How IFRS 19 Will Change Financial Reporting for Subsidiaries

IFRS 19: Subsidiaries Without Public Accountability

Hi, I’m Nabeel Shaikh, a seasoned chartered accountant, management consultant, and entrepreneur with 17 years of diversified experience in the field. I will discuss and summarise some essential changes in the accounting world in this article. 

In 2024, there are two significant updates you should know about in the International Financial Reporting Standards (IFRS). The first is IFRS 18, which is all about how financial statements are presented and disclosed. It’s like giving a makeover to the old IAS 1, which already shared insights on IFRS 18 in a previous article. 

Now, onto the second one – IFRS 19. This standard focuses on “Subsidiaries Without Public Accountability.” In simpler words, it deals with how smaller companies report their financial info. Let’s understand the details of IFRS 19. 

Firstly, a subsidiary is like the little sibling of a bigger company called the parent company. Each subsidiary has its own financial statements with various details. 

Now, let’s tackle “public accountability.” It means two things. If a company’s data or stocks are traded publicly, it is listed on the stock market and falls under this category. And two, if a company doesn’t trade stocks publicly but deals with public funds (like banks do), it is also considered to have public accountability. 

To sum it up, if a company is listed or a bank with public funds, both fall under the umbrella of public accountability according to IFRS 19. It’s all about understanding where the company stands regarding public exposure. 

Most people are more interested in the big picture, like the income statement and the Statement of Changes in Equity (SOCI). The nitty-gritty details in financial statements can be overwhelming. 

This change is set to make life easier for individual subsidiary companies. How? By cutting down on the disclosure requirements. 

In simpler terms, these subsidiaries won’t have to share as much detailed information. It’s like decluttering the financial statement, focusing on what matters to most people – the income statement and equity changes. So, if you prefer the highlights over the fine print, this standard might be your cup of tea. 

This change is expected to reduce the disclosure requirements for them.

A question arises about who benefits from this “Subsidiaries Without Public Accountability” standard and its scope. 

First off, this standard applies to individual financial statements of subsidiary companies. So, if a subsidiary falls under the scope of this standard, it applies specifically to its own financial statements. 

Now, here’s the interesting part. If you’re a parent company dealing with consolidated financial statements (when you combine the financials of the parent and its subsidiaries), applying this standard might still matter to you. In other words, the ripple effect of this change can reach the parent company’s consolidated financial statements. 

So, if you’re a subsidiary company looking to streamline your financial reporting or a parent company working on consolidated statements, the impact of this standard could be quite relevant to your financial reporting game.

Let’s break down the conditions you must meet to qualify for the “Subsidiaries Without Public Accountability” standard.

First and foremost, you must be a subsidiary. Now, here are the essential conditions: 

No Public Accountability: This is a big one. If a company’s equity instruments or stocks are publicly traded, meaning they’re listed on the stock market, it is considered to have public accountability. Also, if companies don’t trade stocks publicly but deal with public funds (like banks do), that falls under public accountability, too. 

So, once they’ve checked these boxes and met these conditions, a parent company creating consolidated accounts according to IFRS, – is eligible for the perks of this new standard. It’s all about keeping things more straightforward for companies that don’t have the complexities of public accountability.

Let’s explore the current scenario before the release of IFRS 19, the alternative that many subsidiary companies, or SMEs (Small and Medium-sized Enterprises), have – the IFRS for SMEs.

Many SMEs opted for the IFRS for SMEs as an alternative. While it reduced the disclosure requirements for these subsidiary companies, it came with its drawbacks. 

Applying IFRS for SMEs isn’t a simple swap; it is more like a full package deal. It impacted not just the disclosure requirements but the entire accounting process. The income statement and balance sheet influenced everything to recognition and management criteria. 

Here’s where it got tricky, especially for parent companies using full IFRS. If the subsidiary used IFRS for SMEs, aligning the two became challenging. The entire financial statement of the subsidiary was affected, creating extra work for the parent company. 

But, with the introduction of IFRS 19, things are looking up. If a subsidiary is under the SME standard, the parent company won’t be burdened with additional tasks. The subsidiary can apply normal IFRS with reduced disclosure requirements, simplifying life for both parties. It’s like finding a better fit without compromising on standards. 

The benefits of IFRS 19 are indeed game-changers, and the Board’s findings shed light on some key advantages.

First and foremost, Cost Savings. With IFRS 19, preparers can sigh relief, especially those dealing with subsidiary companies. The streamlined process makes things more efficient, significantly reducing the service costs for preparers. This not only eases the workload for the subsidiary but also lightens the financial burden on the parent company. 

Now, when it comes to collaborative efforts between parent and subsidiary companies, both parties will align in terms of the income statement, balance sheet, and disclosure requirements. This alignment makes collaborative work smoother and saves costs in preparing and maintaining financial information. 

We all know the world has been drowning in disclosures. IFRS 19 comes to the rescue by focusing only on the relevant ones. Users will get direct, essential information without the unnecessary noise. 

In a nutshell, IFRS 19 is bringing efficiency, clarity, and cost savings to the table—a win-win for everyone involved.

Sue Lloyd, Vice-Chair of the Board, has perfectly summed up the goal of the proposed IFRS 19 Standard. It’s all about simplifying reporting and keeping costs in check for subsidiaries. The idea is to strike a balance – making the financial reporting process more accessible for companies while ensuring that the users of their financial statements still get the information they need.