Ind AS 112

Understanding Ind AS 112: Disclosure of Interests in Other Entities

Ind AS 112, an essential Indian Accounting Standard, provides comprehensive guidelines for the disclosure of an entity’s interests in its subsidiaries, joint arrangements (joint operations or joint ventures), associates, and unconsolidated structured entities. It aims to enhance transparency in financial reporting, enabling users of financial statements to gain a deeper understanding of a company’s complex group structures and the associated risks and rewards.

The Roots of Ind AS 112: Where it Comes From

Ind AS 112 is a direct convergence with IFRS 12, ‘Disclosure of Interests in Other Entities,’ issued by the International Accounting Standards Board (IASB). As part of India’s roadmap towards aligning its accounting standards with global best practices, the Ministry of Corporate Affairs (MCA) notified Ind AS 112, making it mandatory for specific classes of companies as they transition to the Ind AS framework. This standard replaced certain disclosure requirements that were previously scattered across various Indian Generally Accepted Accounting Principles (IGAAP) standards like AS 21 (Consolidated Financial Statements), AS 23 (Accounting for Investments in Associates), and AS 27 (Financial Reporting of Interests in Joint Ventures).

The standard became effective in line with the overall applicability dates for Ind AS, which generally commenced from April 1, 2016, for certain listed and large unlisted companies, with subsequent phases covering more entities.

Unpacking Ind AS 112: A Deep Dive into its Requirements

Ind AS 112 operates on a core principle: entities must disclose information that allows users of their financial statements to evaluate:

• The nature of their interests in other entities.
• The risks associated with those interests.
• The effects of those interests on their financial position, financial performance, and cash flows.

Key Disclosure Categories:

The standard broadly categorises disclosures based on the type of interest an entity holds:

• Interests in Subsidiaries: For entities that prepare consolidated financial statements, Ind AS 112 requires detailed disclosures about subsidiaries. This includes:
  • The name of the subsidiary, country of incorporation, and nature of the business.
  • The proportion of ownership interest and voting rights held.
  • Information about any significant restrictions (e.g., regulatory or contractual) on the parent’s ability to access or use assets and settle liabilities of the group.
  • A summary of financial information for subsidiaries with material non-controlling interests (NCI), including profit or loss allocated to NCI, accumulated NCI at the reporting date, and transactions with NCI.
  • The nature and extent of any non-controlling interests and the significant judgements and assumptions made in determining control.
• Interests in Joint Arrangements and Associates: For investments accounted for using the equity method, the standard mandates disclosures such as:
  • The name, nature of the business, country of incorporation, and the proportion of ownership interest.
  • The nature of the relationship and the extent of the entity’s interest.
  • Summarised financial information for individually material joint ventures and associates, including assets, liabilities, revenues, profit or loss, and other comprehensive income.
  • Information about unrecognised share of losses, if any.
  • The fair value of investments in associates or joint ventures for which there are published price quotations.
  • Contingent liabilities relating to the entity’s interests in joint ventures and associates.
• Interests in Unconsolidated Structured Entities: These are entities designed so that voting or similar rights are not the dominant factor in deciding who controls the entity (e.g., Special Purpose Vehicles for securitisation). Disclosures include:
  • The nature of the entity’s interests in the structured entity.
  • The purpose of the structured entity and how it is financed.
  • How the entity establishes sponsorship, provides financial support, or is otherwise involved.
  • The extent of the entity’s exposure to risk from its interests in unconsolidated structured entities (e.g., maximum exposure to loss, carrying amounts of assets transferred to the structured entity).

Beyond these categories, entities must also disclose significant judgements and assumptions made when determining whether they have control, joint control, or significant influence over another entity, or whether an entity is a structured entity.

Why Your Business Can’t Ignore Ind AS 112: The Imperative for Transparency

Ind AS 112 is not merely a compliance burden; it is a critical tool for enhancing the quality and relevance of financial reporting. Businesses must understand and apply it due to several compelling reasons:

• Enhanced Transparency & Investor Confidence: It provides a clearer, more holistic view of a company’s entire group structure, including complex arrangements and off-balance sheet exposures. This transparency builds trust with investors, lenders, and other stakeholders, who can make more informed decisions based on a comprehensive understanding of risks and rewards.
• Regulatory Compliance & Avoidance of Penalties: For companies mandated to follow Ind AS, adherence to Ind AS 112 is a non-negotiable legal requirement. Non-compliance can lead to audit qualifications, regulatory penalties, and reputational damage.
• Improved Risk Management: By mandating disclosures about various types of interests and the risks associated with them, the standard forces businesses to identify, assess, and articulate potential exposures (e.g., credit risk from guarantees, liquidity risk from funding commitments). This directly supports a robust risk management framework.
• Better Internal & External Decision Making: Comprehensive disclosures provide management with a clearer internal picture for strategic planning and resource allocation. Externally, analysts and rating agencies use this information to assess a company’s financial health and stability more accurately.
• Comparability: Standardised disclosures across entities allow for better comparability of financial statements, both within the industry and across different sectors.

Ind AS 112 in Action: Practical Scenarios for Businesses

Ind AS 112 finds its application across various business scenarios, especially for entities with diverse investment portfolios or complex organisational structures:

• Conglomerates & Large Corporations: Companies with multiple subsidiaries, joint ventures, and associates will extensively apply Ind AS 112 to present a consolidated and transparent view of their sprawling empires.
• Businesses with Strategic Alliances: Entities engaging in joint ventures, partnerships, or other collaborative arrangements will use this standard to disclose the nature, extent, and financial impact of these alliances.
• Special Purpose Entities (SPEs) & Securitisation Vehicles: Companies utilising SPEs for asset securitisation, project financing, or other specific purposes must disclose their involvement, even if these entities are not consolidated, to reveal potential off-balance sheet risks.
• Private Equity & Venture Capital Firms: Investment funds with significant stakes in portfolio companies will need to apply Ind AS 112 to provide transparency on their holdings and the associated risks.
• Mergers & Acquisitions (M&A) Activities: Post-acquisition, the details of acquired entities become subject to Ind AS 112 disclosure requirements within the parent company’s financial statements.
• Government Companies & Public Sector Undertakings (PSUs): Many PSUs operate through a network of subsidiaries and joint ventures, making Ind AS 112 crucial for their financial reporting.

Navigating the Landscape: Concepts Related to Ind AS 112

Ind AS 112 is intricately linked with several other accounting standards and fundamental concepts:

• Ind AS 110 (Consolidated Financial Statements): This standard defines control and dictates when an entity must prepare consolidated financial statements. Ind AS 112 then specifies the disclosures required for those consolidated entities.
• 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 112 mandates the specific disclosures for these equity-accounted investments.
• Control, Joint Control, and Significant Influence: These are the foundational concepts that determine the accounting treatment and, consequently, the disclosure requirements under Ind AS 112.
• Structured Entity: A key concept in Ind AS 112, referring to an entity designed so that voting or similar rights are not the dominant factor in deciding who controls the entity.
• Non-Controlling Interests (NCI): The portion of equity in a subsidiary not attributable directly or indirectly to a parent. Ind AS 112 requires specific disclosures about material NCIs.
• IFRS 12 (Disclosure of Interests in Other Entities): The international equivalent standard from which Ind AS 112 is derived, ensuring global comparability.
• Ind AS 24 (Related Party Disclosures): While distinct, there can be overlaps in disclosing transactions and balances with subsidiaries, associates, and joint ventures if they qualify as related parties.

Staying Current: Recent Developments and Interpretations

Ind AS 112 is considered a relatively stable standard since its initial notification. However, the application and interpretation of its requirements can evolve through several channels:

• Guidance from Regulatory Bodies: The Institute of Chartered Accountants of India (ICAI) and the Ministry of Corporate Affairs (MCA) periodically issue clarifications, educational materials, or FAQs that might impact how certain disclosures are prepared, particularly for complex or emerging business structures.
• Amendments to Related Standards: Changes in other Ind AS standards, such as those related to consolidation (Ind AS 110) or investments in associates/joint ventures (Ind AS 28), can indirectly influence the scope or nature of disclosures required by Ind AS 112. For instance, changes in the definition of a ‘business’ or control criteria might alter which entities fall under consolidation or equity accounting, thus impacting Ind AS 112 disclosures.
• Auditor Scrutiny: Increased focus from auditors on the completeness, accuracy, and relevance of disclosures under Ind AS 112, especially in the wake of corporate governance concerns, drives companies to ensure robust reporting.
• No Major Direct Amendments: As of recent times, there have been no significant direct amendments to Ind AS 112 itself. The standard continues to focus on enhancing transparency regarding group structures and interests in other entities.

Who Needs to Know: Key Departments Impacted by Ind AS 112

Compliance with and understanding of Ind AS 112 extends beyond the finance function, impacting several critical departments within a business:

• Finance and Accounting Department: This is the primary custodian, directly responsible for preparing, reviewing, and presenting the disclosures in the financial statements. They need in-depth knowledge of the standard’s requirements.
• Compliance and Legal Department: Responsible for ensuring adherence to all regulatory requirements, including accounting standards. They play a role in interpreting contractual agreements related to control, joint control, or significant influence.
• Investor Relations (IR) Department: As the interface with investors and financial analysts, IR personnel must understand the implications of these disclosures to effectively communicate the company’s financial position and risks.
• Internal Audit Department: Charged with evaluating the effectiveness of internal controls and the accuracy of financial reporting, Internal Audit scrutinises Ind AS 112 disclosures to ensure compliance and reliability.
• Corporate Strategy and Mergers & Acquisitions (M&A) Teams: When evaluating potential acquisitions, divestitures, joint ventures, or strategic alliances, these teams must consider the future disclosure implications under Ind AS 112.
• Risk Management Department: Uses the detailed information provided by Ind AS 112 disclosures to assess and manage risks stemming from interests in other entities, such as concentration risk or contingent liabilities.

The Road Ahead: Future Trajectories for Disclosure Standards

While Ind AS 112 is a stable standard, the broader financial reporting landscape is constantly evolving, which could influence future expectations for disclosures:

• Digitalisation and XBRL Reporting: The increasing move towards digital financial reporting (e.g., XBRL) may lead to demands for more granular, tagged, and machine-readable disclosures under Ind AS 112, facilitating automated analysis.
• Emphasis on ESG (Environmental, Social, and Governance) Disclosures: As integrated reporting gains traction, there might be future pressure to connect financial disclosures with ESG impacts, potentially requiring entities to disclose the ESG performance or risks associated with their subsidiaries or joint ventures.
• Substance over Form: Regulatory bodies and users of financial statements will likely continue to scrutinise complex structures to ensure that disclosures truly reflect the underlying economic reality, rather than just the legal form, especially for structured entities.
• Global Harmonisation: While Ind AS is already converged with IFRS, any future amendments to IFRS 12 by the IASB would likely be adopted into Ind AS 112, maintaining alignment with international best practices.
• Leveraging AI and Data Analytics: The growing use of artificial intelligence and machine learning in financial analysis and auditing could lead to more sophisticated tools for reviewing disclosures, potentially highlighting inconsistencies or areas requiring further clarity. This could, in turn, drive companies towards even greater precision and conciseness in their reporting.