How to Account for Investments in Separate Financial Statements Under IAS 27

When IAS 27 applies (and when it doesn’t)

IAS 27 applies when an entity prepares separate financial statements in which investments in subsidiaries, associates, or joint ventures are accounted for as investments rather than being consolidated or equity-accounted in the primary statements. The standard does not apply to consolidated financial statements (those fall under IFRS 10) or to the equity method in an investor’s primary financial statements (that’s IAS 28).

The distinction matters because “separate financial statements” has a specific IFRS meaning. IAS 27.4 defines them as financial statements presented by a parent, an investor in an associate, or a venturer in a joint venture, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees. In the Netherlands, the most common scenario is a holding company that prepares consolidated IFRS financial statements for the group and also prepares separate financial statements for statutory filing purposes. Under Dutch GAAP (RJ), the equity method is mandatory for subsidiaries in the separate financial statements. But if the entity prepares its separate financial statements under IFRS (which IAS 27.4 permits), the policy election in IAS 27.10 opens up.

IAS 27.7 is clear: an entity that is exempted from preparing consolidated financial statements under IFRS 10.4(a) may prepare separate financial statements as its only financial statements. In that case, IAS 27 still applies. The exemption from consolidation doesn’t exempt the entity from accounting for its investments properly. A parent that doesn’t consolidate because its own parent produces IFRS consolidated statements still needs an IAS 27 policy election, an impairment assessment, and proper disclosure.

One point auditors miss: IAS 27 also covers investments in associates and joint ventures held in the separate financial statements. If the holding company owns a 30% stake in an associate alongside its 100% subsidiaries, both investments are in scope of IAS 27.10. The policy election applies per category (IAS 27.11), meaning the entity can choose one method for subsidiaries and a different method for associates, but must apply the chosen method consistently within each category.

The IAS 27.10 measurement election: cost, fair value, or equity method

IAS 27.10 gives the entity a choice. Account for each category of investment at cost, in accordance with IFRS 9 (fair value through profit or loss, or fair value through OCI for equity instruments under IFRS 9.5.7.5), or using the equity method as described in IAS 28. The entity must apply the same method to each category but can choose differently between categories.

In practice, most non-Big 4 Dutch clients preparing IFRS separate financial statements choose the cost method. The reasons are practical, not theoretical. Cost is the simplest to apply. It avoids the ongoing fair value measurement that IFRS 9 requires (which for unlisted subsidiaries means a Level 3 fair value exercise at every reporting date). It avoids the operational complexity of the equity method in the separate financial statements (which requires the same adjustments as in the consolidated statements, just applied to a single line item). Cost gives the holding company a stable balance sheet line that only moves on acquisition, disposal, or impairment.

The fair value option under IFRS 9 is more common for investments in associates where the entity holds listed equity or where the associate’s fair value is readily determinable. For wholly-owned unlisted subsidiaries, fair value measurement adds complexity without obvious benefit in most cases. The equity method in separate financial statements is rare in practice except where local regulations encourage or require it.

IAS 27.11 specifies that the policy election is made per category. The entity could measure subsidiaries at cost and associates at fair value through IFRS 9. But it cannot measure Subsidiary A at cost and Subsidiary B at fair value. Within a category, the method is uniform.

When a parent first prepares separate financial statements (or changes its accounting policy for investments), IAS 27.18A–18I provide detailed transition guidance. If an entity transitions from cost to equity method (or vice versa), IAS 27.18D requires the change to be accounted for in accordance with IAS 8. This isn’t something to overlook: a policy change in the measurement of investments in separate financial statements requires retrospective application unless impracticable.

The Dutch context: IFRS separate vs. Dutch GAAP separate

Most Dutch holding entities preparing consolidated IFRS financial statements still prepare their statutory separate financial statements under Dutch GAAP (RJ 100 series), not under IFRS. Under RJ 260, the equity method is mandatory for subsidiaries in the separate financial statements. This means the IAS 27.10 policy election only applies when the entity prepares its separate financial statements under IFRS.

Why does this matter for auditors? Because the same entity often has two sets of separate financial statements: one under IFRS (for group reporting purposes) and one under Dutch GAAP (for statutory filing at the KvK). The investment carrying amounts will differ between the two. A subsidiary measured at cost under IAS 27.10 in the IFRS separate financial statements will be measured at equity method under RJ 260 in the Dutch GAAP separate financial statements. The audit file needs to reconcile both, and the impairment assessment applies differently in each.

Under Dutch GAAP, the equity method carrying amount already reflects the investor’s share of the subsidiary’s net assets. An impairment test is triggered when there are indicators that the recoverable amount is below the equity-accounted balance. Under IFRS cost method, the carrying amount is the historical cost, which may be significantly above or below the current equity-accounted amount. The trigger assessment under IAS 36.12 applies to the cost-method carrying amount, not to an equity-method equivalent.

If your client files under both frameworks, make sure the working paper clearly identifies which measurement basis applies in which set of financial statements and that the impairment assessment is performed for the correct carrying amount in each case.

Impairment of investments in separate financial statements

The impairment rules depend on the measurement method elected.

If the entity measures investments at cost, IAS 27.10 requires application of IAS 36 (Impairment of Assets) to test for impairment. The investment is a single asset. Its carrying amount is the original cost (less any accumulated impairment). The recoverable amount is the higher of fair value less costs of disposal and value in use. For a subsidiary, value in use is typically calculated as the present value of estimated future cash flows expected to arise from dividends and the ultimate disposal of the investment.

Here’s where files fail. The impairment trigger assessment under IAS 36.12 requires the entity to assess at each reporting date whether there is any indication that the investment may be impaired. Auditors frequently skip this step when the subsidiary is profitable, on the assumption that a profitable subsidiary can’t be impaired. That’s wrong. If the subsidiary paid out all its retained earnings as dividends, its net assets may be below the parent’s carrying amount of the investment. If the subsidiary’s market or regulatory environment has deteriorated, its recoverable amount may have fallen below cost even if current-year profit is positive. The trigger assessment looks at indicators, not just the income statement.

IAS 36.12(d) lists one specific indicator relevant to investments: the carrying amount of the investment in the separate financial statements exceeds the carrying amount of the investee’s net assets in the consolidated financial statements, including associated goodwill. If the parent paid €10M for a subsidiary whose consolidated net assets (including goodwill) are now €7M, that’s a trigger under IAS 36.12(d). The trigger doesn’t mean the investment is impaired. It means you must test it.

If the entity measures investments at fair value under IFRS 9, IAS 36 does not apply. Impairment is handled through IFRS 9’s own framework. For equity instruments designated at fair value through OCI, there is no impairment model: fair value changes go to OCI and are never reclassified to profit or loss (IFRS 9.5.7.5). For investments measured at fair value through profit or loss, all changes hit the income statement directly.

If the entity uses the equity method, impairment follows IAS 28.40–43. The investment is tested for impairment as a single asset under IAS 36 whenever IAS 28.41A indicators are present.

Disclosure requirements under IAS 27.16–17

IAS 27.16 requires the entity to disclose a list of significant investments in subsidiaries, associates, and joint ventures, including the name, principal place of business (and country of incorporation if different), and the proportion of ownership interest. IAS 27.17 adds that the entity must disclose the method used to account for each category of investment.

These disclosures sound mechanical, but audit files frequently fail them. The most common gap: the separate financial statements list the subsidiaries but omit the accounting policy for investments entirely, or state “measured at cost” without specifying that this is a policy election under IAS 27.10 applied per category. IFRS 12 (Disclosure of Interests in Other Entities) adds further requirements, including the nature and extent of significant restrictions on the entity’s ability to access or use the assets of subsidiaries. If the subsidiary operates in a jurisdiction with capital controls or if loan covenants restrict dividend payments upstream, IFRS 12.13 requires disclosure of the nature and extent of those restrictions.

For entities using the cost method, another frequently missed disclosure is the amount of dividends recognised as income during the period (IAS 27.17(b)). If the parent received €1.2M in dividends from subsidiaries, that amount belongs in the notes to the separate financial statements. Without it, the reader cannot distinguish between the parent’s own operating income and the cash flow from investments.

Dividends and distributions in separate financial statements

Under the cost method, dividends from subsidiaries are recognised as income in profit or loss when the entity’s right to receive payment is established (IAS 27.12). This is the ex-dividend date in most jurisdictions. The practical consequence: a subsidiary that declares a €2M dividend in March 2025 for the year ended 31 December 2024 creates dividend income in the parent’s 2025 separate financial statements (assuming the right to receive is established in 2025 when the dividend is declared or approved).

One audit trap: if the subsidiary pays a dividend that exceeds its post-acquisition retained earnings, the excess may represent a return of the investment rather than investment income. IAS 27 doesn’t explicitly address this, but IAS 36’s impairment indicators apply. If the subsidiary’s net assets after the dividend distribution fall below the parent’s carrying amount of the investment, that’s an impairment trigger. The dividend itself isn’t automatically a problem, but it changes the impairment arithmetic.

Under the equity method, dividends reduce the carrying amount of the investment (IAS 28.10). They are not income. Under IFRS 9 fair value, dividends are income (IFRS 9.5.7.1A), but the investment’s fair value already reflects the ex-dividend price reduction.

Worked example: Vermeer Holding B.V.

Scenario: Vermeer Holding B.V. is a Dutch holding company with €6M in revenue from management fees. Year-end is 31 December 2024. Vermeer prepares IFRS separate financial statements alongside IFRS consolidated financial statements. Vermeer holds 100% of two subsidiaries and a 25% stake in an associate. The accounting policy is: subsidiaries at cost, associate using the equity method (IAS 27.11 permits different methods per category).

Subsidiary 1: Vermeer Productie B.V.

Acquired in 2019 for €5.2M. Net assets at 31 December 2024: €6.1M. No impairment indicators under IAS 36.12. Carrying amount in separate financial statements: €5.2M.

Subsidiary 2: Vermeer Logistiek B.V.

Acquired in 2021 for €3.8M. Net assets at 31 December 2024: €2.4M. The subsidiary reported consecutive losses in 2023 and 2024 following the loss of a major contract. Consolidated goodwill allocated: €0.9M. Consolidated net assets including goodwill: €3.3M.

Associate: Dekker Techniek B.V. (25%)

Carrying amount at 1 January 2024: €1.1M. Dekker reported profit of €480K for 2024. Share of profit: 25% × €480K = €120K. Dekker declared a dividend of €200K; Vermeer’s share: €50K.

Summary of investments in separate financial statements

A reviewer opening this file sees the policy election documented per category, the IAS 36.12 trigger assessment for each cost-method investment, the full impairment test where the assessment identified a trigger, and the equity method roll-forward for the associate.

Your documentation checklist

1. Document the IAS 27.10 accounting policy election for each category of investment (subsidiaries, associates, joint ventures) in the accounting policy section of the working paper, not just in the financial statements. Confirm the policy was applied consistently with the prior year or that any change was accounted for under IAS 8
2. For investments measured at cost, perform the IAS 36.12 impairment trigger assessment at each reporting date. Compare the carrying amount of each investment to the investee’s consolidated net assets including goodwill (IAS 36.12(d)) as a minimum indicator check
3. Where an impairment trigger exists, document the full IAS 36 impairment test with the recoverable amount calculation, discount rate, cash flow assumptions, and conclusion
4. For investments measured using the equity method, prepare a roll-forward showing the opening balance, share of profit or loss, dividends received, share of OCI, and closing balance. Cross-reference the investee’s financial statements
5. Verify that dividends received from cost-method investments are recognised as income in the correct period (when the right to receive is established, not when cash is received) and assess whether any dividend triggers an impairment indicator
6. Check the IAS 27.16–17 disclosure requirements: the entity must disclose the list of significant investments, the method used, and the same disclosures as required by IFRS 12

Common mistakes regulators flag

• Missing IAS 36.12 impairment trigger assessment: The AFM has flagged files where the separate financial statements carry investments at cost but the file contains no evidence of an IAS 36.12 impairment trigger assessment. The absence of a formal impairment test may be defensible. The absence of a documented trigger assessment is not.
• Confusing separate and consolidated impairment models: The PCAOB’s 2023 inspection observations noted that audit teams frequently fail to distinguish between the impairment model applicable to the separate financial statements (IAS 36 for cost-method investments) and the impairment model in the consolidated financial statements (IAS 36 applied to the CGU including goodwill). An investment can pass the consolidated impairment test while failing the separate financial statement test, or vice versa, because the unit of account differs.

Related Ciferi content

Related guides:

Put audit concepts into practice with these free tools:

Frequently asked questions

Further reading and source references

• IAS 27, Separate Financial Statements: the source standard governing accounting for investments in subsidiaries, associates, and joint ventures in separate financial statements.
• IAS 36, Impairment of Assets: applies to cost-method investments when impairment triggers are identified under IAS 36.12.
• IAS 28, Investments in Associates and Joint Ventures: governs equity method mechanics when elected under IAS 27.10(c).
• IFRS 12, Disclosure of Interests in Other Entities: additional disclosure requirements for significant restrictions and unconsolidated structured entities.