Ind AS 27

Understanding Ind AS 27: A Quick Overview

Ind AS 27, “Separate Financial Statements,” is an Indian Accounting Standard that prescribes the accounting and disclosure requirements for investments in subsidiaries, joint ventures, and associates when an entity presents separate financial statements. It outlines the specific methods an entity can use to account for these investments in its own, standalone financial reports, distinguishing them from consolidated financial statements which present the financial position and results of operations for a group as a single economic entity.

The Journey of Ind AS 27: From Global Standards to Indian Adoption

The journey of Ind AS 27 is deeply rooted in India’s commitment to converge with International Financial Reporting Standards (IFRS). In 2008, the Ministry of Corporate Affairs (MCA) announced its roadmap for the implementation of Ind AS, which are largely converged with IFRS. While IFRS are issued by the International Accounting Standards Board (IASB), Ind AS are notified by the MCA in consultation with the National Financial Reporting Authority (NFRA) and the Institute of Chartered Accountants of India (ICAI).

Originally, the international equivalent, IAS 27, covered both “Consolidated and Separate Financial Statements.” However, with the issuance of IFRS 10 “Consolidated Financial Statements” in 2011, the content of IAS 27 was split. IFRS 10 took over the consolidation aspects, while the revised IAS 27 focused solely on “Separate Financial Statements.” Ind AS followed a similar trajectory, with Ind AS 110 covering consolidated statements and Ind AS 27 specifically addressing separate financial statements. This bifurcation aimed to provide clearer guidance on each distinct type of financial reporting, ensuring comprehensive and consistent application across entities.

The adoption of Ind AS was mandated in a phased manner for Indian companies, starting with large public interest entities from April 1, 2016, and subsequently extending to others. This transition required significant changes in how companies prepared and presented their financial statements, including their approach to separate financial reporting as guided by Ind AS 27.

Delving Deeper: What Ind AS 27 Mandates for Separate Financial Statements

The Core Principle: Why “Separate” Matters

Ind AS 27 applies when an entity elects, or is required by local regulations, to present separate financial statements. These statements are those presented in addition to, or in lieu of, consolidated financial statements. They provide a specific perspective on the financial performance and position of the reporting entity itself, excluding the effects of consolidation. This means that while consolidated statements offer a holistic view of an entire group, separate financial statements allow stakeholders to assess the financial health and operational efficiency of the parent company or an individual entity within a group, independent of its subsidiaries or joint ventures.

For example, a parent company might prepare separate financial statements to comply with specific legal requirements, to provide additional information to its own shareholders, or to serve as the basis for dividend distribution calculations, which are often based on the standalone profits of the parent entity.

Accounting for Investments: The Permitted Methods

The standard specifies how investments in subsidiaries, joint ventures, and associates should be accounted for in the separate financial statements. It offers three distinct accounting policy choices:

• Cost Method: Under this method, investments are recorded at their original cost. Subsequent changes in the investment’s value are generally not recognized in the financial statements unless there is an impairment loss. Dividends received from the investee are recognized as income in the investor’s profit or loss. This method provides a historical perspective and is often simpler to apply, but it does not reflect the current fair value or the investor’s share of the investee’s post-acquisition profits.
• Fair Value Method: Investments are measured at their fair value at each reporting date. Changes in fair value are typically recognized in profit or loss (unless the investment is designated at fair value through Other Comprehensive Income (OCI) under Ind AS 109, “Financial Instruments”). This method provides a more current valuation of the investment but can introduce volatility to the profit or loss statement due to market fluctuations.
• Equity Method: This method, prescribed by Ind AS 28 “Investments in Associates and Joint Ventures,” is generally used for investments in associates and joint ventures in consolidated financial statements. However, Ind AS 27 permits its use for investments in subsidiaries, associates, and joint ventures in separate financial statements. Under the equity method, the investment is initially recognized at cost and subsequently adjusted to reflect the investor’s share of the investee’s post-acquisition profit or loss and OCI. Dividends received reduce the carrying amount of the investment. This method provides a more comprehensive view of the investor’s economic interest in the investee.

Crucially, an entity must apply the chosen accounting policy consistently for each category of investments (i.e., for all investments in subsidiaries, for all investments in joint ventures, and for all investments in associates). However, it is permitted to apply different accounting policies for different categories.

Essential Disclosures

Ind AS 27 also mandates specific disclosures to ensure transparency and comparability. These include:

• The fact that the financial statements are separate financial statements.
• Reasons for preparing separate financial statements if they are not required by law.
• A list of significant investments in subsidiaries, joint ventures, and associates, including their name, country of incorporation, and proportion of ownership interest.
• A description of the methods used to account for these investments (e.g., cost, fair value, or equity method).
• If the entity has chosen the cost or equity method, information about the fair value of these investments (if readily determinable).
• Any significant judgments and assumptions made in applying the chosen accounting policy.

Why Ind AS 27 is Crucial for Your Business

Understanding and complying with Ind AS 27 is not merely a regulatory formality; it’s fundamental for several critical business functions:

• Legal and Regulatory Compliance: Many jurisdictions, including India, require certain entities (especially parent companies) to prepare separate financial statements in addition to, or sometimes instead of, consolidated financial statements. Non-compliance can lead to penalties, legal disputes, and reputational damage.
• Enhanced Transparency for Stakeholders: Separate financial statements offer a clear, unadulterated view of the standalone entity’s performance and financial health. This is vital for shareholders who want to assess the parent company’s direct profitability and solvency, creditors evaluating lending risks to the specific entity, and regulatory bodies overseeing individual corporate entities.
• Informed Decision-Making: Management relies on separate financial statements for internal decision-making, such as evaluating the performance of the core business, making capital allocation decisions, or determining the basis for dividend distributions. For instance, dividend payout policies are often tied to the distributable profits reported in separate financial statements rather than consolidated profits.
• Basis for Financial Ratios and Covenants: Lenders often impose financial covenants (e.g., debt-to-equity ratios, interest coverage ratios) that are calculated based on separate financial statements. Accurate reporting under Ind AS 27 ensures that these covenants are correctly monitored and maintained, preventing potential breaches.
• Facilitates Mergers & Acquisitions (M&A) and Due Diligence: In M&A scenarios, separate financial statements provide crucial insights into the target entity’s standalone financial position, aiding due diligence processes and valuation assessments.

Practical Applications: Where Ind AS 27 Comes into Play

Ind AS 27 has several common applications and use cases within the business world:

• Statutory Filings for Parent Companies: In India, most companies, including parent entities, are required to file their standalone (separate) financial statements with the Registrar of Companies (ROC). Ind AS 27 dictates how investments are presented in these filings.
• Basis for Dividend Declarations: The Companies Act, 2013, generally links dividend distribution to the profits available for distribution as per the standalone financial statements. Thus, the accounting treatment of investments under Ind AS 27 directly impacts the reported profits and, consequently, the capacity for dividend payouts.
• Loan Agreements and Credit Ratings: Banks and financial institutions often require separate financial statements as part of loan applications and for ongoing monitoring. Credit rating agencies also scrutinize separate financial statements to assess the standalone creditworthiness of the entity.
• Specific Regulatory Requirements: Certain sector-specific regulators (e.g., for banks, insurance companies, or non-banking financial companies) might have specific requirements for separate financial statements, and Ind AS 27 provides the overarching framework.
• Providing Complementary Information: Even when consolidated financial statements are presented, separate financial statements can offer valuable supplementary information. They allow users to disaggregate the performance of the parent entity from that of its entire group, providing a different lens for analysis.

Navigating the Landscape: Concepts Related to Ind AS 27

Ind AS 27 does not operate in isolation; it is part of a broader framework of accounting standards:

• Ind AS 110 “Consolidated Financial Statements”: This is the most directly related standard, defining the principles for presenting consolidated financial statements for a group of entities under the control of a parent. Ind AS 27 deals with the parent’s individual statements, while Ind AS 110 aggregates the entire group.
• Ind AS 28 “Investments in Associates and Joint Ventures”: This standard prescribes the accounting for investments in associates and joint ventures using the equity method. Ind AS 27 allows entities to apply the equity method for such investments (and even for subsidiaries) in their separate financial statements.
• Ind AS 103 “Business Combinations”: This standard deals with the accounting for business combinations (mergers and acquisitions), which often result in the creation of subsidiaries, thereby bringing them within the scope of Ind AS 27 (for separate statements) and Ind AS 110 (for consolidated statements).
• Ind AS 109 “Financial Instruments”: When an entity chooses to account for investments at fair value in its separate financial statements, the measurement and recognition criteria often fall under the purview of Ind AS 109, particularly regarding the classification and subsequent measurement of financial assets.
• “Separate Financial Statements” vs. “Consolidated Financial Statements”: This is a fundamental distinction. Separate financial statements present a single legal entity, while consolidated financial statements present the economic activities of an entire group of entities as if they were one.
• Equity Method, Cost Method, Fair Value through Profit or Loss (FVPL)/Other Comprehensive Income (FVOCI): These are the specific accounting methods for investments, as discussed earlier, and their application is a core decision point under Ind AS 27.

Staying Current: Recent Developments and Outlook for Ind AS 27

Compared to other dynamic accounting standards like those for financial instruments (Ind AS 109) or revenue recognition (Ind AS 115), Ind AS 27 itself has remained relatively stable since its split from the consolidation guidance. The core principles regarding the accounting for investments in separate financial statements are well-established globally (via IAS 27) and within the Indian context.

However, “latest about the concept” can often refer to how it interacts with other evolving standards or practical implementation challenges:

• Interplay with Ind AS 109: While Ind AS 27 sets the choices, the precise application of the fair value method often refers back to Ind AS 109 for classification, measurement, and impairment of financial assets. Any amendments to Ind AS 109 could indirectly impact the fair value accounting under Ind AS 27.
• Clarifications from NFRA/ICAI: From time to time, the National Financial Reporting Authority (NFRA) or the Institute of Chartered Accountants of India (ICAI) may issue clarifications, guidance notes, or frequently asked questions (FAQs) regarding the application of various Ind AS, including aspects that might touch upon Ind AS 27. These are essential for companies to monitor for consistent application.
• Impact of Digitalization and XBRL: The move towards more standardized digital reporting formats (like XBRL) means that the data points required by Ind AS 27 disclosures need to be accurately tagged and reported, which can be a continuous area of development for reporting systems.
• Evolving Economic Realities: While the standard itself is stable, economic downturns or specific industry challenges might highlight the importance of disclosures, especially concerning the impairment of investments, which, although primarily governed by Ind AS 36 “Impairment of Assets,” has a direct impact on the carrying value of investments under Ind AS 27.

Who Needs to Know? Impact Across Business Functions

Ind AS 27, while seemingly technical, has implications across various business departments:

• Finance and Accounting Department: This is the primary custodian of Ind AS 27 compliance. They are responsible for understanding the standard, selecting appropriate accounting policies, preparing the separate financial statements, and ensuring all required disclosures are made accurately.
• Compliance and Legal Department: These departments ensure that the company’s financial reporting adheres to all statutory and regulatory requirements, including those related to Ind AS 27. They also advise on the legal implications of financial disclosures.
• Internal and External Auditors: Auditors review the company’s financial statements to ensure they comply with Ind AS 27. Internal auditors ensure internal controls are adequate for accurate reporting, while external auditors provide an independent opinion on the fairness of the financial statements.
• Investor Relations (IR) Department: The IR team communicates the company’s financial performance to investors, analysts, and other stakeholders. A clear understanding of how investments are presented in separate financial statements helps them articulate the company’s standalone financial story accurately.
• Senior Management and Board of Directors: While not involved in day-to-day accounting, they rely on accurate separate financial statements for strategic decision-making, assessing the health of the core entity, and fulfilling their fiduciary duties, especially concerning dividend declarations and regulatory compliance.
• Treasury Department: Decisions related to inter-company financing, dividend repatriation, and liquidity management often have accounting implications under Ind AS 27, particularly concerning the valuation and impact on standalone profits.

The Road Ahead: Future Trajectories for Financial Reporting under Ind AS 27

The future of financial reporting, even for stable standards like Ind AS 27, is influenced by broader trends in corporate governance, technology, and economic transparency:

• Continued Emphasis on Transparency: Stakeholders are increasingly demanding more transparent and granular financial information. While Ind AS 27 is already robust, there might be further pushes for enhanced voluntary disclosures beyond the minimum requirements, especially concerning the fair value of non-marketable investments.
• Digital Transformation of Reporting: The increasing adoption of digital reporting formats (like XBRL) will continue to streamline the submission and analysis of financial statements. This will place greater importance on accurate tagging and data integrity for all disclosures, including those related to Ind AS 27.
• Convergence and Harmonization: India’s commitment to IFRS convergence means that any future amendments or interpretations by the IASB related to IAS 27 would likely be adopted into Ind AS 27, maintaining global alignment.
• Sustainability and ESG Reporting Intersections: As Environmental, Social, and Governance (ESG) reporting gains prominence, there might be indirect impacts. For instance, the valuation of an investment (accounted for under Ind AS 27) might be influenced by ESG risks associated with the investee, requiring careful consideration during impairment testing or fair value assessments.
• Focus on Enforcement and Quality of Reporting: Regulators like NFRA are increasingly scrutinizing the quality of financial reporting. This heightened vigilance will necessitate meticulous adherence to all Ind AS, including Ind AS 27, ensuring that accounting choices and disclosures are appropriate and robustly justified.

In essence, Ind AS 27 remains a foundational standard for understanding the standalone financial position of an entity, offering critical insights that complement the broader group perspective provided by consolidated financial statements.