Ind AS 27 is a standard that governs the presentation of separate financial statements. It is designed to guide entities that choose or are required by law to prepare financial statements separate from their consolidated or equity-accounted statements. It does not mandate the preparation of separate financial statements but sets out the principles and disclosure requirements if an entity opts to do so. Separate financial statements are those presented by a parent, an investor with joint control, or significant influence over an investee, in which the investments are accounted for either at cost or by Ind AS 109. The standard does not prescribe when an entity must prepare separate financial statements, but applies when such a decision is made or required.
Understanding Separate Financial Statements
Separate financial statements are those in which an entity presents its investments in subsidiaries, joint ventures, and associates either at cost or by Ind AS 109. These are distinct from consolidated financial statements, where a parent presents the financial position and results of its subsidiaries as if they were a single economic entity, and from financial statements that apply the equity method of accounting. These separate statements are not required to accompany consolidated financial statements or those using the equity method, but can exist independently if the entity opts for or is mandated to provide them.
Reference to Other Ind AS Standards
Understanding Ind AS 27 requires familiarity with other related standards such as Ind AS 110, which defines control and governs consolidated financial statements, Ind AS 111, which covers joint arrangements, and Ind AS 2, which handles investments in associates and joint ventures using the equity method. These standards help define what constitutes a subsidiary, joint venture, or associate, which is crucial for identifying what investments may be presented in separate financial statements.
Example Analysis on Definition
Consider the case where Harsha Ltd. has no investments in subsidiaries, associates, or joint ventures and prepares financial statements. Can these be considered separate financial statements? According to Ind AS 27, the answer is no. Separate financial statements are specific to situations where the entity holds investments in subsidiaries, joint ventures, or associates and accounts for them at cost or per Ind AS 109. If there are no such investments, the resulting financials cannot be classified under this standard as separate financial statements.
When Consolidation or Equity Method Is Not Required
There are exemptions under Ind AS 110 and Ind AS 28 where a parent entity may be exempt from preparing consolidated financial statements or applying the equity method. These conditions include situations where the entity is a wholly or partially owned subsidiary and all non-controlling interest holders are informed and do not object, and the entity’s securities are not publicly traded nor in the process of becoming publicly traded. Furthermore, the parent must produce consolidated financial statements that are publicly available and compliant with Ind AS.
Investment Entity Exemption from Consolidation
Ind AS 110 allows investment entities, defined as entities that obtain funds from investors to provide them with investment management services and commit to earning returns from capital appreciation or investment income, to not consolidate their subsidiaries. Instead, they measure these investments at fair value through profit or loss in accordance with Ind AS 109. This provision impacts how such entities present separate financial statements under Ind AS 27.
Presentation Requirements under Ind AS 27
When preparing separate financial statements, the entity must comply with all applicable Ind AS,, except for the measurement of investments in subsidiaries, joint ventures, and associates. These investments must be accounted for either at cost or as per Ind AS 109. Importantly, the same accounting policy must be applied consistently to each category of investment. For instance, all subsidiaries must be either carried at cost or fair value; mixed methods within a category are not allowed.
Treatment When Investments Are Held for Sale
Investments accounted for at cost should be measured under Ind AS 105 if they are classified as held for sale. Ind AS 105 applies to non-current assets held for sale and discontinued operations, requiring such assets to be measured at the lower of carrying amount and fair value less costs to sell. However, if the investments are measured using Ind AS 109, their measurement does not change even when they are held for sale.
Understanding the Concept of Cost
Ind AS 27 does not provide a specific definition of cost, but Ind AS 28 clarifies that cost includes the purchase price and any directly attributable expenditure necessary to acquire the investment. It also includes estimates of contingent consideration at the date of acquisition. This understanding of cost is important for measuring investments in separate financial statements when cost accounting is chosen.
Application of Ind AS 109 to Separate Financial Statements
Entities such as mutual funds, venture capital organizations, or investment-linked insurance funds may elect to measure their investments in associates or joint ventures at fair value through profit or loss under Ind AS 109. This policy, once chosen, must be applied consistently in their separate financial statements. For example, Tata Mutual Funds with investments in ten associates may choose to apply Ind AS 109 for measurement in both consolidated and separate financial statements.
Change in Investment Entity Status
When an entity that was previously classified as an investment entity no longer meets the criteria, it must change its accounting treatment from the date the change occurred. It then has two options for accounting for subsidiaries: either carry them at cost, using the fair value at the date of change as deemed cost, or continue to apply Ind AS 109. The choice must be consistently applied across the financials from the date of change.
Example of Change in Investment Entity Classification
Consider PP Ltd., which becomes an investment entity on 1 April 20X2. It previously held its investment in subsidiary Praja Ltd. at fair value with changes recognized in OCI. On the change date, the fair value of the investment is higher than its carrying amount. Ind AS 27 requires that this difference be recognized in profit or loss. Additionally, the previously recognized gains in OCI must be transferred within equity, such as to retained earnings, not to profit or loss. Proper disclosure under Ind AS 107 is also required.
Clarifying Requirements through Practical Scenarios
Consider a few illustrative cases that show how Ind AS 27 interacts with Ind AS 110 and Ind AS 28. In one scenario, Entity A is a 60 percent unlisted subsidiary of another entity and holds an associate. If all exemption conditions under Ind AS 28 are met and there is a legal requirement to prepare separate financial statements, Entity A must comply and present separate financial statements accordingly. Another example shows a similar Entity A but listed on a stock exchange. Since listed entities are not exempt from equity accounting, they must prepare consolidated financial statements rather than separate ones, unless legally required otherwise.
More Examples on Legal Requirement and Eligibility
If Entity A is wholly owned by a listed company and has both a subsidiary and an associate, and there is a legal requirement to prepare separate financial statements, then Entity A can rely on the exemption provisions. It may opt to present only separate financial statements and not prepare consolidated ones, under Ind AS 110 and Ind AS 28.
Categorization of Investments for Measurement
Ind AS 27 requires that investments in subsidiaries, associates, and joint ventures be grouped into categories for applying consistent accounting policies. Although the standard does not define the term category, it is commonly interpreted to mean that each type of investment, such as subsidiaries, associates, or joint ventures, forms its category. Therefore, it is acceptable for a company to measure its investments in subsidiaries at cost while accounting for associates at fair value under Ind AS 109, as long as consistency is maintained within each category.
Recognition of Dividend Income
Under Ind AS 27, an entity shall recognize dividend income from a subsidiary, joint venture, or associate in profit or loss when its right to receive the dividend is established. This recognition principle applies equally to interim and final dividends, regardless of whether they are received in cash or as bonus shares, as long as the right to receive is established.
Treatment of Bonus Shares in Separate Financial Statements
When a parent entity receives bonus shares from a subsidiary, no income is recognized in the separate financial statements. This is because a bonus issue is not considered a distribution of assets. It merely increases the number of shares held without affecting the overall value of the investment. Hence, no accounting entry is required in the parent’s separate financial statements.
Reorganisation of Group Structure and its Impact on Separate Financial Statements
When a parent entity reorganises the structure of its group by establishing a new entity as the parent, certain accounting treatments apply under Ind AS 27. The reorganisation must satisfy specific criteria to qualify for the prescribed accounting method. The new parent must obtain control of the original parent by issuing equity instruments in exchange for the existing equity instruments of the original parent. There must be no change in the assets and liabilities of the group immediately before and after the reorganisation. Additionally, the owners of the original parent must retain the same absolute and relative interests in the net assets of the group before and after the reorganisation.
If these conditions are satisfied and the new parent chooses to measure its investment in the original parent at cost in its separate financial statements, it must do so by using the carrying amount of its share of the equity items shown in the separate financial statements of the original parent at the date of the reorganisation. This ensures continuity in accounting and reflects the unchanged nature of the economic substance of the group.
This treatment applies even when the reorganised entity was not originally a parent but establishes a new parent entity in the same manner. The logic remains the same because the reorganisation does not change the underlying net assets or ownership structure, only the formal corporate arrangement.
Disclosure Requirements in Separate Financial Statements
Ind AS 27 outlines specific disclosures that must be included in separate financial statements. If a parent entity elects not to prepare consolidated financial statements and instead prepares separate financial statements under the exemption provided in paragraph 4(a) of Ind AS 110, it must disclose that fact. The entity must also disclose the name and principal place of business of the entity that prepares consolidated financial statements in accordance with Ind AS, which are available for public use. The address where those consolidated statements can be obtained must also be provided.
In addition to this general disclosure, the entity must present a list of significant investments in subsidiaries, joint ventures, and associates. For each investee, the following information must be disclosed: the name, the principal place of business, and the country of incorporation if different, the proportion of ownership interest, and the proportion of voting rights if different from the ownership interest. A description of the method used to account for each investment must also be included, indicating whether the investment is accounted for at cost or in accordance with Ind AS 109.
These disclosure requirements ensure transparency and enable users of the financial statements to understand the basis of accounting and the nature of the investments held by the entity. They also provide a clear link to the related financial statements prepared under Ind AS 110, Ind AS 111, or Ind AS 28, where more detailed information may be available.
Disclosures for Investment Entities
An investment entity that prepares separate financial statements as its only financial statements must disclose that fact clearly. It must also comply with the disclosure requirements of Ind AS 112, which includes information about the nature and risks associated with interests in other entities. These disclosures help stakeholders understand the financial position of investment entities that do not consolidate their subsidiaries and instead measure them at fair value.
If an entity with joint control or significant influence over an investee prepares separate financial statements, it must identify the related consolidated or equity-accounted financial statements. These related statements should be prepared under Ind AS 110, Ind AS 111, or Ind AS 28. The separate financial statements must repeat the disclosure of the names and principal business locations of the significant investees, the ownership and voting rights, and the accounting method applied to those investments.
These requirements are designed to ensure that separate financial statements do not exist in isolation but are understood within the broader context of the reporting entity’s structure and obligations. Users can access the related consolidated or equity method financial statements if they require more detail.
First-Time Adoption of Ind AS 27
When an entity adopts Ind AS for the first time and prepares separate financial statements, it must choose to measure its investments in subsidiaries, associates, and joint ventures either at cost or fair value in accordance with Ind AS 109. If it chooses to measure the investments at cost, the entity has two options. It can use the cost determined by Ind AS 27, or it can use deemed cost.
Deemed cost can be determined as either the fair value of the investment on the date of transition to Ind AS or the carrying amount of the investment as per the previous GAAP on that date. This flexibility allows entities to transition smoothly without having to reconstruct historical cost records. However, once the choice is made, it must be applied consistently to each category of investment.
For instance, if an entity holds investments in subsidiaries, joint ventures, and associates, it must apply the same accounting policy to each category. Subsidiaries can be measured at cost, while associates can be measured at fair value, provided the policy is consistently applied to all members within each category.
Example on First-Time Adoption and Contingent Consideration
Consider a scenario where A Ltd acquires B Ltd in a business combination and agrees to pay contingent consideration. The contingent consideration is not recognised initially because it is not considered probable. If A Ltd chooses to use the carrying amount under previous GAAP as the deemed cost on the transition date, it does not adjust the carrying amount of the investment for the unrecognised contingent consideration.
By Ind AS 101, this exemption allows entities to treat the previous GAAP carrying amount as the investment’s cost. Any contingent consideration recognised after transition is accounted for in profit or loss. This approach avoids retrospective adjustments to the investment account and reflects the practical realities of first-time adoption.
Dividend Income Recognition
Ind AS 27 requires that dividend income from subsidiaries, associates, or joint ventures be recognised in profit or loss when the entity’s right to receive the dividend is established. This principle applies regardless of whether the dividend is received in cash or shares. It ensures that dividend income is only recognised when it becomes a present right, thereby avoiding premature recognition.
Bonus Shares Received from a Subsidiary
If a parent entity receives bonus shares from a subsidiary, no income is recognised in the separate financial statements. A bonus issue is not considered a distribution of assets. Instead, it is simply a reallocation of equity, increasing the number of shares held without altering the overall value of the investment. Therefore, there is no change in the carrying amount of the investment, and no income entry is made. This treatment aligns with the principle of substance over form, as the economic position of the parent does not change due to the bonus issue.
Measurement Principles for Investments in Separate Financial Statements
Under Ind AS 27, entities are required to account for investments in subsidiaries, associates, and joint ventures using either the cost model or under Ind AS 109. The standard mandates that the same accounting policy must be applied for each category of investment. While the term category is not explicitly defined, a common interpretation considers subsidiaries, associates, and joint ventures as distinct categories. Accordingly, a company can choose to measure all subsidiaries at cost and all associates at fair value under Ind AS 109, as long as the classification is applied consistently within each group.
This flexibility allows entities to align their financial reporting with their business models and operational structures. For example, a group may view its associates as financial investments and wish to reflect fair value changes through profit or loss, while maintaining subsidiaries at cost due to their strategic role and control relationship.
Accounting for Partial and Full Investments
Entities may hold a combination of subsidiaries, associates, and joint ventures. Ind AS 27 permits different accounting bases for each type, provided the classification into categories is clear and consistently applied. A key point is that the method chosen for each category must not change from one investee to another within the same category. For instance, if the cost model is selected for subsidiaries, then all subsidiaries must be accounted for at cost. Selective application of fair value for only a few subsidiaries is not permitted.
This consistency ensures comparability across reporting periods and investments of the same type, reducing complexity for users of the financial statements.
Separate Financial Statements for Investment Entities
Investment entities under Ind AS 110 are required to account for their subsidiaries at fair value through profit or loss, not by consolidation. In such cases, Ind AS 27 aligns with this treatment by allowing investments to be measured at fair value in the separate financial statements. If an investment entity changes its status and no longer qualifies as an investment entity, it must begin consolidating its subsidiaries or apply the cost model as required. The choice of accounting method is based on the entity’s status on the reporting date and must be revised when there is a change in classification.
Change in Status from Investment Entity
If an entity becomes an investment entity, it must measure its subsidiaries at fair value through profit or loss from the date of change. The new carrying amount will be the fair value on the date of reclassification. Any difference between the previous carrying amount and the fair value must be recognised in profit or loss. Additionally, if any changes in fair value were previously recognised in other comprehensive income, those must be reclassified within equity and not through profit or loss.
This accounting ensures a clean and transparent transition between accounting methods. It preserves comparability while reflecting the entity’s change in structure or business model.
Practical Case on Change in Classification
Consider a case where PP Ltd. becomes an investment entity on 1 April 20X2. It holds an investment in Praja Ltd., which was previously measured at fair value with changes in OCI. Upon a change in status, the investment must be remeasured at fair value through profit or loss, and any cumulative gain recognised in OCI must be transferred within equity. The fair value of Praja Ltd. is recorded as the new carrying amount. A gain equal to the difference between the previous carrying amount and the fair value is recognised in profit or loss. This approach ensures that financial statements reflect the current measurement basis and the fair value of investments.
Reclassification of Cumulative Gains and Losses
Ind AS 27 requires that when the classification of the entity changes and results in a change in accounting treatment of investments, cumulative gains and losses that were previously recognised in other comprehensive income must be reclassified within equity. These gains and losses are not taken to profit or loss upon reclassification. Instead, they may be transferred to retained earnings. This avoids double-counting and maintains consistency in the treatment of fair value changes over time.
This reclassification aligns with the principle of continuity and avoids artificial fluctuations in reported income. The treatment is consistent with the entity’s new approach to recognising changes in investment value.
Reporting for Exempt Entities
In specific situations, entities may qualify for exemption from preparing consolidated financial statements under Ind AS 110 and equity accounting under Ind AS 28. One such scenario involves an entity that is a wholly or partially owned subsidiary where all non-controlling interests are informed and do not object to the exemption. Other conditions include the absence of publicly traded securities and that the parent prepares publicly available Ind AS-compliant consolidated financial statements.
If all these criteria are met, the exempt entity may prepare only separate financial statements. These financials will account for investments in subsidiaries, associates, and joint ventures at cost or fair value as permitted under Ind AS 27. However, even when exempt from consolidation, the entity must comply with all the disclosure requirements of Ind AS 27.
Clarification on Legal Requirements
In certain jurisdictions, legal requirements may obligate companies to prepare separate financial statements even when they are not required to consolidate or apply equity accounting. For example, if the law mandates separate statements for tax, regulatory, or compliance purposes, the company must prepare them under Ind AS 27.
In these cases, entities must follow the measurement and disclosure principles in the standard, even though they are not preparing consolidated or equity-accounted financial statements. The key is to clearly label such financials as separate financial statements and ensure that all applicable disclosures are included.
Complex Ownership Structures
In large corporate groups, it is common for multiple layers of ownership and control to exist. When one entity within such a structure prepares separate financial statements, it must account for its investments consistently based on their classification. Furthermore, the financials must which consolidated or equity method financial statements that relate to the separate financial statements.
The requirement to identify and disclose related financials helps users understand the scope and limitations of the separate financial statements. It also provides context about the reporting entity’s structure and its financial relationships with other entities in the group.
Consistency in Accounting Policies
Ind AS 27 places strong emphasis on consistency in applying accounting policies across investments within the same category. Whether an entity chooses cost or fair value, the same method must be used for all subsidiaries, all associates, or all joint ventures. This consistency is essential for comparability over time and across different reporting entities.
In practice, entities may review their accounting policies periodically, but any changes in method must be justified, documented, and disclosed under Ind AS 8. Switching from cost to fair value, or vice versa, would constitute a change in accounting policy and must be applied retrospectively unless it is impracticable.
Interaction with Ind AS 109
When an entity chooses to apply Ind AS 109 to account for its investments in separate financial statements, the standard requires those investments to be measured at fair value. The changes in fair value are recognised in profit or loss unless the entity makes an irrevocable election at initial recognition to present fair value changes in other comprehensive income for investments in equity instruments that are not held for trading.
These investments continue to be measured at fair value even if they are classified as held for sale. This distinguishes them from cost-based investments, which are subject to remeasurement under Ind AS 105 when held for sale. The alignment with Ind AS 109 ensures that the accounting for financial instruments is coherent and consistent across all types of financial statements.
Key Differences Between Ind AS 27 and Other Standards
Ind AS 27 is focused solely on the preparation and presentation of separate financial statements. This makes it distinct from Ind AS 110, which deals with consolidated financial statements, and Ind AS 28, which covers investments in associates and joint ventures. While Ind AS 110 requires the consolidation of financial statements of subsidiaries, Ind AS 27 allows entities to present separate financial statements where such investments are accounted for either at cost, by Ind AS 109, or using the equity method as permitted by Ind AS 28. Under Ind AS 27, an entity does not consolidate its subsidiaries, associates, or joint ventures in its separate financial statements. Instead, it accounts for them using one of the prescribed methods. The choice of accounting treatment in separate financial statements must be applied consistently to each category of investment, namely subsidiaries, associates, and joint ventures. One key difference from Indian GAAP is that Ind AS 27 offers more structured guidance on the accounting for investments in separate financial statements and aligns with the principles of the International Financial Reporting Standards (IFRS).
Presentation and Disclosure Requirements
Although Ind AS 27 provides minimal disclosure requirements compared to consolidated financial statements, it still mandates that an entity preparing separate financial statements must comply with all applicable Ind ASs and provide a description of the financial statements as separate financial statements. It must also disclose the fact that the statements are separate financial statements and the reasons why those financial statements are prepared if the entity has a choice in the matter. Additionally, the entity should disclose the list of significant investments in subsidiaries, associates, and joint ventures, including the names, country of incorporation, ownership interest held, and, if different, the proportion of voting power held. Where investments are accounted for at cost, impairment testing becomes crucial, and entities are expected to provide appropriate disclosures under Ind AS 36 (Impairment of Assets) to reflect the recoverable amount of such investments. Moreover, disclosure is also required under Ind AS 24 (Related Party Disclosures) about transactions with subsidiaries, associates, and joint ventures.
Application to Investment Entities
An investment entity is defined under Ind AS 110 as an entity that obtains funds from one or more investors to provide them with investment management services, commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both, and measures and evaluates the performance of substantially all of its investments on a fair value basis. Ind AS 27 allows an investment entity to present separate financial statements where its investments in subsidiaries are measured at fair value through profit or loss in accordance with Ind AS 109. This is consistent with the treatment in the consolidated financial statements of such investment entities, which are exempted from consolidating their subsidiaries and instead measure them at fair value. Therefore, investment entities have a unique position under Ind AS 27 when compared to other types of entities.
Recent Amendments and Updates
The Ministry of Corporate Affairs (MCA) frequently issues amendments to Ind AS in order to align Indian standards with International Financial Reporting Standards. Recent amendments to Ind AS 27 include clarifications on the accounting treatment of investments in separate financial statements and enhancements in disclosure requirements. One such amendment, effective from April 1, 2019, allows entities to elect to account for investments in subsidiaries, associates, and joint ventures either at cost or in accordance with Ind AS 109, with the choice being applied consistently to each category of investments. These amendments bring more flexibility for preparers of separate financial statements and align Indian accounting practices more closely with global norms. Entities are advised to remain updated with the latest amendments to ensure compliance.
Importance of Consistency and Judgement
Consistency is a fundamental principle when applying accounting policies under Ind AS 27. The method chosen for accounting for investments in separate financial statements must be applied consistently across each category of investments. This enhances the comparability and reliability of financial reporting. Moreover, management judgement plays a key role in determining the classification of entities as subsidiaries, associates, or joint ventures, which directly affects how these are reported in separate financial statements. Judgement is also needed when assessing impairment, determining fair values, and ensuring that the accounting policies are in compliance with other applicable Ind ASs. Therefore, preparing separate financial statements under Ind AS 27 requires a balanced combination of technical knowledge, regulatory awareness, and professional judgement.
Conclusion
Ind AS 27 provides the framework for entities to present separate financial statements by Indian Accounting Standards. It plays a crucial role for entities that need to report financial information for a specific purpose, such as to meet regulatory requirements or facilitate decision-making by investors and stakeholders. The standard allows flexibility in accounting for investments in subsidiaries, associates, and joint ventures, while ensuring consistency and transparency. Understanding the scope, recognition, measurement, and disclosure requirements of Ind AS 27 is essential for preparers and users of financial statements. As the financial reporting landscape continues to evolve, staying informed about amendments and maintaining sound judgement in applying accounting policies remains key to effective financial reporting under Ind AS 27.