IFRS 12: Disclosing Interests in Other Entities

International Financial Reporting Standard 12 (IFRS 12) is a disclosure standard governing how companies report their relationships with other entities in their financial statements. It requires businesses to provide detailed information about their investments and other forms of involvement in outside companies. The purpose of this standard is to enhance transparency, ensuring that users of financial statements can clearly see the nature of a company’s interests in other entities and understand the associated risks. This allows for a more complete evaluation of how these relationships affect the company’s financial position, performance, and cash flows.

The standard consolidates disclosure requirements previously spread across several accounting standards into a single, comprehensive framework. IFRS 12 applies broadly to any entity that holds an interest in subsidiaries, joint arrangements, associates, or unconsolidated structured entities. An “interest” is defined as any contractual or non-contractual involvement that exposes the reporting entity to variability in returns from the performance of the other entity.

Certain interests are exempt from IFRS 12 because other standards provide more appropriate guidance. These exemptions include post-employment benefit plans covered by IAS 19 Employee Benefits and interests in other entities accounted for under IFRS 9 Financial Instruments, unless the interest is in an associate, joint venture, or an unconsolidated structured entity. Interests classified as held for sale under IFRS 5 are also subject to specific, limited disclosure relief.

Core Objective and Scope of the Standard

The central objective of IFRS 12 is to require a company to disclose information that enables users of its financial statements to evaluate the nature of, and risks associated with, its interests in other entities and the effects of those interests on its financial statements. The standard is built on the principle that clear information helps stakeholders make more informed economic decisions.

IFRS 12 applies broadly to any entity that holds an interest in subsidiaries, joint arrangements, associates, or unconsolidated structured entities. The standard defines an “interest” as any contractual or non-contractual involvement that exposes the reporting entity to variability in returns from the performance of the other entity. This definition is intentionally broad to capture a wide range of financial and operational relationships.

Certain types of interests are specifically exempted from the requirements of IFRS 12 because other accounting standards provide more appropriate disclosure guidance. For instance, interests related to post-employment benefit plans, which are covered by IAS 19 Employee Benefits, do not fall under IFRS 12. Similarly, interests in other entities accounted for under IFRS 9 Financial Instruments are generally outside the scope, unless the interest is in an associate, joint venture, or an unconsolidated structured entity.

Disclosure Requirements for Interests in Subsidiaries

A subsidiary is an entity that is controlled by another entity, known as the parent. IFRS 12 mandates specific disclosures that allow users to understand the composition of the corporate group and the financial impact of these controlled entities. For each material subsidiary, the parent company must disclose the subsidiary’s name, its principal place of business, and the proportion of ownership interest held. If the proportion of voting rights held is different from the ownership interest, that must also be disclosed.

Companies must disclose any significant restrictions on their ability to access or use a subsidiary’s assets or settle its liabilities. These can be statutory, contractual, or regulatory limitations that impede the flow of resources within the group. The disclosure must describe the nature and extent of these restrictions and the carrying amounts of the affected assets and liabilities.

Information is also required about the interests of non-controlling interests (NCI), which is the portion of equity in a subsidiary not attributable to the parent company. For each subsidiary with a material NCI, the parent must disclose the profit or loss allocated to the NCI during the period and the accumulated NCI as of the end of the reporting period.

Summarized financial information for these subsidiaries must also be provided, including key figures like assets, liabilities, revenue, and profit or loss. This detail gives financial statement users a clearer view of the financial health and performance of the individual entities in which NCI holders have a significant stake.

The standard also requires disclosure of the consequences of any changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control. A company must present a schedule showing the effects of these transactions on the equity attributable to the owners of the parent. This ensures that transactions with NCI are transparent.

Disclosure Requirements for Interests in Joint Arrangements and Associates

Beyond subsidiaries, companies engage in relationships categorized as joint arrangements or associates. A joint arrangement exists when two or more parties have joint control, meaning decisions require the unanimous consent of the parties sharing control. For all joint arrangements, a company must disclose information about the nature of its relationship, the legal form of the arrangement, and its strategic purpose.

Joint arrangements are classified as either joint operations or joint ventures. In a joint operation, parties have rights to the assets and obligations for the liabilities. In a joint venture, parties have rights to the net assets of the arrangement.

An associate is an entity over which the investor has significant influence but not control or joint control, generally presumed when holding 20% to 50% of the voting power. The disclosure requirements for associates are similar to those for joint ventures, aiming to help users understand the financial impact of these investments.

For interests in material joint ventures and associates, a company must disclose their name, principal place of business, and the proportion of ownership interest held. Summarized financial information is also required, which includes cash, liabilities, revenue, depreciation and amortization, interest income and expense, and income tax expense. This information may be provided individually for material investments or in aggregate for others.

The standard also requires disclosure of any significant restrictions on the ability of associates or joint ventures to transfer funds to the entity, such as through dividends or loan repayments.

Disclosure Requirements for Interests in Unconsolidated Structured Entities

A structured entity (SE) is an entity designed so that voting rights are not the dominant factor in determining who controls it. Examples include securitization vehicles, asset-backed financing entities, and some investment funds, where activities are directed by contractual arrangements. The disclosures are intended to help users understand the nature and extent of the reporting company’s interest in these unconsolidated entities and the associated risks.

The standard requires a company to provide qualitative and quantitative information about its interests. This includes disclosing the nature of the SE, its purpose and activities, and the nature of the company’s involvement, such as whether it sponsors the SE or provides it with liquidity support. To quantify its exposure, a company must disclose the carrying amounts of any related assets and liabilities recognized in its financial statements and the specific line items where they are presented.

The disclosures must illuminate the company’s maximum exposure to loss from its interests, and the company must explain how this maximum exposure is determined. This information is important for risk assessment, as it shows the potential downside even if recognized assets are minimal. If a company has provided financial support to an unconsolidated SE without a contractual obligation, it must disclose the type and amount of support provided and the reasons for providing this support.

Significant Judgements and Assumptions

IFRS 12 requires companies to disclose the significant judgements and assumptions made by management when classifying their interests in other entities. These disclosures are important because the classification of an interest as a subsidiary, joint arrangement, or associate dictates how it is accounted for and presented. This offers insight into the reasoning behind the accounting treatments applied.

A company must disclose the judgements made in determining whether it has control, joint control, or significant influence over another entity. For example, if a company holds less than half the voting rights but determines it does have control, it must provide a detailed explanation. Conversely, if it holds more than half of the voting rights but concludes that it does not have control, it must also explain the rationale.

Changes in facts and circumstances during a reporting period might alter a company’s conclusion, and any such changes in judgement must also be disclosed. The requirement extends to determining the type of joint arrangement when it is structured through a separate vehicle. Management must disclose the judgements made in classifying the arrangement as either a joint operation or a joint venture, as this decision impacts whether the company recognizes its share of individual assets and liabilities or a net investment.