IAS 27 Separate Financial Statements: When and Why They Are Prepared

IAS 27 Separate Financial Statements: When and Why They Are Prepared

By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)

Lead Instructor, Global Fin X | www.globalfinx.in/manikanta

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IAS 27 is a short standard covering a genuinely simple idea, but it sits at the centre of a naming confusion that trips up almost everyone encountering group accounting for the first time. Separate financial statements are not the same thing as standalone financial statements in the loose everyday sense, and they are absolutely not the same thing as individual financial statements of an entity with no subsidiaries, associates, or joint ventures at all. The word "separate" has a precise technical meaning under IFRS, and getting that meaning wrong is where most confusion starts.

In India, this is not an abstract accounting question. Every Indian parent company preparing consolidated financial statements under the Companies Act 2013 is also legally required to lay its own standalone financial statements before its shareholders at the same annual general meeting. IAS 27 (as Ind AS 27) is the standard that governs precisely how that mandatory standalone statement accounts for the investments in subsidiaries, associates, and joint ventures sitting on the parent's own books.

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What "Separate Financial Statements" Actually Means

IAS 27 defines separate financial statements as those presented by a parent (an investor with control of a subsidiary), or an investor with joint control of, or significant influence over, an investee, in which the investments are accounted for at cost, in accordance with IFRS 9, or using the equity method as described in IAS 28, rather than on the basis of the reported results and net assets of the investees.

Three things follow from this definition. First, separate financial statements are, by definition, presented in addition to consolidated financial statements (where a parent has subsidiaries) or in addition to financial statements in which an investor accounts for investments in associates or joint ventures using the equity method. They are a companion set of statements, not a substitute for either. Second, an entity with no investments in subsidiaries, associates, or joint ventures at all does not produce "separate financial statements" in the IAS 27 sense, because there is nothing here for the standard to govern; its ordinary financial statements are simply its financial statements, full stop. Third, and this is the detail most commonly missed, an investor that holds only investments in associates or joint ventures, with no subsidiaries whatsoever, and prepares financial statements applying the equity method to those investments, is not preparing separate financial statements either; equity-accounted financial statements sit conceptually alongside consolidated financial statements as a form of statements that reflect the investee's underlying performance and net assets, which is exactly what IAS 27's definition of separate financial statements excludes.

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Why an Entity Ends Up Preparing Separate Financial Statements

IFRS itself does not mandate that any entity prepare separate financial statements. IAS 27 becomes relevant only once an entity chooses to, or is required by local law or regulation to, present them. This is worth stating plainly: the requirement to prepare separate financial statements, where it exists, comes from company law, securities regulation, or tax law in the relevant jurisdiction, not from the IFRS framework itself.

The most common drivers, both globally and specifically in India:

A parent company legal requirement to present its own individual financial position, distinct from the group's consolidated position, because shareholders, creditors, and regulators of the specific legal entity have an interest in that entity's own standalone solvency, distributable reserves, and performance, independent of how the wider group performs as a combined economic unit.

Distributable reserves and dividend law. In most jurisdictions, including India, a company's ability to declare a dividend is governed by reference to its own standalone (separate) retained earnings and reserves, not the consolidated group's retained earnings. A parent whose subsidiaries are highly profitable but which itself, as a standalone legal entity, has insufficient distributable reserves cannot lawfully pay a dividend out of the group's consolidated profit; the standalone statutory position governs.

Tax computation. Corporate income tax in most jurisdictions, again including India, is assessed at the level of the individual legal entity, not the consolidated group (India does not currently have a group taxation regime comparable to some other jurisdictions). The standalone financial statements are the natural starting point for the entity's own tax computation.

Regulatory capital and lending covenant requirements that reference the specific legal entity's own balance sheet, particularly relevant for regulated entities like banks and NBFCs, where capital adequacy is measured at both the standalone and consolidated levels under RBI's supervisory framework.

Local statutory filing requirements with the company registrar or equivalent body, which in most jurisdictions require the specific legal entity's own accounts, not merely the consolidated group accounts.

India: A Mandatory, Not Optional, Requirement

Under Section 129 of the Companies Act 2013, every Indian company must prepare financial statements for each financial year that give a true and fair view of its own state of affairs, in the form and manner prescribed. Where a company has one or more subsidiaries (a term that, for this specific purpose, is defined by the Act to include associate companies and joint ventures), Section 129(3) additionally requires it to prepare consolidated financial statements, laid before the annual general meeting in the same form and manner as, and alongside, its own standalone financial statements. The company must also attach a separate statement (Form AOC-1) summarising the salient features of each subsidiary's and associate's financial position.

This means Indian parent companies do not have the option IAS 27 otherwise contemplates of choosing to skip separate financial statements entirely; the standalone financial statements are a mandatory, independent statutory deliverable, presented and audited alongside, but never instead of, the consolidated financial statements. A very small number of narrow exemptions from preparing consolidated financial statements do exist under the Companies (Accounts) Rules (a company that is a wholly owned or near-wholly-owned subsidiary, with no listed securities, whose own parent already files consolidated financial statements, for instance) but these exemptions apply to the consolidation requirement, not to the requirement to prepare standalone financial statements, which remains universal.

The practical consequence: every listed Indian parent company, without exception, presents both a standalone balance sheet and income statement and a consolidated balance sheet and income statement in the same annual report, and IAS 27's (Ind AS 27's) measurement choices govern precisely how the investments in subsidiaries, associates, and joint ventures are carried in that standalone set of numbers.

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The Three Measurement Options

Where separate financial statements are prepared, IAS 27 requires the investor to account for its investments in subsidiaries, joint ventures, and associates using one of three methods:

At cost. The investment is carried at its original cost, adjusted only for any impairment. This is the simplest approach and, in practice, the most commonly adopted in Indian standalone financial statements.

In accordance with IFRS 9 (that is, at fair value, either through profit or loss or, for equity instruments, through other comprehensive income under the irrevocable FVOCI election). This treats the investment exactly as any other equity instrument would be treated under IFRS 9's general classification rules, marking it to fair value at each reporting date.

Using the equity method as described in IAS 28. This is somewhat unusual conceptually: IAS 28's equity method exists precisely to reflect the investee's underlying performance in a single-line adjustment, which is exactly what IAS 27's own definition of separate financial statements says these statements are not meant to do. The standard nonetheless permits this option, primarily because some jurisdictions' local company law or local GAAP mandates the equity method for standalone statutory accounts, and permitting the same method under IFRS avoids a company having to maintain two entirely different measurement bases for what is otherwise the same set of standalone numbers.

The same accounting policy must be applied for each category of investment (subsidiaries as one category, joint ventures as another, associates as a third), though different categories can, in principle, use different methods from one another. If any investment in the category is classified as held for sale under IFRS 5, the measurement approach for that specific investment follows IFRS 5's own requirements instead, regardless of which of the three ordinary methods the entity otherwise applies to the category.

Investment Entities: A Mandatory Departure

Where a parent qualifies as an investment entity under IFRS 10's specific definition (covered in Post 50) and is required by IFRS 10 to measure its investments in particular subsidiaries at fair value through profit or loss rather than consolidating them, that same fair value through profit or loss measurement must also be used in the investment entity's separate financial statements for those specific investments; the entity does not have the ordinary IAS 27 choice of cost or equity method for investments that IFRS 10 has already mandated be fair valued.

Cost: What It Actually Means

IAS 27 does not itself define "cost" in detail, leaving entities to develop an accounting policy consistent with the general hierarchy in IAS 8. In practice, cost is generally taken to mean the fair value of the consideration given at the date the investment was made, plus any directly attributable transaction costs, established at initial recognition and not subsequently remeasured (other than for impairment).

Where a new parent is inserted above an existing parent through a reorganisation (a scheme of arrangement, for instance, a structure not uncommon in Indian group restructurings), and the new parent obtains control of the original parent by issuing equity instruments in exchange for equity instruments of the original parent, with the ownership interests of the group's ultimate shareholders otherwise unchanged, specific guidance addresses how the new parent measures the cost of its investment in the original parent, generally at the carrying amount of its share of the equity items of the original parent, rather than at fair value, to avoid an artificial step-up in values purely as a consequence of an internal reorganisation with no substantive change in the ultimate ownership.

Dividends: The Same Fork as the Equity Method

Dividend recognition in separate financial statements depends entirely on which of the three measurement policies is applied, echoing the same fork already established in Post 52's discussion of the equity method.

Where the investment is carried at cost or at fair value under IFRS 9, dividends received from a subsidiary, joint venture, or associate are recognised as income directly in the investor's profit or loss, in the period the investor's right to receive payment is established, regardless of whether the dividend is paid out of the investee's pre-acquisition or post-acquisition profits. This is a deliberate simplification introduced by amendments to IAS 27 some years ago, replacing an earlier and more complicated pre-acquisition/post-acquisition profit distinction that had previously required separate impairment testing whenever a dividend exceeded the investee's post-acquisition earnings; the current approach instead relies on the ordinary IAS 36 impairment indicator framework to catch situations where a large dividend signals a genuine decline in the investment's recoverable value, rather than automatically treating any dividend in excess of post-acquisition earnings as itself a return of capital requiring separate accounting.

Where the equity method is instead applied in the separate financial statements, dividends received reduce the carrying amount of the investment, exactly as they would under ordinary IAS 28 equity accounting; they are not recognised as income.

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Impairment in Separate Financial Statements

Where an investment in a subsidiary, joint venture, or associate is carried at cost in the separate financial statements, the investor applies IAS 36's impairment framework directly to that cost-based carrying amount whenever an impairment indicator exists. A dividend received from the investee that exceeds the investee's total comprehensive income for the relevant period is specifically identified in the standard as an example of an event that may indicate the investment should be tested for impairment, since it may signal that the investee has effectively returned capital rather than distributed genuine post-acquisition earnings.

Where the investment is measured at fair value under IFRS 9 instead, no separate IAS 36 impairment test applies; fair value movements, whether increases or decreases, are captured directly through the normal FVTPL or FVOCI mechanics, which already reflect any decline in recoverable value through the fair value figure itself.

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How Separate Financial Statements Relate to Consolidated Financial Statements

It is worth being explicit about a point that often causes confusion: separate financial statements are not less rigorous, less audited, or somehow a secondary afterthought compared to consolidated financial statements. In India specifically, both the standalone and the consolidated financial statements are audited, both are laid before the same annual general meeting, and both carry full statutory force. They simply answer different questions. The standalone statements answer: how did this specific legal entity perform, and what is its own financial position, on its own books, measuring its investments in subsidiaries and associates using one of the three IAS 27 methods rather than combining or equity-accounting their underlying results? The consolidated statements answer: how did the economic group as a whole perform, combining or equity-accounting the results of every controlled, jointly controlled, or significantly influenced entity as if they were extensions of the reporting entity's own operations?

For an Indian holding company with several operating subsidiaries and relatively modest standalone operations of its own (a common structure for listed group holding companies), the standalone financial statements can look dramatically different from the consolidated ones: a standalone balance sheet dominated by investments carried at cost, with standalone profit driven largely by dividend income received from subsidiaries, sitting alongside a consolidated balance sheet and income statement that reflects the full combined scale of the group's actual manufacturing, retail, or services operations. Both are correct; they are simply answering different questions about different reporting entities (the legal entity versus the economic group), and analysts reading Indian annual reports need to be alert to which set of numbers a given ratio or metric is drawn from.

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Ind AS 27 vs IAS 27: Key Differences

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What Big 4 Auditors Focus On

Consistency of accounting policy across categories of investment. Auditors verify that the same measurement method (cost, IFRS 9, or equity method) has been applied consistently to all investments within the same category (all subsidiaries, for instance), and that any change in policy has been applied retrospectively as a change in accounting policy under IAS 8, rather than selectively to individual investments within a category without proper justification.

Impairment indicator identification for cost-carried investments. Where investments in subsidiaries are carried at cost in the standalone financial statements, auditors specifically test whether dividends received during the year exceeded the relevant subsidiary's total comprehensive income for the period, which is an explicit trigger for impairment testing under the standard, and whether management has performed and documented that test where the trigger was present.

Correct dividend income recognition and timing. Auditors verify that dividend income has been recognised only when the investor's right to receive payment is established (typically the date the dividend is declared by the investee, not merely proposed), and that the classification aligns with the measurement policy actually applied (income for cost/FVTPL, reduction in carrying amount for equity method).

Distinguishing separate financial statements from consolidated exemption scenarios. For intermediate holding companies within Indian groups, auditors verify whether the entity has correctly identified whether it qualifies for the Companies (Accounts) Rules consolidation exemption (which relieves it only from preparing consolidated financial statements, not standalone ones), and that the standalone financial statements are prepared and presented regardless of that exemption's applicability.

Reorganisation-related cost measurement. For newly inserted holding entities arising from group reorganisations or schemes of arrangement, auditors test whether the cost of the investment in the entity now sitting below the new parent has been measured on the appropriate basis (carrying amount of the underlying equity, rather than an inflated fair value), consistent with the specific guidance addressing this scenario.

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Dip IFRS Exam Angle

IAS 27 questions in Dip IFRS are typically shorter and more conceptual than the heavier consolidation and equity method topics, often embedded as a smaller component within a broader group accounting scenario question.

Most tested areas:

Definition precision: distinguishing separate financial statements (an investor with subsidiaries, associates, or joint ventures, choosing cost, IFRS 9, or equity method for those investments) from ordinary individual financial statements of an entity with no such investments at all, and from equity-accounted financial statements of an investor with only associates or joint ventures.

The three measurement options and consistency requirement: know that the same policy must apply to an entire category of investment, and that a change in policy is a change in accounting policy under IAS 8.

Dividend recognition fork: cost or IFRS 9 measurement recognises dividends as income; equity method reduces the carrying amount instead. This exact distinction, already tested under IAS 28, reappears in the IAS 27 context.

Impairment trigger: a dividend exceeding the investee's total comprehensive income for the period is a specific, examinable indicator requiring an impairment assessment where the investment is carried at cost.

Common traps:

Describing any standalone financial statements as "separate financial statements" regardless of whether the entity holds investments in subsidiaries, associates, or joint ventures. The IAS 27 label applies only in that specific context.

Assuming an entity holding only equity-accounted associates (with no subsidiaries at all) is preparing separate financial statements. It is not; IAS 27's definition specifically excludes financial statements in which investments are accounted for using the equity method as the entity's primary basis of reporting for those investees.

Recognising a dividend as income when the equity method has been elected for separate financial statements purposes. The dividend reduces the carrying amount instead, exactly as under ordinary IAS 28 equity accounting.

Assuming IFRS itself requires separate financial statements to be prepared. It does not; the requirement, where it exists, comes from local law or regulation.

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FAQ

Does every company that has a subsidiary need to prepare separate financial statements under IFRS?

No, not purely because of IFRS itself. IAS 27 governs how to account for investments in subsidiaries, associates, and joint ventures if and when separate financial statements are prepared, but the underlying requirement (or choice) to prepare them at all comes from local company law, securities regulation, or similar sources. In India, Section 129 of the Companies Act 2013 creates that requirement directly.

Can a company use the equity method for some subsidiaries and cost for others in its separate financial statements?

No, not within the same category. The same accounting policy must be applied to each category of investment (subsidiaries, joint ventures, associates) as a whole. An entity could, however, use cost for its subsidiary investments and the equity method for its associate investments, since these are different categories.

How does IAS 27 interact with IFRS 5 if an investment in a subsidiary is being sold?

Where an investment (or a portion of it) meets the IFRS 5 held-for-sale criteria, IFRS 5's own measurement requirements apply to that specific investment, overriding whichever of the three ordinary IAS 27 methods the entity otherwise applies to the category, for as long as the held-for-sale classification remains in place.

If an Indian holding company's standalone profit is driven mainly by dividends from subsidiaries, does that mean its standalone financial statements are less meaningful than the consolidated ones?

Not less meaningful, just answering a different question. The standalone financial statements reflect the legal entity's own position, which is what governs its own distributable reserves, its own tax liability, and its own solvency as an independent legal person; the consolidated financial statements reflect the combined economic group. Both are required, both are audited, and both are relevant depending on which question a reader is trying to answer.

Does the choice between cost and fair value in separate financial statements affect the consolidated financial statements?

No. The measurement policy elected under IAS 27 for separate financial statements has no bearing on how the same investments are treated in the consolidated financial statements, where subsidiaries are always fully consolidated (assets, liabilities, income, and expenses combined line by line) and associates and joint ventures are always equity accounted under IAS 28, regardless of what policy the parent uses in its own standalone books.

Is a bank's separate financial statement treated differently under RBI regulation compared to an ordinary company?

The IAS 27 (Ind AS 27) accounting principles themselves are the same. However, RBI's regulatory framework additionally requires banks and NBFCs to report capital adequacy and various prudential ratios at both the standalone (solo) and consolidated levels, with the standalone Ind AS 27 figures feeding directly into that solo-level regulatory reporting, adding a supervisory layer on top of the ordinary accounting requirement.

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Enroll with Global Fin X

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This is Post 53 of the Global Fin X IFRS Series. Previous: IAS 28: Equity Method, Associates, Joint Ventures and Impairment of Investment. Next: Post 54: IFRS 12 Disclosure of Interests in Other Entities: What the Notes Must Say.