HKFRS 12 - Disclosure of Interests in Other Entities

HKFRS 12 - Disclosure of Interests in Other Entities

1. INTRODUCTION AND OBJECTIVE

1.1 Purpose of HKFRS 12

HKFRS 12 *Disclosure of Interests in Other Entities* is a comprehensive disclosure standard that applies to entities that have an interest in:

Effective Date: Annual periods beginning on or after 1 January 2013. Earlier application is permitted.

1.2 Core Objective (Paragraph 1)

The objective of HKFRS 12 is to require an entity to disclose information that enables users of its financial statements to evaluate:

(a) The nature of, and risks associated with, its interests in other entities; and

(b) The effects of those interests on its financial position, financial performance and cash flows.

1.3 Meeting the Objective (Paragraph 2)

To meet the objective, an entity shall disclose:

(a) Significant judgements and assumptions made in determining:

(b) Information about its interests in:

1.4 Additional Disclosures (Paragraph 3)

If the disclosures required by HKFRS 12, together with disclosures required by other HKFRSs, do not meet the objective in paragraph 1, an entity shall disclose whatever additional information is necessary to meet that objective.

1.5 Level of Detail and Aggregation (Paragraph 4)

An entity shall consider:

Useful information must not be obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have different characteristics.

2. SCOPE (Paragraphs 5–6)

2.1 Entities Within Scope (Paragraph 5)

HKFRS 12 shall be applied by an entity that has an interest in any of the following:

2.2 Held for Sale Classification (Paragraph 5A)

Except as described in paragraph B17, the requirements apply to interests classified (or included in a disposal group classified) as held for sale or discontinued operations in accordance with HKFRS 5.

2.3 Entities Outside Scope (Paragraph 6)

HKFRS 12 does NOT apply to:

(a) Post-employment benefit plans or other long-term employee benefit plans to which HKAS 19 applies.

(b) An entity's separate financial statements to which HKAS 27 applies. However:

(c) An interest held by an entity that participates in, but does not have joint control of, a joint arrangement unless that interest results in significant influence or is an interest in a structured entity.

(d) An interest in another entity accounted for in accordance with HKFRS 9. However, an entity shall apply HKFRS 12:

3. SIGNIFICANT JUDGEMENTS AND ASSUMPTIONS (Paragraphs 7–9)

3.1 Disclosure Requirement (Paragraph 7)

An entity shall disclose information about significant judgements and assumptions made (and changes to those judgements and assumptions) in determining:

(a) That it has control of another entity (an investee) as described in HKFRS 10 paragraphs 5 and 6.

(b) That it has joint control of an arrangement or significant influence over another entity.

(c) The type of joint arrangement (joint operation or joint venture) when the arrangement has been structured through a separate vehicle.

3.2 Changes During the Period (Paragraph 8)

The significant judgements and assumptions disclosed include those made when changes in facts and circumstances cause the conclusion about control, joint control or significant influence to change during the reporting period.

3.3 Examples of Disclosures (Paragraph 9)

To comply with paragraph 7, an entity shall disclose significant judgements and assumptions made in determining that:

(a) It does NOT control another entity even though it holds more than half of the voting rights.

(b) It controls another entity even though it holds less than half of the voting rights.

(c) It is an agent or a principal (see HKFRS 10 paragraphs B58–B72).

(d) It does NOT have significant influence even though it holds 20% or more of the voting rights.

(e) It has significant influence even though it holds less than 20% of the voting rights.

4. INVESTMENT ENTITY STATUS (Paragraphs 9A–9B)

4.1 Determination of Investment Entity Status (Paragraph 9A)

When a parent determines that it is an investment entity in accordance with HKFRS 10 paragraph 27, the investment entity shall disclose:

4.2 Changes in Investment Entity Status (Paragraph 9B)

When an entity becomes, or ceases to be, an investment entity, it shall disclose:

Additionally, an entity that becomes an investment entity shall disclose the effect of the change of status on the financial statements for the period presented, including:

(a) The total fair value, as of the date of change of status, of the subsidiaries that cease to be consolidated.

(b) The total gain or loss, if any, calculated in accordance with HKFRS 10 paragraph B101.

(c) The line item(s) in profit or loss in which the gain or loss is recognised (if not presented separately).

5. INTERESTS IN SUBSIDIARIES (Paragraphs 10–19)

5.1 Overall Disclosure Objective (Paragraph 10)

An entity shall disclose information that enables users of its consolidated financial statements:

(a) To understand:

(b) To evaluate:

5.2 Different Reporting Periods (Paragraph 11)

When the financial statements of a subsidiary used in preparing consolidated financial statements are as of a date or for a period different from that of the consolidated financial statements, the entity shall disclose:

(a) The date of the end of the reporting period of that subsidiary's financial statements.

(b) The reason for using a different date or period.

5.3 Non-Controlling Interests (Paragraph 12)

For each subsidiary that has non-controlling interests that are material to the reporting entity, an entity shall disclose:

5.4 Significant Restrictions (Paragraph 13)

An entity shall disclose:

(a) Significant restrictions (e.g., statutory, contractual and regulatory restrictions) on its ability to access or use the assets and settle the liabilities of the group, such as:

(b) The nature and extent to which protective rights of non-controlling interests can significantly restrict the entity's ability to access or use assets and settle liabilities of the group.

(c) The carrying amounts in the consolidated financial statements of the assets and liabilities to which those restrictions apply.

5.5 Risks Associated with Consolidated Structured Entities (Paragraphs 14–17)

Paragraph 14: An entity shall disclose the terms of any contractual arrangements that could require the parent or its subsidiaries to provide financial support to a consolidated structured entity, including events or circumstances that could expose the reporting entity to a loss (e.g., liquidity arrangements or credit rating triggers).

Paragraph 15: If during the reporting period a parent or any of its subsidiaries has, without having a contractual obligation to do so, provided financial or other support to a consolidated structured entity, the entity shall disclose:

(a) The type and amount of support provided, including situations where the parent or its subsidiaries assisted the structured entity in obtaining financial support.

(b) The reasons for providing the support.

Paragraph 16: If during the reporting period a parent or any of its subsidiaries has, without having a contractual obligation to do so, provided financial or other support to a previously unconsolidated structured entity and that provision of support resulted in the entity controlling the structured entity, the entity shall disclose an explanation of the relevant factors in reaching that decision.

Paragraph 17: An entity shall disclose any current intentions to provide financial or other support to a consolidated structured entity, including intentions to assist the structured entity in obtaining financial support.

5.6 Changes in Ownership Interest Without Loss of Control (Paragraph 18)

An entity shall present a schedule that shows the effects on the equity attributable to owners of the parent of any changes in its ownership interest in a subsidiary that do not result in a loss of control.

5.7 Loss of Control (Paragraph 19)

An entity shall disclose the gain or loss, if any, calculated in accordance with HKFRS 10 paragraph 25, and:

(a) The portion of that gain or loss attributable to measuring any investment retained in the former subsidiary at its fair value at the date when control is lost.

(b) The line item(s) in profit or loss in which the gain or loss is recognised (if not presented separately).

6. INTERESTS IN UNCONSOLIDATED SUBSIDIARIES (INVESTMENT ENTITIES) (Paragraphs 19A–19G)

6.1 Disclosure of Exception to Consolidation (Paragraph 19A)

An investment entity that, in accordance with HKFRS 10, is required to apply the exception to consolidation and instead account for its investment in a subsidiary at fair value through profit or loss shall disclose that fact.

6.2 Information About Unconsolidated Subsidiaries (Paragraph 19B)

For each unconsolidated subsidiary, an investment entity shall disclose:

(a) The subsidiary's name.

(b) The principal place of business (and country of incorporation if different).

(c) The proportion of ownership interest held by the investment entity and, if different, the proportion of voting rights held.

6.3 Parent of Another Investment Entity (Paragraph 19C)

If an investment entity is the parent of another investment entity, the parent shall also provide the disclosures in 19B(a)–(c) for investments controlled by its investment entity subsidiary. The disclosure may be provided by including the financial statements of the subsidiary (or subsidiaries) that contain the above information.

6.4 Significant Restrictions and Commitments (Paragraph 19D)

An investment entity shall disclose:

(a) The nature and extent of any significant restrictions (e.g., from borrowing arrangements, regulatory requirements or contractual arrangements) on the ability of an unconsolidated subsidiary to transfer funds to the investment entity in the form of cash dividends or to repay loans or advances.

(b) Any current commitments or intentions to provide financial or other support to an unconsolidated subsidiary, including commitments or intentions to assist the subsidiary in obtaining financial support.

6.5 Non-Contractual Support Provided (Paragraph 19E)

If, during the reporting period, an investment entity or any of its subsidiaries has, without having a contractual obligation to do so, provided financial or other support to an unconsolidated subsidiary, the entity shall disclose:

(a) The type and amount of support provided to each unconsolidated subsidiary.

(b) The reasons for providing the support.

6.6 Contractual Arrangements Requiring Support (Paragraph 19F)

An investment entity shall disclose the terms of any contractual arrangements that could require the entity or its unconsolidated subsidiaries to provide financial support to an unconsolidated, controlled, structured entity, including events or circumstances that could expose the reporting entity to a loss.

6.7 Support Resulting in Control (Paragraph 19G)

If during the reporting period an investment entity or any of its unconsolidated subsidiaries has, without having a contractual obligation to do so, provided financial or other support to an unconsolidated, structured entity that the investment entity did not control, and if that provision of support resulted in the investment entity controlling the structured entity, the investment entity shall disclose an explanation of the relevant factors in reaching the decision to provide that support.

7. INTERESTS IN JOINT ARRANGEMENTS AND ASSOCIATES (Paragraphs 20–23)

7.1 Overall Disclosure Objective (Paragraph 20)

An entity shall disclose information that enables users of its financial statements to evaluate:

(a) The nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates (paragraphs 21 and 22).

(b) The nature of, and changes in, the risks associated with its interests in joint ventures and associates (paragraph 23).

7.2 Nature, Extent and Financial Effects (Paragraph 21)

For each joint arrangement and associate that is material to the reporting entity:

For each joint venture and associate that is material to the reporting entity:

(b)(i) Whether the investment is measured using the equity method or at fair value.

(b)(ii) Summarised financial information about the joint venture or associate as specified in paragraphs B12 and B13.

(b)(iii) If accounted for using the equity method, the fair value of the investment if there is a quoted market price.

For individually immaterial joint ventures and associates:

(c) Financial information as specified in paragraph B16 about investments in joint ventures and associates that are not individually material:

7.3 Investment Entity Exemption (Paragraph 21A)

An investment entity need not provide the disclosures required by paragraphs 21(b)–21(c).

7.4 Additional Disclosures (Paragraph 22)

An entity shall also disclose:

(a) The nature and extent of any significant restrictions on the ability of joint ventures or associates to transfer funds to the entity in the form of cash dividends, or to repay loans or advances made by the entity.

(b) When the financial statements of a joint venture or associate used in applying the equity method are as of a different date or period:

(c) The unrecognised share of losses of a joint venture or associate, both for the reporting period and cumulatively, if the entity has stopped recognising its share of losses when applying the equity method.

7.5 Risks Associated with Joint Ventures and Associates (Paragraph 23)

An entity shall disclose:

(a) Commitments relating to its joint ventures separately from the amount of other commitments as specified in paragraphs B18–B20.

(b) In accordance with HKAS 37, unless the probability of loss is remote, contingent liabilities incurred relating to its interests in joint ventures or associates (including its share of contingent liabilities incurred jointly with other investors), separately from the amount of other contingent liabilities.

8. INTERESTS IN UNCONSOLIDATED STRUCTURED ENTITIES (Paragraphs 24–31)

8.1 Overall Disclosure Objective (Paragraph 24)

An entity shall disclose information that enables users of its financial statements:

(a) To understand the nature and extent of its interests in unconsolidated structured entities (paragraphs 26–28).

(b) To evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities (paragraphs 29–31).

8.2 Previous Period Involvement (Paragraph 25)

The information required by paragraph 24(b) includes information about an entity's exposure to risk from involvement that it had with unconsolidated structured entities in previous periods (e.g., sponsoring the structured entity), even if the entity no longer has any contractual involvement with the structured entity at the reporting date.

8.3 Investment Entity Exemption (Paragraph 25A)

An investment entity need not provide the disclosures required by paragraph 24 for an unconsolidated structured entity that it controls and for which it presents the disclosures required by paragraphs 19A–19G.

8.4 Nature of Interests (Paragraph 26)

An entity shall disclose qualitative and quantitative information about its interests in unconsolidated structured entities, including, but not limited to:

8.5 Sponsored Structured Entities (Paragraph 27)

If an entity has sponsored an unconsolidated structured entity for which it does not provide information required by paragraph 29 (e.g., because it does not have an interest at the reporting date), the entity shall disclose:

(a) How it has determined which structured entities it has sponsored.

(b) Income from those structured entities during the reporting period, including a description of the types of income presented.

(c) The carrying amount (at the time of transfer) of all assets transferred to those structured entities during the reporting period.

8.6 Tabular Presentation (Paragraph 28)

An entity shall present the information in paragraph 27(b) and (c) in tabular format, unless another format is more appropriate, and classify its sponsoring activities into relevant categories.

8.7 Nature of Risks – Summary Disclosure (Paragraph 29)

An entity shall disclose in tabular format, unless another format is more appropriate, a summary of:

(a) The carrying amounts of the assets and liabilities recognised in its financial statements relating to its interests in unconsolidated structured entities.

(b) The line items in the statement of financial position in which those assets and liabilities are recognised.

(c) The amount that best represents the entity's maximum exposure to loss from its interests in unconsolidated structured entities, including how the maximum exposure to loss is determined. If an entity cannot quantify its maximum exposure to loss, it shall disclose that fact and the reasons.

(d) A comparison of the carrying amounts of the assets and liabilities relating to interests in unconsolidated structured entities and the entity's maximum exposure to loss from those entities.

8.8 Non-Contractual Support Provided (Paragraph 30)

If during the reporting period an entity has, without having a contractual obligation to do so, provided financial or other support to an unconsolidated structured entity in which it previously had or currently has an interest, the entity shall disclose:

(a) The type and amount of support provided, including situations where the entity assisted the structured entity in obtaining financial support.

(b) The reasons for providing the support.

8.9 Intentions to Provide Support (Paragraph 31)

An entity shall disclose any current intentions to provide financial or other support to an unconsolidated structured entity, including intentions to assist the structured entity in obtaining financial support.

9. DEFINED TERMS (Appendix A)

9.1 Income from a Structured Entity

For the purpose of HKFRS 12, income from a structured entity includes, but is not limited to:

9.2 Interest in Another Entity

An interest in another entity refers to contractual and non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity. An interest in another entity can be evidenced by, but is not limited to:

Important: An entity does NOT necessarily have an interest in another entity solely because of a typical customer-supplier relationship.

9.3 Structured Entity

An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.

9.4 Other Defined Terms (from other HKFRSs)

The following terms are defined in HKAS 27, HKAS 28, HKFRS 10 and HKFRS 11 and are used in HKFRS 12 with the meanings specified in those HKFRSs:

10. APPLICATION GUIDANCE (Appendix B)

10.1 Aggregation (Paragraphs B2–B6)

B2: An entity shall decide, in light of its circumstances:

A balance must be struck between burdening financial statements with excessive detail and obscuring information through too much aggregation.

B3: An entity may aggregate disclosures for interests in similar entities if aggregation is consistent with the disclosure objective and does not obscure the information provided. The entity shall disclose how it has aggregated its interests.

B4: An entity shall present information separately for interests in:

B5: In determining whether to aggregate, an entity shall consider quantitative and qualitative information about:

B6: Examples of aggregation levels within the classes of entities include:

10.2 Interests in Other Entities (Paragraphs B7–B9)

B7: An interest in another entity refers to contractual and non-contractual involvement that exposes the reporting entity to variability of returns from the performance of the other entity. Consideration of the purpose and design of the other entity may help when assessing whether an interest exists.

B8: A reporting entity is typically exposed to variability of returns by:

Example: A structured entity holds a loan portfolio and obtains a credit default swap from the reporting entity. The reporting entity has involvement that exposes it to variability of returns because the credit default swap absorbs variability of returns of the structured entity.

B9: Some instruments are designed to transfer risk from a reporting entity to another entity. These create variability of returns for the other entity but do not typically expose the reporting entity to variability of returns from the performance of the other entity.

Example: A structured entity issues credit-linked notes to investors and uses proceeds to invest in risk-free assets. The structured entity enters into a credit default swap with a swap counterparty. The swap counterparty does NOT have involvement that exposes it to variability of returns because the CDS transfers variability to the structured entity.

10.3 Summarised Financial Information (Paragraphs B10–B17)

For Subsidiaries with Material Non-Controlling Interests (B10):

For each subsidiary that has non-controlling interests material to the reporting entity, disclose:

(a) Dividends paid to non-controlling interests.

(b) Summarised financial information about assets, liabilities, profit or loss and cash flows of the subsidiary, which might include:

B11: The summarised financial information shall be the amounts before inter-company eliminations.

For Joint Ventures and Associates Material to the Reporting Entity (B12–B13):

B12: For each material joint venture and associate, disclose:

(a) Dividends received from the joint venture or associate.

(b) Summarised financial information including:

B13: In addition, for each material joint venture, disclose:

B14: The summarised financial information shall be the amounts included in the HKFRS financial statements of the joint venture or associate (not the entity's share). If the equity method is used:

B15: An entity may present summarised financial information on the basis of the joint venture's or associate's financial statements if:

For Individually Immaterial Joint Ventures and Associates (B16):

An entity shall disclose, in aggregate, the carrying amount of its interests in all individually immaterial joint ventures or associates accounted for using the equity method. Also disclose separately the aggregate amount of its share of:

Disclosures shall be provided separately for joint ventures and associates.

B17: When an interest is classified as held for sale under HKFRS 5, the entity is not required to disclose summarised financial information in accordance with paragraphs B10–B16.

10.4 Commitments for Joint Ventures (Paragraphs B18–B20)

B18: An entity shall disclose total commitments made but not recognised at the reporting date (including its share of commitments made jointly with other investors) relating to its interests in joint ventures. Commitments are those that may give rise to a future outflow of cash or other resources.

B19: Unrecognised commitments include:

(a) Unrecognised commitments to contribute funding or resources as a result of:

(b) Unrecognised commitments to acquire another party's ownership interest in a joint venture if a particular event occurs or does not occur in the future.

B20: The requirements in B18 and B19 illustrate some of the types of disclosure required by HKAS 24 paragraph 18.

10.5 Structured Entities (Paragraphs B21–B24)

B21: A structured entity is designed so that voting or similar rights are not the dominant factor in deciding control. Voting rights may relate only to administrative tasks, and relevant activities are directed by contractual arrangements.

B22: A structured entity often has some or all of the following features or attributes:

B23: Examples of structured entities include:

B24: An entity controlled by voting rights is NOT a structured entity simply because it receives funding from third parties following a restructuring.

10.6 Nature of Risks from Unconsolidated Structured Entities (Paragraphs B25–B26)

B25: In addition to the information required by paragraphs 29–31, an entity shall disclose additional information necessary to meet the disclosure objective in paragraph 24(b).

B26: Examples of additional information that might be relevant:

(a) Terms of an arrangement that could require the entity to provide financial support, including:

(b) Losses incurred during the reporting period relating to interests in unconsolidated structured entities.

(c) Types of income received during the reporting period from interests in unconsolidated structured entities.

(d) Whether the entity is required to absorb losses before other parties, the maximum limit of such losses, and the ranking and amounts of potential losses borne by parties whose interests rank lower.

(e) Information about liquidity arrangements, guarantees or other commitments with third parties that may affect the fair value or risk of the entity's interests.

(f) Any difficulties an unconsolidated structured entity has experienced in financing its activities during the reporting period.

(g) In relation to funding, the forms of funding (e.g., commercial paper or medium-term notes) and their weighted-average life, including maturity analyses of assets and funding if the structured entity has longer-term assets funded by shorter-term funding.

11. EFFECTIVE DATE AND TRANSITION (Appendix C)

11.1 Effective Date (Paragraph C1)

An entity shall apply HKFRS 12 for annual periods beginning on or after 1 January 2013. Earlier application is permitted.

11.2 Transition Guidance Amendments (Paragraph C1A)

*Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance* (Amendments to HKFRS 10, HKFRS 11 and HKFRS 12), issued in July 2012, added paragraphs C2A–C2B. Apply for annual periods beginning on or after 1 January 2013.

11.3 Investment Entities Amendments (Paragraph C1B)

*Investment Entities* (Amendments to HKFRS 10, HKFRS 12 and HKAS 27), issued in December 2012, amended paragraph 2 and Appendix A, and added paragraphs 9A–9B, 19A–19G, 21A and 25A. Apply for annual periods beginning on or after 1 January 2014. Early adoption is permitted.

11.4 Applying the Consolidation Exception (Paragraph C1C)

*Investment Entities: Applying the Consolidation Exception* (Amendments to HKFRS 10, HKFRS 12 and HKAS 28), issued in January 2015, amended paragraph 6. Apply for annual periods beginning on or after 1 January 2016.

11.5 Annual Improvements 2014–2016 Cycle (Paragraph C1D)

*Annual Improvements to HKFRS Standards 2014–2016 Cycle*, issued in March 2017, added paragraph 5A and amended paragraph B17. Apply retrospectively for annual periods beginning on or after 1 January 2017.

11.6 Transition Relief (Paragraphs C2A–C2B)

C2A: The disclosure requirements of HKFRS 12 need not be applied for any period presented that begins before the annual period immediately preceding the first annual period for which HKFRS 12 is applied.

C2B: The disclosure requirements of paragraphs 24–31 and the corresponding guidance in paragraphs B21–B26 need not be applied for any period presented that begins before the first annual period for which HKFRS 12 is applied.

12. KEY TAKEAWAYS SUMMARY

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