IFRS 18: Does a parent holding company have a specified main business activity?

When applying IFRS 18 Presentation and Disclosure in Financial Statements, an entity with specified main business activities of investing in assets classifies some items of income and expenses in the operating category in the statements of profit or loss that would otherwise belong in the investing category.

The IFRS Interpretations Committee (Committee) was asked whether, when preparing its separate financial statements, a parent holding company has a specified main business activity of investing in assets, i.e. unconsolidated subsidiaries.

Fact pattern

HoldCo is the ultimate parent of a large group of entities and has no trading activities of its own.

HoldCo holds investments in subsidiaries, makes decisions on how these subsidiaries are managed, when they are acquired or sold, and when and how much of a return on these investments is distributed to shareholders of HoldCo.

HoldCo is not an investment entity as defined in IFRS 10 Consolidated Financial Statements.

In its separate financial statements, HoldCo:

• Accounts for its investments in subsidiaries (unconsolidated subsidiaries) at cost as permitted by paragraph 10(a) of IAS 27 Separate Financial Statements
• Does not provide to its shareholders any segmental analysis or use any subtotals to explain its operating performance related to its separate financial statements. HoldCo also does not use such metrics for internal monitoring purposes.

In HoldCo’s consolidated financial statements:

• Shareholders are provided with segmental analysis and subtotals as indicators of the consolidated group’s operating performance
• No specified main business activity is identified.

Question put to the Committee

For the purposes of its separate financial statements, the Committee was asked whether HoldCo has a specified main business activity of investing in unconsolidated subsidiaries.

That is, HoldCo will classify income and expenses from these unconsolidated subsidiaries in its statement of profit or loss:

• In the operating category, if it concludes that it has a main business activity of investing in unconsolidated subsidiaries, or
• In the investing category, if it concludes that it does not have a main business activity of investing in unconsolidated subsidiaries.

IFRS 18 requirements

Some of the key IFRS 18 requirements relating to this fact pattern are:

• Before it can classify income and expenses as operating, investing or financing in its separate financial statements, a parent entity must assess whether it has a specified main business activity of investing in particular types of assets (including investments in unconsolidated subsidiaries) – refer to paragraph 49(a).
• Investments in unconsolidated subsidiaries include investments in subsidiaries in separate financial statements that are accounted for at cost applying paragraph 10(a) of IAS 27 – refer to paragraph B44(c).
• An entity must classify income and expenses from investments in unconsolidated subsidiaries in the investing category unless the entity invests in that type of asset as a specified main business activity – refer to paragraph 53(a).
• If an entity invests in unconsolidated subsidiaries as a specified main business activity, the entity must classify income and expenses from those subsidiaries in the operating category (unless those investments are accounted for applying the equity method) – refer to paragraph 55(b).
• Whether an entity invests in assets as a main business activity of the entity is a matter of fact and not merely an assertion - judgement is required, based on evidence – refer to paragraph B33.
• An entity must assess whether investing in assets is a main business activity for the reporting entity as a whole. Therefore, the assessment of whether investing in assets is a main business activity of a consolidated group or of a reporting entity that is one of the group’s subsidiaries could yield different outcomes – refer to paragraph B37.
• Paragraph BC99 of the Basis for Conclusions on IFRS 18 notes that a parent entity’s conclusion as to whether an activity is a main business activity for the purposes of its separate financial statements might differ from its conclusion for the purposes of the group’s consolidated financial statements.

Analysis for HoldCo fact pattern

HoldCo has a substantive business activity of holding and managing investments in subsidiaries and distributing returns from those investments.

The Committee observed that in this fact pattern, the absence of any other substantive activity is sufficient evidence to conclude that investing in unconsolidated subsidiaries is a main business activity for the purposes of HoldCo’s separate financial statements.

Therefore, the Committee concluded that HoldCo, for the purposes of its separate financial statements, has a specified main business activity of investing in unconsolidated subsidiaries.

HoldCo accounts for its investments in unconsolidated subsidiaries at cost. Therefore, it classifies the income and expenses from its investments in unconsolidated subsidiaries in the operating category of its statement of profit or loss (refer to paragraph 55(b)).

The Committee also noted that the absence of the segmental analysis and the use of subtotals (which are present in the consolidated financial statements) is not determinative because other factors could drive whether HoldCo, itself has a specified main business activity.

Please refer to the agenda decision for more insights from the Committee’s observations, that support HoldCo’s specified main business activity of investing in unconsolidated subsidiaries.

Committee’s conclusion

The Committee concluded that the principles and requirements in IFRS 18 provide an adequate basis for HoldCo to assess, for the purposes of its separate financial statements, whether it has a specified main business activity of investing in unconsolidated subsidiaries. Therefore, the Committee decided not to add a standard-setting project on this topic to the work plan.