Financial Reporting Standard 127 Consolidated and Separate Financial Statements (FRS 127) replaces FRS 1272004 Consolidated Financial Statements and Investments in Subsidiaries and should be applied for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. The Standard also replaces SIC-33 Consolidation and Equity Methodâ€”Potential Voting Rights and Allocation of Ownership Interests. [Reason: MASB has not adopted SIC-33].
IASB's Reasons for Revising IAS 27
The Main Changes
The International Accounting Standards Board developed the revised IAS 27 as part of its project on Improvements to International Accounting Standards. 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 project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.
For IAS 27 the IASB's main objective was to reduce alternatives in accounting for subsidiaries in consolidated financial statements and in accounting for investments in the separate financial statements of a parent, venturer or investor. The IASB did not reconsider the fundamental approach to consolidation of subsidiaries contained in IAS 27.
The main changes from FRS 1272004 are described below.
The Standard applies to accounting for investments in subsidiaries, jointly controlled entities and associates in the separate financial statements of a parent, a venturer or investor. Therefore, the title of the Standard was amended as shown in paragraph IN1.
Exemptions from Consolidating Investments in Subsidiaries
The Standard modifies the exemption from preparing consolidated financial statements. Paragraph 8 in FRS 1272004 (now paragraph 10) was amended so that a parent need not present consolidated financial statements if:
the parent is itself a wholly-owned subsidiary, or the parent is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not preparing consolidated financial statements;
the parent's debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);
the parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and
the ultimate or any intermediate parent of the parent is incorporated in Malaysia and produces consolidated financial statements available for public use that comply with Financial Reporting Standards.
The Standard clarifies the requirements for a parent exempted from preparing consolidated financial statements when the parent elects, or is required by local regulations, to present separate financial statements (see paragraphs IN13 and IN14).
The Standard does not require consolidation of a subsidiary acquired when there is evidence that control is intended to be temporary. However, there must be evidence that the subsidiary is acquired with the intention to dispose of it within twelve months and that management is actively seeking a buyer. In addition, the words 'œin the near future' were replaced with the words 'œwithin twelve months'. When a subsidiary previously excluded from consolidation is not disposed of within twelve months it must be consolidated as from the acquisition date unless narrowly specified circumstances apply.*
FRS 5 Non-current Assets Held for Sale and Discontinued Operations removes this scope exclusion and now eliminates the exemption from consolidation when control is intended to be temporary. See FRS 5 'IASB's Basis for Conclusions for further discussion.
The Standard stipulates that the requirement to consolidate investments in subsidiaries applies to venture capital organisations, mutual funds, unit trusts and similar entities. This was added for clarification.
An entity is not permitted to exclude from consolidation an entity it continues to control simply because that entity is operating under severe long-term restrictions that significantly impair its ability to transfer funds to the parent. Control must be lost for exclusion to occur.
Potential voting rights
The Standard requires an entity to consider the existence and effect of potential voting rights currently exercisable or convertible when assessing whether it has the power to govern the financial and operating policies of another entity. This requirement was previously included in SIC-33, which has been superseded. [Reason: MASB has not adopted SIC-33].
The Standard requires an entity to use uniform accounting policies for reporting like transactions and other events in similar circumstances. FRS 1272004 provided an exception to this requirement when it was 'not practicable to use uniform accounting policies'.
This Standard requires an entity to present minority interests in the consolidated balance sheet within equity, separately from the parent shareholders' equity. Though FRS 1272004 precluded presentation of minority interests within liabilities, it did not require presentation within equity.
Separate Financial Statements
The Standard prescribes the accounting treatment for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by local regulations, to present separate financial statements. It requires these investments to be accounted for at cost or in accordance with FRS 139 Financial Instruments: Recognition and Measurement.
The Standard retains an alternative for accounting for these investments in an investor's separate financial statements.