Ind AS 27 is designed to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures, and associates when an entity prepares separate financial statements. These statements are distinct from consolidated financial statements or those where the equity method of accounting is used. The standard is applicable to entities that choose, or are required by law, to prepare separate financial statements. However, it does not mandate the preparation of such statements.
Understanding Separate Financial Statements
Separate financial statements are those presented by a parent or an investor in a joint venture or associate where the investments are accounted for either at cost or by Ind AS 109, Financial Instruments. They are different from consolidated financial statements and those using the equity method, which are prepared under Ind AS 110, 111, and 28. Separate financial statements are an additional set of financial reports and are not necessarily to be presented alongside the consolidated ones.
Relevance of Other Standards
To understand terms such as subsidiary, associate, joint venture, and control, reference must be made to Ind AS 110, Ind AS 111, and Ind AS 28. These standards provide definitions and detailed guidance on consolidation and the equity method of accounting.
When Financial Statements Cannot Be Called Separate Financial Statements
For financial statements to qualify as separate financial statements under Ind AS 27, the entity must have investments in subsidiaries, joint ventures, or associates and account for those investments either at cost or as per Ind AS 109. If the entity has no such investments, like in the case of Harsha Ltd., which neither holds subsidiaries nor investments in joint ventures or associates, the financial statements cannot be considered separate financial statements under Ind AS 27.
Exemption from Preparation of Consolidated Financial Statements
Certain entities, although being parents or investors in associates or joint ventures, may be exempt from preparing consolidated financial statements or from applying the equity method. As per paragraph 4 of Ind AS 110 and paragraph 17 of Ind AS 28, a parent entity may be exempt if it meets all of the following conditions. First, it must be a wholly owned or partially owned subsidiary of another entity, and the other owners have been informed and do not object to the non-presentation of consolidated financial statements. Second, its securities must not be traded in a public market. Third, it must not be in the process of filing financial statements for public issuance of any class of securities. Fourth, its ultimate or any intermediate parent must prepare consolidated financial statements that are available for public use and comply with Ind AS. Additionally, investment entities under Ind AS 110, which obtain funds from investors to provide investment returns, must not consolidate their subsidiaries. Instead, they are required to measure their investments at fair value through profit or loss as per Ind AS 109.
Presentation Requirements
Entities preparing separate financial statements must apply all applicable Ind AS standards except for accounting for investments in subsidiaries, joint ventures, and associates. For these investments, entities must account either at cost or as per Ind AS 109. The accounting method selected must be consistently applied to each category of investments. If investments accounted at cost are classified as held for sale, Ind AS 105 must be applied. However, investments accounted under Ind AS 109 are not affected by such classification and continue to be measured accordingly.
Understanding the Term Cost
Ind AS 27 does not define the term “cost”. However, Ind AS 28 provides that cost comprises the purchase price and any directly attributable expenses necessary to acquire the investment. When an investment includes contingent consideration, an estimate of the contingent consideration is included in the cost at the acquisition date.
Accounting for Investments by Mutual Funds and Similar Entities
Entities like mutual funds, unit trusts, and similar investment-linked institutions may elect to measure their investments in associates or joint ventures at fair value through profit or loss by Ind AS 109. If such an election is made in the consolidated or equity-accounted financial statements, the same method must also be applied in the separate financial statements under Ind AS 27. For example, if Tata Mutual Fund holds ten associates and has opted to account for them at fair value through profit or loss in the consolidated financials, it must also use the same method in its separate financial statements.
Change in Investment Entity Status
If an entity originally classified as an investment entity changes its status and is no longer considered as such, it must change the accounting method for its investments in subsidiaries from fair value to cost. The fair value on the date of the change becomes the deemed cost. Alternatively, the entity can continue to account for the investments as per Ind AS 109. The decision must be based on the change in intent or business model, and the transition must reflect the new status from the effective date of the change.
Becoming an Investment Entity
Conversely, if a non-investment entity becomes an investment entity during a reporting period, it must begin to account for its investments in subsidiaries at fair value through profit or loss from the date of change. Any difference between the previous carrying amount and the fair value is recognised in the profit or loss. Additionally, any cumulative fair value adjustment previously recognised in other comprehensive income is reclassified within equity, usually to retained earnings, not to profit or loss. As per Ind AS 107, the entity must disclose the reason for any such equity transfers.
Exemption and Local Legal Requirements
When entities meet the exemption criteria under Ind AS 110 and Ind AS 28, they may still be required by local law to prepare separate financial statements. For example, Entity A is a 60 percent unlisted subsidiary with an associate, and the remaining shareholders have not objected to the non-presentation of consolidated financials. In such a case, even though Entity A qualifies for exemption, it must still prepare separate financial statements if required by law. However, if Entity A is a listed subsidiary, even with no subsidiaries of its own, it cannot claim the exemption and must prepare consolidated financial statements including equity accounting for its associate.
Accounting for Different Categories of Investments
When preparing separate financial statements, Ind AS 27 allows an entity to apply different accounting methods to each category of investment. Categories can be interpreted as subsidiaries, associates, and joint ventures. Thus, AB Ltd. can carry its investments in subsidiaries at cost while accounting for associates at fair value through profit or loss under Ind AS 109, provided the method is consistently applied within each category.
Recognition of Dividend Income
Dividend income from subsidiaries, associates, or joint ventures must be recognised in profit or loss when the entity’s right to receive the dividend is established. However, in the case of a bonus issue from a subsidiary, no income is recognised. The receipt of bonus shares does not constitute a distribution, nor does it affect the carrying value of the investment in the subsidiary. Hence, no entries are made in the separate financial statements.
Reorganisation by Establishing a New Parent Entity
When a group restructures by establishing a new parent entity, and the transaction meets certain conditions, the new parent must account for the investment in the original parent at cost in its separate financial statements. These conditions include the new parent obtaining control of the original parent by issuing equity shares in exchange for existing equity, the group’s assets and liabilities remaining the same before and after the reorganisation, and the owners retaining their interests. In such cases, cost is measured as the carrying amount of the share of equity items in the original parent’s separate financial statements at the date of reorganisation. This treatment also applies to reorganisations involving entities that are not parents but follow the same transaction structure.
Disclosure Requirements in Separate Financial Statements
When a parent entity chooses not to prepare consolidated financial statements as permitted by paragraph 4(a) of Ind AS 110 and instead prepares separate financial statements, specific disclosures are required. The entity must clearly state that it has used the exemption from preparing consolidated financial statements. Additionally, it must disclose the name and principal place of business of the entity that prepares consolidated financial statements in compliance with Ind AS and the address from where those statements are obtainable. This helps users understand the reporting structure and locate the full set of financial data.
Disclosure of Significant Investments
Entities preparing separate financial statements must provide a list of significant investments in subsidiaries, joint ventures, and associates. The list must include the name of each investee, the principal place of business, and, if different, the country of incorporation. It should also include the proportion of ownership interest and, if it differs, the proportion of voting rights held in each investee. Furthermore, the method used to account for the investments must be described. This level of disclosure ensures transparency and enables users to assess the financial impact of these investments.
Additional Disclosures for Investment Entities
When an investment entity prepares separate financial statements as its only financial statements, it must disclose this fact. Furthermore, it must provide the specific disclosures required for investment entities as per Ind AS 112. These disclosures help users understand the nature and risks of investments held by such entities and the methods used for measuring those investments.
Identification of Related Financial Statements
If an entity prepares separate financial statements and has joint control or significant influence over another entity, or is a parent, it must identify the financial statements prepared under Ind AS 110, 111, or 28 to which the separate financial statements relate. This helps users connect the separate financial statements with the consolidated or equity-method financial statements, providing a complete view of the financial position and performance of the entity.
Summary of Required Disclosures
Entities must include the following in their separate financial statements. First, a clear indication that these are separate financial statements. Second, a list of significant investments, including the name, principal place of business, country of incorporation if different, ownership interest, and voting rights. Third, a description of the method used to account for the investments. These disclosures ensure that the separate financial statements are informative, consistent, and in line with the objectives of Ind AS 27.
Transition to Ind AS: First-Time Adoption
When an entity adopts Ind AS for the first time and prepares separate financial statements, it must choose how to measure its investments in subsidiaries, associates, and joint ventures. The two options available are measurement at cost or fair value by Ind AS 109. If the entity opts to measure at cost, then it has an additional choice under Ind AS 101. It can either use the actual cost determined by Ind AS 27 or apply deemed cost. Deemed cost can be the fair value of the investment on the date of transition to Ind AS or the carrying amount of the investment as per the entity’s previous GAAP.
Use of Deemed Cost
When an entity uses the exemption provided under Ind AS 101 to adopt the previous GAAP carrying amounts as the deemed cost for investments, it must not make any adjustments to those amounts. This applies even if a contingent liability, such as additional consideration for an acquisition, becomes probable after the transition date. The adjustment, if any, should not alter the carrying value of the investment but instead be recognised in the profit or loss.
Contingent Consideration and Transition Adjustments
Consider a situation where A Ltd. acquired B Ltd. in a business combination that included a liability-classified contingent consideration. If A Ltd. did not recognise the contingent consideration under previous GAAP because it was not considered probable, and it has adopted the previous GAAP carrying amount as deemed cost under Ind AS, then no adjustment should be made to the carrying amount of the investment. Instead, when the contingent consideration becomes payable, the additional payment should be recognised in the statement of profit and loss.
Treatment of Bonus Shares in Separate Financial Statements
In the context of dividend recognition, if a parent receives bonus shares from its subsidiary, this does not constitute a distribution. Since there is no change in the overall investment value, the receipt of bonus shares does not result in any entry in the separate financial statements of the parent. There is no gain, no income recognition, and no change in the carrying value of the investment. This treatment reflects the economic reality that the parent’s ownership percentage remains unchanged, and the bonus shares merely increase the number of shares held.
Application of Fair Value Accounting by Investment Entities
If an investment entity becomes a parent, it does not prepare consolidated financial statements. Instead, it continues to account for its subsidiaries at fair value through profit or loss in accordance with Ind AS 109. The separate financial statements become its only financial statements, and it must disclose this fact along with the investment-related disclosures required by Ind AS 112. This ensures consistency and reflects the unique nature of investment entities whose primary business model is to earn returns from investments.
Recognition of Changes in Investment Entity Status
Entities must carefully assess any change in their status, such as becoming or ceasing to be an investment entity. If an entity that was not an investment entity becomes one, it must adjust its accounting treatment for investments accordingly. The fair value of the investment on the date of the status change becomes the new carrying amount. Any difference between the old carrying value and the new fair value is recognised in profit or loss. Any cumulative fair value adjustments previously recognised in OCI are transferred within equity, usually to retained earnings. These adjustments ensure that the financial statements reflect the new investment strategy and structure of the entity.
Distinguishing Between Cost and Fair Value in Investment Accounting
When preparing separate financial statements, entities must apply the same accounting policy within each category of investment. Categories generally refer to subsidiaries, associates, and joint ventures. If an entity has investments in all three categories, it may choose to account for each category differently, such as using cost for subsidiaries and fair value for associates. However, within each category, the chosen accounting method must be applied uniformly. This approach ensures consistency and comparability of the financial statements.
Local Legal Requirements and Financial Statement Obligations
Local laws may require entities to prepare separate financial statements even when Ind AS does not mandate them. In such cases, entities must comply with both local legal requirements and the relevant Ind AS provisions. For example, if local law requires parent companies to prepare separate financial statements in addition to consolidated financial statements, the entity must comply regardless of whether it qualifies for exemptions under Ind AS 110 or 28.
Exemption Limitations for Listed Entities
Listed entities, even if they meet other exemption criteria under Ind AS 110 or Ind AS 28, are not permitted to avoid preparing consolidated financial statements or equity-accounted statements. The public interest and transparency required for listed companies necessitate the preparation of full financial disclosures, including consolidated statements. This ensures that investors and stakeholders have access to comprehensive and accurate financial information.
Understanding the Reorganisation of Group Structure
When a group undergoes reorganisation by inserting a new parent above the existing parent, and the transaction satisfies specific conditions outlined in Ind AS 27, the new parent records its investment at cost in the separate financial statements. The cost is measured as the carrying amount of its share in the equity items of the original parent. This treatment applies regardless of whether the entity undergoing reorganisation is a parent or a standalone entity. The key conditions include obtaining control through equity instruments, no change in net assets before and after the transaction, and retention of ownership interest by original shareholders.
Accounting for Investments in Separate Financial Statements
When an entity prepares separate financial statements, it must account for investments in subsidiaries, joint ventures, and associates either at cost, by Ind AS 109, or using the equity method as permitted by Ind AS 28. The choice among these methods must be applied consistently to each category of investment. For instance, if an entity chooses to measure its investments in subsidiaries at cost, then all investments in subsidiaries must be measured at cost in the separate financial statements.
Cost measurement refers to the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction. If an entity accounts for investments using Ind AS 109, those investments are treated as financial instruments, and fair value measurement may be required. Ind AS 109 provides detailed guidance on classifying financial instruments and measuring them at fair value through profit or loss, or other comprehensive income, depending on the classification.
It is important to note that Ind AS 27 does not mandate the use of the equity method in separate financial statements. The equity method is generally used in consolidated financial statements under Ind AS 28. However, an entity may elect to use the equity method in its separate financial statements, provided it applies the method consistently to all investments in associates or joint ventures.
Recognition and Measurement
When accounting for investments in separate financial statements, entities must recognize them initially at cost. Any transaction costs directly attributable to the acquisition of the investment are included in the cost of the investment. After initial recognition, investments can be accounted for using the cost model, the fair value model under Ind AS 109, or the equity method if elected.
If the entity chooses the cost model, the investments are carried at cost less impairment losses. If the fair value model is chosen under Ind AS 109, the entity must follow the requirements of that standard, including determining whether changes in fair value should be recognized in profit or loss or other comprehensive income.
Entities must also assess impairment under Ind AS 36 when using the cost model. This means that the carrying amount of the investment must be reviewed for impairment whenever there is an indication that the investment may be impaired. If any such indication exists, the recoverable amount must be estimated, and an impairment loss must be recognized if the recoverable amount is less than the carrying amount.
Dividends from Investments
Dividends received from subsidiaries, joint ventures, or associates are recognized in the separate financial statements when the entity’s right to receive the dividend is established. When investments are measured at cost or using the equity method, dividends received reduce the carrying amount of the investment only to the extent they represent a return on investment. If the dividend represents a return on investment, it reduces the carrying amount of the investment.
For investments accounted for by Ind AS 109, dividends are generally recognized in profit or loss unless they represent a recovery of part of the cost of the investment. The standard emphasizes that judgment is required in determining whether a dividend represents a return on or a return of the investment. Such assessments must be made based on facts and circumstances surrounding the dividend declaration.
Impairment of Investments
When investments in subsidiaries, joint ventures, or associates are accounted for at cost, the entity must assess them for impairment in accordance with Ind AS 36. An impairment loss is recognized if the carrying amount exceeds the recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.
Impairment indicators may include significant financial difficulty of the investee, a decline in market value, or evidence of obsolescence or physical damage. If such indicators exist, the recoverable amount must be estimated and compared to the carrying amount. If the investment is impaired, the entity must recognize the impairment loss in the profit or loss.
Impairment losses recognized in prior periods must be reviewed at each reporting date for any indications that the loss has decreased or no longer exists. If such indications exist, the entity must estimate the recoverable amount and reverse the impairment loss if applicable. However, the carrying amount after the reversal must not exceed the original cost of the investment.
Change in Accounting Policy
If an entity changes its accounting policy for investments in subsidiaries, joint ventures, or associates in separate financial statements, the change must be accounted for in accordance with Ind AS 8. This requires retrospective application unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.
A change in accounting policy may occur if the entity moves from measuring investments at cost to measuring them under Ind AS 109 or vice versa. In such cases, the entity must restate prior period financial statements to reflect the new policy, unless it is impracticable. The disclosure requirements of Ind AS 8 apply, including the reason for the change, the amount of the adjustment for each financial statement line item affected, and the effect on earnings per share, if applicable.
Disclosure Requirements under Ind AS 27
Entities are required to comply with specific disclosure requirements when preparing separate financial statements under Ind AS 27. These disclosures are necessary to ensure that the users of the financial statements are provided with relevant information regarding the accounting policies and the relationships between the parent and its subsidiaries, associates, and joint ventures.
The key disclosures include:
- The fact that the financial statements are separate financial statements.
- A list of significant investments in subsidiaries, joint ventures, and associates, including:
- The name of the investee.
- The principal place of business.
- The proportion of ownership interest and, if different, the proportion of voting rights held.
- A description of the method used to account for these investments.
- If the entity is exempted from preparing consolidated financial statements by the provisions of Ind AS 110, it must disclose the basis for that exemption.
These disclosures help clarify that the financial statements are not consolidated and provide transparency regarding the investments that the entity holds.
Comparison with Ind AS 110
Ind AS 27 should be read in conjunction with Ind AS 110, Consolidated Financial Statements. While Ind AS 27 deals exclusively with the preparation and presentation of separate financial statements, Ind AS 110 provides guidance on when and how an entity should prepare consolidated financial statements.
Under Ind AS 110, a parent entity is required to present consolidated financial statements unless it meets specific exemption criteria. These exemptions may include situations where the parent is itself a wholly-owned subsidiary or is partially owned and the owners have been informed and do not object to not presenting consolidated financial statements.
The primary difference lies in the scope and objective. Ind AS 110 focuses on providing a full picture of a group’s financial position and performance by consolidating all subsidiaries, while Ind AS 27 focuses on presenting the financials of the parent or individual entity on a standalone basis.
Applicability and Exemptions
Ind AS 27 applies to entities that elect or are required to present separate financial statements. It is particularly relevant for:
- Entities that are part of a group but are required to present their financials.
- Entities that voluntarily choose to prepare separate financial statements for internal or external reporting purposes.
An entity that is a parent is required to present consolidated financial statements as per Ind AS 110, but it may also choose to present separate financial statements by Ind AS 27, in addition to consolidated financial
The exemption to not prepare consolidated financial statements (but only separate) is available under certain conditions. For example, a parent need not present consolidated financial statements if:
- It is a wholly-owned or partially-owned subsidiary of another entity.
- Its ultimate or intermediate parent produces consolidated financial statements that are available for public use and comply with Ind AS.
- It is not a listed company or in the process of listing its securities.
Practical Considerations
When preparing separate financial statements, entities need to consider the following:
- Consistency in accounting policies: The accounting policies used for separate financial statements must be consistent with those applied in the consolidated financial statements.
- Disclosure requirements: Proper disclosures must be made to ensure that the financial statements are not misleading and that users can clearly understand the nature and purpose of the separate financial statements.
- Regulatory compliance: Entities must ensure compliance with applicable legal and regulatory requirements while preparing separate financial statements, especially in jurisdictions where such statements are mandated.
- Audit implications: Separate financial statements may also need to be audited depending on the legal and regulatory requirements applicable to the entity.
Conclusion
Ind AS 27 provides a framework for the preparation and presentation of separate financial statements. It allows entities to present their financial position and performance apart from the consolidated view. While the standard provides flexibility in choosing the method of accounting for investments, it also lays down specific disclosure and presentation requirements to maintain transparency and comparability. Understanding the distinction between separate and consolidated financial statements and the implications of Ind AS 27 is crucial for accurate financial reporting and informed decision-making by stakeholders.