Ind AS 112: Disclosure of Interests in Other Entities Explained

Ind AS 112, Disclosure of Interests in Other Entities, requires an entity to disclose information that lets a reader evaluate the nature of, and the risks arising from, its interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities, together with the effect of those interests on its financial position, performance and cash flows. It is a pure disclosure standard. Nothing in it changes how any of those interests is recognised or measured; that work is done by Ind AS 110, Ind AS 111 and Ind AS 28.

The more useful point comes first, and most articles on this standard skip it. Ind AS 112 probably does not apply to your company. It bites only where two conditions hold together: the entity already reports under Ind AS, and it holds an interest in another entity. A private company below the Ind AS thresholds, or an Ind AS company with no subsidiaries, joint ventures or associates, has nothing to disclose under it at all. As Chartered Accountants in Goa we see far more of the second group than the first, so the applicability test below comes before the technical detail.

01 What Does Ind AS 112 Actually Require?

The standard requires two broad categories of disclosure: the significant judgements an entity made in deciding what its interests are, and detailed information about the interests themselves. Those significant judgements are what a reviewer turns to first.

The judgement disclosures come first because they explain everything that follows. An entity must disclose the significant judgements and assumptions it made, and any changes to them, in determining that it controls another entity, that it has joint control of or significant influence over another entity, the type of joint arrangement where the arrangement is structured through a separate vehicle, and that it meets the definition of an investment entity where relevant.

The information disclosures then cover interests in subsidiaries, in joint arrangements and associates, and in unconsolidated structured entities. There is also a catch-all: where the prescribed disclosures, taken with those required by other standards, do not meet the objective, the entity must disclose whatever additional information is needed. That provision turns the note from a checklist into a judgement exercise, and it is where accounting and compliance support usually earns its keep.

02 Does Ind AS 112 Apply to Your Business?

Applicability turns on the reporting framework first and the existence of interests second. Both tests must be satisfied before a single disclosure is required.

03 What Must You Disclose About Subsidiaries?

For subsidiaries, the standard asks for the composition of the group and then focuses hard on non-controlling interests and on anything that restricts the group's freedom to use its own assets.

• Composition of the group. Enough information for a reader to understand what the group consists of.
• Subsidiaries with material non-controlling interests. Name, principal place of business, the proportion of ownership interest and voting rights held by non-controlling interests, profit or loss allocated to them during the period, accumulated non-controlling interests at the reporting date, and summarised financial information about the subsidiary itself.
• Significant restrictions. The nature and extent of statutory, contractual or regulatory restrictions on the group's ability to access or use assets and settle liabilities, including restrictions on transferring cash or other assets between group entities.
• Consolidated structured entities. The nature of, and changes in, the risks associated with interests in structured entities that are consolidated.
• Changes in ownership. The consequences of changes in ownership interest that do not result in loss of control, and the consequences of losing control of a subsidiary during the period.

Two words in that list do the heavy lifting. "Material" governs which subsidiaries attract the full non-controlling interests package, and "significant" governs which restrictions must be described. Both are significant judgements in their own right, both must be applied consistently between periods, and both are areas auditors question.

04 What Must You Disclose About Joint Arrangements and Associates?

For joint arrangements and associates, the standard asks for identification, measurement basis, financial information proportionate to materiality, and the risks the interest creates.

Identification covers the name of each joint venture or associate, the nature of the relationship, the principal place of business, and the proportion of ownership interest or participating share held. The measurement basis must be stated, which for most associates and joint ventures will be the equity method. Where a quoted market price is available for an equity-method investment, its fair value must be disclosed.

Financial information is then scaled to materiality. Summarised financial information is required for each individually material joint venture and associate, while those that are individually immaterial are disclosed in aggregate, separately for joint ventures and for associates. Finally, the standard requires disclosure of the risks arising from these interests, including commitments relating to joint ventures and contingent liabilities incurred in relation to joint ventures and associates.

05 What Are Unconsolidated Structured Entities?

An unconsolidated structured entity is one designed so that voting or similar rights are not the dominant factor in deciding who controls it, and which the reporting entity does not consolidate. Securitisation vehicles, asset-backed financings and certain special purpose vehicles are the usual examples.

These entities matter out of proportion to their size, because the risk they carry is frequently larger than the amount recognised on the balance sheet. The standard therefore requires qualitative and quantitative disclosure of the nature and extent of the interest, the nature of the risks arising from it, the carrying amounts of assets and liabilities recognised in relation to it, and the maximum exposure to loss. It also requires disclosure of financial or other support provided to such an entity without any contractual obligation to provide it, together with the reasons for providing it.

A group that rescues a vehicle it was under no obligation to rescue has told the reader something important about its real exposure.

06 What Falls Outside the Scope of Ind AS 112?

Four exclusions are set out in the standard, and three of them carry exceptions that are easy to overlook.

One further point of scope works the other way. Interests classified as held for sale or included in a disposal group classified as held for sale or discontinued operations under Ind AS 105 remain within scope, with a limited relief from the summarised financial information requirement. Classifying an interest as held for sale does not switch off the disclosure obligation.

07 How Do You Prepare Ind AS 112 Disclosures, Step by Step?

Seven steps, in this order. Preparing the note before the underlying judgements are documented is the single most common cause of audit queries here.

1. Map every interest the group holds. List all subsidiaries, joint operations, joint ventures, associates and structured entities, including entities acquired, disposed of or newly formed during the period. Reconcile the list to the register of investments and to the prior year note.
2. Document the control and influence conclusions. For each entity, record why control, joint control or significant influence exists, and classify any joint arrangement structured through a separate vehicle as a joint operation or a joint venture. Write the reasoning down at the point the conclusion is reached.
3. Apply the scope exclusions deliberately. Work through the four exclusions and their exceptions rather than assuming the standard applies to everything on the list. Interests measured under Ind AS 109 and interests reported only in separate financial statements are where errors cluster.
4. Assess materiality of non-controlling interests. Decide which subsidiaries carry material non-controlling interests, and which joint ventures and associates are individually material. Record the basis, because it drives how much summarised financial information is needed and will be tested for consistency.
5. Collect summarised financial information early. Material joint ventures and associates must supply figures on your reporting calendar, not theirs. Equity-accounted entities you do not control are the usual bottleneck, so request the data before year-end.
6. Identify restrictions and off-balance-sheet exposures. Review loan agreements, shareholder agreements and regulatory approvals for restrictions on moving cash or assets between group entities, and quantify maximum exposure to loss on unconsolidated structured entities.
7. Draft the note and test it against the objective. Read the completed disclosure as an outside user would and ask whether it conveys the nature of, and risks arising from, the group's interests. If it does not, the standard requires additional information, and that judgement sits with the entity rather than the auditor.

08 How Did India Arrive at Ind AS 112?

Group reporting in India was a marginal subject until the economy opened, and the disclosure requirements grew in step with the size and complexity of Indian groups.

Before 1991, under the licence-permit regime, Indian companies operated within controlled capacity limits and group structures were comparatively simple. Consolidated financial statements were not a general statutory requirement, and a reader interested in a group looked at the parent alone. Disclosure of interests in other entities was, in practice, a list of investments.

Liberalisation in 1991 changed the structures before it changed the standards. Joint ventures with foreign partners, holding company structures and special purpose vehicles multiplied, and the gap between what a parent balance sheet showed and what a group actually controlled widened. The Institute of Chartered Accountants of India responded with AS 21 on consolidated financial statements, AS 23 on associates and AS 27 on joint ventures, and listed companies were brought into consolidation through the listing agreement.

The current framework arrived in two moves. The Companies Act, 2013 made consolidation a statutory requirement for every company with a subsidiary, associate or joint venture under Section 129(3), extending well beyond listed companies. Then the Companies (Indian Accounting Standards) Rules, 2015, notified by the Ministry of Corporate Affairs, brought in Ind AS 110, Ind AS 111 and Ind AS 112 in phases from FY 2016-17, separating the question of what to consolidate from the question of what to disclose. Ind AS 112 corresponds directly to IFRS 12, and the notified text is available on the MCA portal.

That separation is the design idea behind the standard. Ind AS 110 decides control, Ind AS 111 classifies joint arrangements, Ind AS 28 handles equity accounting, and Ind AS 112 collects the disclosure obligations arising from all three in one place. Because Ind AS is converged with IFRS rather than adopted from it, the wider set of differences between IFRS and Ind AS still has to be considered where a group also reports internationally.

09 Frequently Asked Questions

The questions below come up most often when finance teams work through this standard for the first time, and are the ones our Chartered Accountants in Goa are asked most. Further material is published on our blog.