Section 41 - AASB 127 - Consolidated and Separate Financial Statements - March 2008 - The following disclosures shall be made in consolidated financial statements: | Zoe
41 The following disclosures shall be made in consolidated financial statements:
(a) the nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly through subsidiaries, more than half of the voting power;
(b) the reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control;
(c) the end of the reporting period of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a date or for a period that is different from that of the parent’s financial statements, and the reason for using a different date or period;
(d) the nature and extent of any significant restrictions (e.g. resulting from borrowing arrangements or regulatory requirements) on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances;
(e) 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; and
(f) if control of a subsidiary is lost, the parent shall disclose the gain or loss, if any, recognised in accordance with paragraph 34, 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).
42 When separate financial statements are prepared for a parent that, in accordance with paragraphs 10-Aus10.2, elects not to prepare consolidated financial statements, those separate financial statements shall disclose:
(a) the fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and country of incorporation or residence of the entity whose consolidated financial statements that comply with International Financial Reporting Standards have been produced for public use; and the address where those consolidated financial statements are obtainable;
(b) a list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held; and
(c) a description of the method used to account for the investments listed under (b).
43 When a parent (other than a parent covered by paragraph 42), venturer with an interest in a jointly controlled entity or an investor in an associate prepares separate financial statements, those separate financial statements shall disclose:
(a) the fact that the statements are separate financial statements and the reasons why those statements are prepared if not required by law;
(b) a list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held; and
(c) a description of the method used to account for the investments listed under (b);
and shall identify the financial statements prepared in accordance with paragraph 9 of this Standard or AASB 128 and AASB 131 to which they relate.
Aus43.1 In respect of not-for-profit public sector entities, where a group of entities is a reporting entity, but separate financial statements for the parent are not prepared, the notes to the consolidated financial statements shall disclose a list of significant subsidiaries, including:
(a) the name;
(b) country of incorporation or residence (where other than Australia); and
(c) proportion of ownership interest and, if different, proportion of voting power held.
RDR43.1 A parent, venturer with an interest in a jointly controlled entity or an investor in an associate, that prepares separate financial statements applying Australian Accounting Standards – Reduced Disclosure Requirements, shall disclose a description of the methods used to account for the investments in subsidiaries, jointly controlled entities and associates.
Effective date and transition Effective date and transition
Effective date and transition
44 [Deleted by the AASB]
45 An entity shall apply the amendments to AASB 127 made in March 2008 in paragraphs 4, 18, 19, 26-37 and 41(e) and (f) for annual periods beginning on or after 1 July 2009. Earlier application is permitted. However, an entity shall not apply these amendments for annual periods beginning before 1 July 2009 unless it also applies AASB 3 (as revised in March 2008). If an entity applies the amendments before 1 July 2009, it shall disclose that fact. An entity shall apply the amendments retrospectively, with the following exceptions:
(a) the amendment to paragraph 28 for attributing total comprehensive income to the owners of the parent and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Therefore, an entity shall not restate any profit or loss attribution for reporting periods before the amendment is applied.
(b) the requirements in paragraphs 30 and 31 for accounting for changes in ownership interests in a subsidiary after control is obtained. Therefore, the requirements in paragraphs 30 and 31 do not apply to changes that occurred before an entity applies the amendments.
(c) the requirements in paragraphs 34-37 for the loss of control of a subsidiary. An entity shall not restate the carrying amount of an investment in a former subsidiary if control was lost before it applies those amendments. In addition, an entity shall not recalculate any gain or loss on the loss of control of a subsidiary that occurred before the amendments are applied.
Aus45.1 Paragraphs Aus17.1-Aus17.10 may be applied to annual reporting periods beginning on or after 1 January 2005 but beginning before 1 July 2008, provided there is early adoption for the same annual reporting period of the following pronouncements, as applicable:
(a) AASB 1004 Contributions;
(b) AASB 1049 Whole of Government and General Government Sector Financial Reporting;
(c) AASB 1050 Administered Items;
(d) AASB 1051 Land Under Roads;
(e) AASB 1052 Disaggregated Disclosures; and
(f) AASB Interpretation 1038 Contributions by Owners Made to Wholly-Owned Public Sector Entities.
45A Paragraph 38 was amended by AASB 2008-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Project issued in July 2008. An entity shall apply that amendment for annual reporting periods beginning on or after 1 January 2009, prospectively from the date at which it first applied AASB 5. Earlier application is permitted. If an entity applies the amendment for an earlier period it shall disclose that fact.
45B AASB 2008-7 Amendments to Australian Accounting Standards – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate, issued in July 2008, deleted the definition of the cost method from paragraph 4 and added paragraph 38A. An entity shall apply those amendments prospectively for annual reporting periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the changes for an earlier period, it shall disclose that fact and apply the related amendments to AASB 118, AASB 121 and AASB 136 at the same time.
45C AASB 2008-7 Amendments to Australian Accounting Standards – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate, issued in July 2008, added paragraphs 38B and 38C. An entity shall apply those paragraphs prospectively to reorganisations occurring in annual reporting periods beginning on or after 1 January 2009. Earlier application is permitted. In addition, an entity may elect to apply paragraphs 38B and 38C retrospectively to past reorganisations within the scope of those paragraphs. However, if an entity restates any reorganisation to comply with paragraph 38B or 38C, it shall restate all later reorganisations within the scope of those paragraphs. If an entity applies paragraph 38B or 38C for an earlier period, it shall disclose that fact.
45D [Deleted by the IASB]
45E AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010), issued in December 2010, amended paragraphs 35, 37, 38 and 40 and deleted paragraph 45D. An entity shall apply those amendments when it applies AASB 9 as issued in December 2010.
Withdrawal of IAS 27 (2003) Withdrawal of IAS 27 (2003)
Withdrawal of IAS 27 (2003)
46 [Deleted by the AASB]
Implementation Guidance Implementation Guidance
Implementation Guidance
Guidance on implementing AASB 127 Consolidated and Separate Financial Statements, AASB 128 Investments in Associates and AASB 131 Interests in Joint Ventures
Consideration of potential voting rights
IG1 Paragraphs 14, 15 and 19 of AASB 127 Consolidated and Separate Financial Statements (as amended in March 2008) and paragraphs 8 and 9 of AASB 128 Investments in Associates require an entity to consider the existence and effect of all potential voting rights that are currently exercisable or convertible. They also 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. Because the definition of joint control in paragraph 3 of AASB 131 Interests in Joint Ventures depends upon the definition of control, and because that Standard is linked to AASB 128 for application of the equity method, this guidance is also relevant to AASB 131.
IG2 Paragraph 4 of AASB 127 defines control as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Paragraph 2 of AASB 128 defines significant influence as the power to participate in the financial and operating policy decisions of the investee but not to control those policies. Paragraph 3 of AASB 131 defines joint control as the contractually agreed sharing of control over an economic activity. In these contexts, power refers to the ability to do or effect something. Consequently, an entity has control, joint control or significant influence when it currently has the ability to exercise that power, regardless of whether control, joint control or significant influence is actively demonstrated or is passive in nature. Potential voting rights held by an entity that are currently exercisable or convertible provide this ability. The ability to exercise power does not exist when potential voting rights lack economic substance (e.g. the exercise price is set in a manner that precludes exercise or conversion in any feasible scenario). Consequently, potential voting rights are considered when, in substance, they provide the ability to exercise power.
IG3 Control and significant influence also arise in the circumstances described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, which include consideration of the relative ownership of voting rights. AASB 131 depends on AASB 127 and AASB 128 and references to AASB 127 and AASB 128 from this point onwards should be read as being relevant to AASB 131. Nevertheless it should be borne in mind that joint control involves contractual sharing of control and this contractual aspect is likely to be the critical determinant. Potential voting rights such as share call options and convertible debt are capable of changing an entity’s voting power over another entity – if the potential voting rights are exercised or converted, then the relative ownership of the ordinary shares carrying voting rights changes. Consequently, the existence of control (the definition of which permits only one entity to have control of another entity) and significant influence are determined only after assessing all the factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, and considering the existence and effect of potential voting rights. In addition, the entity examines all facts and circumstances that affect potential voting rights except the intention of management and the financial ability to exercise or convert such rights. The intention of management does not affect the existence of power and the financial ability of an entity to exercise or convert potential voting rights is difficult to assess.
IG4 An entity may initially conclude that it controls or significantly influences another entity after considering the potential voting rights that it can currently exercise or convert. However, the entity may not control or significantly influence the other entity when potential voting rights held by other parties are also currently exercisable or convertible. Consequently, an entity considers all potential voting rights held by it and by other parties that are currently exercisable or convertible when determining whether it controls or significantly influences another entity. For example, all share call options are considered, whether held by the entity or another party. Furthermore, the definition of control in paragraph 4 of AASB 127 permits only one entity to have control of another entity. Therefore, when two or more entities each hold significant voting rights, both actual and potential, the factors in paragraph 13 of AASB 127 are reassessed to determine which entity has control.
IG5 The proportion allocated to the parent and non-controlling interests in preparing consolidated financial statements in accordance with AASB 127, and the proportion allocated to an investor that accounts for its investment using the equity method in accordance with AASB 128, are determined solely on the basis of present ownership interests. The proportion allocated is determined taking into account the eventual exercise of potential voting rights and other derivatives that, in substance, give access at present to the economic benefits associated with an ownership interest.
IG6 In some circumstances an entity has, in substance, a present ownership as a result of a transaction that gives it access to the economic benefits associated with an ownership interest. In such circumstances, the proportion allocated is determined taking into account the eventual exercise of those potential voting rights and other derivatives that give the entity access to the economic benefits at present.
IG7 AASB 9 Financial Instruments does not apply to interests in subsidiaries, associates and jointly controlled entities that are consolidated, accounted for using the equity method or proportionately consolidated in accordance with AASB 127, AASB 128 and AASB 131 respectively. When instruments containing potential voting rights in substance currently give access to the economic benefits associated with an ownership interest, and the investment is accounted for in one of the above ways, the instruments are not subject to the requirements of AASB 9. In all other cases, instruments containing potential voting rights are accounted for in accordance with AASB 9.
IG8 The five examples below each illustrate one aspect of a potential voting right. In applying AASB 127, AASB 128 or AASB 131, an entity considers all aspects. The existence of control, significant influence and joint control can be determined only after assessing the other factors described in AASB 127, AASB 128 and AASB 131. For the purpose of these examples, however, those other factors are presumed not to affect the determination, even though they may affect it when assessed.
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.
Though the options are out of the money, they are currently exercisable and give Entity A the power to continue to set the operating and financial policies of Entity C, because Entity A could exercise its options now. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity A controls Entity C.
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. If the options are exercised, Entity A will have control over more than one-half of the voting power. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D.
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).
Although the share warrants are not owned by Entity A, they are considered in assessing control because they are currently exercisable by Entities B and C. Normally, if an action (e.g. purchase or exercise of another right) is required before an entity has ownership of a potential voting right, the potential voting right is not regarded as held by the entity. However, the share warrants are, in substance, held by Entity A, because the terms of the call option are designed to ensure Entity A’s position. The combination of the call option and share warrants gives Entity A the power to set the operating and financial policies of Entity D, because Entity A could currently exercise the option and share warrants. The other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 are also considered, and it is determined that Entity A, not Entity B or C, controls Entity D.
Entities A, B and C each own 33⅓ 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. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D. The intention of Entity A’s management does not influence the assessment.
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.
Although the debt instruments are convertible at a substantial price, they are currently convertible and the conversion feature gives Entity B the power to set the operating and financial policies of Entity C. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity B, not Entity A, controls Entity C. The financial ability of Entity B to pay the conversion price does not influence the assessment.
Guidance on implementing AASB 127 Consol Guidance on implementing AASB 127 Consolidated and Separate Financial Statements, AASB 128 Investments in Associates and AASB 131 Interests in Joint Ventures
Guidance on implementing AASB 127 Consolidated and Separate Financial Statements, AASB 128 Investments in Associates and AASB 131 Interests in Joint Ventures
Consideration of potential voting rights Consideration of potential voting rights
Implementation Guidance
Guidance on implementing AASB 127 Consolidated and Separate Financial Statements, AASB 128 Investments in Associates and AASB 131 Interests in Joint Ventures
Consideration of potential voting rights
IG1 Paragraphs 14, 15 and 19 of AASB 127 Consolidated and Separate Financial Statements (as amended in March 2008) and paragraphs 8 and 9 of AASB 128 Investments in Associates require an entity to consider the existence and effect of all potential voting rights that are currently exercisable or convertible. They also 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. Because the definition of joint control in paragraph 3 of AASB 131 Interests in Joint Ventures depends upon the definition of control, and because that Standard is linked to AASB 128 for application of the equity method, this guidance is also relevant to AASB 131.
IG2 Paragraph 4 of AASB 127 defines control as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Paragraph 2 of AASB 128 defines significant influence as the power to participate in the financial and operating policy decisions of the investee but not to control those policies. Paragraph 3 of AASB 131 defines joint control as the contractually agreed sharing of control over an economic activity. In these contexts, power refers to the ability to do or effect something. Consequently, an entity has control, joint control or significant influence when it currently has the ability to exercise that power, regardless of whether control, joint control or significant influence is actively demonstrated or is passive in nature. Potential voting rights held by an entity that are currently exercisable or convertible provide this ability. The ability to exercise power does not exist when potential voting rights lack economic substance (e.g. the exercise price is set in a manner that precludes exercise or conversion in any feasible scenario). Consequently, potential voting rights are considered when, in substance, they provide the ability to exercise power.
IG3 Control and significant influence also arise in the circumstances described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, which include consideration of the relative ownership of voting rights. AASB 131 depends on AASB 127 and AASB 128 and references to AASB 127 and AASB 128 from this point onwards should be read as being relevant to AASB 131. Nevertheless it should be borne in mind that joint control involves contractual sharing of control and this contractual aspect is likely to be the critical determinant. Potential voting rights such as share call options and convertible debt are capable of changing an entity’s voting power over another entity – if the potential voting rights are exercised or converted, then the relative ownership of the ordinary shares carrying voting rights changes. Consequently, the existence of control (the definition of which permits only one entity to have control of another entity) and significant influence are determined only after assessing all the factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, and considering the existence and effect of potential voting rights. In addition, the entity examines all facts and circumstances that affect potential voting rights except the intention of management and the financial ability to exercise or convert such rights. The intention of management does not affect the existence of power and the financial ability of an entity to exercise or convert potential voting rights is difficult to assess.
IG4 An entity may initially conclude that it controls or significantly influences another entity after considering the potential voting rights that it can currently exercise or convert. However, the entity may not control or significantly influence the other entity when potential voting rights held by other parties are also currently exercisable or convertible. Consequently, an entity considers all potential voting rights held by it and by other parties that are currently exercisable or convertible when determining whether it controls or significantly influences another entity. For example, all share call options are considered, whether held by the entity or another party. Furthermore, the definition of control in paragraph 4 of AASB 127 permits only one entity to have control of another entity. Therefore, when two or more entities each hold significant voting rights, both actual and potential, the factors in paragraph 13 of AASB 127 are reassessed to determine which entity has control.
IG5 The proportion allocated to the parent and non-controlling interests in preparing consolidated financial statements in accordance with AASB 127, and the proportion allocated to an investor that accounts for its investment using the equity method in accordance with AASB 128, are determined solely on the basis of present ownership interests. The proportion allocated is determined taking into account the eventual exercise of potential voting rights and other derivatives that, in substance, give access at present to the economic benefits associated with an ownership interest.
IG6 In some circumstances an entity has, in substance, a present ownership as a result of a transaction that gives it access to the economic benefits associated with an ownership interest. In such circumstances, the proportion allocated is determined taking into account the eventual exercise of those potential voting rights and other derivatives that give the entity access to the economic benefits at present.
IG7 AASB 9 Financial Instruments does not apply to interests in subsidiaries, associates and jointly controlled entities that are consolidated, accounted for using the equity method or proportionately consolidated in accordance with AASB 127, AASB 128 and AASB 131 respectively. When instruments containing potential voting rights in substance currently give access to the economic benefits associated with an ownership interest, and the investment is accounted for in one of the above ways, the instruments are not subject to the requirements of AASB 9. In all other cases, instruments containing potential voting rights are accounted for in accordance with AASB 9.
IG8 The five examples below each illustrate one aspect of a potential voting right. In applying AASB 127, AASB 128 or AASB 131, an entity considers all aspects. The existence of control, significant influence and joint control can be determined only after assessing the other factors described in AASB 127, AASB 128 and AASB 131. For the purpose of these examples, however, those other factors are presumed not to affect the determination, even though they may affect it when assessed.
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.
Though the options are out of the money, they are currently exercisable and give Entity A the power to continue to set the operating and financial policies of Entity C, because Entity A could exercise its options now. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity A controls Entity C.
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. If the options are exercised, Entity A will have control over more than one-half of the voting power. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D.
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).
Although the share warrants are not owned by Entity A, they are considered in assessing control because they are currently exercisable by Entities B and C. Normally, if an action (e.g. purchase or exercise of another right) is required before an entity has ownership of a potential voting right, the potential voting right is not regarded as held by the entity. However, the share warrants are, in substance, held by Entity A, because the terms of the call option are designed to ensure Entity A’s position. The combination of the call option and share warrants gives Entity A the power to set the operating and financial policies of Entity D, because Entity A could currently exercise the option and share warrants. The other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 are also considered, and it is determined that Entity A, not Entity B or C, controls Entity D.
Entities A, B and C each own 33⅓ 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. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D. The intention of Entity A’s management does not influence the assessment.
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.
Although the debt instruments are convertible at a substantial price, they are currently convertible and the conversion feature gives Entity B the power to set the operating and financial policies of Entity C. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity B, not Entity A, controls Entity C. The financial ability of Entity B to pay the conversion price does not influence the assessment.
Introduction Introduction
IG1 Paragraphs 14, 15 and 19 of AASB 127 Consolidated and Separate Financial Statements (as amended in March 2008) and paragraphs 8 and 9 of AASB 128 Investments in Associates require an entity to consider the existence and effect of all potential voting rights that are currently exercisable or convertible. They also 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. Because the definition of joint control in paragraph 3 of AASB 131 Interests in Joint Ventures depends upon the definition of control, and because that Standard is linked to AASB 128 for application of the equity method, this guidance is also relevant to AASB 131.
Guidance Guidance
IG2 Paragraph 4 of AASB 127 defines control as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Paragraph 2 of AASB 128 defines significant influence as the power to participate in the financial and operating policy decisions of the investee but not to control those policies. Paragraph 3 of AASB 131 defines joint control as the contractually agreed sharing of control over an economic activity. In these contexts, power refers to the ability to do or effect something. Consequently, an entity has control, joint control or significant influence when it currently has the ability to exercise that power, regardless of whether control, joint control or significant influence is actively demonstrated or is passive in nature. Potential voting rights held by an entity that are currently exercisable or convertible provide this ability. The ability to exercise power does not exist when potential voting rights lack economic substance (e.g. the exercise price is set in a manner that precludes exercise or conversion in any feasible scenario). Consequently, potential voting rights are considered when, in substance, they provide the ability to exercise power.
IG3 Control and significant influence also arise in the circumstances described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, which include consideration of the relative ownership of voting rights. AASB 131 depends on AASB 127 and AASB 128 and references to AASB 127 and AASB 128 from this point onwards should be read as being relevant to AASB 131. Nevertheless it should be borne in mind that joint control involves contractual sharing of control and this contractual aspect is likely to be the critical determinant. Potential voting rights such as share call options and convertible debt are capable of changing an entity’s voting power over another entity – if the potential voting rights are exercised or converted, then the relative ownership of the ordinary shares carrying voting rights changes. Consequently, the existence of control (the definition of which permits only one entity to have control of another entity) and significant influence are determined only after assessing all the factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, and considering the existence and effect of potential voting rights. In addition, the entity examines all facts and circumstances that affect potential voting rights except the intention of management and the financial ability to exercise or convert such rights. The intention of management does not affect the existence of power and the financial ability of an entity to exercise or convert potential voting rights is difficult to assess.
IG4 An entity may initially conclude that it controls or significantly influences another entity after considering the potential voting rights that it can currently exercise or convert. However, the entity may not control or significantly influence the other entity when potential voting rights held by other parties are also currently exercisable or convertible. Consequently, an entity considers all potential voting rights held by it and by other parties that are currently exercisable or convertible when determining whether it controls or significantly influences another entity. For example, all share call options are considered, whether held by the entity or another party. Furthermore, the definition of control in paragraph 4 of AASB 127 permits only one entity to have control of another entity. Therefore, when two or more entities each hold significant voting rights, both actual and potential, the factors in paragraph 13 of AASB 127 are reassessed to determine which entity has control.
IG5 The proportion allocated to the parent and non-controlling interests in preparing consolidated financial statements in accordance with AASB 127, and the proportion allocated to an investor that accounts for its investment using the equity method in accordance with AASB 128, are determined solely on the basis of present ownership interests. The proportion allocated is determined taking into account the eventual exercise of potential voting rights and other derivatives that, in substance, give access at present to the economic benefits associated with an ownership interest.
IG6 In some circumstances an entity has, in substance, a present ownership as a result of a transaction that gives it access to the economic benefits associated with an ownership interest. In such circumstances, the proportion allocated is determined taking into account the eventual exercise of those potential voting rights and other derivatives that give the entity access to the economic benefits at present.
IG7 AASB 9 Financial Instruments does not apply to interests in subsidiaries, associates and jointly controlled entities that are consolidated, accounted for using the equity method or proportionately consolidated in accordance with AASB 127, AASB 128 and AASB 131 respectively. When instruments containing potential voting rights in substance currently give access to the economic benefits associated with an ownership interest, and the investment is accounted for in one of the above ways, the instruments are not subject to the requirements of AASB 9. In all other cases, instruments containing potential voting rights are accounted for in accordance with AASB 9.
Illustrative examples Illustrative examples
IG8 The five examples below each illustrate one aspect of a potential voting right. In applying AASB 127, AASB 128 or AASB 131, an entity considers all aspects. The existence of control, significant influence and joint control can be determined only after assessing the other factors described in AASB 127, AASB 128 and AASB 131. For the purpose of these examples, however, those other factors are presumed not to affect the determination, even though they may affect it when assessed.
Example 1: Options are out of the money Example 1: Options are out of the money
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.
Though the options are out of the money, they are currently exercisable and give Entity A the power to continue to set the operating and financial policies of Entity C, because Entity A could exercise its options now. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity A controls Entity C.
Example 2: Possibility of exercise or co 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. If the options are exercised, Entity A will have control over more than one-half of the voting power. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D.
Example 3: Other rights that have the po Example 3: Other rights that have the potential to increase an entity’s voting power or reduce another entity’s voting power
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).
Although the share warrants are not owned by Entity A, they are considered in assessing control because they are currently exercisable by Entities B and C. Normally, if an action (e.g. purchase or exercise of another right) is required before an entity has ownership of a potential voting right, the potential voting right is not regarded as held by the entity. However, the share warrants are, in substance, held by Entity A, because the terms of the call option are designed to ensure Entity A’s position. The combination of the call option and share warrants gives Entity A the power to set the operating and financial policies of Entity D, because Entity A could currently exercise the option and share warrants. The other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 are also considered, and it is determined that Entity A, not Entity B or C, controls Entity D.
Example 4: Management intention Example 4: Management intention
Entities A, B and C each own 33⅓ 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. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D. The intention of Entity A’s management does not influence the assessment.
Example 5: Financial ability 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.
Although the debt instruments are convertible at a substantial price, they are currently convertible and the conversion feature gives Entity B the power to set the operating and financial policies of Entity C. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity B, not Entity A, controls Entity C. The financial ability of Entity B to pay the conversion price does not influence the assessment.
AUSTRALIAN APPLICATION GUIDANCE AUSTRALIAN APPLICATION GUIDANCE
AUSTRALIAN APPLICATION GUIDANCE
This guidance accompanies, but is not part of, AASB 127.
Exemption from Presenting Consolidated F Exemption from Presenting Consolidated Financial Statements
Exemption from Presenting Consolidated Financial Statements
AG1 The following table summarises the circumstances in which the exemption from presenting consolidated financial statements set out in paragraphs 10-Aus10.2 of this Standard may be available to a parent entity. The exemption is available only if the requirements of those paragraphs are satisfied. For example, the exemption is not available to a parent entity if it is a disclosing entity.
FP = For-profit entity
NFP = Not-for-profit entity
* The exemption would not be available by reference to the intermediate parent when it is a for-profit public sector entity unable to claim compliance with IFRSs – see paragraph Aus16.2 of AASB 101 Presentation of Financial Statements.
^ When the parent entity’s NFP ultimate or intermediate parent is able to claim compliance with IFRSs, the exemption is available.
Australian Accounting Standards consist of two tiers of reporting requirements for preparing general purpose financial statements:
(a) Tier 1: Australian Accounting Standards; and
(b) Tier 2: Australian Accounting Standards – Reduced Disclosure Requirements.
Deleted IAS 27 Text Deleted IAS 27 Text
Deleted IAS 27 Text
Deleted IAS 27 text is not part of AASB 127.
Paragraph 44
An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact.
Paragraph 46
This Standard supersedes IAS 27 Consolidated and Separate Financial Statements (as revised in 2003).