IFRS 12 – Disclosure of Interests In Other Entities

IFRS 12 Disclosure of Interests in Other Entities was issued by the International Accounting Standards Board (IASB) in May 2011 and became effective for annual periods beginning on or after 1 January 2013. It is the companion disclosure standard to IFRS 10 (Consolidated Financial Statements), IFRS 11 (Joint Arrangements), and IAS 28 (Investments in Associates and Joint Ventures).

Prior to IFRS 12, disclosure requirements for different types of interests i.e. subsidiaries, associates, joint ventures, and special-purpose entities were scattered across multiple standards. IFRS 12 consolidates all disclosure requirements into a single, comprehensive standard, providing users of financial statements with a clearer and more complete picture of an entity’s exposure to risks arising from its interests in other entities.

The objective of disclosure requirements is to provide information to enable users of 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 position, financial performance and cash flows. IFRS 12, Paragraph 1

The core objective of IFRS 12 is to require an entity to disclose information that enables users of its financial statements to evaluate:

IFRS 12 applies to entities that have interests in any of the following types of entity:

Scope Exclusions

The following are explicitly outside the scope of IFRS 12:

• Post-employment benefit plans and other long-term employee benefit plans to which IAS 19 applies
• An entity’s separate financial statements (IAS 27 governs those disclosures)
• Interests in an unconsolidated structured entity held by an investment entity that are measured at fair value through profit or loss

Understanding IFRS 12 requires familiarity with several critical defined terms. These definitions are consistent with those used across the related consolidation standards.

For interests in subsidiaries, IFRS 12 requires an entity to disclose information that enables users to understand the composition of the group, the interest that non-controlling interests have, and the nature and extent of significant restrictions on the group’s ability to access assets or settle liabilities.

Composition of the Group

An entity must disclose the name of the parent entity and the name of the ultimate controlling party (if different). Where the parent publishes consolidated financial statements for public use, the country of incorporation or residence must also be disclosed.

Non-Controlling Interests (NCI)

For each subsidiary with material non-controlling interests, IFRS 12 requires:

Restrictions on Access to Assets

Entities must disclose the nature and extent of significant restrictions on their ability to access or use assets and settle liabilities of the group, including restrictions arising from protective rights held by NCI, regulatory requirements, Borrowing Arrangements, or other contractual arrangements.

Risks Associated with Interests in Consolidated Structured Entities

If an entity has provided financial support to a consolidated structured entity (without having a contractual obligation), it must disclose the type and amount of that support.

For interests in joint ventures, joint operations, and associates, IFRS 12 requires disclosure of information that helps users understand the nature, extent, and financial effects of those interests and the associated risks.

Required Disclosures

• Name and nature of the arrangement or associate, including its principal place of business
• The entity’s proportion of ownership interest and voting rights (if different)
• Measurement basis — cost, equity method, or fair value
• Summarised financial information: total assets, total liabilities, revenues, profit or loss from continuing operations, and OCI
• Fair value of investment where there is a quoted market price
• Dividends received from the joint venture or associate
• Share of any contingent liabilities incurred jointly with other investors

Individually Immaterial Interests – Aggregate Disclosure

For interests in individually immaterial joint ventures or associates, IFRS 12 permits and effectively requires aggregate disclosure rather than entity-by-entity disclosure. The aggregate must separately present:

• The carrying amount of interests in associates/joint ventures
• The share of profit or loss from continuing operations
• The share of OCI and total comprehensive income

The disclosures relating to unconsolidated structured entities are among the most extensive in IFRS 12. These were introduced specifically to address concerns raised during the 2008 financial crisis, when off-balance-sheet vehicles created significant but undisclosed risks for reporting entities.

What is a Structured Entity?

A structured entity is one that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Typical examples include:

• Securitisation vehicles (e.g. asset-backed securities, mortgage-backed securities)
• Asset-backed financing structures
• Investment funds (mutual funds, hedge funds)
• Lease financing special-purpose entities

Required Disclosures for Unconsolidated Structured Entities

IFRS 12 provides important guidance on how entities should approach the preparation of the required disclosures. The standard follows a principles-based approach, prescribing what information must be conveyed rather than a mechanical list of line items.

Level of Aggregation and Disaggregation

Entities must determine the appropriate level of aggregation or disaggregation for disclosures. The standard requires that information be aggregated or disaggregated so as not to obscure useful information with the inclusion of a large amount of insignificant detail or to aggregate items that have different characteristics.

Significance Judgement

IFRS 12 frequently refers to disclosure requirements that apply when information is considered significant. The standard does not define significance precisely i.e. entities must use professional judgement, considering the nature of the interest and the related risks relative to the entity as a whole.

Interaction with Other Standards

IFRS 12 disclosures work in conjunction with the recognition and measurement requirements of:

IFRS 12 has been subject to several amendments since its original issuance. The key changes are summarised chronologically below.

In practice, preparers frequently encounter challenges when applying IFRS 12. The following are among the most commonly observed issues noted by standard-setters, auditors, and regulators:

1. Insufficient Detail on Structured Entities

Entities often fail to adequately describe the nature and purpose of structured entities, or to quantify their maximum exposure to loss. Regulators have repeatedly flagged boilerplate disclosure as non-compliant with the standard’s principles-based intent.

2. Inadequate Disclosure of Significant Judgements

IFRS 12 requires disclosure of the significant judgements and assumptions made in determining control, joint control, or significant influence. These disclosures are frequently omitted or too generic to provide useful information, particularly where the assessment is non-obvious (e.g. de facto control).

3. Non-Controlling Interests Aggregation

Some entities inappropriately aggregate NCI disclosures across several subsidiaries when individual subsidiaries have material NCI, which is not permitted and material NCI must be disclosed on a subsidiary-by-subsidiary basis.

4. Held-for-Sale Entities

Following the 2016 Annual Improvements, entities must apply most IFRS 12 disclosures to subsidiaries classified as held for sale. This requirement is sometimes overlooked, leading to incomplete disclosure.

5. Protective Rights vs. Substantive Rights

Judgements about whether rights held by other parties represent protective rights (which do not prevent control) or substantive rights (which may affect control conclusions) are sometimes made without adequate explanation. Disclosing these judgements clearly is a requirement of IFRS 12.