Separate financial statements

Overview of guidance under IFRS

Under IFRS, separate financial statements are such, which are prepared in addition to the consolidated financial statements. An entity is not required to prepare separate financial statements, however when it has chosen to do so, it must comply with the requirements of IAS 27 Separate Financial Statements.

Separate financial statements could also be presented as the only financial statements of the company if the exemption from preparing consolidated financial statements is applied. Furthermore, investment entities which are required to apply the consolidation exemption for all of the subsidiaries, prepare separate financial statements.

Financial statements of an entity which does not have any subsidiaries, associates or joint ventures, are individual financial statements and not separate financial statements within the scope of IAS 27.

In separate financial statements, investments in subsidiaries, associates and joint ventures are accounted for either:

• At cost,
• In accordance with IFRS 9, or
• Using the equity method as described in IAS 28.

Accounting policy decisions are made for each investment category and the chosen policy must be applied consistently.

Cost method

Cost is defined in IFRS as “the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction”. In the separate financial statements, cost of investment in a subsidiary includes any transaction costs incurred, whereas transaction costs would be expensed in the consolidated financial statements.

Investments which are accounted for at cost, are not remeasured after the initial recognition, and are thus measured in the separate financial statements at the initial cost of the investment until it is de-recognised or has impaired.

IFRS 9 method

Under IFRS 9 Financial Instruments, equity investments in subsidiaries, joint ventures and associates are classified as financial assets measured at fair value through profit or loss. At initial recognition, an investor is also allowed to elect to classify such investments as financial assets measured at fair value through other comprehensive income.

If the fair value through profit or loss classification is used, all subsequent changes in the fair value of the investment will be recognised in profit or loss. In the case of classification as fair value through other comprehensive income, subsequent remeasurement effects will be reported in other comprehensive income and will not be reclassified to profit or loss upon disposal of investment, though they could be reclassified within equity.

Equity method

For investments accounted for using the equity method, an investor shall follow the guidance provided in IAS 28 Investments in Associates and Joint Ventures. Investments in subsidiaries, joint ventures, and associates are initially recognised at cost, including any directly attributable expenditure. The carrying amount of the investment is subsequently increased or decreased to account for the investor’s share of profit or loss of the investee. Losses are recognised only until the investment value is reduced to zero.

Dividend income

Dividends received from the investee that is accounted for in the investor’s separate financial statements either at cost or in accordance with IFRS 9, are recognised in profit or loss when the right to dividends has arisen.

Where the investor accounts for investments in subsidiaries, joint ventures, and associates in its separate financial statements using the equity method, dividends received are recognised as a reduction in the carrying value of the investment, and they would not impact profit or loss.

Illustrative example

Overview of guidance under the US GAAP

Under the US GAAP parent entities are allowed to prepare parent-entity financial statements if such need arises. However, only consolidated financial statements are primary financial statements of a parent and subsidiaries and parent-entity financial statements should not be used as an alternative.

Investments in subsidiaries

In the parent-entity financial statements, investments in subsidiaries are generally accounted for using the equity method as described in ASC 323 Investments — Equity Method and Joint Ventures. Investments are thus initially recognised at cost (i.e., the consideration transferred to obtain the investment) and subsequently adjusted for changes in ownership that do not result in a loss of control, subsidiary income or losses, the effects of elimination entries attributable to the controlling interest, intercompany dividends, and other items that result in changes to the net assets of the subsidiary.

Investments in non-controlled entities

For investments accounted for as financial assets or under the equity method in the consolidated financial statements, same basis should be used for accounting in the parent-entity financial statements. Carrying amounts of such investments should usually reconcile between consolidated financial statements and parent-company financial statements.