Disclosure requirements for interests in structured entities – general

The disclosure requirements in this section apply to:

• Consolidated financial statements prepared according to IFRS 10 may eliminate the need for disclosures in any separate financial statements that are also presented.
• Financial statements that utilize the equity method for interests in associates or joint ventures do not need separate disclosures in additional financial statements.
• If the financial statements are presented as the reporting entity’s only financial statements, they should be separate.

Nature and extent of interests in unconsolidated structured entities

Disclosures regarding the nature and extent of interests in unconsolidated structured entities – general

An entity must provide details in its financial statements to help readers grasp the scope and nature of its investments in unconsolidated structured entities.

An investment entity is not obligated to give the disclosures specified by IFRS 12 for an unconsolidated structured entity that it controls and for which it presents the required disclosures under IFRS 12.

IFRS 12 provides an exemption for investment entities specifically related to the disclosures outlined in IFRS 12. Yet, the detailed disclosure requirements in IFRS 12 (as shown below) simply provide additional information needed to meet the criteria in IFRS 12 and, therefore, fall under the exemption.

The reporting entity needs to provide detailed qualitative and quantitative information regarding its investments in unconsolidated structured entities. The information should cover the nature, purpose, size, and activities of the structured entity, as well as how it is financed.

IFRS 12 mandates the disclosure of the carrying amounts of assets and liabilities related to an entity’s interest in unconsolidated structured entities. When a reporting entity has sponsored an unconsolidated structured entity but does not disclose any information under IFRS 12, it must disclose:

(a) how it has determined which structured entities it has sponsored;

(b) income from those structured entities (see below) during the reporting period, together with a description of the types of income presented; and

(c) if assets have been transferred to those structured entities during the reporting period, the carrying amount of those assets at the time of the transfer.

IFRS 12 discusses structured entities that the reporting entity has sponsored but has not provided information on under IFRS 12, rather than all sponsored structured entities.

IFRS 12 requires disclosure of all assets transferred to the structured entity during the reporting period, not limited to assets transferred by the sponsor

Disclosures must cover the nature of risks associated with interests retained in unconsolidated structured entities due to explicit or implicit involvement, but risks may extend beyond this scope. For instance, a company may not plan to offer support to a structured entity, yet could face legal risks from sponsoring a failed structured entity. Disclosures are necessary for unconsolidated structured entities that the reporting entity has sponsored but does not have an interest in. They are crafted to provide users with an understanding of the scope of the operations a reporting entity has handled through these transactions and how much the reporting entity depends on such entities to support its business. These are not meant to evaluate the real risk of failure or recourse to an entity.

Revenue generated from a structured entity encompasses various sources such as recurring and one-time fees, interest, dividends, gains or losses on the remeasurement or derecognition of interests in structured entities, and gains or losses from the transfer of assets and liabilities to the structured entity.

IFRS 12 disclosures should be presented in a tabular format unless a different format is more suitable. It’s important to categorize the sponsoring activities appropriately.

Disclosures regarding an investment manager’s interest in an unconsolidated investment fund

Disclosures regarding an investment manager’s interest in an unconsolidated investment fund When an investment manager identifies its connection with a fund as an interest in an unconsolidated structured entity, disclosing the value of the fund’s assets under management is usually necessary. IFRS 12 mandates entities to reveal the risks linked to their stakes in unconsolidated structured entities, including details like the size of the structured entity. Furthermore, IFRS 12 states that if it is pertinent to evaluating its risk exposure, a company must offer more details about the assets and funding of structured entities. When examining financial statements, individuals interested in an investment manager who earns fees by optimizing investor returns in a fund tend to see the total assets under management as a key indicator of risk exposure and the fund’s scale. Hence, disclosing the assets under management is usually necessary according to IFRS 12. IFRS 12 does not specify the format for this disclosure. Consider presenting assets under management in a tabular layout categorized by asset class. If the investment manager decides that this information wouldn’t be relevant to a user of the financial statements, they could opt for a narrative disclosure of total assets under management instead. Quantifying assets under management is not specified in IFRS 12. Nevertheless, it is important for the investment manager to provide details that assist financial statement users in assessing the entity’s risks related to its investments in unconsolidated structured entities. Thus, it is essential for the investment manager to offer adequate information for financial statement users to grasp the calculation of assets under management and their relation to the manager’s risk, such as through the variable investment management fees receivable

Risks associated with interests in unconsolidated structured entities

An organization must provide details in its financial statements to help users assess the nature of, and alterations in, the risks linked to its investments in unconsolidated structured entities. This disclosure should address the entity’s risk exposure related to its interactions with unconsolidated structured entities, such as sponsoring them, in the current or prior reporting periods, even if the entity is no longer contractually involved at the reporting date.

An organization could face risks by being associated with a structured entity, even if it does not have control or a contractual relationship with the structured entity at the reporting date. For instance, a reporting entity may find it necessary to offer assistance to a structured entity to avoid its collapse, even if there is no legal obligation to do so, as the failure of the structured entity could harm the reporting entity’s reputation. As a result, the Board now mandates the disclosure of risks even in the absence of contractual obligations at the reporting date.

Disclosures required by IFRS 12 need not be provided by an investment entity for an unconsolidated structured company it controls if the latter already provides such disclosures.

The information needed to meet the requirements of IFRS 12 is expanded upon in IFRS 12, as well as in Appendix B to IFRS 12 (see to below). As a result, IFRS 12’s investment entity exemption applies to them. Unless another format is more suitable, the reporting entity is required to provide the following in tabular format:

• the amounts reported in the financial statements for assets and liabilities associated with its investments in unconsolidated structured entities;
• the specific categories in the balance sheet where these assets and liabilities are listed;
• the figure that most accurately reflects the potential loss the entity could face from its investments in unconsolidated structured entities, along with the method used to calculate this maximum loss exposure. If the maximum exposure to loss cannot be quantified, it should be disclosed along with the reasons.
• Additionally, a comparison should be provided between the carrying amounts of the assets and liabilities related to interests in unconsolidated structured entities and the entity’s maximum exposure to loss from those entities.

If a financial instrument poses a risk of unlimited losses for the reporting entity, it becomes crucial to clarify the inability to determine the maximum potential loss.

If, during the reporting period, the entity has voluntarily offered financial or other support to an unconsolidated structured entity in which it previously had or currently has an interest, including helping the structured entity secure financial support, disclosure is necessary regarding the type and amount of support given and the reasons behind it.

The entity must also reveal any current plans to offer financial or other assistance to an unconsolidated structured entity, including any plans to help the structured entity secure financial support.

The Board chose not to provide a specific definition for financial support. However, the Basis for Conclusions on IFRS 12 mentions that the Board considers it to be commonly understood as the supply of resources to another entity, whether directly or indirectly.

Buying assets from a structured entity or buying securities produced by the structured entity are both examples of giving money to that entity.

If the above disclosures aren’t enough to meet IFRS 12’s overall disclosure requirements, then more information should be given so that users can figure out how the reporting entity’s exposure to risks related to its interests in unconsolidated structured entities has changed and what those changes are.

When figuring out the risks an entity faces when it has a stake in an unconsolidated structured entity, the following extra pieces of information may be useful, based on the situation:

• the terms of any agreements (for example, liquidity agreements or credit rating triggers that require the entity to buy structured entity assets or provide financial support) that could require the entity to give money to an unconsolidated structured entity, such as
• • a description of events or circumstances that could expose the reporting entity to a loss;
  • whether any terms would limit the obligation; and
  • whether any other parties provide financial support and, if so, how the reporting entity’s obligation ranks with those of other parties;
• losses that the reporting entity had during the time because of its holdings in unconsolidated structured entities;
• what kinds of income the reporting entity got from its shares in unconsolidated structured entities during the time;
• if the reporting entity has to take on the unconsolidated structured entity’s losses before other parties, how much the reporting entity can lose, and, if applicable, how the parties whose interests in the unconsolidated structured entity are lower than the reporting entity’s interest are ranked and how much they could lose;
• a list of any agreements, pledges, or other promises made with third parties that could affect the reporting entity’s interests in unconsolidated structured entities and their fair value or risk;
• any problems that an unconsolidated structured entity had during the time with getting money to run its business; and
• about how an unconsolidated structured company gets its money, what kinds of money it gets (like commercial paper and medium-term notes), and how long their weighted average life is. There may be maturity analyses of the assets and funding for the structured company if it has longer-term assets that are financed by shorter-term funding.

Kindly remember that this is just a list of extra knowledge that might be useful in some situations. It is not a list of rules that should always be followed. The Board did want to stress, though, how much information would need to be given when a reporting company has a lot of risk from its holdings in unconsolidated structured entities.