for consolidated financial statements.

The intention of the IFRS 12 disclosures is to give relevant information to users to help them understand significant judgements and assumptions made in:

• judging that the entity has control of another entity;
• determining that it does not control another entity, even where it holds more than half of the voting rights of that entity; and
• determining that it does control another entity, even where it holds less than half of the voting rights of that entity.

IFRS 12 requires a number of other disclosures relating to interests in subsidiaries, as follows:

• general disclosures;

• interests that non-controlling interests have in the group’s activities and cash flows;
• nature and extent of significant restrictions;
• risks associated with interests in consolidated structured entities;
• consequences of changes in ownership that do not result in a loss of control;
• consequences of losing control of a subsidiary; and

• interests in unconsolidated structured entities.

Does an interest purchased for trading purposes require disclosure under IFRS 12? A trading company (TC) buys and sells stocks all the time to make money. At the time of the report, TC only owned a small part (<1%) of a structured entity (SE), which it had bought not long before the report date and then sold not long after. Question Is TC required to make the disclosures relating to interests in unconsolidated structured entities (SEs) (under paras 24 to 31 of IFRS 12) for the units that it holds in SE? Solution Yes, the disclosures are required if the interest held in SE is material to TC. TC would consider all relevant factors in assessing materiality. The general requirement in paragraph 24 of IFRS 12 is to disclose information that enables the users of its financial statements: ·        to understand the nature and extent of interests in unconsolidated SEs; and ·        to evaluate the nature of, and changes in, the risks associated with interests in unconsolidated SEs. Such factors include: the size of the investment in the SE; how long it is held for; whether it is a senior or junior interest, and the degree of risk associated with it; and the purpose for holding it. ·        Some of the IFRS 12 disclosure requirements overlap with existing IFRS 7 disclosures and need not be repeated.

Does the definition of an ‘interest in another entity’, for IFRS 12 disclosure purposes, include non-financial benefits? According to IFRS 12, a company has to tell the public about the types of entities it owns, how much it owns, how those interests affect its finances, and any risks that come with them. These types of entities include joint ventures, partners, and unconsolidated structured entities. The definition of an ‘interest in another entity’ in IFRS 12 refers to “contractual and non-contractual involvement that exposes an entity to variability of returns from performance of the other entity” . IFRS 10 includes various examples of returns, which include “economies of scale, cost savings, sourcing scarce products, gaining access to proprietary knowledge or limiting some operations or assets” and “tax benefits and access to future liquidity”. Question  Do such non-financial benefits, included as examples of a return in IFRS 10, also represent an ‘interest in another entity’ for the purposes of the disclosure requirements of IFRS 12? Solution Yes, the definition of an ‘interest in another entity’, for the purposes of IFRS 12 disclosure, does include non-financial benefits arising from involvement with an entity. In determining what disclosures are appropriate, entities should consider the purpose and design of arrangements and materiality.

Does the requirement in IFRS 12, to disclose losses incurred during the reporting period for interests in unconsolidated structured entities, apply to interests disposed of during the period? Solution Yes, we think that the requirement to disclose applies to interests that were sold during the period as well as those that were still owned at the end of the period. IFRS 12 says that certain details must be made public in order to reach its goal and let a user “evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities.” IFRS 12 also says that involvement with unconsolidated structured entities in past periods is part of the disclosure requirements, even if there is no longer any contractual involvement at the date of the report. This means that losses for interests that were sold during the time need to be reported. However, IFRS 12 makes it clear that interests that haven’t given the information needed by paragraph 29 must also report income from structured entities. In this group are interests that were held at the beginning of the period but were sold during the year. Appendix A to IFRS 12 says that “income from a structured entity” includes “gains or losses on the… derecognition of interests in structured entities.” We think that this rule would also apply to losses from interests in structured entities since it already applies to income from them.

Should the assessment of whether a non-controlling interest in a subsidiary is material be performed on the net equity interest or on the gross assets and liabilities associated with the interest? Solution We believe that figuring out what is “material” will depend on the specifics of the case. However, we think that the gross assets and liabilities should be used to figure out what a “non-controlling interest” (NCI) is. If an NCI is important to the reporting entity, IFRS 12 says that each subsidiary must share a summary of its financial details about an NCI. The goal of IFRS 12 is to make public information that helps people figure out the risks that come with a company’s holdings in other companies and how those holdings might affect the company’s finances and cash flows. The purpose of the requirement is to facilitate users in comprehending the interests that a Non-Controlling Interest (NCI) holds in the activities of the group (such as financial flows that the parent company may not have direct access to). Therefore, if the subsidiary had a small quantity of net assets consisting of significant assets and liabilities, doing a materiality evaluation based on the net value could lead to the failure of achieving this purpose.

Where there is a sub-group and there is a non-controlling interest (NCI) within the sub-group’s parent company, should the reporting entity’s assessment of whether the NCI is material be based on the NCI share in the individual parent only or in the entire sub-group? Solution In our opinion, the evaluation should be conducted by considering the proportion of ownership that the NCI holds within the entire sub-group. The reporting entity will consolidate the financial performance and position of the entire sub-group, including the share of the non-controlling interest in the parent company of the sub-group. Performing the materiality assessment based on this foundation would be fitting. In cases where the net carrying amount of the sub-group is deemed significant, the IFRS Interpretations Committee affirmed (at their meeting in September 2014) that an organization must exercise discretion in deciding the approach to be taken in presenting financial information as mandated by IFRS 12. Based on this assessment, the information may be disclosed for the entire sub-group or broken down into individual subsidiaries within the sub-group.