Chapter 2: Significant judgements and assumptions

Disclosures regarding significant judgments and assumptions – general

A reporting entity must disclose all material assumptions and judgments it made, as well as any subsequent revisions to those assumptions and judgments, in order to ascertain:

• that it has control of another entity;
• that it has joint control of an arrangement;
• the type of joint arrangement, either a joint venture or joint operation, when the arrangement is structured through a separate vehicle; and
• that it has a significant influence over another entity.

An example of this would be for a reporting organization to reveal the major assumptions and judgments that went into the following determinations:

(a) It does not control another entity even though it has 1/2 of the voting rights;

(b)It controls another entity even though it has 1/2 of the voting rights but less than 1/2;

(c) It is an agent or principal;

(d) It does not significantly influence another entity even though it has 20% or more of the voting rights; or

(e) It significantly influences another entity even though it has 20% of the voting rights but less than 20% of the voting rights.

IFRS 12 mandates disclosures beyond the five scenarios mentioned; it necessitates revealing all important judgments and assumptions used to determine the interest’s nature and the type of joint arrangement when organized via a separate entity.

There are instances where no need arises to disclose judgments or assumptions, especially when it comes to subsidiaries. Disclosure is necessary when important judgments and assumptions play a role in establishing the connection with the other entity. When evaluating various subsidiaries, the assessment can be quite simple in cases where control is clearly established through equity instruments like ordinary shares, which grant voting rights to the holder.

If there are changes in facts and circumstances during the reporting period that impact the reporting entity’s assessment of its control, joint control, or significant influence over another entity, it is necessary to disclose the significant judgements and assumptions made due to those changes.

Investment entity status

When a parent identifies itself as an investment entity under IFRS 10, it must disclose details regarding the significant judgments and assumptions used to reach this classification.

When an investment entity lacks certain typical characteristics, it must provide an explanation for why it still qualifies as an investment entity.

It is necessary to disclose the change in investment entity status and the reasons for the change when an entity becomes or ceases to be an investment entity.

Moreover, a company that transitions into an investment entity must disclose the impact of this change on the financial statements for the relevant period, such as:

• The overall worth of the subsidiaries that are no longer part of the consolidated financial statements, calculated as of the date they stop being included.
• Any profit or loss resulting from this change, determined according to IFRS 10 guidelines.
• The specific section(s) in the company’s profit or loss statement where this profit or loss is recorded, if it’s not already shown separately.