IFRS 12 “Disclosure of Interests in Other Entities” establishes the principles for disclosing information about an entity’s interests in subsidiaries, joint arrangements, associates, and structured entities. The standard requires an entity to disclose information about the nature, extent, and financial effects of its interests in other entities.
Rules:
Under IFRS 12, an entity is required to provide the following disclosures:
Information about its interests in subsidiaries, joint arrangements, associates, and structured entities.
The nature of its relationship with these entities.
The extent of its interest in these entities.
The financial effects of its interests in these entities on its financial statements.
Descriptions:
IFRS 12 defines “interest” as a contractual right that gives an entity the right to participate in the economic benefits of an entity, and “entity” as a legal structure that has its own distinct set of rights and obligations.
Subsidiaries:
An entity is required to disclose information about its subsidiaries, including the name, country of incorporation, percentage of ownership interest, and whether the subsidiary is consolidated or not.
Joint arrangements: An entity is required to disclose information about its joint arrangements, including the nature of the arrangement, the rights and obligations of the parties to the arrangement, and the entity’s share of the assets, liabilities, revenues, and expenses of the arrangement.
Associates:
An entity is required to disclose information about its associates, including the name, country of incorporation, percentage of ownership interest, and the entity’s share of the associate’s profit or loss and other comprehensive income.
Structured entities: An entity is required to disclose information about its interests in structured entities, including the name, nature, and purpose of the entity, the risks and rewards associated with the entity, and the accounting treatment of the entity.
Examples:
Example 1: A company has a subsidiary that operates in the United States. The company owns 80% of the subsidiary’s shares, and the subsidiary is fully consolidated in the company’s financial statements. The company is required to disclose the name of the subsidiary, the country of incorporation, the percentage of ownership interest, and the fact that the subsidiary is fully consolidated.
Example 2: A company has a joint arrangement with another company to develop a new product. The joint arrangement is accounted for using the equity method. The company is required to disclose the nature of the joint arrangement, the parties to the arrangement, and the company’s share of the assets, liabilities, revenues, and expenses of the arrangement.
Case studies:
Case study 1: Company A has a 30% interest in Company B, which is an associate. Company A’s share of Company B’s profit for the year was $100,000. Company A is required to disclose the name of Company B, the country of incorporation, the percentage of ownership interest, and the share of Company B’s profit for the year.
Case study 2: Company C has an interest in a structured entity that invests in real estate. The structured entity is a special purpose vehicle established to invest in a portfolio of real estate assets. Company C is required to disclose the name of the structured entity, the nature and purpose of the entity, and the risks and rewards associated with the entity.
New developments:
In 2020, the International Accounting Standards Board (IASB) issued an amendment to IFRS 12, which requires entities to disclose information about the significant judgements and assumptions made in determining the nature and extent of their interests in other entities. This amendment is effective for annual reporting periods beginning on or after January 1, 2022.