CFM92457 – Corporate Finance Manual – HMRC Internal Manual

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These guidelines apply to worldwide group accounting periods ending on or before April 1, 2017.

Subsidiaries not consolidated by a parent applying IFRS {#}

IFRS 10 has been amended with effect from 1 January 2014 so that investment entities, as defined, do not have to consolidate their subsidiaries, unless the main objective of the subsidiary is to provide services related to the activities of investment of the investment entity. Therefore, the parent company would not consolidate the underlying assets, liabilities, income or expenses of the subsidiary in its accounts, but rather measure its interest in the subsidiary as an investment at fair value. This accounting treatment needs to be addressed in the debt cap legislation because, in the absence of special provisions, the financing costs of these unconsolidated subsidiaries would not be taken into account in the calculation of the amount available and inappropriate discharges could occur.

An “investment entity” is defined in IFRS10.27. An investment entity is an entity that:

  • obtains funds from one or more investors for the purpose of providing such investors with investment management services;
  • undertakes to its investor(s) that its business objective is to invest funds solely for returns of capital appreciation, investment income, or both; and
  • measures and evaluates the performance of substantially all of its investments on a fair value basis.

The logic behind these changes is that an investment entity holds investments for the sole purpose of capital appreciation, investment income (such as dividends, interest, or rental income), or the two. The most useful information for such an entity is provided by measuring all investments, including investments in subsidiaries, at fair value. Preparing consolidated financial statements for these entities could impede users’ ability to assess their financial position and results. The removal of the consolidation requirement should also reduce the compliance burden on the investment entity.

IFRS 10.31 contains a requirement (as opposed to an option) not to consolidate subsidiaries unless the primary purpose of the subsidiary is to provide services related to the investment activities of the investment entity. The effect may be that no subsidiary is consolidated or that only subsidiaries performing a support function and therefore not held as participations need to be consolidated; there are more details in the following paragraphs of the standard and in the application guide.

While amendments to the standard were not mandatory until annual periods beginning on or after January 1, 2014, early adoption was permitted.

Subsidiaries not consolidated by a parent applying FRS102

FRS 102 is a new British accounting standard. It is likely to apply to any “large group” whose parent company is in the UK under the debt ceiling which does not choose or is not required to apply IFRS. FRS 102 applies to accounting periods beginning on or after January 1, 2015, with early adoption permitted.

FRS102-9.9 provides that subsidiaries should be excluded from consolidation in two circumstances:

  • The first is where severe long-term restrictions substantially interfere with the exercise of the parent company’s rights over the assets or management of the subsidiary.
  • The second is where the stake in the subsidiary is held exclusively with a view to subsequent resale; and the subsidiary has not been previously consolidated in the consolidated financial statements prepared in accordance with FRS102. This may include subsidiaries held as part of an investment portfolio and is therefore similar to IFRS10.31. However, there is no specific requirement for the parent company to be an investment entity.

Case where no subsidiary is consolidated

If none of an investment entity’s subsidiaries are consolidated under IFRS, TIOPA10/S348(5A) provides that where an investment entity is a leverage-limited ultimate parent, its financial statements single entity prepared under IFRS should be treated as IFRS financial statements for debt. capping purposes. Accordingly, they are then the global group financial statements (TIOPA10/S346(2A)) and are used as a starting point for the calculation of the amount available.

Similarly, it is also possible that under FRS102, no consolidated accounts will be prepared for a debt-limited ultimate parent as FR102-9.3(f) and 9.9 are concerned. In this case, the parent company’s single entity accounts are treated as global group financial statements – TIOPA10/S346(2A).

Note, however, that if an Investment Entity is also a mutual fund or partnership, it cannot be a leveraged ultimate parent and its investee groups may form a number of different global debt ceiling groups – see CFM90270.

It is conceivable that the ultimate parent company of a debt ceiling group could be a subsidiary of an investment entity and be exempted from the obligation to prepare consolidated accounts simply because it is a subsidiary and not because it is also an investment entity (or its subsidiaries are excluded from consolidation under FRS 102). In this event, TIOPA10/S348(5A) is not applicable and the group should follow the other provisions of S348 in calculating the amount available as if it had prepared consolidated accounts, see CFM90460; the rules described below do not apply.

The approach taken to calculate the amount available differs depending on whether the expenses which are not disclosed line by line in the group accounts are expenses of UK group companies or other group members.

Financing costs of unconsolidated subsidiaries subject to corporate tax

The accounting changes have reduced the compliance burden for investment entities. Consequently, it would not be desirable for the debt ceiling to reimpose the burden of preparing consolidated accounts as a method of dealing with unconsolidated subsidiaries. Accordingly, the approach is, where possible, to use figures available from tax calculations to make adjustments in the calculation of the amount available. This also means that tax/accounting mismatches (see CFM92475) are eliminated.

In respect of UK group company finance charges, the amount available, as reflected in the worldwide group financial statements (which may be single entity accounts, in the circumstances described above), is plus amounts as described below in TIOPA10/S332AA(2)(a)(i) and (2)(b):

  • Amounts of financing expenses of UK group companies (CFM90250) taken into account in the calculation of the amount of expenses tested (CFM91020) or the amount of income tested (CFM91220); or
  • The amount would be taken into account in the calculation of the amount available, but for the effect of IFRS10.27/31 or FRS102-9.9.

The amount to be added to the available amount is the amount taken into account for the tax, thus avoiding the risk of an accounting/tax mismatch.

Reference to but for the effect of IFRS10.27 or FRS102-9.9 ensures that these amounts are external financing charges directly incurred by the unconsolidated UK group companies.

Financing costs of unconsolidated subsidiaries not subject to corporate tax

The same approach cannot be used for global group members that are not UK group companies, as there will be no UK tax measure of the expenditure. However, it is possible, for example, that amounts may be borrowed from external lenders by non-UK group unconsolidated members and on-lent to the UK. It would be inappropriate to disregard these external borrowing costs in calculating the amount available.

In this case, the measure of the external financing charge is the amount that would have been reflected in the consolidated accounts, if the non-consolidated companies had been consolidated. The rules do not require a determination of whether funds borrowed externally have actually been on-lent to the UK. The adoption of this approach ensures consistency of treatment with the situation where all the subsidiaries of a group are consolidated line by line.

Accordingly, in respect of the financing costs of group members which are not UK group companies, the amount available, as reflected in the worldwide group financial statements, is increased by amounts as described below , in TIOPA10/S332AA(2)(a) (ii) and (2)(b):

  • the amounts of financing expenses of members of the global group which are not UK group companies; and
  • Where the amount would be taken into account in the calculation of the amount available, but for the effect of IFRS10.27/31 or FRS102-9.9.

This wording takes into account the amount that would have been recognized in the group’s consolidated financial statements had it not been for the non-consolidation of the subsidiaries bearing the charge. The amounts are assessed by reference to what would have been recognized in the accounts; it is not necessary to consider what amounts would have been taken into account under UK tax rules.

FRS 101: unlikely to be applied by a group to which the debt limit applies

FRS 101 (Reduced Disclosure Framework) is a new British accounting standard which could only be used by certain parent companies which are themselves subsidiaries. Thus, it is only in exceptional circumstances that it could be used by a large group to which the debt ceiling applies.

FRS 101 largely applies the recognition and measurement requirements of full IFRSs (adopted by the EU), but with reduced disclosure requirements. FRS 101 applies to accounting periods beginning on or after January 1, 2015, with early adoption permitted.

An entity eligible for FRS 101 is a member of a group where the parent company of this group prepares consolidated financial statements available to the public which aim to give a true and fair view (of assets, liabilities, financial position and results) and which member is included in the consolidation. FRS 101 cannot be used for consolidated accounts.

Gateway test

No changes were made to the gateway test.

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