AASB 12 - Disclosure of Interests in Other Entities - August 2015

How it works, mechanically

• Entities must disclose the significant judgements and assumptions used to determine control, joint control or significant influence, and the type of joint arrangement when a separate vehicle is involved (paras 7–9, 9A).

• For subsidiaries, entities must disclose the group composition, the interests of non-controlling owners, significant restrictions on use of assets or settlement of liabilities, and risks and events that could require the parent to provide support (paras 10–19).

• For investment entities that do not consolidate certain subsidiaries, there are specific disclosure requirements about unconsolidated subsidiaries, restrictions, support and related contractual terms (paras 19A–19G).

• For joint arrangements and associates, entities must disclose the nature, extent and financial effects of those interests, including summarised financial information for material joint ventures and associates, measurement basis, and commitments or contingent liabilities (paras 20–23; B12–B16).

• For unconsolidated structured entities, entities must disclose qualitative and quantitative information about the nature, purpose, financing and maximum exposure to loss, including tabular summaries where appropriate (paras 24–31; B21–B26, B29).

• The Standard allows entities to choose aggregation levels and the appropriate level of detail, but requires disclosure of how aggregation is done and a balancing of usefulness against burden (para 4; B2–B6).

Why the Standard says it matters (official rationale) and how that maps to costs and incentives

• Officially, the Standard exists to enable users to evaluate the nature, risks and effects of an entity’s interests in other entities (Objective, para 1). Put simply, the disclosures are intended to improve transparency about relationships and potential exposures.

• Who pays: preparers (the reporting entities) bear the compliance cost of collecting, preparing and presenting the disclosures (para 4; B2). Those costs include staff time, systems and possibly external advice when significant judgements are required (paras 7–9).

• Who decides: preparers exercise judgement about control, joint control, significant influence and the level of aggregation (paras 7–9; para 4; B2–B6). The Standard also gives the AASB room to add Australian-specific guidance (comparison notes and Aus paragraphs), and preparers must follow the Australian appendices where applicable (Comparison with IFRS 12; Aus paragraphs; Appendices E, F).

• Incentives and behavioural effects: requiring disclosure of support provided without contractual obligation (paras 15–16, 19E, 30) and of maximum exposure to loss (para 29) creates an incentive for entities to document and disclose contingent actions and exposures. That transparency may affect decisions about providing support, structuring investments, or the terms of contractual arrangements because such actions will be visible in the financial statements.

• Trade-offs and opportunity costs: entities must balance the benefit of providing useful information to users against the cost and effort of producing detailed disclosures. The Standard explicitly requires entities to consider aggregation and the level of detail to avoid excessive burden or obscuring useful information (para 4; B2–B6).

• Implementation risk and discretion: several provisions rely on significant judgement (control, investment entity status, classification of structured entities) (paras 7–9, 9A; Appendix B guidance). That creates a risk that different entities will make different reasonable decisions, which affects comparability and places a burden on preparers to disclose the judgements they made (para 2(a)).

• Compliance burden and reporting mechanics: the Standard requires both qualitative narratives and quantitative schedules or tabular disclosures in specified areas (for example paras 12, 18, 24–31; B10–B16, B29). Some disclosures (eg maximum exposure to loss, carrying amounts related to structured entities) can require additional measurement and presentation effort (para 29).

Concentrated benefits, diffuse costs and other distributional points

• Primary beneficiaries of the disclosures are users of financial statements seeking information about risks and group structure (Objective, para 1). Preparers (entities) bear most of the cost of producing and supporting the disclosures (para 4; B2).

• The Standard recognises that one size does not fit all: it allows simplified application for smaller Tier 2 entities (AusF1) and permits entities to aggregate similar interests when appropriate (B3–B6), which reduces burden for some preparers.

Implementation points to watch (source-referenced)

• Significant judgement areas: control and significant influence (paras 7–9), investment entity status and changes in that status (paras 9A–9B), and identification of structured entities (Appendix A definition and B21–B24).

• Disclosures that may create operational work: tabular summaries of exposures for unconsolidated structured entities (para 29), summarised financial information for material subsidiaries/joint ventures/associates (paras 12, 21; B10–B16), and schedules showing equity effects of changes in ownership that do not change control (para 18).

• Aggregation and presentation: entities must decide appropriate aggregation and state how they aggregated (para 4; B2–B6). The Standard explicitly asks entities to avoid excessive detail that obscures useful information (para 4; B2).

Where to look in the Standard

• Overall aim and scope: Objective (para 1) and Scope (para 5).
• Core disclosure requirements: paras 2 and 10–31.
• Guidance on judgement and aggregation: paras 4 and 7–9; Appendix B (B1–B26).
• Definitions and special cases (investment entity, structured entity, not-for-profit guidance, Tier 2 simplifications): Appendix A, Appendix E, Appendix F and Aus paragraphs (eg AusCF1, AusF1).