IAS 27, 28 and 31 Consolidated and Separate Financial Statements Investment is Associates Interests in Joint Ventures

IAS 27, 28 and 31 Consolidated and Separate Financial Statements Investment is Associates Interests in Joint Ventures Prakash C Bisht Sr. Vice President ( Group Accounts) Jubilant Life Sciences Ltd

Agenda Classification of Investment Identifying a subsidiary / associate / joint venture Presentation of Consolidated Financial Statements Exclusions Separate Financial Statements Disclosures Differences IFRS / IND AS

Classification of Investments Indian Scenario Four Options Control Joint Control Significant Influence Others Subsidiary AS 21 Joint Venture AS 27 Associate AS 23 Others AS 30 / AS 13 Consolidate Proportionate Consolidation Equity Method Fair Value/Cost

Classification of Investments IFRS Scenario Four Options Control Joint Control Significant Influence Others Subsidiary IAS 27 Joint Venture IAS 31 Associate IAS 28 Others IAS 39 Consolidate Proportionate Consolidation Equity Method Fair Value

Identifying a Subsidiary i GAAP

The Starting Point 50% - 100% 20% - 50% Control Joint Control Significant Influence 0% - 20% No Influence Level of Ownership Level of Influence

Identifying a Subsidiary i GAAP

Identifying a Subsidiary Section 4, Companies Act, 1956 H Ltd is a holding company of S Ltd, the subsidiary company, if any of three circumstances exist: H Ltd controls the composition of Board of Directors of S Ltd H Ltd exercises control over >50% of total voting power of S Ltd H Ltd is a holding company of HS Ltd which in turn is a holding company of S Ltd

Identifying a Subsidiary - igaap A subsidiary is an enterprise that is controlled by another enterprise known as parent Control is defined as: Ownership of over 50% voting power Control of the composition of the Board of Directors ( or corresponding governing body) so as to obtain economic benefit from its activities. Power to appoint / remove all or majority of directors Directors not to be appointed without positive vote of parent Director due to appointment in a position in the parent Director nominated by the parent or a subsidiary thereof

Identifying a SUBSIDIARY IFRS

Identifying a Subsidiary - IFRS A subsidiary is an entity that is controlled by another entity known as parent Control is defined as: the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities

Identifying a Subsidiary - IFRS Financial policies Capital expenditures Budget approvals Dividend policies Capital Structuring Operating policies Marketing and Sales Manufacturing Human Resources Acquisitions and Mergers

Identifying a Subsidiary - IFRS Can veto rights negate apparent power? holding of veto rights may negate apparent power if those rights are participative and not protective i.e. has ability to block actions if: Those veto rights relate to operating and financial policies; and Those veto rights relate to decisions in the ordinary course of business and not only to fundamental changes in the organization such as disposal of business units or acquisitions of significant assets

Identifying a Subsidiary - IFRS Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity But a rebuttable presumption

Identifying a Subsidiary - IFRS Control also exists when the parent owns half or less of the voting power of an entity when there is: Power over more than half of the voting rights by virtue of agreement with other investors Power to govern financial and operating policies under a statute or agreement Power to appoint / remove majority of members of BoDs or equivalent governing body and that BoD / governing body controls the entity Power to cast majority of votes at BoDs meetings or other governing body and that BoD / controls the entity

Identifying a Subsidiary - IFRS Nature of Control Direct Control Indirect Control Passive Control De-facto Control Potential Voting Rights Special Purpose Entity

Identifying a subsidiary IFRS Direct Control

Identifying a Subsidiary - IFRS Direct Control Illustration: Entity H holds 60% of voting power and controls entity S. Entity S a subsidiary of entity H.

IDENTIFYING A SUBSIDIARY IFRS Indirect Control

Identifying a Subsidiary - IFRS Indirect Control Illustration through subsidiary: Entity P holds 60% of voting power and controls entity N. Entity N holds 60% of voting power and controls entity B. Is entity B a subsidiary of entity P?

Identifying a Subsidiary - IFRS Indirect Control Illustration Directly & through subsidiary: Entity P holds 60% of voting power and controls entity N. Entity N holds 40% of voting power in entity B. Entity P also hold 20% of voting power in entity B. Is entity B a subsidiary of entity P?

Identifying a Subsidiary - IFRS Indirect Control Illustration Through subsidiary and associate: Entity P holds 60% of voting power and controls entity N. Entity N holds 40% of voting power in entity B. Entity P also holds 40% of voting power in entity O. Entity O holds 45% of voting power in entity B. Is entity B a subsidiary of entity P?

IDENTIFYING A SUBSIDIARY IFRS Passive Control

Identifying a Subsidiary - IFRS Passive Control No requirement to exercise actual control Just having power to control - suffice

Identifying a Subsidiary - IFRS Passive Control Example 1: Passive government influence A government has a controlling shareholding in a company, has board representation and is able to cast a majority vote, but in practice permits the other shareholder to govern the entity s operating and financial policies. The government elects to be passive, voting consistently with the other shareholder and appearing only to intervene where necessary to protect the national interest? Is the Company under the control of government?

Identifying a Subsidiary - IFRS Passive Control Example 2: Passive shareholding Entity A has control over the composition of entity C s board, which has seven members; four appointed by entity A and three appointed by a third entity, entity B. One of the entity A s directors rarely attends board meetings and strategic decisions are generally made by majority vote of the remaining members. Is entity C under the control of entity A?

IDENTIFYING A SUBSIDIARY IFRS De-facto Control

Identifying a Subsidiary - IFRS De-facto Control: De facto control describes the situation where an entity owns less than 50% of the voting shares in another entity, but is deemed to have control for reasons other than potential voting rights, contract or other statutory means. A company that decides to consolidate on the basis of defacto control must define its policy such that the policy can be applied consistently.

Identifying a Subsidiary - IFRS De-facto Control: Example 1: Ownership of less than 50% of voting rights with dispersed public shareholding: Entity P holds 48% of entity Q. Entity Q is listed and no other shareholder owns more than 5% of its equity shares. The other shareholders have not formed any group that might vote collectively for their combined 52% shareholding. Other shareholder representation at general meetings, in person or by proxy, has not been more than 30% of the total voting rights for many years. Entity P nominates a majority of directors and, due to its presence at general meetings, these nominations are approved. There is no history of institutional shareholder activism in the country where entity P and entity Q have their primary listings and hostile takeovers are unusual. Does entity P controls entity Q?

Identifying a Subsidiary - IFRS De-facto Control: Example 2: Passive majority shareholder: Entity R owns 40% of the equity share capital of entity S. The remaining 60% is owned by a single investor. That investor does not attend general meetings. Does entity R controls entity S?

Identifying a Subsidiary - IFRS De-facto Control: Example 3: Sophisticated shareholder: Entity T owns 30% of entity V. Entity V has five other shareholders, all of whom are venture capital companies or institutional investors. None owns more than 20% of entity V. Although they do not participate at general meetings they are known to meet with representatives of entity V and with each other. Does entity T controls entity V?

Identifying a Subsidiary - IFRS De-facto Control: Example 4: Temporary shareholding at general meeting: Entity W has the following ownership structure: Entity X : 35% Entity Y : 40% Various small shareholders : 25% Entity Y and a majority of the small shareholders have attended and voted at past general meetings. At entity W s most recent general meeting entity Y did not vote and entity X had sufficient votes to elect three directors to the board of nine, being all of the board members that were put forward for election in the current year. All other matters put to a vote of the shareholders were for routine business and the proposals of executive management were carried. Does entity Y controls entity W?

IDENTIFYING A SUBSIDIARY IFRS Potential Voting Rights

Identifying a Subsidiary - IFRS Potential Voting Rights Currently Exercisable Require all facts and circumstances that affect potential voting rights to be examined, except the intention of management and the financial ability to exercise or convert potential voting rights

Identifying a Subsidiary - IFRS Potential Voting Rights Example 1: Call Options Entities A and B own 80 per cent and 20 per cent respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity A sells one-half of its interest to Entity D and buys call options from Entity D that are exercisable at any time at a premium to the market price when issued, and if exercised would give Entity A its original 80 per cent ownership interest and voting rights.

Identifying a Subsidiary - IFRS Potential Voting Rights Example 2: Possibility of exercise or conversion Entities A, B and C own 40 per cent, 30 per cent and 30 per cent respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entity A also owns call options that are exercisable at any time at the fair value of the underlying shares and if exercised would give it an additional 20 per cent of the voting rights in Entity D and reduce Entity B s and Entity C s interests to 20 per cent each.

Identifying a Subsidiary - IFRS Potential Voting Rights Example 3: Other rights that have the potential to increase an entity s voting power or reduce another entity s voting power Entities A, B and C own 25 per cent, 35 per cent and 40 per cent respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entities B and C also have share warrants that are exercisable at any time at a fixed price and provide potential voting rights. Entity A has a call option to purchase these share warrants at any time for a nominal amount. If the call option is exercised, Entity A would have the potential to increase its ownership interest, and thereby its voting rights, in Entity D to 51 per cent (and dilute Entity B s interest to 23 per cent and Entity C s interest to 26 per cent).

Identifying a Subsidiary - IFRS Potential Voting Rights Example 4: Management intention Entities A, B and C each own 33 per cent of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entities A, B and C each have the right to appoint two directors to the board of Entity D. Entity A also owns call options that are exercisable at a fixed price at any time and if exercised would give it all the voting rights in Entity D. The management of Entity A does not intend to exercise the call options, even if Entities B and C do not vote in the same manner as Entity A.

Identifying a Subsidiary - IFRS Potential Voting Rights Example 5: Financial ability Entities A and B own 55 per cent and 45 per cent respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity B also holds debt instruments that are convertible into ordinary shares of Entity C. The debt can be converted at a substantial price, in comparison with Entity B s net assets, at any time and if converted would require Entity B to borrow additional funds to make the payment. If the debt were to be converted, Entity B would hold 70 per cent of the voting rights and Entity A s interest would reduce to 30 per cent.

IDENTIFYING A SUBSIDIARY IFRS Special Purpose Entity s (SIC 12)

Identifying a Subsidiary - IFRS Special Purpose Entity An SPE is an entity created to accomplish a narrow and well-defined objective, e.g. to effect Lease Research and development activity Securitisation of financial assets Principles for identifying control apply equally to an SPE Control may exist even in cases where an entity owns little or none of the SPE s equity

Identifying a Subsidiary - IFRS SPE s Features: Auto-pilot arrangements that restrict the decision-making capacity of the governing board Use of professional directors, trustees or partners Thin capitalization, the proportion of real equity is too small to support the SPE s overall activities Absence of an apparent profit-making motive, such that the SPE is engineered to pay out all profits in the form of interest or fees Domiciled in offshore capital havens Have a specified life Exist for financial purposes

Identifying a Subsidiary - IFRS SPE s Indicators of control Activities conducted on behalf of reporting entity, which created the SPE according to its business needs Decision-making reporting entity has the decision-making powers to control the SPE or its assets/ may have been delegated these powers by establishing an 'autopilot' mechanism. Benefits reporting entity has rights to obtain a majority of the benefits of the SPE's through a statute, contract, agreement, or trust deed, or any other scheme, arrangement or device. Risks reporting entity guarantees a return or credit protection directly or indirectly through the SPE to outside investors and retains residual or ownership risks.

IDENTIFYING AN ASSOCIATE

Associate An associates is an entity, including an unincorporated entity such as a partnership over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the associate but is not control or joint control over those policies

Identifying an Associate igaap AS 23 IFRS IAS 28 An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor Significant influence is the power to participate in the financial and / or operating policy decisions of the investee but not control over those policies. An associate is an entity over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Identifying an Associate Rebuttable presumption: 20% or more of voting power Indicators Representation on board of directors Participation in policy-making process Material transactions between investor and investee Interchange of managerial personnel Provision of essential technical information Potential voting rights included

Accounting for Associate Consolidated Financial Statements Must apply the equity method Except when: -Investee classified as held for sale (IFRS 5) -Exemption applies - the parent itself a subsidiary of another entity and its other owners do not object / not traded / not filing to public market / IFRS statements are reported by parent

Equity Method The equity method is a method of accounting whereby the investment is initially recognized at cost and adjusted thereafter for the post-acquisition change in the investor s share of net assets of the investee. The profit or loss of the investor includes the investor s share of the profit or loss of the investee.. Distribution received from the Investee is reduced the carrying amount of the investment. Investor s share of profit or loss is adjusted for the effect of any fair value differences recognised on acquisition of the associate ( e.g. Depreciation on incremental fair value of assets)

Equity Method On acquisition of the investment any difference between the cost of the investment and the investor s share of the net fair value of the associate s identifiable assets and liabilities is accounted for as (a) goodwill relating to an associate is included in the carrying amount of the investment. Amortisation of that goodwill is not permitted. (b) any excess of the investor s share of the net fair value of the associate s identifiable assets and liabilities over the cost of the investment is included as income in the determination of the investor s share of the associate s profit or loss in the period in which the investment is acquired. (treated as capital reserve in Ind AS) If an investor s share of losses of an associate equals or exceeds its interest in the associates, the investor discontinues recognising its share of further losses

Impairment Losses After application of the equity method, including recognising the associate s losses, the investor applies the requirements of IAS- 39 to determine whether it is necessary to recognise any additional impairment loss with respect to the investor s net investment in the associate

IDENTIFYING A JOINT VENTURE

Identifying a Joint Venture igaap AS 27 IFRS IAS 31 A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity.. A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control.

IAS - 31 Forms of Joint Venture Jointly controlled operations Jointly controlled assets Jointly controlled entities

Definition Jointly Controlled Operatio ns Involve use of assets and other resources of the venturer rather than the establishment of a separate entity. Each venturer uses its owns assets and resources. The sale of joint product and expenses are shared by venturers through a contractual arrangement. Example : Air Craft manufacturing, Marketing, Research.

Accounting Jointly Controlled Operations A venturer shall recognize - The assets that it controls and the liabilities that it incurs; and The expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint venture The above transactions are recorded in the financial statements of the venturer hence no consolidation are required.

Definition Jointly Controlled Assets Involve the joint control, and often the joint ownership, of the assets dedicated to the joint venture. Each joint venturer may take a share of the output from the assets and each bears a share of the expense incurred. These ventures does not involve establishment of a separate entity. Example : Oil and Gas pipeline or Mineral Extraction

Accounting Jointly Controlled Assets A venturer shall recognize Its share of the jointly controlled assets, as per the nature Its share of any liabilities incurred Any income from the sale or use of its share of the output of the joint venture Any expenses that it has incurred in respect of its interest in the joint venture. The above transactions are recorded in the financial statements of the venturer hence no consolidation are required.

Definition Jointly Controlled Entities A corporation, partnership or any other entity in which two or more venturers have an interest, under a contractual agreement that establishes joint control over the entity

Accounting Jointly Controlled Entities Proportionate consolidation or Equity method Exceptions to proportionate consolidation and equity method - Interests in jointly controlled entities that are classified as held for sale in accordance with IFRS 5 - Held for trading investments (IAS 39 at Fair Value) - Parent exempted from CFS in IAS 27 - Other 4 conditions like subsidiary, no public listing, ultimate parent provides consolidated accounts

Transactions between a venturer and a joint venture When venturer sells assets to joint venture it shall recognise only that portion of the gain or loss that is attributable to the interests of the other ventureres. The venturer shall recognise the full amount of any loss when the contribution or sale provides evidence of an impairment loss When a venturer purchases assets from a joint venture, the venturer shall not recognise its share of the profit of the joint venture from the transaction until it resells the assets to an independent party. A venturer shall recognise its share of the losses resulting from these transactions in the same way as profits except that losses shall be recognised immediately when they represent a reduction in the net realizable value of current assets or an impairment loss. Unrealised Gains and Loss on Non Monetary for if ( SIC 13) : Contribution not accounted Risk and rewards has not been transferred, Gains or losses can not be measured reliably or transaction laces commercial substance

Presentation of CFS

Presentation of Consolidated Financial Statements igaap IFRS Not mandatory to produce CFS Listing Agreement requires listed companies to produce CFS Exclusions: Subsidiaries acquired for subsequent disposals Subsidiaries operating under severe long-term restrictions which significantly impair their ability to transfer funds to parent Requires a parent to prepare CFS Unless exempted all 4 conditions to be satisfied (no such exemption in Ind AS) Parent itself is a subsidiary; owners do not object Debts / equity instruments not listed Did not file / nor in the process of getting listed Ultimate / intermediary parent produces IFRS complied CFS

Consolidation Procedures Consolidation by: igaap more than one enterprise possible IFRS one entity Uniform accounting policies: igaap unless impracticable IFRS uniform accounting policies Difference between reporting dates: igaap six months IFRS 3 months

Consolidation Procedure The carrying amount of the parent s investment in each subsidiary and the parent s portion of equity of each subsidiaries are eliminated resulting in resultant Goodwill (in accordance with IFRS 3). Income Statement Inter Company transaction : Inter-Company Purchases; Inter-Company Dividends; Inter-Company Interest Elimination of Unrealised Profit on stock IAS 12 Income Tax Applies to temporary differences arising from elimination of profit and loss from the intergroup transactions. Balance Sheet Inter-company loans; Inter-company receivables/payables; Shares in subsidiaries/preacquisition reserves.

Non-Controlling Interest Portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent.

Statement of Comprehensive Income Profit or loss and total comprehensive income for the period allocated to the parent and minority interest in statement of comprehensive income. Statement of Financial Position Non-controlling interests in the net assets of consolidated subsidiaries are identified. Shown within equity but separate from parent shareholders equity.

Changes in Parent s Ownership Scenario 1- Not Losing Control Changes in parent s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions (i.e. transactions with owners in their capacity as owners).

Changes in Parent s Ownership Scenario 2- Losing Control When a parent company losses control over the subsidiary, accounting impact has to given at various levels. De-recognize the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost. De-recognize the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost Recognizes the fair value of the consideration received, if any, from the transaction

Loss of control recognises any investment retained in the former subsidiary at its fair value at the date when control is lost; reclassifies to profit or loss, or transfers directly to retained earnings/oci if required in accordance with other IFRSs ;& recognises any resulting difference as a gain or loss in profit or loss attributable to the parent.

Loss of control If a parent loses control of a subsidiary, it shall account for all amounts recognised in OCI in relation to that subsidiary on the same basis as would be required if the parent had directly disposed of the related assets or liabilities. Thus, if a gain or loss previously recognised in OCI would be reclassified to profit or loss on the disposal of the related assets or liabilities, the parent reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when it loses control of the subsidiary,e.g., if a subsidiary has cumulative exchange differences relating to a foreign operation and the parent loses control of the subsidiary, the parent shall reclassify to profit or loss the gain or loss previously recognised in OCI in relation to the foreign operation. Similarly, if a revaluation surplus previously recognised in other comprehensive income would be transferred directly to retained earnings on the disposal of the asset, the parent transfers the revaluation surplus directly to retained earnings when it loses control of the subsidiary.

EXCLUSIONS

Exclusions igaap Acquired and held exclusively with a view to its subsequent disposal in the near future The subsidiary / investee / JV operates under the severe long-term restrictions that significantly impair its ability to transfer funds to parent / investor / venturer IFRS Consolidate but in accordance with IFRS 5 Consolidate

Exclusions igaap Venture capital investors and similar entities No guidance IFRS Venture capital investors and similar entities Subsidiaries consolidate However venture capital investors and similar entities may elect not to apply equity method for investments in associates and instead account for these investments as financial instruments at fair value through profit or loss

Separate financial statements

Separate Financial Statements igaap As per AS 13 Accounting for investments IFRS At cost; or In accordance with IAS 39

Disclosures

Disclosures - Subsidiaries Nature of relationship when parent does not own more than half of the voting power in a subsidiary Reasons why owning more than half of the voting power of an investee does not constitute control Reporting date of the FS of a subsidiary if different from the parent Restrictions on ability of subsidiary to transfer funds to parent

Disclosures - Subsidiaries a schedule that shows the effects of any changes in a parent s ownership interest in a subsidiary that do not result in a loss of control on the equity attributable to owners of the parent; if control of a subsidiary is lost, the parent shall disclose the gain or loss, if any and: (i) the portion of that gain or loss attributable to recognising any investment retained in the former subsidiary at its fair value at the date when control is lost; and (ii) the line item(s) in the statement of comprehensive income in which the gain or loss is recognised (if not presented separately in the statement of comprehensive income).

Disclosures - Associates Fair value of investments when published prices are available Summarised financial information, including the aggregated amounts of assets, liabilities, revenues and profit or loss Reasons why the presumption that an investor does not have significant influence is overcome if the investor holds less than 20% but concludes it has significant influence Reasons why the presumption that an investor has significant influence is overcome if the investor holds 20% or more but concludes it does not have significant influence

Disclosures - Associates Reporting date of the FS of associates (when different from that of the investor) and reasons therefore Any significant restrictions to transfer funds Unrecognised share of losses (if discontinued recognition) Fact that associate is not accounted for using the equity method Summarised information of associates not equity accounted

Disclosures Joint Ventures Contingent liabilities incurred in connection with JV activities separately from the amount of other contingent liabilities Any capital commitments of the venturer in relation to its interests in JVs and its share in the capital commitments incurred jointly with other venturers Its share of the capital commitments of the JVs themselves Accounting policy for jointly controlled entities (JCEs) The aggregate current assets and liabilities, long-term assets and liabilities, income and expenses related to the JCEs (when using line-by-line reporting) List and description of interests in significant JCEs and the proportion of ownership interests held Method used to recognise the interest in Joint Controlled Entity.

Ind AS Carve outs IAS 28 Paragraph 23 (b) has been modified on the lines of Ind AS 103 to transfer excess of the investor s share of the associate s identifiable assets and liabilities over the cost of investment in capital reserve whereas in IAS 28, it is recognised in profit or loss. (carve out) Where the financial statements of an associate used in applying equity method are prepared as of a date different from that of the investor, IAS 28 requires that this difference should not be more than three months. However, paragraph 25 (Ind AS) 28 provides that this difference should not be more than three months, unless impracticable. Similarly, paragraph 26 of Ind AS 28 requires use of uniform accounting policies, unless impracticable, which IAS 28 does not provide. These changes have been made because the investor does not have control over the associate, it may not be able to influence the associate to prepare additional financial statements or to follow the accounting policies that are followed by the investor. (carve out) Exemption from Consolidation has been deleted.

SIC 13 Non-Monetary Contribution by Venturer IFRS IGAAP Recognition of proportionate share of gains or losses on contribution of non- monetary assets in exchange for an entity interest is generally appropriate. No Specific Guidance.

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