Adopting the consolidation suite of standards

IFRS PRACTICE ISSUES Adopting the consolidation suite of standards Transition to IFRSs 10, 11 and 12 January 2013 kpmg.com/ifrs

Contents Simplifications provide relief 1 1. Extent of relief depends on extent of comparatives 2 2. Adopting the consolidation standard 4 2.1 Date of testing the consolidation conclusion 4 2.2 No change in consolidation conclusion 5 2.3 First-time consolidation 5 2.4 Deconsolidation 13 2.5 Interaction with income taxes 15 3. Adopting the joint arrangements standard 16 3.1 Testing for joint venture vs joint operation 16 3.2 Transitioning to the equity method Collapsing the investment 17 3.3 Transitioning from the equity method Grossing up the investment 19 3.4 Transitioning from investment accounting 20 3.5 Interaction with income taxes 21 4. Relief from the related disclosures 22 4.1 Interests in other entities 22 4.2 Change in accounting policy 22 About this publication 23 Content 23 Keeping you informed 23 Acknowledgements 25

IFRS Practice Issues: Adopting the consolidation suite of standards 1 Simplifications provide relief When the new consolidation suite of standards was published in May 2011, we were not the only ones to ask questions about the transitional requirements. For example, what was really the date of initial application? And which versions of other standards, such as IFRS 3 Business Combinations, should be applied in making the transitional adjustments? In addition, questions were raised by constituents about whether the cost/benefit of restating comparatives was reasonable when an entity provided more than one year of comparatives, and the difficulty of providing some of the related disclosures. The IASB listened to constituents questions and acted, issuing an exposure draft in December 2011. The final amendments published in June 2012 simplify the process of adopting the standards on consolidation and joint arrangements, and provide relief from the disclosures for unconsolidated structured entities disclosures that could have been onerous for some to make retrospectively. In this IFRS Practice Issues, we focus on the transition to the new standards, which is now upon us. For additional guidance on the accounting models introduced by these standards, see our publication Insights into IFRS, 9 th Edition 2012/13. And for additional information on the consolidation exception for investment entities, including transitional requirements, see our publication First Impressions: Consolidation relief for investment funds. Paul Munter Mike Metcalf Julie Santoro Jim Tang KPMG s global IFRS Business Combinations and Consolidation leadership team KPMG International Standards Group

2 IFRS Practice Issues: Adopting the consolidation suite of standards 1. Extent of relief depends on extent of comparatives IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities are effective for annual periods beginning on or after 1 January 2013. The standards are based on a general principle of retrospective application on adoption. Depending on the extent of comparative information provided in the financial statements, the amendments simplify the transition and provide additional relief from disclosures that could have been onerous. The following table compares the transitional requirements of the standards as if there were no relief from retrospective application, and after the relief provided by the amendments. Adopting the consolidation standard (Section 2) Transitional requirements without relief Transitional requirements after relief The entity would be required to restate its entire history as if IFRS 10 had always been in effect. Relief would be available only to the extent that restatement was impracticable. Easier assessment at the date of transition to IFRS 10 (2.1 and 2.2) For each investee, an entity tests the consolidation conclusion i.e. whether the investee should be consolidated at the beginning of the annual period in which IFRS 10 is applied for the first time. If an entity with a calendar year end has not adopted IFRS 10 early, then this date is 1 January 2013. This means that there is no need to perform the consolidation assessment at an earlier date, which avoids the need to consolidate and then deconsolidate a controlling interest that was disposed of in the comparative period, for example. An entity does not change its previous accounting if there is no change in the consolidation conclusion. Restatement limited to one year (2.3 and 2.4) If there is a change in the consolidation conclusion and the investee is: consolidated for the first time, then the mandatory restatement of comparatives is limited to one year; or deconsolidated, then the mandatory restatement of comparatives is again limited to one year. This means that entities that provide comparatives for more than one period have the option of leaving additional comparative periods unchanged.

IFRS Practice Issues: Adopting the consolidation suite of standards 3 Adopting the joint arrangements standard (Section 3) Transitional requirements without relief Transitional requirements after relief The entity would be required to restate its entire history as if IFRS 11 had always been in effect. Relief would be available only to the extent that restatement was impracticable. Restatement limited to one year (3.2 and 3.3) If the entity is required to change the accounting for a joint venture (under IFRS 11) to the equity method, then the mandatory restatement of comparatives is limited to one year. If the entity is required to change the accounting for a joint operation (under IFRS 11) from the equity method, then the mandatory restatement of comparatives is again limited to one year. This means that entities that provide comparatives for more than one period have the option of leaving additional comparative periods unchanged. Disclosures about interests in other entities (Section 4.1) Transitional requirements without relief Transitional requirements after relief The entity would be required to disclose all information required by IFRS 12 in all periods presented. Disclosures limited to one year In addition to limiting the accompanying comparative information to be disclosed under IFRS 12, there is further relief from the disclosures for unconsolidated structured entities. These disclosures may be made prospectively from the date of initial application i.e. from 1 January 2013 for an entity with a calendar year end that does not early adopt the standards. Disclosures about changes in accounting policies (Section 4.2) Transitional requirements without relief Transitional requirements after relief As part of its disclosures, the entity would be required to provide information about the effect of the change in accounting policy on each financial statement line item and on earnings per share. This disclosure would be required for both the current period and for all comparative periods presented. Restatement limited to one year Disclosure of the impact of initial application of standards is required only for the period immediately preceding the date of adoption i.e. for 2012 for an entity with a calendar year end that does not early adopt the standards. This means that an entity is not required to keep additional accounting records e.g. as if an investee had not been consolidated in the year of adopting the standards in order to collect data to disclose the impact of adopting the standards on the current period.

4 IFRS Practice Issues: Adopting the consolidation suite of standards 2. Adopting the consolidation standard IFRS 10 prescribes a completely new approach to assessing control, rather than simply adjusting the previous model under IAS 27 (2008) Consolidated and Separate Financial Statements and SIC 12 Consolidation Special Purpose Entities. This new approach has significant implications for some entities, and the IASB acknowledged that full retrospective application would have been burdensome. As a result, the original IFRS 10 issued in May 2011 included some relief on transition. However, a number of key issues remained unclear, which led to the amendments in June 2012. The discussion that follows is based on the final transitional requirements i.e. after amendment. The amendments simplify the adoption of IFRS 10 by clarifying the date on which the need for transitional adjustments is determined and limiting the period of restatement for some entities. In the following sections, we discuss the transitional requirements of IFRS 10 with the help of examples. 2.1 Date of testing the consolidation conclusion IFRS 10.C2B The amendments explain that the date of initial application in IFRS 10 refers to the beginning of the annual reporting period in which IFRS 10 is applied for the first time. If an entity with a calendar year end does not early adopt IFRS 10, then the date of initial application is 1 January 2013. Example 1 Investment disposed of before transition Company P acquired 48% of the shares in Company S on 1 March 2008. Although P had de facto control over S, its accounting policy under IAS 27 (2003) and IAS 27 (2008) was to apply a power-togovern approach to consolidation. Therefore, P equity accounted its investment in accordance with IAS 28 Investments in Associates. P disposed of its investment in S on 1 June 2012. The following diagram illustrates the fact pattern, based on P s year end of 31 December. 1 January 2012 Date of initial application of IFRS 10 1 January 2013 31 December 2013 Comparative period Current period Equity accounting 1 March 2008 Acquisition of 48% interest 1 June 2012 Disposal of 48% interest Because P s investment in S was disposed of before 1 January 2013, no adjustment is made to P s previous accounting for S on transition to IFRS 10 i.e. P does not need to assess, based on the guidance in IFRS 10, whether it had de facto control over S in the periods before disposing of its investment.

IFRS Practice Issues: Adopting the consolidation suite of standards 5 2.2 No change in consolidation conclusion IFRS 10.C3 On the date of initial application of IFRS 10, an entity assesses whether the consolidation conclusion is different under IAS 27 (2008) and SIC-12 compared with IFRS 10. When there is no change to the consolidation conclusion for an investee, the entity is not required to make any adjustments to its previous accounting for the investee. Example 2 No change in consolidation conclusion Changing the facts of Example 1, Company P acquired an additional 10% interest in Company S on 1 June 2012, and applied acquisition accounting (step acquisition) at that date because S became a subsidiary of P under IAS 27 (2008). The following diagram illustrates the fact pattern, based on P s year end of 31 December. Date of initial application of IFRS 10 1 January 2012 1 January 2013 31 December 2013 Comparative period Current period Equity accounting Consolidation 1 March 2008 Acquisition of 48% interest 1 June 2012 Acquisition of additional 10% interest Because there is no change in the consolidation conclusion at 1 January 2013, no adjustment is made to P s previous accounting for S on transition to IFRS 10. This is despite the fact that the date of obtaining control of S was different under IAS 27 (2008) (1 June 2012) and IFRS 10 (1 March 2008). Although the transitional requirements do not require retrospective application when the consolidation conclusion is unchanged on the initial application of IFRS 10, it is not ruled out. This is relevant when the date on which control is obtained differs between IAS 27/SIC-12 and IFRS 10, as in Example 2. 2.3 First-time consolidation 2.3.1 Restatement limited to one year IFRS 10.C4 C4A IFRS 10.C6B, BC199C, IAS 1 (2012).38 38A If, at the date of initial application of IFRS 10, an entity concludes that an investee that was previously unconsolidated should be consolidated, then comparative information is restated unless it is impracticable to do so. However, the IASB acknowledges that restating comparative information could be onerous for entities presenting comparatives for more than one year. Therefore, the requirement to present restated comparatives is limited to the immediately preceding period, which corresponds to the minimum requirement for comparative information in IAS 1 Presentation of Financial Statements. An entity has an option to leave further comparative periods unchanged, in which case that fact is disclosed.

6 IFRS Practice Issues: Adopting the consolidation suite of standards Example 3 First-time consolidation Restatement of comparatives Company P acquired 48% of the shares in Company S on 1 March 2008. Although P had de facto control over S, its accounting policy under IAS 27 (2003) and IAS 27 (2008) was to apply a power-togovern approach to consolidation. Therefore, P equity accounted its investment in accordance with IAS 28. P s year end is 31 December and the date of initial application of IFRS 10 is 1 January 2013. At that date, P concludes that it controls S under IFRS 10. Scenario 1 One year of comparatives P presents comparative information for one year, as required by IAS 1. Therefore, P will present the following for the year ending 31 December 2013, all prepared in accordance with IFRS 10 (with S consolidated): financial statements for 2013 comparative financial statements for 2012 opening statement of financial position as of 1 January 2012. This is illustrated in the following diagram. 1 March 2008 1 January 2012 Date of initial application of IFRS 10 1 January 2013 31 December 2013 Comparative period restated Current period Equity accounting Consolidation Acquisition of 48% interest Presentation of opening statement of financial position Scenario 2 Two years of comparatives Minimum restatement P presents comparative information for two years. As part of its adoption of IFRS 10, P decides to restate only one year of comparatives. Therefore, P will present the following for the year ending 31 December 2013. Prepared in accordance with IFRS 10 (with S consolidated): financial statements for 2013 comparative financial statements for 2012 IAS 1 (2012).40D opening statement of financial position as of 1 January 2012. Comparative financial statements for 2011, prepared in accordance with IAS 27 (2008) (with S equity accounted).

IFRS Practice Issues: Adopting the consolidation suite of standards 7 This is illustrated in the following diagram. 1 March 2008 1 January 2011 1 January 2012 Date of initial application of IFRS 10 1 January 2013 31 December 2013 Comparative period not restated Comparative period restated Current period Equity accounting Consolidation Acquisition of 48% interest Presentation of opening statement of financial position This means that P will present two statements of financial position at effectively the same date under two different standards: IAS 27 (2008) at 31 December 2011 (with S equity accounted), and IFRS 10 at 1 January 2012 (with S consolidated). Accordingly, P will need to be careful that its presentation is clear for readers of the financial statements. Scenario 3 Two years of comparatives Voluntary restatement P presents comparative information for two years. As part of its adoption of IFRS 10, P decides to restate both years of comparatives. Therefore, P will present the following for the year ending 31 December 2013, all prepared in accordance with IFRS 10 (with S consolidated): financial statements for 2013 comparative financial statements for 2012 and 2011. IAS 1 (2012).40D The literal reading of IAS 1 is that an opening statement of financial position as of 1 January 2012 is required. However, in this scenario, this will be the same as the statement of financial position presented at 31 December 2011. Therefore, there would be no need to effectively present the same statement of financial position twice. This is illustrated in the following diagram. 1 March 2008 1 January 2011 1 January 2012 Date of initial application of IFRS 10 1 January 2013 31 December 2013 Comparative period restated (voluntary) Comparative period restated (mandatory) Current period Equity accounting Consolidation Acquisition of 48% interest

8 IFRS Practice Issues: Adopting the consolidation suite of standards Insight Regulators may take a stricter approach Local regulators in jurisdictions that require two years or more of comparatives may decide to require full restatement. As illustrated in Scenario 3 of Example 3, this approach is permitted under the standard, which allows but does not require the restatement of more than one year of comparatives. This is an issue that an entity should discuss with its local regulator if there is any uncertainty over whether the stricter approach of full restatement will be required by the regulator. 2.3.2 Determining which standards to apply IFRS 10.C4B C4C An entity applies acquisition accounting as specified in IFRS 3 when it consolidates an investee for the first time on transition, even if the investee is not a business (see table in 2.3.3). Depending on the date on which control was obtained, an entity can choose which version of the standard to apply. In this regard, the consolidation standard is also relevant if there were transactions with non-controlling interests (NCI) after obtaining control. Control obtained Before effective date of IFRS 3 (2008) / IAS 27 (2008) Apply IFRS 3 (2008) or IFRS 3 (2004). If relevant, apply either IFRS 10 for all periods, or IAS 27 (2003) up to the effective date of IAS 27 (2008) and then apply IFRS 10 from that date. After effective date of IFRS 3 (2008) / IAS 27 (2008) Apply IFRS 3 (2008). If relevant, apply IFRS 10. Notes IFRS 3 (2008) was effective for business combinations in annual periods beginning on or after 1 July 2009, or at an earlier date if adopted early. IAS 27 (2008) was effective for annual periods beginning on or after 1 July 2009, or at an earlier date if adopted early. The standards were required to be adopted at the same time. IFRS 10.BC196A BC196C The IASB notes that allowing entities to apply IFRS 3 (2004) and IAS 27 (2003) reduces the risk of using hindsight to determine the transitional adjustments, which may therefore provide a more reliable basis for consolidation. 2.3.3 Methodology distinguishes businesses from asset groups IFRS 10.C4 C4A The following table highlights the steps to follow when consolidating an investee for the first time. Step 1 Determine the date on which the investor obtained control over the investee in accordance with IFRS 10 i.e. the new consolidation standard. Step 2 Investee is a business Measure the investee s assets, liabilities and NCI as if acquisition accounting had applied at that date. Investee is not a business Measure the investee s assets, liabilities and NCI as if acquisition accounting had applied at that date, except that no goodwill should be recognised.

IFRS Practice Issues: Adopting the consolidation suite of standards 9 Step 3 Step 4 If Step 2 is impracticable Roll forward these values to the beginning of the period immediately preceding the year of adoption (assuming one year of comparatives). The difference between the values determined in Step 3 and the carrying amount of the investment is recognised in equity at the beginning of the immediately preceding period. Additional comparatives may be left unadjusted. The deemed acquisition date is the beginning of the earliest period for which Step 2 is practicable. The immediately preceding period is restated unless the deemed acquisition date is the beginning of the current period. Example 4A First-time consolidation Company P acquired 48% of the shares in Company S on 1 March 2008. Although P had de facto control over S, its accounting policy under IAS 27 (2003) and IAS 27 (2008) was to apply a power-togovern approach to consolidation. Therefore, P equity accounted its investment in accordance with IAS 28. P s year end is 31 December and the date of initial application of IFRS 10 is 1 January 2013. At that date, P concludes that it controls S under IFRS 10. P elects to apply IFRS 3 (2004), because S had obtained information about fair value under IAS 28; this choice is explained further in Insight Incentive to use standards that were in force (below). P presents one year of comparatives in accordance with IAS 1, and the following diagram illustrates the approach that P follows. 1 March 2008 1 January 2012 Date of initial application of IFRS 10 1 January 2013 31 December 2013 Comparative period restated Current period Equity accounting Consolidation Acquisition of 48% interest Transitional adjustments made Relevant facts Amount paid for 48% interest in S at 1 March 2008: 10,000 Fair value of S s identifiable net assets at 1 March 2008: 18,000 Roll-forward of the carrying amount of S s identifiable net assets to 1 January 2012: 25,000 Carrying amount of investment in S at 1 January 2012: 13,360 Steps for first-time consolidation (see above) 1) Under IFRS 10, control would have been obtained on 1 March 2008.

10 IFRS Practice Issues: Adopting the consolidation suite of standards 2) Under IFRS 3 (2004): the fair value of S s identifiable net assets at 1 March 2008 was 18,000; NCI would have been measured at their proportionate interest in S s identifiable net assets, at 9,360 (18,000 x 52%); and goodwill would have been measured at 1,360 (10,000 - (18,000 x 48%)). 3) Rolling forward the values in Step 2 to 1 January 2012: the carrying amount of S s identifiable net assets would have been 25,000; the carrying amount of NCI would have been 13,000 (9,360 + (7,000 1 x 52%)); and goodwill would have continued to be measured at 1,360. 4) Based on the calculations in Step 3, P records the following journal entry as of 1 January 2012. Debit Credit Identifiable net assets of S 25,000 Goodwill 1,360 NCI 13,000 Investment in S 13,360 1 Insight Incentive to use standards that were in force In Example 4A, there is no balancing amount to be recognised in equity. This is because P s equity accounting performed in accordance with IAS 28 was in effect a one-line consolidation that mirrored IFRS 3 (2004). If, for example, P had elected to restate the consolidation by applying IFRS 3 (2008), then the values calculated in Step 2 and rolled forward to Step 3 would probably not have been a simple gross-up of the equity-accounted carrying amount. This is because the changes to IFRS 3 (2008) might have had an impact on the amounts determined for adopting IFRS 10. Depending on exact facts and circumstances, this highlights that the transition may be much easier to apply using the standards in force when control was obtained. IFRS 10.C4 As part of the consolidation process, the parent measures the subsidiary s assets and liabilities, and determines the amount attributable to NCI. When the investee is a business, because the standard refers to the investee s assets rather than identifiable assets, this means that the calculation includes goodwill as illustrated in Example 4A. (When the investee is not a business, the net amount calculated in Step 2 of the consolidation process excludes goodwill.) Insight Gain on bargain purchase not recognised IFRS 10.C4 C4A In our view, any gain on a bargain purchase that may arise from the consolidation process is not recognised in profit in loss as it would be under IFRS 3 (2004) and IFRS 3 (2008) because the standard only envisages the recognition of assets and liabilities. This means that any such gain is subsumed into the amount recognised in equity as part of Step 4 of the consolidation process. 1 Difference between identifiable net assets as of 1 January 2012 and 1 March 2008 (25,000-18,000)

IFRS Practice Issues: Adopting the consolidation suite of standards 11 Insight Measuring consideration paid when restatement is impracticable IFRS 10.C4A, IFRS 3.37 When restatement is impracticable and an entity applies IFRS 3 at a later date (without the recognition of goodwill when the investee is not a business), in our view the fair value of the consideration paid under IFRS 3 is the fair value of the parent s investment in the investee at that date; it is not the historical cost that the parent paid for its investment. This is consistent with the application of IFRS 3 when control is achieved in stages (a step acquisition). Example 4B First-time consolidation Restatement impracticable Changing the facts of Example 4A, assume that it is impracticable for Company P to determine the fair value of Company S s net assets before 1 January 2013. The following diagram illustrates the approach that P follows. 1 March 2008 1 January 2012 Date of initial application of IFRS 10 1 January 2013 31 December 2013 Comparative period Current period Equity accounting Consolidation Acquisition of 48% interest Transitional adjustments made Relevant facts as at 1 January 2013 Fair value of S s identifiable net assets: 30,000 Carrying amount of investment in S: 12,000 Fair value of investment in S: 16,000 Steps for first-time consolidation (see above) 1) The deemed date of obtaining control is 1 January 2013. 2) Under IFRS 3 (2008): the fair value of S s identifiable net assets at 1 January 2013 is 30,000; the fair value of the consideration transferred is 16,000; NCI are measured at their proportionate interest (accounting policy choice made by P) in S s identifiable net assets, at 15,600 (30,000 x 52%); and goodwill arises of 1,600 ((16,000 + 15,600) - 30,000). 3) Step 3 is not applicable because the deemed acquisition date is the start of the current period (1 January 2013).

12 IFRS Practice Issues: Adopting the consolidation suite of standards 4) Based on the calculations in Step 2, P records the following journal entry at 1 January 2013. Debit Credit Identifiable net assets of S 30,000 Goodwill 1,600 NCI 15,600 Investment in S 12,000 Equity 4,000 In this example, which resulted in the recognition of goodwill, the amount recognised in equity is in effect the unrecognised increase in the fair value of P s investment in S (16,000-12,000). Insight Grandfathering previous GAAP on adoption of IFRS IFRS 1.C1, C5 Step 2 of the consolidation process (see above) refers to the application of acquisition accounting and does not explicitly refer to the grandfathering of previous GAAP numbers as part of the first-time adoption of IFRS. For example, modifying the facts of Example 4A, assume that Company P acquired its investment in Company S before its adoption of IFRS. When it adopted IFRS in 2011, P elected not to restate the carrying amount of its investment and therefore carried forward the previous GAAP amount into its opening IFRS statement of financial position. Accordingly, as shown in the diagram below, P s investment in S was accounted for at cost until 1 January 2011 (P s date of transition) and equity accounted from that date under IAS 28. 1 March 2008 Date of transition to IFRS 1 January 2011 1 January 2012 Date of initial application of IFRS 10 1 January 2013 31 December 2013 Comparative period restated Current period Cost accounting under previous GAAP Equity accounting under IFRS Consolidation Acquisition of 48% interest Previous GAAP carrying amount grandfathered under IFRS 1 Transitional adjustments made In our view, the transitional requirements of IFRS 10 implicitly incorporate the transition under IFRS 1 First-time Adoption of International Financial Reporting Standards, because those carrying amounts became the basis for subsequent accounting under IFRS i.e. the previous election under IFRS 1 may be incorporated in the retrospective application under IFRS 10. Therefore, Step 2 of the consolidation process is based on the numbers that were grandfathered at the date of transition i.e. at 1 January 2011 in the above example.

IFRS Practice Issues: Adopting the consolidation suite of standards 13 2.4 Deconsolidation IFRS 10.C5 IFRS 10.C5 C5A IFRS 10.C5 C5A If, at the date of initial application of IFRS 10, an entity concludes that an investee that was previously consolidated should be deconsolidated, then comparative information is restated unless it is impracticable to do so. However, as in the case of first-time consolidation, the mandatory restatement of comparatives is limited to one year (see 2.3.1). An entity applies IFRS 10 when an investee is deconsolidated on transition, regardless of the date on which control was lost i.e. even if the date of losing control under IFRS 10 was before IAS 27 (2008) was in effect. The following table highlights the steps that are followed when an investee is deconsolidated for the first time. Step 1 Step 2 Step 3 Step 4 If Step 2 is impracticable Determine the date on which the investor would have stopped consolidating in accordance with IFRS 10 i.e. the new consolidation standard. Measure the interest in the investee at the amount at which it would have been measured if IFRS 10 had been effective at that date. Roll forward this value to the beginning of the period immediately preceding the year of adoption (assuming one year of comparatives). The difference between the value determined in Step 3 and the carrying amount of the investee s net assets plus NCI is recognised in equity at the beginning of the immediately preceding period. Additional comparatives may be left unadjusted. The deemed date of losing control is the beginning of the earliest period for which Step 2 is practicable. The immediately preceding period is restated unless the deemed date of losing control is the beginning of the current period. IFRS 10.25(b), C5 In applying Step 1, it might be concluded that the investor would never have had control under IFRS 10. In that case, IFRS 10 does not apply in Step 2 and the investee would be measured at that date in accordance with other applicable standards e.g. at cost (consideration paid) under IAS 28. Example 5 Deconsolidation Company P has consolidated its 48% interest in Company S since it acquired the interest on 1 March 2008. P s year end is 31 December and the date of initial application of IFRS 10 is 1 January 2013. At that date, P concludes that it does not control S under IFRS 10. Instead, S is an associate that should be equity accounted.

14 IFRS Practice Issues: Adopting the consolidation suite of standards P presents one year of comparatives in accordance with IAS 1, and the following diagram illustrates the approach that P follows. 1 March 2008 1 January 2012 Date of initial application of IFRS 10 1 January 2013 31 December 2013 Comparative period restated Current period Consolidation Equity accounting Acquisition of 48% interest Transitional adjustments made Relevant facts Amount paid for 48% interest in S at 1 March 2008: 10,000 Carrying amount of investment in S at 1 January 2012 as if equity accounted: 13,360 Carrying amount of identifiable net assets of S at 1 January 2012: 25,000 Carrying amount of goodwill at 1 January 2012: 1,360 Carrying amount of NCI at 1 January 2012: 13,000 Steps for deconsolidation (see above) 1) The date of losing control is 1 March 2008 i.e. S would never have been a subsidiary under IFRS 10. 2) The measurement of the investment in S at 1 March 2008 would have been 10,000. 3) Rolling forward the carrying amount of P s investment in S using the equity method, the carrying amount would have been 13,360 at 1 January 2012. 4) Based on the calculations in Step 3, P records the following journal entry as of 1 January 2012. Debit Credit Investment in associate 13,360 NCI 13,000 Identifiable net assets of S 25,000 Goodwill 1,360 This example is the reverse of Example 4A, and again shows no balancing amount to be recognised in equity. This is because P s equity accounting is in effect a one-line consolidation. However, if the facts had been different e.g. if there were a gain on bargain purchase (negative goodwill) that had been recognised in profit or loss, or acquisition-related costs that had been recognised in profit or loss then there would have been a balancing entry to equity.

IFRS Practice Issues: Adopting the consolidation suite of standards 15 2.5 Interaction with income taxes IAS 12.15, 22, 24, 32A IAS 12.39, 44 When an investee is consolidated for the first time except for the initial recognition of goodwill the initial recognition exemption in IAS 12 Income Taxes generally does not apply. As a result, deferred taxes are generally recognised for any resulting temporary differences. Conversely, when a previous subsidiary is deconsolidated on transition, deferred taxes will be derecognised as part of the transition; this is because the related temporary differences are no longer present in the consolidated financial statements. These adjustments might result in an adjustment to opening equity. In addition, an entity will need to reconsider the requirements of IAS 12 in respect of investments in subsidiaries and associates, and interests in joint arrangements. Any related adjustments to deferred tax will be recognised separately from the steps outlined in 2.3.3 and 2.4. The requirements of IAS 12 are discussed in the 9 th Edition 2012/13 of our publication Insights into IFRS (3.13.110 and 510).

16 IFRS Practice Issues: Adopting the consolidation suite of standards 3. Adopting the joint arrangements standard 3.1 Testing for joint venture vs joint operation IFRS 10.C1 Unlike under IFRS 10, there is no relief under IFRS 11 from the date on which an entity assesses whether a joint arrangement is a joint venture or a joint operation. An entity with a calendar year end, that does not early adopt IFRS 11 and that presents one year of comparatives, is required to classify its joint arrangements as of 1 January 2012. Example 6 Interest disposed of before transition Company P acquired a 50% interest in jointly controlled entity J on its formation on 1 March 2008. P elected to account for J using proportionate consolidation under IAS 31 Interests in Joint Ventures. P disposed of its interest in J on 1 June 2012. P s year end is 31 December and the date on which it assesses its joint arrangements is 1 January 2012. As illustrated in the diagram below, P s interest in J is not excluded from any transitional adjustments, even though it was disposed of before 1 January 2013. 1 January 2012 1 January 2013 31 December 2013 Comparative period restated Current period Proportionate consolidation IFRS 11 applied 1 March 2008 Acquisition of joint-controlling interest 1 June 2012 Disposal of joint-controlling interest IFRS 11.C2, C7, C12A, BC69A, IAS 1 (2012).38 38A However, like IFRS 10, the requirement to present restated comparatives is limited to the immediately preceding period, which corresponds to the minimum requirement for comparative information in IAS 1. An entity has an option to leave further comparative periods unchanged. See Example 3 and Insight Regulators may take a stricter approach in 2.3.1, which apply similarly to the adoption of IFRS 11.

IFRS Practice Issues: Adopting the consolidation suite of standards 17 3.2 Transitioning to the equity method Collapsing the investment 3.2.1 General requirements IFRS 11.C2 C3, BC61 IFRS 11.C4 In transitioning from proportionate consolidation to the equity method, an entity collapses the proportionately consolidated net asset value (including any allocation of goodwill), less any impairment, into a single investment at the beginning of the earliest period restated. Aggregating the individual assets and liabilities that were previously proportionately consolidated may result in negative net assets. In this case, the entity recognises the corresponding liability only if it has a legal or constructive obligation related to the negative net assets. If no liability is recognised, then an adjustment is made to retained earnings at the beginning of the earliest period restated; the entity discloses that fact and the unrecognised share of losses. Example 7 Transitioning to the equity method Company P obtained a 50% interest in jointly controlled entity J on its formation on 1 March 2008. P elected to account for J using proportionate consolidation under IAS 31. On transition to IFRS 11, P determines that J is a joint venture that should be equity accounted. P presents comparative information for one year, as required by IAS 1; therefore, the transition to the equity method occurs at 1 January 2012, as illustrated in the following diagram. 1 March 2008 1 January 2012 1 January 2013 31 December 2013 Comparative period restated Current period Proportionate consolidation Equity accounting Acquisition of joint-controlling interest Transitional adjustments made Relevant facts as of 1 January 2012 Carrying amount of goodwill: 7,500 Carrying amount of proportionate share of J s identifiable net assets (50%): 47,500 Journal entry on transitioning to IFRS 11 as of 1 January 2012 Debit Credit Investment in J 55,000 Goodwill 7,500 Proportionate share of identifiable net assets (various) 47,500 IFRS 11.C5 In addition, at 1 January 2012, P discloses a breakdown of the assets and liabilities that have been combined into the single investment of 55,000.

18 IFRS Practice Issues: Adopting the consolidation suite of standards IFRS 11.C2 C3, IAS 36.86 If goodwill related to the joint venture interest was previously allocated to a larger cash-generating unit or group of units, then the amount of goodwill subsumed into the equity-accounted investee is determined on the basis of relative carrying amounts; this approach simplifies the usual approach in IAS 36 Impairment of Assets when there is a disposal, which requires relative values as a basis. In addition, the opening balance of the equity-accounted investee is assessed for impairment; the methodology applied is discussed in the 9 th Edition 2012/13 of our publication Insights into IFRS (3.10.580). 3.2.2 Previous transition to proportionate consolidation IAS 28.24, 45 IFRS 11.C2 It is not clear how to apply the restatement requirements when: under IAS 28, an investee changed from an associate to a proportionately consolidated jointly controlled entity; as a result, the investor remeasured the investment in the associate at fair value through profit or loss; and on application of IFRS 11, the investee is an equity-accounted joint venture. IAS 28 (2011) states that if an investment in an associate becomes an investment in a joint venture, then the entity continues to apply the equity method and does not remeasure the previously held interest. This means that the previous remeasurement to fair value on the loss of significant influence would be reversed as part of the restatement. However, IFRS 11 provides specific guidance on transitioning from proportionate consolidation to the equity method (see 3.2.1). Following this guidance, the previous remeasurement to fair value on the loss of significant influence would not be reversed. Given the ambiguity in terms of which standard takes precedence, in our view an entity should choose an accounting policy, to be applied consistently, to follow the transitional guidance in either IAS 28 (2011) or IFRS 11. Example 8 Transitioning to the equity method following previous transition to proportionate consolidation In 2011, an entity obtained joint control over an existing associate and remeasured the previously held interest in the associate at fair value through profit or loss. This resulted in a gain of 100 being recognised in profit or loss, and 50 of reserves being reclassified to profit or loss. The entity then applied proportionate consolidation to the jointly controlled entity in accordance with IAS 31. In 2013, the entity adopts IFRS 11 and needs to transition from proportionate consolidation to the equity method. At the date of transition, the net carrying amount of the investee is 2,000. Associate (equity accounted) Jointly controlled entity (proportionately consolidated) Joint venture (equity accounted) Step acquisition to joint control in 2011 Transition to IFRS 11 If the entity decides to follow the transition in IAS 28 (2011), then the carrying amount of the investee on transition will be 1,900 (2,000-100). In addition, the reclassification of reserves of 50 will be reversed. Alternatively, if the entity decides to follow the transition in IFRS 11 (see 3.2.1), then the carrying amount of the investee on transition will be 2,000. Neither the previous gain of 100 nor the reclassification of reserves of 50 will be reversed.

IFRS Practice Issues: Adopting the consolidation suite of standards 19 3.3 Transitioning from the equity method Grossing up the investment IFRS 11.C7 C8 IFRS 11.C9 In transitioning a joint operation from the equity method to accounting for assets and liabilities, an entity grosses up the equity-accounted investment to recognise its share of individual assets and liabilities, including any goodwill. This is based on the amounts underlying the previous equity method and in accordance with its participation share in the contractual arrangement. The aggregate of the newly recognised assets and liabilities may differ from the investment derecognised. When the individual net assets are lower, the net derecognised value is written off against opening retained earnings. When the individual net assets are greater, goodwill of the joint operation is first reduced so that the newly recognised net assets equal the derecognised investment. If goodwill is fully eliminated, then any remaining amount is balanced by a credit to opening retained earnings. Example 9 Transitioning from the equity method Company P obtained a 50% interest in jointly controlled entity J on its formation on 1 March 2008. P elected to account for J using the equity method under IAS 31 / IAS 28. On transition to IFRS 11, P determines that J is a joint operation and that P should account for its share of the assets, liabilities, revenue and expenses of J. P presents comparative information for one year, as required by IAS 1; therefore, the transition from the equity method occurs at 1 January 2012, as illustrated in the following diagram. 1 March 2008 1 January 2012 1 January 2013 31 December 2013 Comparative period restated Current period Equity method Accounting for P s share of assets, liabilities, revenue and expenses Acquisition of joint-controlling interest Transitional adjustments made Relevant facts as of 1 January 2012 Carrying amount of investment in J: 55,000 Represented by (at 50%): property, plant and equipment: 50,000 loans receivable: 25,000 goodwill: 17,500 trade payables: (12,500) bank debt: (15,000) previously recognised impairment loss: (10,000)

20 IFRS Practice Issues: Adopting the consolidation suite of standards Journal entry on transitioning to IFRS 11 as of 1 January 2012 Debit Credit Property, plant and equipment 50,000 Loans receivable 25,000 Goodwill (17,500-10,000) 7,500 Trade payables 12,500 Bank debt 15,000 Investment in J 55,000 IFRS 11.C10 In addition, at 1 January 2012, P discloses a reconciliation between: the investment in J derecognised; and the assets and liabilities recognised. If the previously unallocated impairment loss were greater than the carrying amount of goodwill, then any remaining balance would be recognised as an adjustment to retained earnings. However, this situation is expected to be rare, because it might indicate, for example, that an impairment loss should have been recognised: in the investee s financial statements for its assets; or in the investor s accounting in respect of fair value adjustments. 3.4 Transitioning from investment accounting IFRS 11.C12 IFRS 11.BC67 In accounting for a joint operation in its separate financial statements, the entity derecognises its previously held investment and recognises its interests in the underlying assets and liabilities. These interests are determined in accordance with the transitional requirements provided for the consolidated financial statements (see 3.3). Any difference between the investment derecognised and the net assets recognised is an adjustment to opening retained earnings. There should be no difference between the amount recognised in the parties consolidated financial statements and in their separate financial statements. Therefore, on transition, an entity recognises the underlying assets and liabilities arising from the joint operation at the amounts recognised in the consolidated financial statements; any difference between the investment derecognised and the net assets recognised is recorded as an adjustment to retained earnings. Insight Consolidated financial statements not prepared An issue may arise if the entity does not prepare consolidated financial statements. In such scenarios, in our view the entity is required to recognise its interest in the underlying assets and liabilities as if consolidated financial statements had been prepared in which the investment was accounted for under the equity method. Determining these amounts may be particularly difficult when the investment was never accounted for under the equity method, although it may be possible that the investment was accounted for under the equity method at a higher level in the group.

IFRS Practice Issues: Adopting the consolidation suite of standards 21 3.5 Interaction with income taxes IFRS 11.C3, C11, C13 IAS 12.39, 44 The initial recognition exemption included in IAS 12 does not apply to the recognition on transition of either the equity method investment or the underlying assets and liabilities. Accordingly, deferred taxes are generally recognised for any movements in temporary differences. Because the recognition of the tax effects follows the transaction or event itself, on transition the effect of such deferred taxes is recognised directly in equity i.e. in retained earnings. In addition, an entity will need to reconsider the requirements of IAS 12 in respect of investments in subsidiaries and associates, and interests in joint arrangements. The requirements of IAS 12 are discussed in the 9 th Edition 2012/13 of our publication Insights into IFRS (3.13.110 and 510).

22 IFRS Practice Issues: Adopting the consolidation suite of standards 4. Relief from the related disclosures 4.1 Interests in other entities IFRS 12.C2A IFRS 12.C2B IFRS 12.24 31 Consistent with the transitional relief provided under IFRSs 10 and 11, the amendments limit the requirement to present all of the disclosures contained in IFRS 12 to the immediately preceding period. The amendments provide additional relief from the disclosures for unconsolidated structured entities for all entities. Such disclosures may be provided prospectively from the date of initial application i.e. from 1 January 2013 for a calendar year entity, assuming no early adoption of the standards. IFRS 12 requires extensive qualitative and quantitative disclosures about the nature of an entity s interest and risks in unconsolidated structured entities. The disclosure requirements may require some entities to develop new systems and/or controls to track the interest and risks in such entities. The relief from retrospective application means that entities do not have to put in place new systems and controls to provide these disclosures for comparative periods. 4.2 Change in accounting policy IFRS 10.C6B, IFRS 11.C12B IAS 8.28(f) IFRS 10.C2A, BC199D, IFRS 11.C1B, BC69B If an entity presents additional comparative information but elects not to restate beyond the immediately preceding period (see 2.3.1 and 3.1), then it discloses that fact and explains the basis on which the additional information is prepared. When the initial application of a standard has an effect on the financial statements, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires entities (unless it is impracticable) to quantify and disclose, for the current period and for each comparative period presented, the impact on: each financial statement line item affected; and basic and diluted earnings per share. The amendments provide relief from this general principle. The impact of adopting of the standards needs to be quantified only for the immediately preceding period not for the current period or any additional comparative periods. The IASB provided this relief because it would be onerous for entities adopting the standards to maintain parallel sets of records in the year of adoption for the purpose of quantifying the impact on each financial statement line item and earnings per share.

IFRS Practice Issues: Adopting the consolidation suite of standards 23 About this publication This publication has been produced by the KPMG International Standards Group (part of KPMG IFRG Limited). Our IFRS Practice Issues publications address practical application issues that an entity may encounter when applying a specific IFRS or related interpretation. They include a discussion of selected requirements, together with interpretative guidance and examples to elaborate and clarify the practical application of the requirements. Content This edition of IFRS Practice Issues considers the requirements of Consolidated Financial Statements, Joint Arrangement and Disclosure of Interests in Other Entities: Transition Guidance, which was published in June 2012. This IFRS Practice Issues deals not only with the amendments but also with all aspects of the transition to the new consolidation suite of standards; further discussion is included in the 9 th Edition 2012/13 of our publication Insights into IFRS (chapters 2.5A and 3.6A). The text is referenced to the amendments and to other IFRSs in issue at 1 January 2013. References in the left-hand margin identify the relevant paragraphs of the IFRSs. In many cases, further interpretation will be needed in order for an entity to apply IFRS to its own facts, circumstances and individual transactions. IFRSs and their interpretation change over time. Accordingly, neither this publication nor any of our other publications should be used as a substitute for referring to the standards and interpretations themselves. Keeping you informed Visit www.kpmg.com/ifrs to keep up to date with the latest developments in IFRS and browse our suite of publications. Whether you are new to IFRS or a current user of IFRS, you can find digestible summaries of recent developments, detailed guidance on complex requirements, and practical tools such as illustrative financial statements and checklists. For a local perspective, follow the links to the IFRS resources available from KPMG member firms around the world. All of these publications are relevant for those involved in external IFRS reporting. The In the Headlines series and Insights into IFRS: An overview provide a high-level briefing for audit committees and boards. User need Publication series Purpose Briefing In the Headlines Provides a high-level summary of significant accounting, auditing and governance changes together with their impact on entities. IFRS Newsletters The Balancing Items New on the Horizon First Impressions Highlights recent IASB and FASB discussions on the financial instruments, insurance, leases and revenue projects. Includes an overview, an analysis of the potential impact of decisions, current status and anticipated timeline for completion. Focuses on narrow-scope amendments to IFRS. Considers the requirements of due process documents such as exposure drafts and provides KPMG s insight. Also available for specific sectors. Considers the requirements of new pronouncements and highlights the areas that may result in a change in practice. Also available for specific sectors.

24 IFRS Practice Issues: Adopting the consolidation suite of standards User need Publication series Purpose Application issues Insights into IFRS Emphasises the application of IFRS in practice and explains the conclusions that we have reached on many interpretative issues. Interim and annual reporting GAAP comparison Sector-specific issues Insights into IFRS: An overview IFRS Practice Issues IFRS Handbooks Illustrative financial statements Disclosure checklist IFRS compared to US GAAP IFRS Sector Newsletters Application of IFRS Accounting under IFRS Impact of IFRS Provides a structured guide to the key issues arising from the standards. Addresses practical application issues that an entity may encounter when applying IFRS. Also available for specific sectors. Includes extensive interpretative guidance and illustrative examples to elaborate or clarify the practical application of a standard. Illustrates one possible format for financial statements prepared under IFRS, based on a fictitious multinational corporation. Available for annual and interim periods, and for specific sectors. Identifies the disclosures required for currently effective requirements for both annual and interim periods. Highlights significant differences between IFRS and US GAAP. The focus is on recognition, measurement and presentation; therefore, disclosure differences are generally not discussed. Provides a regular update on accounting and regulatory developments that directly impact specific sectors. Illustrates how entities account for and disclose sector-specific issues in their financial statements. Focuses on the practical application issues faced by entities in specific sectors and explores how they are addressed in practice. Provides a high-level introduction to the key IFRS accounting issues for specific sectors and discusses how the transition to IFRS will affect an entity operating in that sector. For access to an extensive range of accounting, auditing and financial reporting guidance and literature, visit KPMG s Accounting Research Online. This web-based subscription service can be a valuable tool for anyone who wants to stay informed in today s dynamic environment. For a free 15-day trial, go to aro.kpmg.com and register today.

IFRS Practice Issues: Adopting the consolidation suite of standards 25 Acknowledgements We would like to acknowledge the efforts of the principal authors of this publication. They are Nirav Patel and Julie Santoro of the KPMG International Standards Group. We would also like to thank the contributions made by other reviewers, including other members of the Business Combinations and Consolidation Topic Team: Mahesh Balasubramanian Peter Carlson Steve Douglas Egbert Eeftink Ramon Jubels Wincey Lam Steve McGregor Mike Metcalf Paul Munter Claus Nielsen Emmanuel Paret Jim Tang KPMG in Bahrain KPMG in Australia KPMG in Canada KPMG in the Netherlands KPMG in Brazil KPMG in Hong Kong KPMG in South Africa KPMG in the UK KPMG in the US KPMG in Russia KPMG in France KPMG in Hong Kong

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