IFRS Guide to annual fnancial statements – IFRS 12 supplement OCI September 2014 STATEMENT SUBSIDIARY DISPOSAL kpmg.com/ifrs IFRS EQUITY ASSETS OPERATING SEGMENTS FAIR VALUE NON-CONTROLLING INTERESTS PRESENTATION PROVISIONS ESTIMATES DISCONTINUED OPERATIONS LEASES JUDGEMENT OFFSETTING ACCOUNTING POLICIES SHARE-BASED PAYMENT PERFORMANCE TRANSACTIONS CARRYING AMOUNT SHARE-BASED PAYMENT UPDATE FINANCIAL INSTRUMENTS ACCOUNTING POLICIES L O A N S B O R R O W I N G S FINANCIAL POSITION CASH FLOWS IMPAIRMENT COST CONSOLIDATION FAIR PRESENTATION PENSION PROFIT OR LOSS IFRS ASSUMPTIONS REVENUE ANNUAL DISCONTINUED OPERATIONS DERIVATIVES PRESENTATION GROUP ASSOCIATE IFRS IFRS 12NOTES FAIR VALUE BUSINESS COMBINATIONS JOINT ARRANGEMENTS CASH EQUIVALENTS FAIR VALUE MEASUREMENT ACCOUNTING POLICIES CONTINGENCY RELATED PARTY CURRENT TRANSACTIONS INTANGIBLE ASSETS GOING CONCERN PERFORMANCE OFFSETTING EPS PROFIT OR LOSS MATERIALITY INVENTORIES ACQUISITIONTAX CAPITAL COMPARATIVE VALUATION UPDATE ASSETS MATERIALITY CGU PENSION NCI FAIR VALUE PERFORMANCE BUSINESS COMBINATIONS OPERATING SEGMENTS GOODWILL ESTIMATESOFFSETTINGOCI CASH FLOWS PROFIT OR LOSS LIABILITIES CONSOLIDATION GOING CONCERN UNCONSOLIDATED STRUCTURED ENTITIESFINANCIAL POSITIONPRESENTATION DISCLOSURES SIGNIFICANT PROPERTY ACQUISITION ASSUMPTIONS COMPARATIVE EQUITY FINANCIAL POSITION SHARE-BASED PAYMENT EPS JOINT ARRANGEMENTS DISCLOSURES HELD-FOR-SALE PENSION Contents About this supplement 1 About IFRS 12 2 Material associates 4 Material joint ventures 6 Material joint operations 8 Immaterial associates and joint ventures 10 Subsidiaries and NCI 12 Unconsolidated structured entities 16 Keeping you informed 18 Acknowledgements 19 About this supplement This supplement has been produced by the KPMG International Standards Group (part of KPMG IFRG Limited) to complement our Guide to annual fnancial statements – Illustrative disclosures (the September 2014 guide). The September 2014 guide helps you to prepare fnancial statements in accordance with IFRS, illustrating one possible format for fnancial statements based on a fctitious multinational corporation; the corporation is not a frst-time adopter of IFRS. iD sclosure o f interests in other entities This supplement focuses on IFRS 12 Disclosure of Interests in Other Entities, which became effective for annual periods beginning on or after 1 January 2013. It provides additional disclosure examples and explanations as a supplement to the September 2014 guide; as such, this supplement is not intended to reconcile to that guide. IFRS 12 contains the disclosure requirements for the following standards: IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IAS 28 Investments in Associates and Joint Ventures. In addition, it includes disclosure requirements in respect of unconsolidated structured entities. This supplement does not illustrate all of the disclosure requirements of IFRS 12, which will depend on an entity’s underlying facts and circumstances; for a full list of the potential disclosures, see our Guide to annual fnancial statements – Disclosure checklist (September 2014). In particular, this supplement does not illustrate the disclosures related to investment entities − see Appendix I of our Guide to annual fnancial statements – Illustrative disclosures for investment funds (December 2013). Illustrative eax mples The example disclosures in this supplement relate to a multinational corporation that is not engaged in banking or other fnancial services. In addition, the disclosures are intended to explain the relevant requirements and therefore may be more detailed than is necessary. Individual entities should tailor the disclosures to refect their specifc circumstances, including the materiality of the items concerned. In addition, IFRS and its interpretation change over time. Accordingly, this supplement should not be used as a substitute for referring to the standards and interpretations themselves. Reef rences and abbreviations References to the standards (primarily IFRS 12) are included in this supplement to identify the source of the disclosures. The following abbreviation is used: NCI  –  Non-controlling interests. © 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 2 | Guide to annual fnancial statements – IFRS 12 supplement About IFRS 12 IFRS 12.7 IFRS 12 requires disclosure of the signifcant judgements and assumptions that an entity has made in determining the nature of its interest in another entity or arrangement. It also contains extensive disclosure requirements for subsidiaries, associates, joint ventures and unconsolidated structured entities. IFRS 12.1 The objective of IFRS 12 is to require disclosure that helps users of fnancial statements to evaluate: l the nature of, and risks associated with, an entity’s interests in other entities; and l the effects of those interests on the entity’s fnancial position, fnancial performance and cash fows. IFRS 12.A In this context, ‘interests in other entities’ are contractual and non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity. These interests may, for example, take the form of equity or debt instruments, but the defnition is broad and interests can also comprise other forms of involvement, such as liquidity support, credit enhancement and/or guarantees. However, an interest in another entity does not exist solely as a result of a typical customer-supplier relationship. IFRS 12.B7 Interests in another entity are the basis for many of the disclosures in IFRS 12. Understanding the purpose and design of the other entity may assist in identifying such interests. The entity considers the risks that the other entity was designed to create, and the risks that the other entity was designed to pass on to the reporting entity and other parties. IFRS 12.27–28 In addition, IFRS 12 requires an entity to provide disclosure about its relationships with unconsolidated structured entities that it sponsors even if it does not have an interest in them at the reporting date. Agregation IFRS 12.4, B2–B6 The disclosures may be aggregated for interests in similar entities, with the method of aggregation being disclosed. A quantitative and qualitative analysis, taking into account the different risk and return characteristics of each entity, is made in order to determine the aggregation level. IFRS 12 gives the following examples of aggregation levels: by nature of activities, by industry or by geography. IFRS 12.B4–B6 However, as a minimum, information is given separately for interests in subsidiaries, joint ventures, joint operations, associates and unconsolidated structured entities. In July 2014, the IFRS Interpretations Committee discussed the requirement to disclose summarised fnancial information of joint ventures and associates under IFRS 12 and noted that fnancial information from material joint ventures and associates should be presented on an individual basis rather than aggregated. The Committee tentatively decided not to add this issue to its agenda. The Committee is expected to redeliberate its tentative decision and publish a fnal decision in Q4 of 2014. Structured entities IFRS 12.A A ‘structured entity’ is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate only to administrative tasks and the relevant activities are directed by means of contractual arrangements. Whether an investee is a structured entity is a key factor in determining the extent of disclosures required under IFRS 12. l Paragraphs 10(b)(ii) and 14–17 of IFRS 12 require an entity to disclose the nature of and changes in the risks associated with its interests in consolidated structured entities (see page 13). l Paragraphs 24–31 of IFRS 12, supported by B25–B26, require an entity to disclose information about its interests in unconsolidated structured entities (see page 17). The discussion that follows is focused on determining the population of entities that are in the scope of these disclosure requirements. Characteristics IFRS 12.B22 To supplement the defnition, IFRS 12 indicates that a structured entity often (i.e. not always) has some or all of the following characteristics: l restricted activities; l a narrow and well-defned objective; © 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. About IFRS 12 | 3 l insuc�f ient euq ity to permit the str uctured entity to n� ance its activities iw thout subordinated n� ancial support ; ando/ r l n� ancing in the of rm o f multiple contract ually linek d instruments issued to investors that create concentrations o f credit or other rissk t( ranches.) Although these characteristics are helpful in identifying structured entities, they may not be defnitive in all cases. IFRS 12.B22(b) Examples of entities with a narrow and well-defned objective that may be structured entities include those designed to effect a tax-effcient lease, carry out research and development activities, provide a source of capital or funding to an entity or provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors. IFRS 12.B23 Other examples of structured entities include securitisation vehicles, asset-backed fnancings and some investment funds. In assessing whether an investee is a structured entity, an investor also considers how the power assessment was made under IFRS 10, irrespective of the outcome of that analysis. This is because IFRS 10 requires entities to conduct the power analysis differently depending on whether voting rights are the dominant factor in deciding who controls the investee. Therefore, the analysis of the investee under IFRS 10 is directly relevant to a decision under IFRS 12 about whether the investee is a structured entity. l If the decision aw s made on the basis of who held a majority of voting rights, or less than a maoj rity but iw th de af cto poew r over the investee, then the investee is not a structured entity. l I f the control analysis reuq ired a more ind- epth consideration, such as o f the purpose and design o f the investee, and evidence o f the practical ability to direct the relevant activities o f the investee etc, then it is more liek ly that the investee is a structured entity. ‘Similar’ rights As noted above, a structured entity is an entity that has been designed so that voting or ‘similar’ rights are not the dominant factor in deciding who controls the entity. Therefore, it is important to understand the meaning of ‘similar’ rights. It appears that an example of rights that are similar to voting rights include rights to appoint or remove members o f an investees’ ek y management personnel hw o have the ability to direct the relevant activities. Conversely, it appears that voting or similar rights would not generally include rights that derive from a contract that gives the holder the ability to direct relevant activities. Such a contract might apply directly or indirectly as an override of the usual power that is derived from the voting rights of investors. This approach focuses on how the investee is governed in order to consider what similar rights are; it does not focus on whether the activities of the investee are those of a conventional operating entity – e.g. a manufacturing company. We believe that the following are examples of entities governed by voting or similar rights – i.e. they are not structured entities. l A conventional company in hw ich shareholders eex rcise voting rights, hw ich determines the party that has poew r over the company. l A oj int arrangement in hw ich the partners eex rcise voting rights, hw ich determines that the parties have oj int control. hT is is the case even i f there are nonp- articipating investors or i f the voting rights held by the partners are disproportionate to their share o f returns. oJ int arrangements are the subej ct o f hC apter .3 6 o f our publication Insights into IFRS . Conversely, the activities of the structured entities noted above (see ‘Characteristics’) – e.g. securitisation vehicles, asset-backed fnancings and structures designed to effect a tax-effcient lease – are typically governed by a contract that specifes the rights and obligations of each party in the structure; they would not be governed by voting or similar rights. © 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 4 | Guide to annual fnancial statements – IFRS 12 supplement Material associates Explanatory notes IFRS 12.B14(a) a. IFRS 12 indicates that the amounts included in the summarised fnancial information are those prepared in accordance with IFRS, modifed to refect adjustments made by the entity in applying equity accounting; fair value adjustments and accounting policy alignments are noted as examples. Fair value adjustments Although the standard refers to fair value adjustments at the date of acquisition, this would include the effect of the subsequent accounting since that date. There is no guidance on whether the fair value adjustments should be made on a net basis (refecting only the investor’s interest) or grossed up to relate to the investee as a whole. In this example, such adjustments have been grossed up and are embedded in the summarised fnancial information. An alternative would be to multiply the fnancial information by the investor’s interest and then adjust for fair value adjustments; this approach might result in a more complex disclosure. Goodwill There is no guidance on how goodwill that forms part of the carrying amount of an investment in an associate or joint venture is incorporated into the summarised fnancial information. Although it can be argued that goodwill is an adjustment made in applying equity accounting, the determination of goodwill is very specifc to the particular transaction between the parties. Therefore, in this example goodwill has been included in the reconciliation to the carrying amount of the investee in the statement of fnancial position, rather than being embedded in the summarised fnancial information of the associate. IFRS 12.B15 b. The summarised fnancial information may be presented on the basis of the associate’s or joint venture’s fnancial statements if either: l● the investee is accounted for at fair value; or l● the investee does not prepare IFRS fnancial statements and preparation on that basis would be impracticable or cause undue cost. IFRS 12.B14(b) c. IFRS 12 requires the summarised fnancial information, which comprises fnancial position and fnancial performance, to be reconciled to the carrying amount in the statement of fnancial position. One method of reconciliation, illustrated in our September 2014 guide (Note 23(a)), is to focus the reconciliation on the fnancial position of equity-accounted investees. This example incorporates both elements – fnancial performance and fnancial position – into the reconciliation, which is then adjusted for reconciling items at the group level. IFRS 12.B11, d. In respect of summarised fnancial information for subsidiaries with material NCI, IFRS 12 specifes B14, IAS 28.26, that such information should be before inter-company eliminations. However, the standard is silent in 28 respect of transactions with associates and joint ventures. In this example, the elimination of unrealised gains or losses is presented as part of the reconciliation. An alternative would be to present the summarised fnancial information after such eliminations because they are adjustments made in applying equity accounting (see Explanatory note (a)). The accounting for transactions with equity-accounted investees is discussed in the 11th Edition 2014/15 of our publication Insights into IFRS (3.5.430). © 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Material associates | 5 oN tes to the consolidated n� ancial statements e( tx ract ) Associates IFRS 12.21(b)(i) The Group has two associates that are material to the Group, both of which are equity accounted. IFRS 12.21(a)(i) Gold Silver Strategic retailer providing Strategic retailer providing Nature of relationship with the IFRS 12.21(a)(ii) access to new customers and access to new customers and Group markets in Asia markets in Europe Principal place of business / IFRS 12.21(a)(iii) Singapore Germany Country of incorporation Ownership interest / IFRS 12.21(a)(iv) 40% (2013: 40%) 30% (2013: 30%) Voting rights held IFRS 12.21(b)(iii), Fair value of ownership interest (if €980 thousand N/A 13.97 listed) (2013: €870 thousand)1 IFRS 12.21(b)(ii), 1 Based on the quoted market price at 31 December (Level 1 in the fair value hierarchy). B14(a) The following is summarised fnancial information for Gold and Silver, based on their respective consolidated fnancial statements prepared in accordance with IFRS, modifed for fair value a, b adjustments on acquisition and differences in the Group’s accounting policies. Gold Silver In thousands of euro 2014 2013 2014 2013 IFRS 12.B12(b)(v) Revenue 6,500 ,5 200 1,000 059 IFRS 12.B12(b)(vi) Prot� rf om continuing operations 460 404 345 408 IFRS 12.B12(b)(vii) Postt- a x prot� rf om discontinued operations 85 - - - IFRS 12.B12(b)(viii) tO her comprehensive income 55 4( ) 30 20 IFRS 12.B12(b)(ix) Total comprehensive income 600 400 375 05 0 Attributable to ICN 120 08 75 100 Attributable to investees’ shareholders 480 23 0 300 400 IFRS 12.B12(b)(i) uC rrent assets 2,000 2,000 2,000 2,000 IFRS 12.B12(b)(ii) oN nc- urrent assets 3,000 ,3 000 3,000 ,3 000 IFRS 12.B12(b)(iii) uC rrent liabilities (1,000) 1( ,000) (1,000) 1( ,000) IFRS 12.B12(b)(iv) oN nc- urrent liabilities (1,306) 1( ,05 0) (625) 1( ,000) Net assets 2,694 2,500 3,375 3,000 Attributable to ICN 539 05 0 675 06 0 Attributable to investees’ shareholders 2,155 2,000 2,700 2,400 Groups’ interest in net assets o f investee at beginning o f c year 800 26 7 720 06 0 IFRS 12.B14(b) oT tal comprehensive income attributable to the Group 192 128 90 120 IFRS 12.B12(a) iD vidends received during the year (130) 09( ) - - IFRS 12.B14(b) Groups’ interest in net assets o f investee at end o f year 862 08 0 810 27 0 IFRS 12.B14(b) lE imination o f unrealised prot� on donw stream sales d (27) (50) (5) (80) a IFRS 12.B14(b) Goodiw ll 60 60 - - IFRS 12.B14(b) Carrying amount of interest in investee at end of year 895 810 805 640 IFRS 12.22(a) Gold’s non-current liabilities include a bank loan (repayable in 2016) that is subject to covenants that include restrictions on the payment of dividends to shareholders unless a certain level of interest cover is achieved from continuing operations. © 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 6 | Guide to annual fnancial statements – IFRS 12 supplement Material joint ventures Explanatory notes a. See Explanatory notes (a) and (b) on page 4. IFRS 12.B13, b. The minimum line item disclosures required for each material joint venture are more extensive BC51 than for material associates. In this example, the additional information is presented in the form of footnotes to the tables summarising fnancial performance and fnancial position. c. See Explanatory note (c) on page 4. d. See Explanatory note (d) on page 4. © 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Material joint ventures | 7 oN tes to the consolidated n� ancial statements e( tx ract) Joint venture IFRS 12.21(a) Mercury is an unlisted joint arrangement in which the Group has joint control and a 50% ownership interest. Mercury was founded by the Group and XYZ, and is one of the Group’s strategic partners, based in Denmark, principally engaged in exploring new distribution channels for paper products. IFRS 12.7(c), 21(b)(i) Mercury is structured as a separate vehicle and the Group has a residual interest in its net assets. Accordingly, the Group has classifed its interest in Mercury as a joint venture, which is equity-accounted. IFRS 12.21(b)(ii), The following is summarised fnancial information for Mercury, based on its fnancial statements B14(a) prepared in accordance with IFRS, modifed for fair value adjustments on acquisition and differences in a, b the Group’s accounting policies. In thousands of euro 2014 2013 IFRS 12.B12(b)(v) Revenue 25,796 21,405 IFRS 12.B12(b)(vi) Prot� rf om continuing operations 1 1,186 697 IFRS 12.B12(b)(viii) tO her comprehensive income (396) 2( 1)8 IFRS 12.B12(b)(ix) Total comprehensive income 790 875 1 Includes: IFRS 12.B13(d) – depreciation and amortisation of €12,445 thousand (2013: €11,350 thousand) IFRS 12.B13(f) – interest expense of €1,396 thousand (2013: €1,218 thousand) IFRS 12.B13(g) – income tax expense of €875 thousand (2013: €590 thousand). IFRS 12.B12(b)(i) uC rrent assets 2 3,123 ,5 216 IFRS 12.B12(b)(ii) oN nc- urrent assets 5,953 ,3 295 IFRS 12.B12(b)(iii) uC rrent liabilities 3 (543) 1( ,103 ) IFRS 12.B12(b)(iv) oN nc- urrent liabilities 4 (1,715) 1( ,23 0) Net assets 6,818 ,6 007 IFRS 12.B13(a) 2 Includes cash and cash equivalents of €1,200 thousand (2013: €2,150 thousand). IFRS 12.B13(b) 3 Includes current fnancial liabilities (excluding trade and other payables and provisions) of €122 thousand (2013: €230 thousand). IFRS 12.B13(c) 4 Includes non-current fnancial liabilities (excluding trade and other payables and provisions of €1,211 thousand (2013: €986 thousand). c Groups’ interest in net assets o f investee at beginning o f the year 3,035 2,47 6 IFRS 12.B14(b) hS are o f total comprehensive income 395 298 IFRS 12.B12(a) iD vidends received during the year (21) - IFRS 12.B14(b) Groups’ interest in net assets o f investee at end o f year 3,409 ,3 053 IFRS 12.B14(b) lE imination o f unrealised prot� on donw stream sales d (96) 4( 2) IFRS 12.B14(b) Carrying amount of interest in investee at end of year 3,313 2,39 IFRS 12.23(a), B18– In accordance with the agreement under which Mercury is established, the Group and XYZ have B19 agreed to make additional contributions in proportion to their interests to make up any losses, if required, up to a maximum amount of €6,000 thousand. This commitment has not been recognised in the Group’s consolidated fnancial statements. © 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 8 | Guide to annual fnancial statements – IFRS 12 supplement Material joint operations Explanatory notes IFRS 12.7(c), 21(a) a. Unlike joint ventures, IFRS 12 requires only limited quantitative disclosures for joint operations, including information about signifcant judgements and assumptions made in determining the classifcation of a joint arrangement that is structured through a separate entity. The classifcation of joint arrangements is discussed in the 11th Edition 2014/15 of our publication Insights into IFRS (3.6.70). © 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.