Most firms accept the cost-method carrying value for subsidiary investments without reassessing impairment indicators. I’ve reviewed files where the sub investment line has sat at the same number for five years and the WPs contain nothing except a copy of the prior-year balance. Your client is a Dutch holding company with four subs. The group produces consolidated FS under IFRS. But the holding company itself also files separate (enkelvoudige) financial statements (SFS), and the audit file has a single-line entry for “investments in subsidiaries” at €14M with no working paper explaining how that number was measured. The policy election isn’t documented. There’s no impairment assessment, no reconciliation to the consolidated carrying amounts. This is the file that fails review, and IAS 27 is the standard that tells you what should have been there.
IAS 27 (as amended 2011) governs the accounting for investments in subsidiaries, associates, and joint ventures in an entity’s SFS, requiring the entity to account for those investments at cost, at fair value under IFRS 9 , or using the equity method ( IAS 27.10 ), with the same accounting policy applied consistently to each category of investment.
Key Takeaways
- You’ll be able to identify when separate financial statements are in scope of IAS 27 and how they differ from individual financial statements prepared under local GAAP
- You’ll know the IAS 27.10 policy election and what drives the choice between cost, fair value, and equity method in practice for mid-tier clients
- You’ll understand the impairment and dividend requirements that apply differently depending on which measurement basis the entity elects
- You’ll have a worked example showing the full accounting for a Dutch holding entity using the cost method, including impairment triggers and dividend income recognition
When IAS 27 applies (and when it doesn’t)
IAS 27 applies when an entity prepares SFS in which investments in subs, 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 FS (those fall under IFRS 10 ) or to the equity method in an investor’s primary FS (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 FS for the group and also prepares SFS for statutory filing purposes. Under Dutch GAAP (RJ), the equity method is mandatory for subs in the SFS. But if the entity prepares its SFS 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 FS under IFRS 10.4 (a) may prepare SFS 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 SFS. If the holding company owns a 30% stake in an associate alongside its 100% subs, 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 subs and a different method for associates, but must apply the chosen method consistently within each category.
The IAS 27.10 measurement election
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 our experience, most mid-tier Dutch clients preparing IFRS SFS 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 subs means a Level 3 fair value exercise at every reporting date). It avoids the operational complexity of the equity method in the SFS (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, impairment, or a new capital contribution.
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 subs, fair value measurement adds complexity without obvious benefit in most cases. The equity method in SFS 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 subs 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 FS still prepare their statutory SFS under Dutch GAAP (RJ 100 series), not under IFRS. Under RJ 260, the equity method is mandatory for subs in the SFS. This means the IAS 27.10 policy election only applies when the entity prepares its SFS under IFRS.
Why does this matter for auditors? Because the same entity often has two sets of SFS. 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 sub measured at cost under IAS 27.10 in the IFRS SFS will be measured at equity method under RJ 260 in the Dutch GAAP SFS. 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 sub is profitable, on the assumption that a profitable sub can’t be impaired. The sub made money this year. Indicators appear reasonable. Waive further pursuit. That’s wrong. If the sub paid out all its retained earnings as dividends, its net assets may be below the parent’s carrying amount of the investment. If the sub’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. The file should tell a story about why the indicators were considered and what the team concluded, and in too many files I’ve seen that story is missing entirely.
IAS 36.12 (d) lists one specific indicator relevant to investments. The carrying amount of the investment in the SFS exceeds the carrying amount of the investee’s net assets in the consolidated FS, including associated goodwill. If the parent paid €10M for a sub 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), the proportion of ownership interest, and the voting rights held where these differ from the 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 is that the SFS list the subs 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 subs. If the sub 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 subs, that amount belongs in the notes to the SFS. 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 subs 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 is that a sub that declares a €2M dividend in March 2025 for the year ended 31 December 2024 creates dividend income in the parent’s 2025 SFS (assuming the right to receive is established in 2025 when the dividend is declared or approved).
One audit trap. If the sub 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 sub’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 SFS alongside IFRS consolidated FS. Vermeer holds 100% of two subs and a 25% stake in an associate. The accounting policy is subs 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.
Documentation note: “Investment in Vermeer Productie B.V. carried at cost of €5.2M ( IAS 27.10 (a)). Net assets per subsidiary’s trial balance: €6.1M. IAS 36.12 (d) comparison: carrying amount (€5.2M) does not exceed investee net assets in consolidated statements (€6.1M including allocated goodwill of €0.8M = €6.9M). No impairment trigger. No adjustment required.”
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.
Documentation note: “Investment in Vermeer Logistiek B.V. carried at cost of €3.8M ( IAS 27.10 (a)). IAS 36.12 (d) trigger identified: carrying amount (€3.8M) exceeds consolidated net assets including goodwill (€3.3M). Additional indicators: consecutive losses ( IAS 36.12 (b)), loss of major contract ( IAS 36.12 (c)). Impairment test required. Recoverable amount determined as value in use: present value of expected future dividend stream and terminal value based on management’s revised forecast (discount rate 9.2%, approved by engagement partner). Value in use: €3.1M. Impairment loss: €3.8M − €3.1M = €700K recognised in profit or loss. Revised carrying amount: €3.1M.”
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.
Documentation note: “Investment in Dekker Techniek B.V. accounted for using equity method ( IAS 27.10 (c) / IAS 28 ). Opening carrying amount: €1,100K. Add: share of profit €120K. Less: dividend received €50K. Closing carrying amount: €1,170K. No impairment indicators under IAS 28 .41A. Dividend of €50K reduces carrying amount, not recognised as income ( IAS 28.10 ).”
The summary of investments in the SFS pulls together the three lines above.
| Investment | Method | Carrying amount 31 Dec 2024 |
|---|---|---|
| Vermeer Productie B.V. | Cost | €5,200K |
| Vermeer Logistiek B.V. | Cost (post-impairment) | €3,100K |
| Dekker Techniek B.V. | Equity method | €1,170K |
| Total | €9,470K |
Your documentation checklist
- Document the IAS 27.10 accounting policy election for each category of investment (subs, associates, joint ventures, and any structured entities) in the accounting policy section of the WPs, not just in the FS. Confirm the policy was applied consistently with PY or that any change was accounted for under IAS 8
- 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
- Where an impairment trigger exists, document the full IAS 36 impairment test with the recoverable amount calculation, discount rate, cash flow assumptions, terminal value, and conclusion
- 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
- 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
- Check the IAS 27.16 -17 disclosure requirements. The entity must disclose the list of significant investments, the method used, the amount of dividends recognised, and the same disclosures as required by IFRS 12
Common mistakes regulators flag
- 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 (AFM, Sector in Beeld 2024, Accountancy en Verslaggeving, 28 November 2024). The absence of a formal impairment test may be defensible. The absence of a documented trigger assessment is not.
- 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 content
- Equity method (ciferi glossary entry covering the mechanics of equity method accounting that apply when the entity elects this option under IAS 27.10 (c))
- Financial ratio calculator (free ciferi tool for assessing subsidiary profitability ratios, which feed into the IAS 36.12 impairment trigger assessment for cost-method investments)
Related ciferi content
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Frequently asked questions
What measurement options does IAS 27.10 provide for investments in separate financial statements?
IAS 27.10 gives the entity three choices for each category of investment: cost, fair value in accordance with IFRS 9 , or the equity method as described in IAS 28 . The entity must apply the same method consistently within each category (subsidiaries, associates, joint ventures) but can choose differently between categories.
When does IAS 36 impairment testing apply to investments in separate financial statements?
IAS 36 impairment testing applies when the entity measures investments at cost under IAS 27.10 . The entity must assess at each reporting date whether there is any indication that the investment may be impaired under IAS 36.12 . If the carrying amount exceeds the investee’s consolidated net assets including goodwill, that is an impairment trigger requiring a full test.
How are dividends treated under the cost method in IAS 27 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 ). However, if the subsidiary pays a dividend that causes its net assets to fall below the parent’s carrying amount, this triggers an impairment indicator under IAS 36.12 .
Can an entity choose different measurement methods for subsidiaries and associates under IAS 27 ?
Yes. 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 , or subsidiaries at cost and associates using the equity method. However, within a single category, the method must be uniform across all investments.
What disclosures does IAS 27.16 –17 require for investments in separate financial statements?
IAS 27.16 requires disclosure of a list of significant investments including the name, principal place of business, country of incorporation, and ownership proportion. IAS 27.17 adds disclosure of the method used per category and the amount of dividends recognised as income. IFRS 12 adds further requirements about restrictions on accessing subsidiary assets.
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.