Ifrs 12Edit
IFRS 12 Disclosure of Interests in Other Entities is an international accounting standard issued by the International Accounting Standards Board (IASB). It prescribes the disclosures reporting entities must provide about interests in other entities, including subsidiaries, joint ventures, associates, and unconsolidated structured entities. The standard sits alongside the broader IFRS framework, notably IFRS 10, IFRS 11, and IAS 28, to give users a clearer view of governance, risk, and potential financial exposure within corporate groups. It is a disclosure-focused standard, not a rule that changes recognition or consolidation outcomes by itself.
IFRS 12 aims to improve transparency for investors, lenders, and regulators by illuminating the relationships and arrangements that can affect a reporting entity’s returns. By requiring visibility into who controls what, how much risk an investor bears, and what the entity’s involvement with other entities entails, the standard supports more informed capital allocation and governance oversight. It does not alter the core consolidation standards, but it complements them by detailing the information users need to assess the true economic reality of a group. For readers seeking context, the standard interacts with discussions of control and influence as outlined in IFRS 10 and IAS 28, and with the concept of structured entities as discussed in structured entity.
Scope and application
- IFRS 12 applies to all entities reporting under IFRS that have interests in other entities. This includes:
- subsidiaries, joint ventures, and associates, where ownership or contractual arrangements give rise to power, joint control, or significant influence. See IFRS 10 for the definition of control and IAS 28 for significant influence.
- unconsolidated structured entities, such as special purpose vehicles or similar arrangements where the entity has exposure to variability in returns from its involvement. See structured entity for the concept.
- The disclosures cover the nature of relationships, the extent of involvement, and the associated risks and returns. They also require the disclosure of significant judgments used to determine whether relationships meet the criteria for consolidation, joint control, or significant influence. See IFRS 10 for control criteria and IAS 28 for equity-accounted investments.
- The range of entities and arrangements described by IFRS 12 is broad enough to encompass traditional corporate subsidiaries as well as modern financing structures and off-balance-sheet vehicles. The standard is applicable to the annual financial statements prepared under IFRS, with the intention of enhancing comparability across entities and jurisdictions. For broader context on reporting, see financial reporting.
Key disclosures and concepts
The nature of interests in other entities:
The extent of involvement with unconsolidated structured entities:
- Information about the entity’s exposure to risks and rewards arising from involvement with structured entities that are not consolidated.
- The maximum exposure to loss and other potential returns, where applicable, and how those exposures arise (e.g., guarantees, liquidity facilities, or other commitments). See off-balance-sheet practices and structured entity discussions.
Significant judgments and assumptions:
Consequences for financial statements:
- How these interests affect the entity’s reported assets, liabilities, and risks, including any effect on the consolidation boundary if control or significant influence is reassessed. The disclosures are designed to illuminate potential sources of variability in returns, not to redefine accounting measurements.
Relationship to the IFRS framework
IFRS 12 does not replace the core consolidation standards; instead, it provides a transparent overlay that helps users understand the structure and risk profile of the reporting entity’s business combinations and investments. It clarifies the line between reporting entities’ direct ownership and the arrangements that could affect returns without triggering consolidation. In practice, this means readers can better assess: - Who has control or significant influence over other entities (see IFRS 10 and IAS 28); - How structured entities contribute to risk and exposure (see structured entity); - How these relationships interact with the entity’s governance, liquidity, and capital management (see Consolidated financial statements and risk disclosures).
Controversies and debates
From a governance and market-efficiency perspective, IFRS 12 supports the principle that markets function best when participants have access to relevant information about ownership, control, and risk. Proponents argue that the standard: - Improves transparency, reducing information asymmetries that can distort investment decisions. - Decreases the risk that off-balance-sheet arrangements obscure leverage and liquidity pressures. - Encourages disciplined governance, since managers must justify the nature and extent of relationships with other entities.
Critics, particularly those concerned about the cost and complexity of compliance, contend that IFRS 12 imposes substantial administrative burden, especially on smaller firms or groups with complex structures. They may argue that the disclosures can be verbose and duplicative of other notes, leading to diminishing marginal usefulness. However, the core function of the disclosures—clarifying risk exposure and the basis for consolidation decisions—remains a defensible objective for capital markets.
Another area of debate centers on the interpretation of control, joint control, and significant influence. Because IFRS 12 relies on judgments about power and returns, disagreements can arise over whether particular arrangements should be consolidated or disclosed as structured entities. Proponents contend that well-documented judgments tied to established definitions in IFRS 10 and IAS 28 reduce opportunistic reporting, while critics worry about potential inconsistency in applying the judgments across entities. The ongoing relevance of IFRS 12 rests in its ability to provide comparable disclosures without stifling legitimate corporate financing creativity.
From a broader policy angle, defenders of rigorous disclosures argue that transparency supports investor protection and efficient capital allocation. Critics who frame disclosures as a form of regulatory overreach or a drawback to competitiveness miss the point that the standard targets information asymmetries, not social policy goals. In this view, the improvement in market discipline is a feature, not a flaw.