There are actually two issues here:
- An argument that the Board merely discouraged the availment of the exception under paragraph 10 of IAS 27 to present consolidated financial statements. The availment should only be made in very rare circumstances, wherein it would ease up the burden of certain companies mandated by their respective applicable law to prepare separate financial statements in addition to the consolidated financial statements.
- The fact that you append the parent financial statements to the consolidated financial statements does not constitute the parent figures to be that of a separate financial statements.
In the Basis of Conclusion (BC) No.29, the Members of the Board of the IASB considered the following:
“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 investors 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.”
This basis of conclusion can be referred to in the provision of the standard in paragraph 41:
“When separate financial statements are prepared for a parent that, in accordance with paragraph 10, elects not to prepare consolidated financial statements, those separate financial statements shall disclose:(a) the fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and country of incorporation or residence of the entity whose consolidated financial statements that comply with International Financial Reporting Standards have been produced for public use; and the address where those consolidated financial statements are obtainable.”
The reason for me saying that the Board merely discouraged the availment set forth in paragraph 10 is because of Basis of Conclusion BC4 to BC6 as follows:
“Paragraph 7 of the previous version of IAS 27 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 statemens. The Board considered whether to withdraw or amend this exemption from the general requirement.
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.
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 of financial statements of a subsidiary often have, or can get access to, more information.”
Moreover, the fact that you are required under paragraph 9 of IAS 27 to present consolidated financial statements and you don’t have the option to present separate financial statements under paragraph 10, it is implicit that the company should record and account for its investment under the equity method of accounting. It’s not even an option to present separate financial statements. Thus, simply appending the parent company financial statements to the consolidated financial statements for comparative purposes does not render the parent column to be that of a separate financial statements. Again, in the first place, you don’t even have the option to present the separate statements. The parent company balances are merely there for additional information, for comparative purposes,and especially for income tax purposes. After all, you simply reflected what is actually in the books of the parent company, which accounted for its investment in subsidiaries using the equity method.
Now, another question arises….if all intermediate parents (i.e., parents with a common ultimate parent) chooses to avail of the exception set forth in paragraph 10, and accounts for its investment in subsidiaries and associates (IAS 28 ) under the cost method (IAS 27 par. 37), then does it mean that in the consolidated financial statements of the ultimate parent the scope of consolidation is limited only to the financial position and results of operations of the “IMMEDIATE” subsidiaries?
In my opinion, the answer is no. Because I believe that it will defeat the purpose of the standard to present the consolidated financial statements of an “ECONOMIC ENTITY” as a whole, which by coincidence is the same purpose of the Board in allowing the cost method under paragraph 37. That is why, by implication, although an intermediate parent opted to follow paragraph 10, it must still submit a report to the ultimate parent its books as if the investments in subsidiaries and associates were carried under the equity method for consolidation purposes.
You can now imagine how onerous this option can be to the intermediate parent, right? That’s why in my opinion it is discouraged by the Board; hence, by the standard.