APPLICATION GUIDANCE TO NAS 27 SEPARATE FINANCIAL STATEMENTS

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1 APPLICATION GUIDANCE TO NAS 27 SEPARATE FINANCIAL STATEMENTS ACCOUNTING STANDARDS BOARD (ASB) NEPAL

2 Application Guidance to NAS 27 Separate Financial Statements 1. Introduction NAS 27 Separate Financial Statements prescribes accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. All companies or other entities shall follow regulatory requirements as regards presentation of separate or consolidated financial statements. When an entity is required to prepare or elects to prepare separate financial statements, it applies NAS 27 to account for investments in subsidiaries, associates and joint ventures. NAS 27 contains accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an undertaking prepares separate financial statements. NAS 27 requires an entity preparing separate financial statements to account for those investments at cost, or in accordance with NFRS 9 Financial Instruments. 2. Explanation to scope and definitions (1) NAS 27 applies to account investments in subsidiary, associate and joint venture in separate financial statements. (2)Separate financial statements are those presented by a parent (i.e. an investor with control of a subsidiary) or an investor with joint control of, or significant influence over, an investee, in which the investments are accounted for at cost or in accordance with NFRS 9 Financial Instruments. An entity shall prepare separate financial statements in compliance with the governing regulations. As per NFRSs separate financial statements are those which are prepared in addition to consolidated financial statements. As per governing regulations, separate financial statements may be the primary financial statements, and consolidated financial statements may be additional financial statements. In separate financial statements investments in subsidiaries, associates and joint ventures are accounted for applying NAS 27. Entities which are exempt from presentation of consolidated financial statements as per Paragraph 4(a) of NFRS 10 would present separate financial statements. ASB-NEPAL 2

3 A financial statement in which investment in associate or joint venture is accounted for applying equity method accounting is not a separate financial statement. NAS 28 Investments in Associates and Joint Ventures that prescribed equity method accounting, in general, applies to all entities other than the exception to equity method accounting granted in Paragraphs of that standard. An entity that is exempt under Paragraph 4(a), NFRS 10 from consolidation and under Paragraph 17, NAS 28 from pursuing equity method accounting may present separate financial statements. Given below is the list of those entities: (i) it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements; (ii) its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); (iii) it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; and (iv) its ultimate or any intermediate parent produces consolidated financial statements that are available for public use and comply with NFRSs. (3)Consolidated financial statements are financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. These financial statements are prepared in accordance with NAS 10 Consolidated Financial Statements. Group means parent and subsidiaries. The terms parent and subsidiaries are explained in Application Guidance to NAS 10. NFRS 10 Consolidated Financial Statements prescribes principles of consolidation of subsidiaries. (4) Application of equity method accounting and exceptions thereto- NAS 28 Investments in Associated and Joint Ventures prescribes application of equity method accounting for investment in associates and joint ventures in consolidated financial statements. This Standard shall be applied by all entities that are investors with joint control of, or significant influence over, an investee. Exception to pursuing equity method accounting by specified entities as per Paragraph 17, NAS 28 has already been discussed in Paragraph 2(2) above. Paragraphs 18 and 19 of NAS 28 grant exceptions to application of equity method ASB-NEPAL 3

4 accounting to certain investment entities. The exemptions are as follows: (i) Investments in associated or joint ventures held by or is held indirectly through a venture capital organisation, a mutual fund, unit trust or similar entity including unit linked insurance plan; may be accounted for at fair value through profit or loss as per NFRS 9 (or as per NAS 39 till NFRS 9 comes into effect). (ii) Investments in associates or joint venture by an entity, a portion of which is indirectly held through a venture capital organisation, a mutual fund, unit trust or similar entity including unit linked insurance plan regardless of whether specified investment entities have significant influence over that investments. The investor may elect to account for these investments in associates or joint ventures at fair value through profit or loss as per NFRS 9 (or NAS 39). Fair value accounting would apply to the entire investments even when a portion of it is held through specified investment entities. In case these entities prepare consolidated financial statements as well as separate financial statements, then investments in associates and joint ventures shall be accounted for applying the same principle i.e. fair value through profit or loss. [Refer to Paragraph 11, NAS 27]. 3. Measurement principles Investments in associates or joint ventures is measured: (a) at cost or (b) in accordance with NFRS 9 (till NFRS 9 is not applied in accordance with NAS 39). Cost means purchase price of investments plus fees and commissions paid to agents (including employees acting as agents), advisers, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. It does not include administrative expenses, financing costs ( i.e. borrowing costs in respect of money borrowed for investments in subsidiary, associate or joint venture), and holding costs. When investments are acquired by way of business combination transaction to which NFRS 3 Business Combinations, it is measured applying principles of that standard. It may be mentioned that business combination is a transaction or another event in which an acquirer obtains control of one or more businesses. The entity shall apply the same accounting for each category of investments [Paragraph 10, NAS 27].An entity shall classify investments in subsidiaries, associates or joint ventures into different categories: (a) Investments in subsidiaries Subsidiary A Subsidiary B ASB-NEPAL 4

5 (b) Investments in associates; Associate A Associate B (c) Investments in joint ventures JV A JV B For the purpose of Paragraph 10 of NAS 27 category of investments means broad category i.e. (a) Investments in subsidiary, (b) Investment s in associates and (c) Investments in joint ventures. It is possible to apply cost approach in respect of one category and fair value approach for another category. However, it is not possible to apply cost approach to one subsidiary and fair value approach to another subsidiary. Investments measured at cost are subjected to impairment testing in accordance with NAS 36. Impairment testing is not required when these investments are measured at fair value applying NAS 39 (or NFRS 9). 4. Investments in subsidiaries, associates or joint ventures classified as held for sale or disposal group NFRS 5 requires inter alia to classify investments in subsidiaries, associates or joint ventures as held for sale or disposal group when those investments satisfy criteria stated in that standard. An entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell [ refer to Paragraph 15, NFRS 5]. Cost to sell is defined as the incremental costs directly attributable to the disposal of an asset (or disposal group), excluding finance costs and income tax expense. Examples of such costs are legal costs, stamp duty and similar transaction taxes, costs of removing the asset and direct incremental costs to bring an asset into condition for its sale. However, termination benefits (as defined in NAS 19) and costs associated with reducing or reorganizing a business following the disposal of an asset are not direct incremental costs to dispose of the asset. However, if an entity follows fair value approach as per NAS 39 or NFRS 9 then the measurement is not changed i.e. estimated cost to sell is not deducted from the fair value. [Refer to Paragraph 10, NAS 27]. The underlying principle is that non-current assets should be excluded from the measurement scope of NFRS 5 only if (i) they are already carried at fair value with changes in fair value recognised in profit or loss or (ii) there would be difficulties in determining their fair value less costs to sell. Based on this principle, NAS 27 excluded investments in subsidiaries, associates or joint ventures which are carried at fair value from NFRS 5 measurement of principle based on fair value less costs to sell. ASB-NEPAL 5

6 5. Investment entities Investment entities means an entity that: (a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services; (b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and (c) measures and evaluates the performance of substantially all of its investments on a fair value basis. Paragraph 31 of IFRS 10 (2014) exempts investment entities from consolidating its subsidiaries. This exception does not apply to subsidiaries that provides services that relate to the investment entity's investment activities. Examples of investment-related services are Investment advisory services; investment management; investment support and administrative services; providing management services and strategic advice to an investee; providing financial support to an investee, such as a loan, capital commitment or guarantee; Any subsidiary of an investment entity that provides any of these investment-related activities is consolidated applying IFRS 10. This principle is yet to be included in NFRS 10. Investments in subsidiary of an investment entity other than a subsidiary that provides invest-related activities measured at fair value as per IFRS 9. When an investment entity ceases to be an investment entity, it may switch over to cost approach as regards accounting for investment in subsidiary in its separate financial statements. Table 1 Accounting for Investments in Subsidiaries, associates or joint ventures in separate financial statements Alternative Cases At Initial recognition Subsequent measurement 1. When a entity presents separate financial statements Measured at cost (i) As per governing regulations (ii) As additional financial statements (iii) When exceptions of Paragraph 4(a) NFRS 10 apply Or At fair value through profit or loss as per NAS 39 ( or NFRS 9 when it becomes effective) At cost Subjected to impairment testing as per NAS 36 Impairment of Assets At Fair value through profit or loss ( or NFRS 9 when it becomes effective) ASB-NEPAL 6

7 2. When exceptions of Paragraph 17 of NAS 28 apply 3. When exceptions of Paragraphs 18 & 19 of NAS 28 apply 4. Investment in subsidiary by Investment entities to which exception of Paragraph 31 of IFRS 10 applies Equity method is not applied to investments in associates or joint ventures These investments are accounted for applying the principles explained in Case 1 above. At fair value through profit or loss as per NAS 39 ( or NFRS 9 when it becomes effective) At fair value through profit or loss as per NAS 39 ( or NFRS 9 when it becomes effective) Equity method is not applied to investments in associates or joint ventures Measurement and recognition principles of Case 1 apply At Fair value through profit or loss ( or NFRS 9 when it becomes effective) At fair value through profit or loss as per NAS 39 ( or NFRS 9 when it becomes effective) When an entity ceases to be an investment entity May switch over cost approach Continue with fair value through profit or loss approach Cost less impairment loss if any Fair value through profit or loss When an entity becomes an investment entity 5. When investment are classified as held for sale or disposal group Measure investment in subsidiary ( other subsidiary that carries out investment related activities) at fair value through profit or loss Any unrealized fair value gain is charged to profit or loss [ Refer to Paragraph 11B(b) of IAS 27] (a) Prior to classification as per NFRS 5, measured at cost Re-measured at fair value less costs to sale, and the difference is charged to profit or loss Fair value through profit or loss Change in fair value less costs to sell is charged to profit or loss. ASB-NEPAL 7

8 (b) a) Prior to classification as per NFRS 5, measured at fair value No change in measurement Change in fair value is accounted for in the profit or loss 6. Accounting for Dividends Dividend from investments in subsidiaries, associates or joint ventures is accounted for when right to receive the dividend is established. Generally, the Board of Directors of a company is empowered to declare interim dividend and the decision is not reversible. Accordingly, the criterion of right to receive interim dividend 'is satisfied when the Board s resolution is passed. Final dividend is proposed by the Board and declared by the Annual General Meeting. Accordingly, the criterion of right to receive final dividend is satisfied when dividend is declared on approval of the annual general meeting. 7. Re-organisation of an entity that holds investments in subsidiaries, associates and joint ventures In the case of re-organisation of a parent entity into new entity that satisfies specified criteria of Paragraphs 13 of NAS 27, the cost of any investment in subsidiaries, associates or joint venture in the hands of the new entity shall be the cost at which it was earlier carried in the financial statements of previous entity. Specified criteria to be stratified by the new entity are- (a) the new parent obtains control of the original parent by issuing equity instruments in exchange for existing equity instruments of the original parent; (b) the assets and liabilities of the new group and the original group are the same immediately before and after the reorganisation; and (c) the owners of the original parent before the reorganisation have the same absolute and relative interests in the net assets of the original group and the new group immediately before and after the reorganization. [ Refer to Paragraph 13, NAS 27] 8. Disclosures IAS 27 requires an entity to comply with the following disclosure requirements: 1. (a) The fact that the financial statements are separate financial statements; (b) The company has applied the exemption from consolidation as per Paragraph 4(a) of ASB-NEPAL 8

9 NFRS 10 and equity method of accounting has not been followed in respect of investments in associates and joint ventures in accordance with Paragraph 17, NAS 27. (c) (i) The name and principal place of business (and country of incorporation, if different) of the entity whose consolidated financial statements that comply with Nepal Financial Reporting Standards have been produced for public use: (ii) The address where those consolidated financial statements are obtainable: The details of its substantial investments in subsidiary, joint venture or associate which includes: A. Investment in subsidiaries Principal places of business Proportion of its holding in such business entity Method used by the entity to account for such holdings S Ltd. B. Investment in associates A Ltd. Kathmandu Kathmandu 70% 22% Cost Fair value C. Investment in joint ventures Kathmandu 40% Fair value ASB-NEPAL 9

International Accounting Standard 27 Separate Financial Statements. Objective. Scope. Definitions

International Accounting Standard 27 Separate Financial Statements Objective 1 The objective of this Standard is to prescribe the accounting and disclosure requirements for investments in subsidiaries,