IAS 27, Consolidated and Separate Financial Statements shall be applied in the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent. This standard shall also be applied in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by local regulations, to present separate financial statements. But this standard does not deal with methods of accounting for business combinations and their effects on consolidation, including goodwill arising on a business combination (refer to IFRS 3 Business Combinations).
As stated in para. 9 of IAS 27, a parent entity must present consolidated financial statements in which it consolidates its investments in subsidiaries [the standard defines a subsidiary as an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as the parent)].
Following, para. 10 states that a parent need not present consolidated financial statements if all the following conditions apply :
(a) the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;
(b) the parent's debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);
(c) the parent did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and
(d) the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with International Financial Reporting Standards.
Under the provisions of IAS 27, when the above conditions are all satisfied and as a consequence the parent entity chooses not to present consolidated financial statements, but to instead present separate financial statements, then all investments in its subsidiaries, jointly controlled entities and associates that are consolidated, proportionally consolidated or accounted for under the equity method in consolidated financial statements prepared in accordance with the requirements of IAS 27 or in financial statements prepared in accordance with the requirements of IAS 31 Interest in Joint Ventures or IAS 28 Investments in Associates, must be accounted for either at cost, or as available-for-sale financial assets in accordance with IAS 39 Financial Instruments : Recognition and Measurement. The same method must be applied for each category of investments. In other words, if consolidated financial reporting if foregone, then equity method accounting or proportional consolidation is also precluded.
As stated in para. 38 of IAS 27, when an entity prepares separate financial statements, it shall account for investments in subsidiaries, jointly controlled entities and associates either : (a) at cost, or (b) in accordance with IFRS 9 Financial Instruments and IAS 39 Financial Instruments : Recognition and Measurement.
Further, it states that the entity shall apply the same accounting for each category of investments. Investments accounted for at cost shall be accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations when they are classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5. The accounting for investments in accordance with IFRS 9 and IAS 39 is not changed in such circumstances (HRD).