How to Audit Disclosures of Interests in Other Entities Under IFRS 12

Why IFRS 12 generates more disclosure findings than any comparable standard

IFRS 12 was issued in 2011 to consolidate the disclosure requirements previously scattered across IAS 27 , IAS 28 , IAS 31 , and SIC-12. That consolidation made the total volume of requirements visible for the first time, and the volume is substantial. A client with subsidiaries, an associate, and a joint arrangement can easily generate eight to twelve pages of IFRS 12 disclosures. Most mid-market clients produce two.

The gap exists because IFRS 12 has no materiality shortcut for most of its requirements. IFRS 12.3 states that the standard applies to entities with interests in subsidiaries, associates, joint arrangements, or unconsolidated structured entities. Unlike IFRS 7 (which allows grouping and summarising of financial instrument disclosures when individual detail is not material), IFRS 12 requires specific disclosures for each category of interest, and several requirements apply per individual investee. The summarised financial information requirement for material associates and joint ventures ( IFRS 12 .B12 through B13) requires twelve specific line items per investee. Multiply that across two or four investments and the note grows fast.

Your file needs a structured approach. A paragraph-by-paragraph checklist mapping each IFRS 12 requirement to the draft FS is the only reliable method I have found. In our experience, reviewing IFRS 12 disclosures without a checklist produces the same result every year. The engagement team confirms the investee list is complete, misses half the detailed requirements, and the review partner finds the gaps at sign-off.

Significant judgments and assumptions: IFRS 12.7 through IFRS 12.9

IFRS 12.7 requires disclosure of significant judgments and assumptions made in determining the nature of an interest in another entity or arrangement, and in determining the type of joint arrangement. IFRS 12.8 and IFRS 12.9 give specific examples.

IFRS 12.9 (a) requires disclosure when the client has determined it controls another entity even though it holds less than a majority of voting rights. This applies to de facto control situations where the client holds, for example, 45% of the voting rights and the remaining shares are widely dispersed. The disclosure must explain why the client concluded it has control despite holding less than half the votes. IFRS 12.9 (b) requires the equivalent disclosure when the client has determined it does not control another entity even though it holds more than half the voting rights (think protective rights or contractual restrictions on decision-making).

IFRS 12.7 (c) requires disclosure of significant judgments made in determining the type of joint arrangement (joint operation or joint venture). If the classification turned on the contractual terms overriding the legal form (the scenario described in the ciferi IFRS 11 guide), the FS must explain that judgment. This means describing the specific contractual provisions that led to the conclusion and why they were determinative.

Regulators flag this disclosure more than any other IFRS 12 requirement. The AFM’s reviews of structured entity disclosures have consistently noted that clients state conclusions without explaining the judgments behind them. “The Group has determined that it controls Entity X” without any explanation of the basis for that conclusion does not meet IFRS 12.7 . The fix is straightforward. Describe the specific facts that led to the judgment. The file should tell a story about how the conclusion was reached.

Compare the engagement team’s own documentation (the IFRS 10 control assessment, the IFRS 11 classification analysis) against what appears in the notes. If the engagement file contains a detailed control analysis but the notes contain a single sentence, the disclosure is incomplete.

Subsidiary disclosures: what IFRS 12.10 through IFRS 12.19 require

IFRS 12 requires two distinct categories of subsidiary disclosure. The first applies to every subsidiary. IFRS 12.10 requires disclosure of the composition of the group, including the name of each subsidiary, the principal place of business, the proportion of ownership interests held, and (if different) the proportion of voting rights held. For subsidiaries with material non-controlling interests (NCI), the requirements expand significantly.

IFRS 12.12 requires disclosure for each subsidiary with NCI that is material to the reporting entity. The required disclosures include the name of the subsidiary, the proportion of ownership interests held by NCI, profit or loss allocated to NCI during the period, accumulated NCI at the end of the period, and summarised financial information about the subsidiary.

The summarised financial information for subsidiaries with material NCI is specified in IFRS 12 .B10. It includes current assets, non-current assets, current liabilities, non-current liabilities, revenue, profit or loss, total other comprehensive income, and cash flows from operating, investing, and financing activities. This is not a condensed income statement and balance sheet. It is ten specific line items, each of which must appear in the notes. Most mid-market clients with material NCI disclose only profit or loss and the NCI balance.

IFRS 12.13 adds a requirement that applies when there are significant restrictions on the parent’s ability to access or use assets and settle liabilities of the group. Restrictions include protective rights of NCI and regulatory requirements, as well as contractual arrangements limiting dividend repatriation or asset transfers. If a subsidiary operates in a jurisdiction where dividend repatriation requires regulatory approval, IFRS 12.13 requires disclosure of the nature and extent of that restriction.

Associate and joint venture disclosures: the summarised financial information requirement

IFRS 12.20 through IFRS 12.23 require disclosures for interests in associates and joint ventures. The nature and extent of the interest and the risks associated with it must be addressed, along with the effects on the client’s financial position.

IFRS 12.21 (b) requires disclosure of summarised financial information for each associate or joint venture that is material to the reporting client. The specific items are listed in IFRS 12 .B12 and IFRS 12 .B13: current assets, non-current assets, current liabilities, non-current liabilities, revenue, profit or loss from continuing operations, post-tax profit or loss from discontinued operations, other comprehensive income, and total comprehensive income. IFRS 12 .B14 requires these amounts to be the full figures from the associate’s or joint venture’s own IFRS FS (adjusted for fair value adjustments at acquisition and equity method modifications), not the client’s share of those amounts.

This distinction matters. On the engagements we’ve worked, clients frequently disclose their 30% share of the associate’s revenue and profit. IFRS 12 .B14 requires disclosure of 100% of the associate’s revenue and profit. The reconciliation from the summarised financial information to the carrying amount of the interest is then disclosed separately under IFRS 12 .B12(b).

For individually immaterial associates and joint ventures, IFRS 12.21 (c) requires disclosure of aggregate carrying amount and aggregate amounts of the client’s share of profit or loss, other comprehensive income, and total comprehensive income.

Your file should identify which associates and joint ventures are material (apply your firm’s materiality threshold), prepare the disclosure checklist for each material investee, and verify that the summarised financial information reconciles to the equity method carrying amount. The ciferi Financial Ratio Calculator can help you cross-check the summarised financial information against the investee’s own reported figures.

Joint arrangement disclosures: what goes beyond IFRS 11

IFRS 12.20 through IFRS 12.23 apply to joint ventures (equity-accounted), and the summarised financial information requirements described above apply in full. For joint operations, the disclosure requirements are lighter because the assets, liabilities, revenues, and expenses are already recognised line by line in the client’s FS. The primary IFRS 12 disclosure for joint operations is IFRS 12.21 (a): the name, nature of the relationship, principal place of business, and proportion of ownership interest (and voting rights if different).

IFRS 12.7 (c) adds a significant judgment disclosure for the classification itself. If the joint arrangement is structured through a separate vehicle and the classification required analysis of contractual terms, that analysis must be described in the notes. This is the disclosure most frequently missing on files involving joint operations structured through B.V.s. The engagement team performs the classification analysis in the working papers but does not check whether the client reproduces the key judgments in the financial statements. Your review should cross-reference the IFRS 11 working paper (WP) against the IFRS 12 note.

Commitments and contingent liabilities relating to joint ventures and associates require separate disclosure under IFRS 12.22 . The client’s share of capital commitments and commitments to provide funding must be disclosed, along with any guarantees given. Contingent liabilities include both the client’s share of the joint venture’s contingent liabilities and any contingent liabilities of the client itself relating to the arrangement.

Unconsolidated structured entities: the disclosure most clients forget entirely

IFRS 12.24 through IFRS 12.31 require disclosures about unconsolidated structured entities in which the client has an interest. An unconsolidated structured entity is one designed so that voting or similar rights are not the dominant factor in deciding who controls it ( IFRS 12 .B21). Securitisation vehicles, asset-backed financing arrangements, and some fund structures fall into this category.

This is the disclosure that nobody wants to redraft on Day 90 of the audit. Most mid-market clients do not have interests in unconsolidated structured entities. The risk is when they do and nobody identifies them. In our experience, this is also where teams just roll it forward year after year, copying the prior period note without retesting whether a new arrangement (a fresh guarantee, a new subordinated lending position) has crept in.

Once identified, the IFRS 12.24 through IFRS 12.31 disclosures apply in full. A client that provides a guarantee to a special purpose vehicle for a property financing arrangement has an interest. So does a client holding subordinated notes in a securitisation vehicle. IFRS 12.26 requires disclosure of the nature and extent of the interest, including the nature, purpose, size, and activities of the structured entity, and how it is financed. IFRS 12.29 requires disclosure of the maximum exposure to loss and how that maximum exposure is determined. These two requirements together form the core of the structured entity note.

At planning, ask one specific question. Does the client have any interests in entities not controlled through voting rights? If yes, map the disclosures. If the answer is uncertain, send examples to management (guarantees, subordinated lending, variable interests in off-balance-sheet vehicles) and ask again. A blank response without investigation is not sufficient audit evidence for concluding that no structured entity interests exist.

Worked example: Van Leeuwen Groep N.V. and its five interests

Scenario: Van Leeuwen Groep N.V. (revenue €95M, industrial equipment distribution) has the following interests: (1) Van Leeuwen Duitsland GmbH, a 100% subsidiary in Germany; (2) Van Leeuwen Belgie N.V., an 80% subsidiary with 20% NCI held by a local partner; (3) Hafentechnik AG, a 35% associate in Switzerland; (4) Logistiek Centrum Rijn B.V., a 50/50 joint operation (classified per IFRS 11 based on an output purchase clause); (5) a guarantee over a property financing SPV (Van Leeuwen Vastgoed Fonds) that the group does not control. The client’s IFRS 12 note lists the five entities with ownership percentages and principal place of business. No other disclosures are provided.

Conclusion: The client’s existing two-paragraph IFRS 12 note covers roughly 15% of the required disclosures. The file now contains a mapped schedule showing each IFRS 12 requirement, the investee it applies to and the paragraph reference, with a column noting whether the draft FS address it. This schedule becomes the disclosure deficiency list for the management letter.

Practical checklist for your next IFRS 12 disclosure review

Common mistakes

• Disclosing summarised financial information for associates and joint ventures at the investor’s share (e.g., 30% of revenue) instead of 100% as required by IFRS 12 .B14. The FRC’s disclosure reviews have specifically flagged this error, noting that entities present their share of an associate’s profit without disclosing the associate’s total revenue, total assets, or other required line items.
• Omitting the IFRS 12.7 through IFRS 12.9 significant judgment disclosures entirely. The AFM’s thematic reviews on consolidation and interests in other entities have found that entities state classification conclusions (e.g., “the Group controls Entity X”) without explaining the basis for the judgment, particularly in cases involving de facto control or joint arrangement classification.

Related content

• Equity method: the ciferi glossary entry on IAS 28 equity method accounting, relevant for understanding the carrying amount that must reconcile to the summarised financial information under IFRS 12 .B12(b).
• Financial Ratio Calculator: use this tool to verify the summarised financial information line items for material associates by reconstructing key ratios from the investee’s own reported figures.
• IFRS 11 : Joint arrangements: covers the classification analysis under IFRS 11 that feeds directly into the IFRS 12.7 (c) significant judgment disclosure.

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Frequently asked questions

Further reading and source references

• IFRS 12 , Disclosure of Interests in Other Entities: the full disclosure framework for subsidiaries, associates, joint arrangements, and unconsolidated structured entities.
• IFRS 10 , Consolidated Financial Statements: the control framework that determines subsidiary classification.
• IAS 28 , Investments in Associates and Joint Ventures: equity method mechanics referenced in the summarised financial information reconciliation.
• IFRS 11 , Joint Arrangements: the classification framework that feeds into IFRS 12.7 (c) significant judgment disclosures.
• Equity method: ciferi glossary entry on IAS 28 equity method accounting.