FRS 127

Basis for Conclusions on

FRS 127 Consolidated and Separate Financial Statements
This Basis for Conclusions and its appendices accompany, but are not part of, FRS 127.

FRS 127 is based on IAS 27 Consolidated and Separate Financial Statements. In approving FRS
127, MASB considered and concurred with the provisions of IAS 27.

The IASB’s Basis for Conclusions and Guidance on implementing IAS 27 are reproduced below
for reference.

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Basis for Conclusions on

IAS 27 Consolidated and Separate Financial Statements
This Basis for Conclusions accompanies, but is not part of, IAS 27.

Introduction
BC1 This Basis for Conclusions summarises the International
Accounting Standards Board’s considerations in reaching its
conclusions on revising IAS 27 Consolidated Financial
Statements and Accounting for Investments in Subsidiaries in
2003 and on amending IAS 27 Consolidated and Separate
Financial Statements in 2008. Individual Board members gave
greater weight to some factors than to others.
BC2 In July 2001 the Board announced that, as part of its
initial agenda of technical projects, it would undertake a
project to improve a number of standards, including IAS 27
(as revised in 2000). The project was undertaken in the
light of queries and criticisms raised in relation to the
standards by securities regulators, professional accountants
and other interested parties. The objectives of the
Improvements project were to reduce or eliminate
alternatives, redundancies and conflicts within standards,
to deal with some convergence issues and to make other
improvements. In May 2002 the Board published its proposals
in an exposure draft of Improvements to International
Accounting Standards, with a comment deadline of 16
September 2002. The Board received over 160 comment letters
on the exposure draft. After redeliberating the issues in
the light of the comments received, the Board issued a
revised IAS 27 in December 2003.
BC3 In July 2001 the Board added a project on business
combinations to its agenda. Phase I of the project resulted
in the Board issuing in March 2004 IFRS 3 Business
Combinations and revised versions of IAS 36 Impairment of
Assets and IAS 38 Intangible Assets. The second phase of
the project was conducted jointly with the US Financial
Accounting Standards Board (FASB), and focused primarily on
the application of the acquisition method.
BC4 Part of the second phase of the business combinations
project was the reconsideration of business combinations in
which an acquirer obtains control of a subsidiary through
the acquisition of some, but not all, of the equity
interests in that subsidiary. In those business
combinations, non-controlling interests in the subsidiary
exist at the date of the business combination.
BC5 When the Board revised IAS 27 in 2003, it acknowledged that
additional guidance was needed on the recognition and
measurement of non-controlling interests and the treatment
of transactions with non-controlling interests. The Board
was aware of diversity in practice in the absence of

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guidance in IFRSs, with as many as five methods being used

to account for acquisitions of non-controlling interests
after control is obtained.
BC6 In June 2005 the Board published an exposure draft of
proposed amendments to IAS 27 in conjunction with an
exposure draft of proposed amendments to IFRS 3 as part of
the second phase of the business combinations project. The
Board received 95 comment letters on the exposure draft of
amendments to IAS 27.
BC7 After redeliberating the issues in the light of the comments
received, in 2008 the Board issued a revised IFRS 3 together
with an amended version of IAS 27. Close to the same time,
the FASB issued Statement No. 141 (revised 2007) Business
Combinations and Statement No. 160 Non-controlling Interests
in Consolidated Financial Statements, which amended
Accounting Research Bulletin No. 51, Consolidated Financial
Statements (ARB 51). In developing the amendments, the
Board did not reconsider all of the requirements in IAS 27,
and the FASB did not discuss all of the requirements of ARB
51. The changes primarily relate to accounting for non-
controlling interests and the loss of control of
subsidiaries. The boards reached the same conclusions on
all of the issues considered jointly.
BC8 Because the Board’s intention was not to reconsider the
fundamental approach to consolidation established in IAS 27,
this Basis for Conclusions does not discuss requirements in
IAS 27 that the Board has not reconsidered. The Board is
considering the other requirements of IAS 27 as part of its
project on consolidation.

Presentation of consolidated financial statements (2003 revision)

Exemption from preparing consolidated financial statements

BC9 Paragraph 7 of IAS 27 (as revised in 2000) required
consolidated financial statements to be presented. However,
paragraph 8 permitted a parent that is a wholly-owned or
virtually wholly-owned subsidiary not to prepare
consolidated financial statements. The Board considered
whether to withdraw or amend this exemption from the general
requirement.
BC10 The Board decided to retain an exemption, so that entities
in a group that are required by law to produce financial
statements available for public use in accordance with
International Financial Reporting Standards, in addition to
consolidated financial statements, would not be unduly
burdened.
BC11 The Board noted that in some circumstances users can find
sufficient information for their purposes regarding a
subsidiary from either its separate financial statements or
consolidated financial statements. In addition, the users

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of financial statements of a subsidiary often have, or can

get access to, more information.
BC12 Having agreed to retain an exemption, the Board decided to
modify the circumstances in which an entity would be exempt
and considered the following criteria.

Unanimous agreement of the owners of the minority interests*

BC13 The 2002 exposure draft proposed to extend the exemption to
a parent that is not wholly-owned if the owners of the
minority interest, including those not otherwise entitled to
vote, unanimously agree.
BC14 Some respondents disagreed with the proposal for unanimous
agreement of minority shareholders to be a condition for
exemption, in particular because of the practical
difficulties in obtaining responses from all of those
shareholders. The Board decided that the exemption should
be available to a parent that is not wholly-owned when the
owners of the minority interests have been informed about,
and do not object to, consolidated financial statements not
being presented.

Exemption available only to non-public entities

BC15 The Board believes that the information needs of users of
financial statements of entities whose debt or equity
instruments are traded in a public market are best served
when investments in subsidiaries, jointly controlled
entities and associates are accounted for in accordance with
IAS 27, IAS 28 Investments in Associates and IAS 31
Interests in Joint Ventures. The Board therefore decided
that the exemption from preparing such consolidated
financial statements should not be available to such
entities or to entities in the process of issuing
instruments in a public market.
BC16 The Board decided that a parent that meets the criteria for
exemption from the requirement to prepare consolidated
financial statements should, in its separate financial
statements, account for those subsidiaries in the same way
as other parents, venturers with interests in jointly
controlled entities or investors in associates account for
investments in their separate financial statements. The
Board draws a distinction between accounting for such
investments as equity investments and accounting for the
economic entity that the parent controls. In relation to
the former, the Board decided that each category of
investment should be accounted for consistently.
BC17 The Board decided that the same approach to accounting for
investments in separate financial statements should apply

*
IAS 27 (as amended in 2008) changed the term ‘minority interest’ to ‘non-
controlling interest’. For further discussion see paragraph BC28.

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irrespective of the circumstances for which they are

prepared. Thus, parents that present consolidated financial
statements, and those that do not because they are exempted,
should present the same form of separate financial
statements.

Scope of consolidated financial statements (2003 revision)

Scope exclusions
BC18 Paragraph 13 of IAS 27 (as revised in 2000) required a
subsidiary to be excluded from consolidation when control is
intended to be temporary or when the subsidiary operates
under severe long-term restrictions.

Temporary control
BC19 The Board considered whether to remove this scope exclusion
and thereby converge with other standard-setters that had
recently eliminated a similar exclusion. The Board decided
to consider this issue as part of a comprehensive standard
dealing with asset disposals. It decided to retain an
exemption from consolidating a subsidiary when there is
evidence that the subsidiary is acquired with the intention
to dispose of it within twelve months and that management is
actively seeking a buyer. The Board’s exposure draft ED 4
Disposal of Non-current Assets and Presentation of
Discontinued Operations proposed to measure and present
assets held for sale in a consistent manner irrespective of
whether they are held by an investor or in a subsidiary.
Therefore, ED 4 proposed to eliminate the exemption from
consolidation when control is intended to be temporary and
it contained a draft consequential amendment to IAS 27 to
achieve this.*

Severe long-term restrictions impairing ability to transfer funds

to the parent
BC20 The Board decided to remove the exclusion of a subsidiary from
consolidation when there are severe long-term restrictions
that impair a subsidiary’s ability to transfer funds to the
parent. It did so because such circumstances may not preclude
control. The Board decided that a parent, when assessing its
ability to control a subsidiary, should consider restrictions
on the transfer of funds from the subsidiary to the parent.
In themselves, such restrictions do not preclude control.

*
In March 2004, the Board issued IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations. IFRS 5 removed this scope exclusion and
eliminated the exemption from consolidation when control is intended to be
temporary. For further discussion see the Basis for Conclusions on IFRS
5.

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Venture capital organisations, private equity entities and

similar organisations
BC21 The 2002 exposure draft of IAS 27 proposed to clarify that a
subsidiary should not be excluded from consolidation simply
because the entity is a venture capital organisation, mutual
fund, unit trust or similar entity. Some respondents from
the private equity industry disagreed with this proposed
clarification. They argued that private equity entities
should not be required to consolidate the investments they
control in accordance with the requirements in IAS 27. They
argued that they should measure those investments at fair
value. Those respondents raised varying arguments—some
based on whether control is exercised, some on the length of
time that should be provided before consolidation is
required, and some on whether consolidation was an
appropriate basis for private equity entities or the type of
investments they make.
BC22 Some respondents also noted that the Board decided to
exclude venture capital organisations and similar entities
from the scope of IASs 28 and 31 when investments in
associates or jointly controlled entities are measured at
fair value in accordance with IAS 39 Financial Instruments:
Recognition and Measurement. In the view of those
respondents, the Board was proposing that similar assets
should be accounted for in dissimilar ways.
BC23 The Board did not accept these arguments. The Board noted
that those issues are not specific to the private equity
industry. It confirmed that a subsidiary should not be
excluded from consolidation on the basis of the nature of
the controlling entity. Consolidation is based on the
parent’s ability to control the investee, which captures
both the power to control (ie the ability exists but it is
not exercised) and actual control (ie the ability is
exercised). Consolidation is triggered by control and
should not be affected by whether management intends to hold
an investment in an entity that it controls for the short
term.
BC24 The Board noted that the exception from the consolidation
principle in IAS 27 (as revised in 2000), when control of a
subsidiary is intended to be temporary, might have been
misread or interpreted loosely. Some respondents to the
exposure draft had interpreted ‘near future’ as covering a
period of up to five years. The Board decided to remove
these words and to restrict the exception to subsidiaries
acquired and held exclusively for disposal within twelve
months, providing that management is actively seeking a
buyer.
BC25 The Board did not agree that it should differentiate
between types of entity, or types of investment, when
applying a control model of consolidation. It also did not
agree that management intention should be a determinant of
control. Even if it had wished to make such
differentiations, the Board did not see how or why it would

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be meaningful to distinguish private equity investors from

other types of entities.
BC26 The Board believes that the diversity of the investment
portfolios of entities operating in the private equity
sector is not different from the diversification of
portfolios held by a conglomerate, which is an industrial
group made up of entities that often have diverse and
unrelated interests. The Board acknowledged that financial
information about an entity’s different types of products
and services and its operations in different geographical
areas—segment information—is relevant to assessing the risks
and returns of a diversified or multinational entity and may
not be determinable from the aggregated data presented in
the consolidated balance sheet.* The Board noted that IAS 14
Segment Reporting establishes principles for reporting
segment information by entities whose equity or debt
instruments are publicly traded, or any entity that
discloses segment information voluntarily.†
BC27 The Board concluded that for investments under the control
of private equity entities, users’ information needs are
best served by financial statements in which those
investments are consolidated, thus revealing the extent of
the operations of the entities they control. The Board
noted that a parent can either present information about the
fair value of those investments in the notes to the
consolidated financial statements or prepare separate
financial statements in addition to its consolidated
financial statements, presenting those investments at cost
or at fair value. By contrast, the Board decided that
information needs of users of financial statements would not
be well served if those controlling investments were
measured only at fair value. This would leave unreported
the assets and liabilities of a controlled entity. It is
conceivable that an investment in a large, highly geared
subsidiary would have only a small fair value. Reporting
that value alone would preclude a user from being able to
assess the financial position, results and cash flows of the
group.

Non-controlling interests (2003 revision and 2008 amendments)

BC28 The 2008 amendments to IAS 27 changed the term ‘minority
interest’ to ‘non-controlling interest’. The change in
terminology reflects the fact that the owner of a minority
interest in an entity might control that entity and,
conversely, that the owners of a majority interest might not
control the entity. ‘Non-controlling interest’ is a more
accurate description than ‘minority interest’ of the
interests of those owners who do not have a controlling

*
IAS 1 Presentation of Financial Statements (as revised in 2007) replaced
the term ‘balance sheet’ with ‘statement of financial position’.
†
In 2006 IAS 14 Segment Reporting was replaced by IFRS 8 Operating
Segments.

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interest in an entity.
BC29 Non-controlling interest is defined in IAS 27 as the equity
in a subsidiary not attributable, directly or indirectly, to
a parent. Paragraph 26 of IAS 27 (as revised in 2000)
required minority (non-controlling) interests to be
presented in the consolidated balance sheet separately from
liabilities and the equity of the shareholders of the
parent.
BC30 As part of the 2003 revision of IAS 27, the Board decided to
amend this requirement to require minority (non-
controlling) interests to be presented in the consolidated
balance sheet within equity, separately from the equity of
the shareholders of the parent. The Board concluded that a
minority (non-controlling) interest is not a liability of a
group because it does not meet the definition of a liability
in the Framework for the Preparation and Presentation of
Financial Statements.
BC31 Paragraph 49(b) of the Framework states that a liability is
a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow
from the entity of resources embodying economic benefits.
Paragraph 60 of the Framework further indicates that an
essential characteristic of a liability is that the entity
has a present obligation and that an obligation is a duty or
responsibility to act or perform in a particular way. The
Board noted that the existence of a minority (non-
controlling) interest in the net assets of a subsidiary does
not give rise to a present obligation of the group, the
settlement of which is expected to result in an outflow of
economic benefits from the group.
BC32 Rather, the Board noted that minority (non-controlling)
interests represent the residual interest in the net assets
of those subsidiaries held by some of the shareholders of
the subsidiaries within the group, and therefore meet the
Framework’s definition of equity. Paragraph 49(c) of the
Framework states that equity is the residual interest in the
assets of the entity after deducting all of its liabilities.

Attribution of losses (2008 amendments)

BC33 IAS 27 (as revised in 2003) stated that when losses
attributed to the minority (non-controlling) interests
exceed the minority’s interests in the subsidiary’s equity
the excess, and any further losses applicable to the
minority, is allocated against the majority interest except
to the extent that the minority has a binding obligation and
is able to make an additional investment to cover the
losses.
BC34 The Board decided that this treatment was inconsistent with
its conclusion that non-controlling interests are part of
the equity of the group and proposed that an entity should
attribute total comprehensive income applicable to non-

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controlling interests to them, even if this results in the

non-controlling interests having a deficit balance.
BC35 If the parent enters into an arrangement that places it
under an obligation to the subsidiary or to the non-
controlling interests, the Board believes that the entity
should account for that arrangement separately and the
arrangement should not affect the way the entity attributes
comprehensive income to the controlling and non-controlling
interests.
BC36 Some respondents to the 2005 exposure draft agreed with the
proposal, noting that non-controlling interests share
proportionately in the risks and rewards of the investment
in the subsidiary and that the proposal is consistent with
the classification of non-controlling interests as equity.
BC37 Other respondents disagreed with the proposal, often on the
grounds that controlling and non-controlling interests have
different characteristics and should not be treated the same
way. Those respondents argued that there was no need to
change the guidance in IAS 27 (as revised in 2003) (ie that
an entity should allocate excess losses to the controlling
interest unless the non-controlling interests have a binding
obligation and are able to make an additional investment to
cover the losses). The reasons offered by those respondents
were:
(a) The non-controlling interests are not compelled to cover
the deficit (unless they have otherwise specifically
agreed to do so) and it is reasonable to assume that,
should the subsidiary require additional capital in
order to continue operations, the non-controlling
interests would abandon their investments. In contrast,
respondents asserted that in practice the controlling
interest often has an implicit obligation to maintain
the subsidiary as a going concern.
(b) Often guarantees or other support arrangements by the
parent, without any effect on the way losses are
attributed to the controlling and non-controlling
interests, protect the non-controlling interests from
losses of the subsidiary in excess of equity.
Respondents believe that allocating those losses to the
parent and non-controlling interests and recognising
separately a guarantee would not reflect the underlying
economics, which are that only the parent absorbs the
losses of the subsidiary. In their view, it is
misleading for financial statements to imply that the
non-controlling interests have an obligation to make
additional investments.
(c) Recognising guarantees separately is contrary to the
principle of the non-recognition of transactions between
owners.
(d) Loss allocation should take into account legal,
regulatory or contractual constraints, some of which may
prevent entities from recognising negative non-

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controlling interests, especially for regulated

businesses (eg banks and insurers).
BC38 The Board considered these arguments but observed that,
although it is true that non-controlling interests have no
further obligation to contribute assets to the subsidiary,
neither does the parent. Non-controlling interests
participate proportionally in the risks and rewards of an
investment in the subsidiary.
BC39 Some respondents asked the Board to provide guidance on the
accounting for guarantees and similar arrangements between
the parent and the subsidiary or the non-controlling
interests. They also suggested that the Board should
require additional disclosures about inter-company
guarantees and the extent of deficits, if any, of non-
controlling interests.
BC40 The Board considered these requests but observed that this
is an issue that is wider than negative non-controlling
interests. Similarly, the parent is not necessarily
responsible for the liabilities of a subsidiary, and often
there are factors that restrict the ability of a parent
entity to move assets around in a group, which means that
the assets of the group are not necessarily freely available
to that entity. The Board decided that it would be more
appropriate to address comprehensively disclosures about
non-controlling interests.

Changes in ownership interests in subsidiaries

(2008 amendments)
BC41 The Board decided that after control of an entity is
obtained, changes in a parent’s ownership interest that do
not result in a loss of control are accounted for as equity
transactions (ie transactions with owners in their capacity
as owners). This means that no gain or loss from these
changes should be recognised in profit or loss. It also
means that no change in the carrying amounts of the
subsidiary’s assets (including goodwill) or liabilities
should be recognised as a result of such transactions.
BC42 The Board reached this conclusion because it believes that
the approach adopted in these amendments is consistent with
its previous decision that non-controlling interests are a
separate component of equity (see paragraphs BC29–BC32).
BC43 Some respondents agreed that non-controlling interests are
equity but stated that they should be treated as a special
class of equity. Other respondents disagreed with the
requirement because they believe that recognising transactions
with non-controlling interests as equity transactions means
that the Board has adopted an entity approach whereas the
respondents prefer a proprietary approach. The Board
disagreed with this characterisation of the accounting
treatment, noting that the accounting proposed is a
consequence of classifying non-controlling interests as

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equity. The Board did not consider comprehensively the entity

and proprietary approaches as part of the amendments to IAS 27
in 2008.
BC44 Many respondents to the 2005 exposure draft suggested
alternative approaches for the accounting for changes in
controlling ownership interests. The most commonly
suggested alternative would result in increases in
controlling ownership interests giving rise to the
recognition of additional goodwill, measured as the excess
of the purchase consideration over the carrying amount of
the separately identified assets in the subsidiary
attributable to the additional interest acquired.
BC45 Some respondents suggested that when an entity reduces its
ownership interest in a subsidiary, without losing control,
it should recognise a gain or loss attributable to the
controlling interest. They would measure that gain or loss
as the difference between the consideration received and the
proportion of the carrying amount of the subsidiary’s assets
(including recognised goodwill) attributable to the ownership
interest being disposed of. Respondents supporting this
alternative believed that it would provide relevant
information about the gains and losses attributable to the
controlling interest arising on the partial disposal of
ownership interests in subsidiaries.
BC46 The Board rejected this alternative. Recognising a change
in any of the assets of the business, including goodwill, is
inconsistent with the Board’s decision in IFRS 3 (as revised
in 2008) that obtaining control in a business combination is
a significant economic event. That event causes the initial
recognition and measurement of all the assets acquired and
liabilities assumed in the business combination. Subsequent
transactions with owners should not affect the measurement
of those assets and liabilities.
BC47 The parent already controls the assets of the business,
although it must share the income from those assets with the
non-controlling interests. By acquiring the non-controlling
interests the parent is obtaining the rights to some, or
all, of the income to which the non-controlling interests
previously had rights. Generally, the wealth-generating
ability of those assets is unaffected by the acquisition of
the non-controlling interests. That is to say, the parent
is not investing in more or new assets. It is acquiring
more rights to the income from the assets it already
controls.
BC48 By acquiring some, or all, of the non-controlling interests
the parent will be allocated a greater proportion of the
profits or losses of the subsidiary in periods after the
additional interests are acquired. The adjustment to the
controlling interest will be equal to the unrecognised share
of the value changes that the parent will be allocated when
those value changes are recognised by the subsidiary.
Failure to make that adjustment will cause the controlling
interest to be overstated.

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BC49 The Board noted that accounting for changes in controlling

ownership interests as equity transactions, as well as
ensuring that the income of the group and the reported
controlling interests are faithfully represented, is less
complex than the other alternatives considered.
BC50 Some respondents disagreed with the proposal because they
were concerned about the effect on reported equity of the
subsequent acquisition of non-controlling interests by the
parent. Those respondents seemed to be particularly
concerned about the effect on the reported leverage of an
entity that acquires non-controlling interests and whether
this might, for example, cause those entities to have to
renegotiate loan agreements.
BC51 The Board observed that all acquisitions of an entity’s
equity reduce the entity’s equity, regardless of whether it
is an acquisition of the parent’s ordinary or preference
shares or non-controlling interests. Hence, the treatment
of a subsequent acquisition of non-controlling interests is
consistent with the general accounting for the acquisition
by an entity of instruments classified as equity.
BC52 The Board understands the importance of providing owners of
the parent with information about the total changes in their
reported equity. Therefore, the Board decided to require
entities to present in a separate schedule 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.

Loss of control (2008 amendments)

BC53 A parent loses control of a subsidiary when it loses the
power to govern the financial and operating policies of an
investee so as to obtain benefit from its activities. Loss
of control can result from the sale of an ownership interest
or by other means, such as when a subsidiary issues new
ownership interests to third parties. Loss of control can
also occur in the absence of a transaction. It may, for
example, occur on the expiry of an agreement that previously
allowed an entity to control a subsidiary.
BC54 On loss of control, the parent-subsidiary relationship
ceases to exist. The parent no longer controls the
subsidiary’s individual assets and liabilities. Therefore,
the parent derecognises the individual assets, liabilities
and equity related to that subsidiary. Equity includes any
non-controlling interests as well as amounts previously
recognised in other comprehensive income in relation to, for
example, available-for-sale financial instruments and
foreign currency translation.
BC55 The Board decided that any investment the parent has in the
former subsidiary after control is lost should be measured
at fair value at the date that control is lost and that any
resulting gain or loss should be recognised in profit or

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loss. Some respondents disagreed with that decision. Those

respondents asserted that the principles for revenue and
gain recognition in the Framework would not be satisfied for
the retained interest. The Board disagreed with those
respondents. Measuring the investment at fair value
reflects the Board’s view that the loss of control of a
subsidiary is a significant economic event. The parent-
subsidiary relationship ceases to exist and an investor-
investee relationship begins that differs significantly from
the former parent-subsidiary relationship. Therefore, the
new investor-investee relationship is recognised and
measured initially at the date when control is lost.
BC56 The Board decided that the loss of control of a subsidiary
is, from the group’s perspective, the loss of control over
some of the group’s individual assets and liabilities.
Accordingly, the general requirements in IFRSs should be
applied in accounting for the derecognition from the group’s
financial statements of the subsidiary’s assets and
liabilities. If a gain or loss previously recognised in
other comprehensive income would be reclassified to profit
or loss on the separate disposal of those assets and
liabilities, the parent reclassifies the gain or loss from
equity to profit or loss on the indirect disposal of those
assets and liabilities through loss of control of a
subsidiary. For example, if a subsidiary sells one of its
available-for-sale financial assets in a separate
transaction, a gain or loss previously recognised in other
comprehensive income would be reclassified to profit or
loss. Similarly, on the loss of control of a subsidiary,
the entire gain or loss attributed to the parent on that
former subsidiary’s available-for-sale financial assets
previously recognised in other comprehensive income would be
reclassified to profit or loss.
BC57 The Board also discussed the accounting when an entity
transfers its shares in a subsidiary to its own shareholders
with the result that the entity loses control of the
subsidiary (commonly referred to as a spin-off). The
International Financial Reporting Interpretations Committee
had previously discussed this matter, but decided not to
take it on to its agenda while the business combinations
project was in progress. The Board observed that the issue
is outside the scope of the business combinations project.
Therefore, the Board decided not to address the measurement
basis of distributions to owners in the amendments to IAS
27.

Multiple arrangements
BC58 The Board considered whether its decision that a gain or
loss on the disposal of a subsidiary should be recognised
only when that disposal results in a loss of control could
give rise to opportunities to structure transactions to
achieve a particular accounting outcome. For example, would
an entity be motivated to structure a transaction or

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arrangement as multiple steps to maximise gains or minimise

losses if an entity was planning to dispose of its
controlling interest in a subsidiary? Consider the
following example. Entity P controls 70 per cent of entity
S. P intends to sell all of its 70 per cent controlling
interest in S. P could initially sell 19 per cent of its
ownership interest in S without loss of control and then,
soon afterwards, sell the remaining 51 per cent and lose
control. Alternatively, P could sell all of its 70 per cent
interest in S in one transaction. In the first case, any
difference between the amount by which the non-controlling
interests are adjusted and the fair value of the
consideration received on the sale of the 19 per cent
interest would be recognised directly in equity, whereas the
gain or loss from the sale of the remaining 51 per cent
interest would be recognised in profit or loss. In the
second case, a gain or loss on the sale of the whole 70 per
cent interest would be recognised in profit or loss.
BC59 The Board noted that the opportunity to conceal losses
through structuring would be reduced by the requirements of
IAS 36 and IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations. Paragraph 12 of IAS 36 includes
significant changes in how an entity uses or expects to use
an asset as one of the indicators that the asset might be
impaired.
BC60 Once an asset meets the criteria to be classified as held
for sale (or is included in a disposal group that is
classified as held for sale), it is excluded from the scope
of IAS 36 and is accounted for in accordance with IFRS 5.
In accordance with paragraph 20 of IFRS 5 ‘an entity shall
recognise an impairment loss for any initial or subsequent
write-down of the asset (or disposal group) to fair value
less costs to sell …’. Therefore, if appropriate, an
impairment loss would be recognised for the goodwill and
non-current assets of a subsidiary that will be sold or
otherwise disposed of before control of the subsidiary is
lost. Accordingly, the Board concluded that the principal
risk is the minimising of gains, which entities are unlikely
to strive to do.
BC61 The Board decided that the possibility of such structuring
could be overcome by requiring entities to consider whether
multiple arrangements should be accounted for as a single
transaction to ensure that the principle of faithful
representation is adhered to. The Board believes that all
of the terms and conditions of the arrangements and their
economic effects should be considered in determining whether
multiple arrangements should be accounted for as a single
arrangement. Accordingly, the Board included indicators in
paragraph 33 to assist in identifying when multiple
arrangements that result in the loss of control of a
subsidiary should be treated as a single arrangement.
BC62 Some respondents disagreed with the indicators that were
provided in the exposure draft. Some respondents stated
that the need for guidance on when multiple arrangements

14 © IASCF
 IAS 27 BC

should be accounted for as a single arrangement indicates a

conceptual weakness in the accounting model developed in the
exposure draft. They also stated that such guidance would
be unnecessary under other alternatives for accounting for
decreases in ownership interests. The Board acknowledges
that guidance on multiple arrangements would be unnecessary
under some of the other accounting alternatives. However,
the Board believes that this does not mean that those models
are conceptually superior.
BC63 Some respondents suggested that IAS 27 should include
examples rather than indicators for when multiple
transactions should be treated as a single transaction or
arrangement, but that those examples should not be
considered a complete list. The Board considered that
suggestion, but decided to affirm the indicators that were
in the exposure draft. The Board believed that the
indicators could be applied to a variety of situations and
are preferable to providing what could be an endless list of
examples to try to capture every possible arrangement.

Loss of significant influence or joint control

BC64 The Board observed that the loss of control of a subsidiary,
the loss of significant influence over an associate and the
loss of joint control over a jointly controlled entity are
economically similar events; thus they should be accounted
for similarly. The loss of control as well as the loss of
significant influence or joint control represents a
significant economic event that changes the nature of an
investment. Therefore, the Board concluded that the
accounting guidance on the loss of control of a subsidiary
should be extended to events or transactions in which an
investor loses significant influence over an associate or
joint control over a jointly controlled entity. Thus, the
investor’s investment after significant influence or joint
control is lost should be recognised and measured initially
at fair value and the amount of any resulting gain or loss
should be recognised in profit or loss. Therefore, the
Board decided to amend IAS 21 The Effects of Changes in
Foreign Exchange Rates, IAS 28 and IAS 31, accordingly. The
FASB considered whether to address that same issue as part
of this project. The FASB concluded that the accounting for
investments that no longer qualify for equity method
accounting was outside the scope of the project.

Measurement of investments in subsidiaries,

jointly controlled entities and associates in separate financial
statements (2003 revision and 2008 amendments)
BC65 Paragraph 29 of IAS 27 (as revised in 2000) permitted
investments in subsidiaries to be measured in any one of
three ways in a parent’s separate financial statements.
These were cost, the equity method, or as available-for-sale
financial assets in accordance with IAS 39. Paragraph 12 of

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IAS 27 BC

IAS 28 (as revised in 2000) permitted the same choices for

investments in associates in separate financial statements,
and paragraph 38 of IAS 31 (as revised in 2000) mentioned
that IAS 31 did not indicate a preference for any particular
treatment for accounting for interests in jointly controlled
entities in a venturer’s separate financial statements. The
Board decided to require use of cost or IAS 39 for all
investments included in separate financial statements.
BC66 Although the equity method would provide users with some
profit and loss information similar to that obtained from
consolidation, the Board noted that such information is
reflected in the investor’s economic entity financial
statements and does not need to be provided to the users of
its separate financial statements. For separate statements,
the focus is upon the performance of the assets as
investments. The Board concluded that separate financial
statements prepared using either the fair value method in
accordance with IAS 39 or the cost method would be relevant.
Using the fair value method in accordance with IAS 39 would
provide a measure of the economic value of the investments.
Using the cost method can result in relevant information,
depending on the purpose of preparing the separate financial
statements. For example, they may be needed only by
particular parties to determine the dividend income from
subsidiaries.
BC66A As part of its annual improvements project begun in 2007,
the Board identified an apparent inconsistency with IFRS 5.
The inconsistency relates to the accounting by a parent in
its separate financial statements when investments it
accounts for in accordance with IAS 39 are classified as held
for sale in accordance with IFRS 5. Paragraph 38 requires an
entity that prepares separate financial statements to
account for such investments that are classified as held for
sale (or included in a disposal group that is classified as
held for sale) in accordance with IFRS 5. However, financial
assets that an entity accounts for in accordance with IAS 39
are excluded from IFRS 5’s measurement requirements.
BC66B Paragraph BC13 of the Basis for Conclusions on IFRS 5
explains that the Board decided that non-current assets
should be excluded from the measurement scope of IFRS 5 only
‘if (i) they are already carried at fair value with changes
in fair value recognised in profit or loss or (ii) there
would be difficulties in determining their fair value less
costs to sell.’ The Board acknowledged in the Basis for
Conclusions on IFRS 5 that not all financial assets within
the scope of IAS 39 are recognised at fair value with
changes in fair value recognised in profit or loss, but it
did not want to make any further changes to the accounting
for financial assets at that time.
BC66C Therefore, the Board amended paragraph 38 by Improvements to
IFRSs issued in May 2008 to align the accounting in separate
financial statements for those investments that are
accounted for in accordance with IAS 39 with the measurement
exclusion that IFRS 5 provides for other assets that are

16 © IASCF
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accounted for in accordance with IAS 39 before

classification as held for sale. Thus, an entity should
continue to account for such investments in accordance with
IAS 39 when they meet the held for sale criteria in IFRS 5.

Dividend received from a subsidiary, jointly controlled entity or

associate
BC66D Before Cost of an Investment in a Subsidiary, Jointly
Controlled Entity or Associate was issued in May 2008, IAS
27 described a ‘cost method’. This required an entity to
recognise distributions as income only if they came from
post-acquisition retained earnings. Distributions received
in excess of such profits were regarded as a recovery of
investment and were recognised as a reduction in the cost of
the investment. To apply that method retrospectively upon
first-time adoption of IFRSs in its separate financial
statements, an investor would need to know the subsidiary’s
pre-acquisition retained earnings in accordance with IFRSs.
BC66E Restating pre-acquisition retained earnings would be a task
tantamount to restating the business combination (for which
IFRS 1 First-time Adoption of International Financial
Reporting Standards provides an exemption in Appendix B).* It
might involve subjective use of hindsight, which would
diminish the relevance and reliability of the information.
In some cases, the restatement would be time-consuming and
difficult. In other cases, it would be impossible (because
it would involve making judgements about the fair values of
the assets and liabilities of a subsidiary at the
acquisition date).
BC66F Therefore, in Cost of an Investment in a Subsidiary, an
exposure draft of proposed amendments to IFRS 1 (published
in January 2007), the Board proposed to give first-time
adopters an exemption from restating the retained earnings
of the subsidiary at the date of acquisition for the purpose
of applying the cost method.
BC66G In considering the responses to that exposure draft, the
Board observed that the principle underpinning the cost
method is that a return of an investment should be deducted
from the carrying amount of the investment. However, the
wording in the previous version of IAS 27 created a problem
in some jurisdictions because it made specific reference to
retained earnings as the means of making that assessment.
The Board determined that the best way to resolve this issue
was to delete the definition of the cost method.
BC66H In removing the definition of the cost method, the Board
concluded that an investor should recognise a dividend from
a subsidiary, jointly controlled entity or associate as
income in its separate financial statements. Consequently,

*
As a result of the revision of IFRS 1 First-time Adoption of
International Financial Reporting Standards in November 2008, Appendix B
became Appendix C.

© IASCF 17
IAS 27 BC

the requirement to separate the retained earnings of an

entity into pre-acquisition and post-acquisition components
as a method for assessing whether a dividend is a recovery
of its associated investment has been removed from IFRSs.
BC66I To reduce the risk that removing the definition of the cost
method would lead to investments in subsidiaries, jointly
controlled entities and associates being overstated in the
separate financial statements of the investor, the Board
proposed that the related investment should be tested for
impairment in accordance with IAS 36.
BC66J The Board published its revised proposals in Cost of an
Investment in a Subsidiary, Jointly Controlled Entity or
Associate, an exposure draft of proposed amendments to IFRS
1 and IAS 27, in December 2007. Respondents generally
supported the proposed amendments to IAS 27, except for the
proposal to require impairment testing of the related
investment when an investor recognises a dividend. In the
light of the comments received, the Board revised its
proposal and identified specific indicators of impairment.
This was done to narrow the circumstances under which
impairment testing of the related investment would be
required when an investor recognises a dividend (see
paragraph 12(h) of IAS 36). The Board included the
amendments in Cost of an Investment in a Subsidiary, Jointly
Controlled Entity or Associate issued in May 2008.

Measurement of cost in the separate financial statements of a

new parent
BC66K In 2007 the Board received enquiries about the application
of paragraph 38(a) when a parent reorganises the structure
of its group by establishing a new entity as its parent.
The new parent obtains control of the original parent by
issuing equity instruments in exchange for existing equity
instruments of the original parent.
BC66L In this type of reorganisation, the assets and liabilities
of the new group and the original group are the same
immediately before and after the reorganisation. In
addition, the owners of the original parent have the same
relative and absolute interests in the net assets of the new
group immediately after the reorganisation as they had in
the net assets of the original group before the
reorganisation. Finally, this type of reorganisation
involves an existing entity and its shareholders agreeing to
create a new parent between them. In contrast, many
transactions or events that result in a parent-subsidiary
relationship are initiated by a parent over an entity that
will be positioned below it in the structure of the group.
BC66M Therefore, the Board decided that in applying paragraph
38(a) in the limited circumstances in which a parent
establishes a new parent in this particular manner, the new
parent should measure the cost of its investment in the
original parent at the carrying amount of its share of the

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equity items shown in the separate financial statements of

the original parent at the date of the reorganisation. In
December 2007 the Board published an exposure draft
proposing to amend IAS 27 to add a paragraph with that
requirement.
BC66N In response to comments received from respondents to that
exposure draft, the Board modified the drafting of the
amendment (paragraphs 38B and 38C of the Standard) to
clarify that it applies to the following types of
reorganisations when they satisfy the criteria specified in
the amendment:
(a) reorganisations in which the new parent does not acquire
all of the equity instruments of the original parent.
For example, a new parent might issue equity instruments
in exchange for ordinary shares of the original parent,
but not acquire the preference shares of the original
parent. In addition, a new parent might obtain control
of the original parent, but not acquire all of the
ordinary shares of the original parent.
(b) the establishment of an intermediate parent within a
group, as well as the establishment of a new ultimate
parent of a group.
(c) reorganisations in which an entity that is not a parent
establishes a new entity as its parent.
BC66O In addition, the Board clarified that the amendment focuses
on the measurement of one asset—the new parent’s investment
in the original parent in the new parent’s separate
financial statements. The amendment does not apply to the
measurement of any other assets or liabilities in the
separate financial statements of either the original parent
or the new parent or in the consolidated financial
statements.
BC66P The Board included the amendment in Cost of an Investment in
a Subsidiary, Jointly Controlled Entity or Associate issued
in May 2008.
BC66Q The Board did not consider the accounting for other types of
reorganisations or for common control transactions more
broadly. Accordingly, paragraphs 38B and 38C apply only
when the criteria in those paragraphs are satisfied.
Therefore, the Board expects that entities would continue to
account for transactions that do not satisfy the criteria in
paragraphs 38B and 38C in accordance with their accounting
policies for such transactions. The Board plans to consider
the definition of common control and the accounting for
business combinations under common control in its project on
common control transactions.

Disclosure (2008 amendments)

BC67 In considering the 2008 amendments to IAS 27 the Board
discussed whether any additional disclosures were necessary.

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IAS 27 BC

The Board decided that the amount of any gain or loss

arising on the loss of control of a subsidiary, including
the portion of the 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 the line item in
the statement of comprehensive income in which the gains or
losses are recognised should be disclosed. This disclosure
will provide information about the effect of the loss of
control of a subsidiary on the financial position at the end
of, and performance for, the reporting period.
BC68 In its deliberations in the second phase of the business
combinations project, the FASB decided to require entities
with one or more partially-owned subsidiaries to disclose in
the notes to the consolidated financial statements a
schedule showing the effects on the controlling interest’s
equity of changes in a parent’s ownership interest in a
subsidiary that do not result in a loss of control.
BC69 In the 2005 exposure draft, the Board did not propose to
require this disclosure. The Board noted that IFRSs require
this information to be provided in the statement of changes
in equity or in the notes to the financial statements. This
is because IAS 1 Presentation of Financial Statements
requires an entity to present, within the statement of
changes in equity, a reconciliation between the carrying
amount of each component of equity at the beginning and end
of the period, disclosing separately each change.
BC70 Many respondents to the 2005 exposure draft requested more
prominent disclosure of the effects of transactions with
non-controlling interests on the equity of the owners of the
parent. Therefore, the Board decided to converge with the
FASB’s disclosure requirement and to require that if a
parent has equity transactions with non-controlling
interests, it should disclose in a separate schedule the
effects of those transactions on the equity of the owners of
the parent.
BC71 The Board understands that some users will be interested in
information pertaining only to the owners of the parent.
The Board expects that the presentation and disclosure
requirements of IAS 27, as revised, will meet their
information needs.

Transitional provisions (2008 amendments)

BC72 To improve the comparability of financial information across
entities, amendments to IFRSs are usually applied
retrospectively. Therefore, the Board proposed in its 2005
exposure draft to require retrospective application of the
amendments to IAS 27, on the basis that the benefits of
retrospective application outweigh the costs. However, in
the 2005 exposure draft the Board identified two
circumstances in which it concluded that retrospective
application would be impracticable:

20 © IASCF
 IAS 27 BC

(a) accounting for increases in a parent’s ownership

interest in a subsidiary that occurred before the
effective date of the amendments. Therefore, the
accounting for any previous increase in a parent’s
ownership interest in a subsidiary before the effective
date of the amendments should not be adjusted.
(b) accounting for a parent’s investment in a former
subsidiary over which control was lost before the
effective date of the amendments. Therefore, the
carrying amount of any investment in a former subsidiary
should not be adjusted to its fair value on the date
when control was lost. In addition, an entity should
not recalculate any gain or loss on loss of control of a
subsidiary if the loss of control occurred before the
effective date of the amendments.
BC73 The Board concluded that the implementation difficulties and
costs associated with applying the amendments
retrospectively in these circumstances outweigh the benefit
of improved comparability of financial information.
Therefore, the Board decided to require prospective
application. In addition, the Board concluded that
identifying those provisions for which retrospective
application of the amendments would be impracticable, and
thus prospective application would be required, would reduce
implementation costs and result in greater comparability
between entities.
BC74 Some respondents were concerned that the transitional
provisions were different for increases and decreases in
ownership interests. They argued that accounting for
decreases in non-controlling interests retrospectively
imposes compliance costs that are not justifiable, mainly
because the requirement to account for increases
prospectively reduces comparability anyway. The Board
accepted those arguments and decided that prospective
application would be required for all changes in ownership
interests. The revised transitional provisions mean that
increases and decreases in ownership interests will be
treated symmetrically and that recasting of financial
statements is limited to disclosure and presentation. The
recognition and measurement of previous transactions will
not be changed upon transition.
BC75 In response to practical concerns raised by respondents, the
Board also decided to require prospective application of the
requirement to allocate losses in excess of the non-
controlling interests in the equity of a subsidiary to the
non-controlling interests, even if that would result in the
non-controlling interests being reported as a deficit.

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IAS 27 BC

Dissenting opinions
Dissent of Tatsumi Yamada from IAS 27 (as revised in 2003)
DO1 Mr Yamada dissents from this Standard because he believes
that the change in classification of minority interests in
the consolidated balance sheet, that is to say, the
requirement that it be shown as equity, should not be made
as part of the Improvements project. He agrees that
minority interests do not meet the definition of a liability
under the Framework for the Preparation and Presentation of
Financial Statements, as stated in paragraph BC31 of the
Basis for Conclusions, and that the current requirement, for
minority interests to be presented separately from
liabilities and the parent shareholders’ equity, is not
desirable. However, he does not believe that this
requirement should be altered at this stage. He believes
that before making the change in classification, which will
have a wide variety of impacts on current consolidation
practices, various issues related to this change need to be
considered comprehensively by the Board. These include
consideration of the objectives of consolidated financial
statements and the accounting procedures that should flow
from those objectives. Even though the Board concluded as
noted in paragraph BC27, he believes that the decision
related to the classification of minority interests should
not be made until such a comprehensive consideration of
recognition and measurement is completed.*
DO2 Traditionally, there are two views of the objectives of
consolidated financial statements; they are implicit in the
parent company view and the economic entity view. Mr Yamada
believes that the objectives, that is to say, what
information should be provided and to whom, should be
considered by the Board before it makes its decision on the
classification of minority interests in IAS 27. He is of
the view that the Board is taking the economic entity view
without giving enough consideration to this fundamental
issue.
DO3 Step acquisitions are being discussed in the second phase of
the Business Combinations project, which is not yet
finalised at the time of finalising IAS 27 under the
Improvements project. When the ownership interest of the
parent increases, the Board has tentatively decided that the
difference between the consideration paid by the parent to
minority interests and the carrying value of the ownership
interests acquired by the parent is recognised as part of
equity, which is different from the current practice of
recognising a change in the amount of goodwill. If the
parent retains control of a subsidiary but its ownership
interest decreases, the difference between the consideration

*
Paragraph BC27 of IAS 27 (as revised in 2003) was deleted as part of the
2008 amendments to IAS 27. That paragraph stated:

22 © IASCF
 IAS 27 BC

received by the parent and the carrying value of the

ownership interests transferred is also recognised as part
of equity, which is different from the current practice of
recognising a gain or a loss. Mr Yamada believes that the
results of this discussion are predetermined by the decision
related to the classification of minority interests as
equity. The changes in accounting treatments are
fundamental and he believes that the decision on which of
the two views should govern the consolidated financial
statements should be taken only after careful consideration
of the ramifications. He believes that the amendment of IAS
27 relating to the classification of minority interests
should not be made before completion of the second phase of
the Business Combinations project.

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IAS 27 BC

Dissent of Philippe Danjou, Jan Engström, Robert P Garnett,

Gilbert Gèlard and Tatsumi Yamada from the amendments
to IAS 27 issued in January 2008 on the accounting for
non-controlling interests and the loss of control of a subsidiary
DO1 Messrs Danjou, Engström, Garnett, Gèlard and Yamada dissent
from the 2008 amendments to IAS 27.

Accounting for changes in ownership interests in a subsidiary

DO2 Messrs Danjou, Engström, Gèlard and Yamada do not agree that
acquisitions of non-controlling interests in a subsidiary by
the parent should be accounted for in full as equity
transactions.
DO3 Those Board members observe that the consideration paid for
an additional interest in a subsidiary will reflect the
additional interest’s share in:
(a) the carrying amount of the subsidiary’s net assets at
that date;
(b) additionally acquired goodwill; and
(c) unrecognised increases in the fair value of the
subsidiary’s net assets (including goodwill) since the
date when control was obtained.
DO4 Paragraphs 30 and 31 of the Standard require such a
transaction to be accounted for as an equity transaction, by
adjusting the relative interests of the parent and the non-
controlling interests. As a consequence, the additionally
acquired goodwill and any unrecognised increases in the fair
value of the subsidiary’s net assets would be deducted from
equity. Those Board members disagree that such accounting
faithfully represents the economics of such a transaction.
DO5 Those Board members believe that an increase in ownership
interests in a subsidiary is likely to provide additional
benefits to the parent. Although control has already been
obtained, a higher ownership interest might increase
synergies accruing to the parent, for example, by meeting
legal thresholds provided in company law, which would give
the parent an additional level of discretion over the
subsidiary. If the additional ownership interest has been
acquired in an arm’s length exchange transaction in which
knowledgeable, willing parties exchange equal values, these
additional benefits are reflected in the purchase price of
the additional ownership interest. Those Board members
believe that the acquisition of non-controlling interests by
the parent should give rise to the recognition of goodwill,
measured as the excess of the consideration transferred over
the carrying amount of the subsidiary’s net assets
attributable to the additional interest acquired. Those
Board members acknowledge that this amount also includes
unrecognised increases in the fair value of the subsidiary’s

24 © IASCF
 IAS 27 BC

net assets since the date when control was obtained.

However, on the basis of cost-benefit considerations, they
believe that it is a reasonable approximation of the
additionally acquired goodwill.
DO6 Messrs Danjou, Gèlard and Yamada agree that, in conformity
with the Framework for the Preparation and Presentation of
Financial Statements, non-controlling interests should be
presented within the group’s equity, because they are not
liabilities. However, they believe that until the debates
over the objectives of consolidated financial statements (ie
what information should be provided and to whom) and the
definition of the reporting entity have been settled at the
conceptual level, transactions between the parent and non-
controlling interests should not be accounted for in the
same manner as transactions in which the parent entity
acquires its own shares and reduces its equity. In their
view, non-controlling interests cannot be considered
equivalent to the ordinary ownership interests of the owners
of the parent. The owners of the parent and the holders of
non-controlling interests in a subsidiary do not share the
same risks and rewards in relation to the group’s operations
and net assets because ownership interests in a subsidiary
share only the risks and rewards associated with that
subsidiary.
DO7 In addition, Messrs Danjou and Gèlard observe that IFRS 3
Business Combinations (as revised in 2008) provides an
option to measure non-controlling interests in a business
combination as their proportionate share of the acquiree’s
net identifiable assets rather than at their fair value.
However, paragraph BC207 of the Basis for Conclusions on
IFRS 3 (as revised in 2008) states that accounting for the
non-controlling interests at fair value is conceptually
superior to this alternative measurement. This view implies
that the subsidiary’s portion of goodwill attributable to
the non-controlling interests at the date when control was
obtained is an asset at that date and there is no conceptual
reason for it no longer to be an asset at the time of any
subsequent acquisitions of non-controlling interests.
DO8 Mr Garnett disagrees with the treatment of changes in
controlling interests in subsidiaries after control is
established (paragraphs BC41–BC52 of the Basis for
Conclusions). He believes that it is important that the
consequences of such changes for the owners of the parent
entity are reported clearly in the financial statements.
DO9 Mr Garnett believes that the amendments to IAS 27 adopt the
economic entity approach that treats all equity interests in
the group as being homogeneous. Transactions between
controlling and non-controlling interests are regarded as
mere transfers within the total equity interest and no gain
or loss is recognised on such transactions. Mr Garnett
observes that the non-controlling interests represent equity
claims that are restricted to particular subsidiaries,
whereas the controlling interests are affected by the
performance of the entire group. The consolidated financial

© IASCF 25
IAS 27 BC

statements should therefore report performance from the

perspective of the controlling interest (a parent entity
perspective) in addition to the wider perspective provided
by the economic entity approach. This implies the
recognition of additional goodwill on purchases, and gains
or losses on disposals of the parent entity’s interest in a
subsidiary.
DO10 If, as Mr Garnett would prefer, the full goodwill method
were not used (see paragraphs DO7–DO10 of the dissenting
views on IFRS 3), the acquisition of an additional interest
in a subsidiary would give rise to the recognition of
additional purchased goodwill, measured as the excess of the
consideration transferred over the carrying amount of the
subsidiary’s net assets attributable to the additional
interest acquired.
DO11 Mr Garnett does not agree with the requirement in paragraph
31 of the Standard that, in respect of a partial disposal of
the parent’s ownership interest in a subsidiary that does
not result in a loss of control, the carrying amount of the
non-controlling interests should be adjusted to reflect the
change in the parent’s interest in the subsidiary’s net
assets. On the contrary, he believes that the carrying
amount of the non-controlling interests should be adjusted
by the fair value of the consideration paid by the non-
controlling interests to acquire that additional interest.
DO12 Mr Garnett also believes that it is important to provide the
owners of the parent entity with information about the
effects of a partial disposal of holdings in subsidiaries,
including the difference between the fair value of the
consideration received and the proportion of the carrying
amount of the subsidiary’s assets (including purchased
goodwill) attributable to the disposal.

Loss of control
DO13 Mr Garnett disagrees with the requirement in paragraph 34 of
the Standard that if a parent loses control of a subsidiary,
it measures any retained investment in the former subsidiary
at fair value and any difference between the carrying amount
of the retained investment and its fair value is recognised
in profit or loss, because the retained investment was not
part of the exchange. The loss of control of a subsidiary
is a significant economic event that warrants
deconsolidation. However, the retained investment has not
been sold. Under current IFRSs, gains and losses on cost
method, available-for-sale and equity method investments are
recognised in profit or loss only when the investment is
sold (other than impairment). Mr Garnett would have
recognised the effect of measuring the retained investment
at fair value as a separate component of other comprehensive
income instead of profit or loss.

26 © IASCF
 IAS 27 BC

Accounting for losses attributable to non-controlling interests

DO14 Mr Danjou disagrees with paragraph 28 of the Standard
according to which losses can be attributed without
limitation to the non-controlling interests even if this
results in the non-controlling interests having a deficit
balance.
DO15 In many circumstances, in the absence of any commitment or
binding obligation of the non-controlling interests to make
an additional investment to cover the excess losses of the
subsidiary, the continuation of the operations of a
subsidiary will be funded through the contribution of
additional capital by the parent and with the non-
controlling interests being diluted. In those
circumstances, the deficit balance attributable to the non-
controlling interests that would result from the amendment
in paragraph 28 does not present faithfully the equity of
the consolidating entity.
DO16 Mr Danjou believes that the Standard should therefore not
preclude the allocation against the parent equity of losses
that exceed the non-controlling interests in a consolidated
subsidiary when the facts and circumstances are as outlined
in paragraph DO15.

Dissent of Mary E Barth and Philippe Danjou from

Cost of an Investment in a Subsidiary, Jointly Controlled Entity or
Associate (amendments to IFRS 1 and IAS 27) issued in May 2008
DO1 Professor Barth and Mr Danjou voted against the publication
of Cost of an Investment in a Subsidiary, Jointly Controlled
Entity or Associate (Amendments to IFRS 1 First-time
Adoption of International Financial Reporting Standards and
IAS 27 Consolidated and Separate Financial Statements). The
reasons for their dissent are set out below.
DO2 These Board members disagree with the requirement in
paragraphs 38B and 38C of IAS 27 that when a reorganisation
satisfies the criteria specified in those paragraphs and the
resulting new parent accounts for its investment in the
original parent at cost in accordance with paragraph 38(a)
of IAS 27, the new parent must measure the cost at the
carrying amount of its share of the equity items shown in
the separate financial statements of the original parent at
the date of the reorganisation.
DO3 These Board members acknowledge that a new parent could
choose to apply paragraph 38(b) of IAS 27 and account for
its investment in the original parent in accordance with IAS
39 Financial Instruments: Recognition and Measurement.
However, the new parent then would be required to account
for the investment in accordance with IAS 39* in subsequent
periods and to account for all other investments in the same
category in accordance with IAS 39.*

© IASCF 27
IAS 27 BC

DO4 These Board members also acknowledge, as outlined in

paragraph BC66L of the Basis for Conclusions on IAS 27, that
this type of reorganisation is different from other types of
reorganisations in that the assets and liabilities of the
new group and the original group are the same immediately
before and after the reorganisation, as are the interests of
the owners of the original parent in the net assets of those
groups. Therefore, using the previous carrying amount to
measure the cost of the new parent’s investment in the
original parent might be appropriate on the basis that the
separate financial statements of the new parent would
reflect its position as part of a pre-existing group.
DO5 However, these Board members believe that it is
inappropriate to preclude a new parent from measuring the
cost of its investment in the original parent at the fair
value of the shares that it issues as part of the
reorganisation. Separate financial statements are prepared
to reflect the parent as a separate legal entity (ie not
considering that the entity might be part of a group).
Although such a reorganisation does not change the assets
and liabilities of the group and therefore should have no
accounting effect at the consolidated level, from the
perspective of the new parent as a separate legal entity,
its position has changed—it has issued shares and acquired
an investment that it did not have previously. Also, in
many jurisdictions, commercial law or corporate governance
regulations require entities to measure new shares that they
issue at the fair value of the consideration received for
the shares.
DO6 These Board members believe that the appropriate measurement
basis for the new parent’s cost of its investment in the
original parent depends on the Board’s view of separate
financial statements. The Board is or will be discussing
related issues in the reporting entity phase of its
Conceptual Framework project and in its project on common
control transactions. Accordingly, these Board members
believe that the Board should have permitted a new parent to
measure the cost of its investment in the original parent
either at the carrying amount of its share of the equity
items shown in the separate financial statements of the
original parent or at the fair value of the equity
instruments that it issues until the Board discusses the
related issues in its projects on reporting entity and
common control transactions.

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Guidance on implementing
IAS 27 Consolidated and Separate Financial Statements,
IAS 28 Investments in Associates and
IAS 31 Interests in Joint Ventures
This guidance accompanies IAS 27, IAS 28 and IAS 31, but is not
part of them.

Consideration of potential voting rights

Introduction
IG1 Paragraphs 14, 15 and 19 of IAS 27 Consolidated and Separate
Financial Statements (as amended in 2008) and paragraphs 8
and 9 of IAS 28 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 IAS 31 Interests in Joint
Ventures depends upon the definition of control, and because
that Standard is linked to IAS 28 for application of the
equity method, this guidance is also relevant to IAS 31.

Guidance
IG2 Paragraph 4 of IAS 27 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 IAS 28
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 IAS 31
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 (eg 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.

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IG3 Control and significant influence also arise in the

circumstances described in paragraph 13 of IAS 27 and
paragraphs 6 and 7 of IAS 28 respectively, which include
consideration of the relative ownership of voting rights.
IAS 31 depends on IAS 27 and IAS 28 and references to IAS 27
and IAS 28 from this point onwards should be read as being
relevant to IAS 31. 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 IAS 27 and paragraphs 6 and 7 of IAS 28 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 IAS 27 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 IAS 27 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 IAS 27, and the proportion allocated to an
investor that accounts for its investment using the equity
method in accordance with IAS 28, 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.

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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 IAS 39 Financial Instruments: Recognition and Measurement
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 IAS 27, IAS 28 and IAS 31 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 IAS 39. In all other
cases, instruments containing potential voting rights are
accounted for in accordance with IAS 39.

Illustrative examples
IG8 The five examples below each illustrate one aspect of a
potential voting right. In applying IAS 27, IAS 28 or IAS
31, 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 IAS 27, IAS 28 and IAS 31. 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
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 IAS 27, are considered and it
is determined that Entity A controls Entity C.
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

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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 IAS 27 and paragraphs 6 and 7 of IAS 28, 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 (eg 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 IAS 27 and paragraphs 6 and 7
of IAS 28 are also considered, and it is determined that
Entity A, not Entity B or C, controls Entity D.
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.

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The existence of the potential voting rights, as well as the

other factors described in paragraph 13 of IAS 27 and
paragraphs 6 and 7 of IAS 28, 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
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 IAS 27, 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.

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