14. 05. 2024

Overhaul of IFRS accounting rules for subsidiaries

Overhaul of IFRS accounting rules for subsidiaries

In a bid to simplify financial reporting for subsidiary companies, the IASB has issued a new accounting standard, IFRS 19 with reduced disclosures

The new standard, IFRS 19 Subsidiaries without Public Accountability: Disclosures, permits eligible subsidiaries to use IFRS accounting standards with reduced disclosures, but will be a voluntary standard when it comes into effect in 2027.

Th e main reductions in disclosure will be related to liquidity risk and currency risk; comparative information for property, plant and equipment and intangible assets; breakdown of expenses by nature; and reconciliation of cash and cash equivalents.

Applying IFRS 19 will reduce the costs of preparing subsidiaries’ financial statements while maintaining the usefulness of the information for users of their financial statements, the International Accounting Standard Board (IASB) said.

It expects that for many companies, the cost savings and reporting simplifications on transition to IFRS 19 could be significant, reducing global reporting costs substantially by eliminating the need for dual record keeping and creating a centralised and standardised reporting process across groups.

One of the biggest beneficiaries will be on structure of the business with 68% of disclosures under IFRS 12 Disclosure of Interests in Other Entities removed, while there will be a 52% reduction in disclosures on revenue recognition, currently required under IFRS 15 Revenue from Contracts with Customers. IAS 16 Property Plant and Equipment disclosures will also be cut by two thirds.

When a parent company prepares consolidated financial statements that comply with IFRS, subsidiaries are required to report to the parent using IFRS. However, for their own financial statements, subsidiaries are permitted to use IFRS for SMEs Accounting Standard or UK GAAP

This means that subsidiaries have to keep two sets of accounting records because the requirements in the local standards differ from those in IFRS.

This means that the level of disclosures is often disproportionate to the information needs of their users.

IFRS 19 will address these problems by:

•            enabling subsidiaries to keep only one set of accounting records―to meet the needs of both their parent company and the users of their financial statements; and

•            reducing disclosure requirements―IFRS 19 permits reduced disclosures better suited to the needs of the users of their financial statements.

Andreas Barckow, IASB chair, said: ‘IFRS 19 reduces costs in the financial reporting ecosystem, especially for companies, while meeting users’ information needs.

‘It simplifies the reporting for subsidiaries by permitting the global financial reporting language to be applied throughout the group.’

A subsidiary will not be able to report under IFRS 19 if they do not have equities or debt listed on a stock exchange, or hold assets in a fiduciary capacity.

IFRS 19 has an effective date of 1 January 2027. Earlier application is permitted.

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