Disclosure requirements for interests in structured entities – general

The disclosure requirements in this section apply to:

• consolidated financial statements prepared by IFRS 10, in which case the disclosures will not be required in any separate financial statements that are also presented;
• financial statements in which the equity method is used to account for interests in associates or joint ventures, in which case the disclosures will not be required in any separate financial statements that are also presented; and
• separate financial statements if these are presented as the reporting entity’s only financial statements.

Nature and extent of interests in unconsolidated structured entities

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

An entity is required to disclose information that enables users of its financial statements to understand the nature and extent of its interests in unconsolidated structured entities.

An investment entity need not provide the disclosures required by IFRS 12 for an unconsolidated structured entity that it controls and for which it presents the disclosures required by IFRS 12.

The exemption in IFRS 12 for investment entities refers only to the disclosures required by IFRS 12. However, the specific disclosure requirements in IFRS 12 (see below) simply expand on the detail necessary to satisfy the requirements in IFRS 12 and, consequently, they are covered by the exemption.

The reporting entity should disclose both qualitative and quantitative information about its interests in unconsolidated structured entities. Such information should include but is not limited to, the nature, purpose, size, and activities of the structured entity together with how the structured entity is financed.

As discussed, IFRS 12 requires disclosure of, inter alia, the carrying amounts of assets and liabilities relating to an entity’s interest in unconsolidated structured entities. If a reporting entity has sponsored an unconsolidated structured entity for which it does not disclose any information under IFRS 12 (e.g., because it does not have an interest in the structured entity at the reporting date), the entity is required to 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.

In IFRS 12, the structured entities referred to are those that the reporting entity has sponsored but about which it has not given any information under IFRS 12 (rather than all structured entities that it has sponsored).

In IFRS 12, the disclosure relates to all assets transferred to the structured entity during the reporting period, not just assets transferred by the sponsor.

Although disclosures are required about the nature of risks relating to interests retained in unconsolidated structured entities through explicit or implicit involvement, risks can be wider than this. For example, an entity might not intend to provide any support to a structured entity but might be exposed to litigation risk from sponsoring a failed structured entity. The disclosures are, therefore, required for unconsolidated structured entities that the reporting entity has sponsored but in which it does not have an interest. They are designed to give users a sense of the scale of the operations a reporting entity had managed with these types of transactions and the extent of the reporting entity’s reliance on such entities to facilitate its business. They are not intended to help assess the actual risk of failure or recourse to an entity.

Income from a structured entity includes but is not limited to, recurring and non-recurring 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.

The disclosures required by IFRS 12 should be presented in tabular format unless another format is more appropriate. The sponsoring activities should be classified into relevant categories.

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 determines that its relationship with a fund constitutes an interest in an unconsolidated structured entity, the manager is typically required to disclose the value of the fund’s assets under management. As noted, IFRS 12 requires an entity to disclose the risks associated with its interests in unconsolidated structured entities and IFRS 12 requires that the disclosure of the nature of such interests includes, inter alia, the ‘size’ of the structured entity. In addition, IFRS 12 explains that “if relevant to an assessment of its exposure to risk, an entity would be required to provide additional information about the assets and funding of structured entities”. While not explicitly stated in the Standard, a user of the financial statements of an investment manager earning fees through its ability to maximize the returns of investors in a fund is likely to view the total value of assets under management as both a measure of the investment manager’s susceptibility to risk and the most relevant measure of the fund’s size. Therefore, the assets under management would typically be a required disclosure under IFRS 12. IFRS 12 does not, however, prescribe the format of this disclosure. One approach would be to disclose assets under management in a tabular format by asset class. Alternatively, if the investment manager determines that this would not be meaningful to a user of the financial statements, a narrative disclosure of total assets under management may be sufficient. The method for quantifying assets under management is also not prescribed in IFRS 12. However, the investment manager should disclose information to help users of financial statements evaluate the nature and extent of the entity’s risks from its interests in unconsolidated structured entities. Therefore, the investment manager should provide sufficient information to enable users of the financial statements to understand how assets under management are calculated and how they correspond to the manager’s risk (e.g., through the calculation of variable investment management fees receivable).

Risks associated with interests in unconsolidated structured entities

An entity is required to disclose information that enables users of its financial statements to evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities. This disclosure should cover the entity’s exposure to risk from involvement it had with unconsolidated structured entities (e.g., sponsoring the structured entity) during the reporting period or in previous periods, even if the entity no longer has contractual involvement at the reporting date.

An entity may be exposed to risk from an involvement with a structured entity even though the reporting entity may not control or have a contractual involvement with the structured entity at the reporting date. For example, a reporting entity might feel compelled to provide support to a structured entity to prevent its failure, even though the reporting entity has no legal or contractual requirement to provide support, because if the structured entity failed the reporting entity’s reputation would be damaged. Consequently, the Board has required disclosure of risk even when there is no contractual involvement at the reporting date.

An investment entity need not provide the disclosures required by IFRS 12 for an unconsolidated structured entity that it controls and for which it presents the disclosures required by IFRS 12.

IFRS 12, as supplemented by Appendix B to IFRS 12 (see below), expands on the detail necessary to satisfy the requirements of IFRS 12. Consequently, they are covered by the investment entity exemption in IFRS 12. The reporting entity should disclose in tabular format, unless another format is more appropriate, a summary of:

• the carrying amounts recognized in its financial statements of the assets and liabilities relating to its interests in unconsolidated structured entities;
• the line items in the statement of financial position in which those assets and liabilities are recognized;
• the amount that best represents the entity’s maximum exposure to loss from its interests in unconsolidated structured entities, including how the maximum loss exposure is determined. If the maximum exposure to loss cannot be quantified, the entity should disclose that fact and the reasons; and
• a comparison of the carrying amounts of the assets and liabilities of the entity that relate to its interests in unconsolidated structured entities and the entity’s maximum exposure to loss from those entities.

When a financial instrument exposes the reporting entity to theoretically unlimited losses, it will not be possible to determine the maximum loss exposure and this would need to be explained.

If during the reporting period, without having a contractual obligation to do so, the entity has provided financial or other support to an unconsolidated structured entity in which it previously had or currently has an interest, including assisting the structured entity in obtaining financial support, disclosure is required of the type and amount of support provided and the reasons for providing the support.

The entity is also required to disclose any current intentions to provide financial or other support to an unconsolidated structured entity, including any intentions to assist the structured entity in obtaining financial support.

The Board decided not to define financial support, but the Basis for Conclusions on IFRS 12 notes that the Board believes it is widely understood as the provision of resources to another entity, directly or indirectly.

Examples of financial support to a structured entity include purchasing assets from the structured entity and purchasing instruments issued by the structured entity.

If the disclosures above are not sufficient to satisfy the overall disclosure requirement in IFRS 12, additional information should be given that enables users to evaluate the nature of and changes in, the reporting entity’s exposure to risks associated with its interests in unconsolidated structured entities.

Examples of additional information that, depending on the circumstances, might be relevant to an assessment of the risks to which an entity is exposed when it has an interest in an unconsolidated structured entity are:

• the terms of any arrangements (e.g., liquidity arrangements or credit rating triggers associated with obligations to purchase assets of the structured entity or provide financial support) that could require the entity to provide financial support to an unconsolidated structured entity, including:
  • 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 incurred during the period by the reporting entity relating to its interests in unconsolidated structured entities;
• the types of income received during the period by the reporting entity from its interests in unconsolidated structured entities;
• whether the reporting entity is required to absorb an unconsolidated structured entity’s losses before other parties, the maximum limit of such losses for the reporting entity, and, if relevant, the ranking and amounts of potential losses borne by parties whose interests rank lower than the reporting entity’s interest in the unconsolidated structured entity;
• information about any liquidity arrangements, guarantees, or other commitments with third parties that may affect the fair value or risk of the reporting entity’s interests in unconsolidated structured entities;
• any difficulties experienced during the period by an unconsolidated structured entity in financing its activities; and
• about the funding of an unconsolidated structured entity, the forms of funding, such as commercial paper and medium-term notes, and their weighted average life. If the structured entity has longer-term assets funded by shorter-term funding, the information might include maturity analyses of the assets and funding.

This is a list of additional information that, depending on the circumstances, might be relevant and not a list of requirements that should be applied regardless of the circumstances. However, the Board wished to emphasize the level of detail that would be required when a reporting entity has a large exposure to risk from its interests in unconsolidated structured entities.