Overview of IFRS 12

IFRS 12 is a consolidated disclosure Standard requiring a wide range of disclosures about an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated ‘structured entities’. The disclosure requirements are presented as a series of objectives, with detailed guidance on satisfying those objectives.

Recent Amendments to IFRS 12

There have been no amendments to IFRS 12 since 1 September 2017.

Disclosure requirements – general

Objective of IFRS 12

The objective of IFRS 12 is to require information to be disclosed in an entity’s financial statements that will enable users of those statements to evaluate:

• the nature of, and risks associated with, the entity’s interests in other entities; and
• the effects of those interests on the entity’s financial position, financial performance and cash flows.

Overview of disclosure requirements

The disclosures required by IFRS 12 can be categorized as follows:

• significant judgements and assumptions made by an entity in determining:
  • the nature of its interests in another entity or arrangement;
  • the type of joint arrangement in which it has an interest; and
  • that it meets the definition of an investment entity, if applicable;
• information about interests in subsidiaries;
• information about interests in joint arrangements and associates; and
• information about interests in unconsolidated structured entities.

If the disclosures specified in these four sections, together with disclosures provided under other Standards, do not meet the overall objective of IFRS 12 as set out, the reporting entity should disclose whatever additional information is needed to ensure that the objective is met.

Aggregation

In satisfying the objective of IFRS 12, the reporting entity should consider both the level of detail that is necessary and how much emphasis to place on each of the Standard’s disclosure requirements. Including a large amount of insignificant detail or aggregating items having different characteristics would obscure useful information. Therefore, disclosures should be aggregated or disaggregated so as to ensure that useful information is not obscured.

The extent of aggregation, disaggregation and emphasis should be tailored by each reporting entity to meet its users’ needs. Each entity needs to find the right balance between too much and too little information.

Information should be presented separately for interests in:

• subsidiaries;
• joint ventures;
• joint operations;
• associates; and
• unconsolidated structured entities.

Aggregation within each of these categories is permitted for interests in similar entities, provided that it is consistent with the Standard’s overall objective and does not obscure the information provided. In determining whether to aggregate information about particular entities, both qualitative and quantitative information about the different risk and return characteristics of each of those entities needs to be considered, together with the significance of each of the entities to the reporting entity. IFRS 12 gives examples of possible aggregation levels, such as by nature of activities, by industry classification or by geography (e.g., by country or region).

The disclosures should be presented in the financial statements in a way that makes clear the nature and extent of the reporting entity’s interests in the other entities.

A reporting entity should disclose in its financial statements how it has aggregated interests in similar entities.

In some cases, this disclosure may be apparent from how the information is presented and may not require any additional explanation. For example, in circumstances in which information is aggregated by geographical region when it is judged appropriate to do so, this may be readily apparent from headings and sub-headings.

Scope

Scope – general

Subject to certain exemptions, which are set out below, an entity is required to apply IFRS 12 if it has an interest in one or more of the following:

• subsidiaries;

• joint arrangements (i.e., joint operations or joint ventures);
• associates; and

• unconsolidated structured entities.

Scope – interests held during the period or only at the end of the period? IFRS 12 does not state explicitly whether ‘has an interest’ means at the end of the reporting period or at any time during the reporting period. However, the Standard requires a number of disclosures regarding events that occur during the reporting period (e.g., in relation to the loss of control of a subsidiary during the reporting period). Accordingly, an entity should apply the Standard if it held any interest of the nature described in IFRS 12 at any time during the reporting period.

IFRS 12 includes a definition of an interest in another entity. But if an entity has already determined, through its application of IFRS 10, IFRS 11 or IAS 28, that it has a subsidiary, joint operation, joint venture or associate, that interest will fall within the scope of IFRS 12.

Exemptions from the disclosure requirements of IFRS 12 fall into two categories:

• financial statements outside the scope of IFRS 12; and
• interests for which the disclosures are not required.

In addition, investment entities are exempted from certain of IFRS 12’s general disclosure requirements.

Interests in entities within the scope of IFRS 5

Except as set out in IFRS 12, the requirements of IFRS 12 apply to the types of interests listed in IFRS 12:5 when they are classified (or included in a disposal group that is classified) as held for sale or discontinued operations in accordance with IFRS 5.

IFRS 12 states explicitly that the requirements for disclosure of summarized financial information in accordance with IFRS 12 are not required for interests classified as held for sale.

Financial statements outside the scope of IFRS 12

The requirements of IFRS 12 do not generally apply to an entity’s separate financial statements. The disclosure requirements for separate financial statements are set out in IAS 27.

However, if an entity’s separate financial statements are its only financial statements, disclosures are required under IFRS 12 as follows:

(i) if the entity has interests in unconsolidated structured entities, the disclosures required by IFRS 12 regarding unconsolidated structured entities, set out in IFRS 12; and

(ii) if the entity is an investment entity and all of its subsidiaries are measured at fair value through profit or loss as required by IFRS 10, the disclosures relevant for investment entities required by IFRS 12.

Application of IFRS 12 by investment entities

Application of IFRS 12 by investment entities All of the disclosure requirements of IFRS 12 are applicable to investment entities (to the extent that the disclosures relate to matters relevant to the investment entity) other than those explicitly stated as not applicable to investment entities. IFRS 12 requirements explicitly stated as not being applicable to investment entities are IFRS 12 regarding interests in joint arrangements and associates, and IFRS 12 regarding unconsolidated structured entities, from which investment entities are exempted by IFRS 12 and IFRS 12, respectively. Consequently, in addition to the specific requirements in IFRS 12, and 19, that apply only to investment entities, an investment entity should provide the disclosures required by the following general requirements in IFRS 12: IFRS 12 regarding significant judgements and assumptions; IFRS 12 regarding material joint arrangements and associates, significant restrictions on transfers of funds from joint ventures and associates, and risks associated with interests in joint ventures and associates, respectively; and IFRS 12 regarding interests in unconsolidated structured entities, but only in respect of entities that the investment entity does not control (and that are not, therefore, covered by the exemption in IFRS 12). An investment entity preparing financial statements in which all subsidiaries are measured at fair value through profit or loss is not, however, required to provide the disclosures described in: IFRS 12 regarding interests in subsidiaries (because these either relate to consolidation accounting not applied by investment entities or are duplicated by the specific requirements of IFRS 12; or IFRS 12 regarding the equity method of accounting (which is also not applied by investment entities due to the requirement in IFRS 10 that they elect the exemption from applying the equity method in IAS 28). When an investment entity consolidates a service-providing subsidiary as required by IFRS 10, the disclosure requirements of IFRS 12 apply to those consolidated financial statements (see IFRS 12). The considerations described in the previous paragraphs then apply in determining the disclosures that should be provided. In addition, the disclosures required by IFRS 12 (significant judgements made in determining that the investment entity has control over the service-providing subsidiary) and IFRS 12 (regarding interests in subsidiaries) should be provided as applicable to the facts and circumstances of the service-providing subsidiary.

Interests for which disclosures are not required

IFRS 12 does not require disclosures to be provided about the following interests:

• post-employment benefit plans to which IAS 19 applies;
• other long-term employee benefit plans to which IAS 19 applies;
• an interest held by a party that participates in, but does not have joint control of, a joint arrangement (i.e., a joint venture or joint operation), unless that interest results in significant influence over the arrangement or is an interest in a structured entity;
• an interest in another entity that is accounted for in accordance with IFRS 9 (or, prior to the adoption of IFRS 9, IAS 39), unless the interest is (1) an interest in an associate or a joint venture that is measured at fair value through profit or loss in accordance with IAS 28, or (2) an interest in an unconsolidated structured entity.

In relation to the final bullet above, IAS 28 permits an interest in an associate or a joint venture held by a venture capital organization or a mutual fund, unit trust or similar entity (including an investment-linked insurance fund) to be measured at fair value through profit or loss. The disclosure requirements of IFRS 12 apply to such interests.

Scope – employee share trusts IFRS 12 does not apply to “post-employment benefit plans or other long-term employee benefit plans to which IAS 19 applies”. This exemption does not extend to entities such as employee share trusts established to facilitate equity compensation plans, which are within the scope of IFRS 2 rather than IAS 19 (and are not, therefore, subject to the detailed disclosure requirements of IAS 19). Such entities fall within the scope of IFRS 12.

Definitions

Interest in another entity – definition

An interest in another entity, for the purpose of applying IFRS 12, refers to contractual and non-contractual involvement that exposes an entity (the reporting entity) to variability of returns from the performance of the other entity. An interest can be evidenced by the holding of debt or equity instruments as well as other forms of involvement including (but not limited to) the provision of funding, liquidity support, credit enhancement and guarantees. An interest encompasses the means by which an entity has control of, joint control of, or significant influence over another entity. A typical customer-supplier relationship alone does not necessarily give rise to an interest in another entity for the purpose of applying IFRS 12.

If the reporting entity is exposed, or has rights, through contractual or non-contractual involvement, to variability of returns from the performance of another entity, the reporting entity has an interest in that other entity for the purpose of applying IFRS 12.

Variability of returns is key to the meaning of control in IFRS 10 and is widely defined.

Typically, an entity will already have determined, through its application of IFRS 10, IFRS 11 and IAS 28, the extent to which it has interests in subsidiaries, joint arrangements and associates. In addition, for the purpose of applying IFRS 12, a reporting entity will need to determine the extent to which it has interests in unconsolidated structured entities.

Structured entity – definition

A structured entity is defined in IFRS 12 as “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”.

The term ‘structured entity’ is not used in IFRS 10. The background to this definition, and to IFRS 12’s requirement to provide disclosures about unconsolidated structured entities, is that the Board was asked by, among others, the G20 leaders and the Financial Stability Board to improve disclosure requirements relating to ‘off balance sheet’ activities. Unconsolidated structured entities, particularly securitization vehicles and asset-backed financings, are seen as part of such activities.

A structured entity that is controlled by the reporting entity will meet the definition of a subsidiary and be consolidated (and thus ‘on balance sheet’). Specific disclosures are required in respect of subsidiaries that are structured entities.

Appendix B to IFRS 12 states that a structured entity often has some or all of the following features or attributes:

• restricted activities;
• a narrow and well-defined objective, such as to effect a tax-efficient lease, carry out research and development activities, provide a source of capital or funding to an entity or provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors;
• insufficient equity to permit the structured entity to finance its activities without subordinated financial support; and/or
• financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches).

With respect to the third bullet point above, simply needing subordinated financial support does not mean that an entity is automatically a structured entity. For example, groups sometimes choose to finance subsidiaries through a mixture of equity and subordinated debt, but if such subsidiaries are controlled through voting rights attached to the equity instruments, they will not meet the definition of a structured entity.

If, following a restructuring, an entity that is controlled by voting rights receives funding from third parties, this in itself does not make the entity a structured entity.

Securitization vehicles, asset-backed financings and some investment funds are examples of structured entities given in IFRS 12.

Interest in another entity – additional guidance

If a reporting entity has an interest in a joint venture or an associate that is a structured entity, that interest is also an interest in an unconsolidated structured entity for IFRS 12. Therefore, the reporting entity should provide information in respect of that interest that meets both sets of disclosure requirements – those relating to interests in joint ventures and associates, and those relating to interests in unconsolidated structured entities.

The Board considered this issue and confirmed the conclusion in the previous paragraph. In reaching this conclusion, the Board noted that an entity should capture most, and in some cases all, of the disclosures required for interests in unconsolidated structured entities by providing the disclosures for interests in joint ventures and associates. Accordingly, the Board did not think that this conclusion should significantly increase the amount of information that an entity would be required to provide.

This section discusses IFRS 12’s guidance on how to determine whether an entity has an interest in another entity.

An interest in another entity (e.g., an unconsolidated structured entity) is a contractual or non-contractual involvement that exposes the reporting entity to variability of returns from the performance of the other entity. Consideration of the purpose and design of the other entity, including consideration of the risks that the other entity was designed to create and the risks it was designed to pass on to the reporting entity and other parties, may assist with the assessment of whether the reporting entity has an interest in the other entity.

Typically, a reporting entity is exposed to variability of returns from the performance of another entity by holding instruments (e.g., debt or equity instruments issued by the other entity), or having some other involvement that absorbs variability. Consider the example of a structured entity that holds a loan portfolio. To protect itself from default of both interest and principal payments on the loans, the structured entity may enter into a credit default swap with the reporting entity. By entering into the credit default swap, the reporting entity would have an involvement that exposes it to variability of returns from the structured entity’s performance because the credit default swap absorbs the structured entity’s variability of returns.

But simply entering into a credit default swap, or other instrument, with a structured entity is not sufficient to conclude that the counterparty has an interest in that structured entity. The counterparty must be exposed to variability of returns from the structured entity – and this will not always follow, as explained below.

Some instruments are designed to transfer risk from a reporting entity to another entity. Such instruments create variability of returns for the other entity but do not typically expose the reporting entity to variability of returns from the performance of the other entity. Consider a structured entity (Entity A) set up to provide investment opportunities for investors who wish to have exposure to the credit risk of another entity (Entity Z), where Entity Z is unrelated to any of the parties. Entity A issues credit-linked notes to the investors for cash; the notes are linked to Entity Z’s credit risk. Entity A invests the cash it receives in risk-free financial assets. Additionally, Entity A enters into a credit default swap (CDS) with Entity X; under the CDS, Entity A obtains exposure to Entity Z’s credit risk in return for a fee paid to it by Entity X. The investors receive a return based on the return from the asset portfolio plus the fee received from Entity X and, if Entity Z’s creditworthiness does not deteriorate, their full principal back at the end. The credit default swap transfers variability to Entity A, rather than absorbing variability of returns of Entity A, so that Entity X is not exposed to variability of returns from Entity A’s performance. Consequently, in this example, Entity X does not have an interest in Entity A for IFRS 12.

An investment manager’s interest in an unconsolidated investment fund

Investment manager’s interest in an unconsolidated investment fund The fee earned by an investment manager from an investment fund that it manages, but does not consolidate, constitutes an ‘interest in an unconsolidated structured entity’ to be disclosed in accordance with IFRS 12, provided that the fund meets the definition of a structured entity. As noted, an interest in another entity refers to “contractual and non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity”. IFRS 10 explains that variable returns are “returns that are not fixed and have the potential to vary as a result of the performance of the investee”. In addition, IFRS 10 states as follows. “Variable returns can be only positive, only negative or both positive and negative. An investor assesses whether returns from an investee are variable and how variable those returns are on the basis of the substance of the arrangement and regardless of the legal form of the returns…. Similarly, fixed performance management fees for managing an investee’s assets are variable returns because they expose the investor to the performance risk of the investee. The amount of variability depends on the investee’s ability to generate sufficient income to pay the fee.” Consequently, an investment manager should treat an investment fee received from an investment fund that it manages as an ‘interest in another entity’ given that it exposes the investment manager to the variability of the value of the assets under management. As noted, a structured entity is “an entity that has been designated 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”. IFRS 12 indicates that ‘some investment funds’ are examples of structured entities. In the context of an investment fund, it is necessary to evaluate the extent to which investment strategy decisions are determined by the votes of unit holders (either directly or, as discussed, through a substantive right to vote to remove the fund manager) rather than through the fund management contract.