CFM95350 - Interest restriction: Groups, periods and financial statements: the worldwide group: consolidated and non-consolidated subsidiaries

TIOPA10/S475

The rules differentiate between consolidated and non-consolidated subsidiaries. This distinction is important when determining the composition of the worldwide group because this includes the ultimate parent and all its consolidated subsidiaries. Subsidiaries which are not consolidated will therefore not be included in the group. They may instead be capable of forming their own groups.

Non-consolidated subsidiaries

Subsidiary X of parent Y will be a non-consolidated subsidiary of Y where Y would be required to measure its investment in X using fair value accounting.

IFRS investment entities

The most likely circumstance in which non-consolidated subsidiaries are encountered is where a parent entity is or would be considered an ‘investment entity’ under IFRS 10 (paragraphs 27 to 31). The essential characteristics of an investment entity are that:

  • it obtains funds from one or more investors for the purpose of providing those investors with investment management services;
  • it commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and
  • it measures and evaluates the performance of substantially all of its investments on a fair value basis.

Where a subsidiary is one of the investments managed on a fair value basis, IFRS 10.31 requires the investment entity to measure its investment in the subsidiary at fair value through profit and loss. So, where the investment entity prepares consolidated financial statements, it discloses the investment at fair value through profit or loss and does not consolidate the subsidiary. Further if all of its subsidiaries are such investments, the investment entity does not prepare consolidate financial statements.

Under S475, a subsidiary treated as an investment will be a non-consolidated subsidiary.

That subsidiary may then be the ultimate parent of its own worldwide group, comprising it and its subsidiaries.

Subsidiaries held for sale or for distribution to shareholders

During a period of account where a sub-group made up of subsidiary X and X’s own subsidiaries is accounted for as ‘held for sale’ or ‘held for distribution to owners’ in the consolidated financial statements of ultimate parent Y, Y still controls the sub-group until disposal. For accounting purposes, the results of the sub-group should continue to be included in the consolidated financial statements of Y, and therefore the sub-group should remain within Y’s CIR group until disposal. Post disposal, the sub-group should be consolidated into the acquirer’s CIR group

Consolidated subsidiaries

If X is a subsidiary of Y but fails the non-consolidated subsidiary test, then it will be a consolidated subsidiary of Y by default.

Subsidiaries that are excluded from consolidation on the basis of immateriality

It is possible that an ultimate parent, Y, does not consolidate the results of a subsidiary X when preparing its financial statements purely on the grounds of materiality. This would not prevent the entity from being a consolidated subsidiary of Y. Therefore, unless X meets the non-consolidation test above, X will still be a consolidated subsidiary of Y for CIR purposes.

International accounting standards

Whether an entity is a subsidiary is determined by reference to its meaning under international accounting standards (IAS), rather than the actual accounting treatment under other GAAP, if different.

Certain subsidiaries of investment managers

S454A may have the effect of excluding certain subsidiaries, consolidated in the financial statements of the investment manager’s group, from the investment manager’s CIR worldwide group. See CFM95395.