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Plain‑English explainer of HKAS 27 / IAS 27 for students, junior accountants and non‑specialists who find official standards too dense to read.
This article is based on Hong Kong Accounting Standards (HKAS / HKFRS), which are fully aligned with IAS / IFRS except for minor local tweaks, so the same principles generally apply under IAS / IFRS unless noted otherwise. The goal is to unpack HKAS 27 Consolidated and Separate Financial Statements (equivalent to IAS 27) using plain English and practical, real‑life examples instead of technical jargon. It is written for students, junior accountants, audit juniors and finance professionals who want to understand not just “what the standard says” but how to actually read and prepare financial statements in line with it.
When you see “the company” or “the entity” below, you can think of any entity that prepares general purpose financial statements under HKFRS / IFRS.
Three measurement routes under HKAS 27
Picture yourself reviewing a Hong Kong listed company’s annual report: the consolidated financial statements show the entire group’s balance sheet and comprehensive income, but flip to the back and you’ll find a separate set of “company-level” standalone financial statements . In these statements, investments in subsidiaries, joint ventures and associates are no longer consolidated line by line—instead, they’re recorded as single-line items using one of several methods: some at cost, some at fair value, some even using the equity method . These choices are the core issues governed by HKAS 27 .
In typical work scenarios, you might be asked: does the parent company’s separate statement measure subsidiary investments at cost or fair value ? When should dividend income be recognised ? When a new parent company is created during group restructuring, how should the new parent measure its investment cost ? Without a clear main thread, it’s easy to get lost among different standards . The purpose of this article is to help you connect “method selection → subsequent treatment → important exceptions” into a logical line .
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- Summarise in simple terms the three major investment measurement methods allowed by HKAS 27: cost method, measurement in accordance with HKFRS 9, and using the equity method, plus the “one method per category” requirement
- Explain the basic operating logic of the cost method in separate financial statements, including initial recognition, no subsequent revaluation, and the perspective difference from consolidated statements
- Describe how to handle fair value changes in separate statements when investments are measured under HKFRS 9, and why classification as held for sale still maintains the HKFRS 9 measurement basis rather than switching to the HKFRS 5 model
- Understand how the equity method returned as a policy option in separate statements after the 2014 amendments, and the treatment logic for investment carrying amounts and dividends when using the equity method
- Grasp several key exceptions: the intersection with HKFRS 5 when investments are classified as held for sale, when dividend income should be recognised and how it signals impairment, and the special provision for measuring cost when a new parent company is established through reorganisation using the original parent’s equity carrying amount
1. Overview of the three measurement methods and the “one method per category” principle
In the world of HKAS 27, once an entity chooses or is required to prepare separate financial statements that comply with HKFRSs, it must handle investments in subsidiaries, joint ventures and associates according to the methods prescribed by the standard .
What are the three measurement methods?
After amendments, HKAS 27 permits three investment measurement methods :
- Cost method (at cost): Investments are recorded at cost and not subsequently adjusted for the investee’s profits or losses—only impairment and dividend receipts are processed
- Measurement in accordance with HKFRS 9: Investments are treated as financial instruments and measured according to HKFRS 9’s classification and measurement model, such as fair value through profit or loss (FVPL) or fair value through other comprehensive income (FVOCI)
- Using the equity method: Investments are accounted for according to the equity method principles in HKAS 28 (equivalent to IAS 28), meaning that after initial recognition, the investment is adjusted for the investor’s share of the investee’s profit or loss and other comprehensive income, with periodic impairment reviews
These three methods cannot be mixed randomly—they must be applied within a “one method per category” framework .
“One method per category”: Consistency within each investment class
HKAS 27 requires that the same accounting policy must be applied to investments in the same category . For example, all investments in subsidiaries must use the cost method, or all subsidiary investments must be measured under HKFRS 9; similarly, all investments in associates should use the same method, and all investments in joint ventures likewise .
This requirement has several important implications for practice and exams :
- Prevents cherry-picking: Management cannot deliberately select different methods for individual investments to polish the numbers—consistency helps maintain comparability and reliability
- In common scenarios: “Can a company use different methods for subsidiary A and subsidiary B?” You should immediately recall the “one method per category” main thread
- During audit: If you find that some associates are measured at cost while others are at fair value, you need to check whether the notes explain different classifications (e.g., some are trading financial assets) or whether this simply violates HKAS 27’s consistency requirement
Remember: HKAS 27 doesn’t ask you to memorise three methods blindly—it asks you to classify first, then “pick one route and stick with it” within each category .
2. How the cost method operates in separate financial statements
The cost method can be described as the “most traditional” approach and is the method most commonly adopted by many Hong Kong companies in their separate financial statements . But to use it properly, you still need to understand its logic and limitations .
Core concept of the cost method
Under the cost method :
- Initial recognition: Investments are recorded at cost, including the purchase price and directly attributable costs (e.g., legal fees, transaction costs, depending on specific circumstances and other standard requirements)
- Subsequent periods: Investments are not adjusted for changes in the investee’s profits, losses or reserves—unlike the equity method, there’s no periodic updating; unless impairment indicators arise, the carrying amount basically remains at original cost
- Dividend treatment: In general circumstances, dividends are recognised as income when the right to receive them is established (unless the entity chooses to account using the equity method, discussed later)
The advantage of this approach is simplicity and ease of operation, and for certain users (such as shareholders who only want to see the parent company’s distributable profits), the cost method provides relatively stable information .
A simplified numerical example
Assume parent company A acquires 100% equity in subsidiary B for $10 million in 20X1, with no bargain purchase gain or other complex factors . When accounting at cost :
- 20X1 beginning: A’s separate statement recognises $10 million cost in the “investment in subsidiary” account
- In 20X2: Whether B makes a profit or loss will not directly change the $10 million carrying amount in A’s separate statement—unless B shows clear impairment indicators, an impairment test would be performed per HKAS 36 (equivalent to IAS 36), with an impairment loss if necessary
- If B declares a $2 million dividend to A in 20X2: A recognises $2 million income in its separate statement when the right to receive the dividend is established, with corresponding cash or dividend receivable
This treatment differs markedly from consolidated financial statements .
Perspective comparison with consolidated statements
In consolidated financial statements :
- Subsidiary B’s assets and liabilities are consolidated line by line, and the $10 million investment is “unpacked” at the consolidated level and replaced by B’s individual assets and liabilities
- B’s profit or loss is incorporated into the group’s profit, and dividends paid to the parent are “intragroup transactions” that are eliminated at the consolidated level
In separate statements, the parent simply treats B as an investment: cost remains at $10 million (except for impairment), and dividends are reflected as income only when declared . This is why many people say separate statements are “legal / distribution perspective” statements, while consolidated statements are “economic substance perspective” statements .
In typical work scenarios, if you’re asked to explain the basis for the parent company’s distributable dividends, you’d normally turn to the separate statement and review retained profits under the cost method, rather than looking at the consolidated total surplus .
3. Investments measured in accordance with HKFRS 9
The second route is to treat investments in subsidiaries, joint ventures or associates according to the financial instrument requirements of HKFRS 9 (equivalent to IFRS 9) . This situation is more common in investment entities or entities that hold investments primarily for trading or return management .
When would you use the HKFRS 9 route?
HKAS 27 permits companies to treat these investments as financial assets in separate financial statements, measured according to HKFRS 9’s classification and measurement model . For example :
- An investment entity whose business purpose is primarily to earn fair value changes and dividend income through holding investments
- A parent company that doesn’t prepare consolidated statements (e.g., qualifies for an exemption) but wants to reflect investment performance through fair value in separate statements
In such cases, investments may be classified as :
- Fair value through profit or loss (FVPL)
- Or when conditions are met, designated as fair value through other comprehensive income (FVOCI)
Which category to choose depends on the business model and contractual cash flow characteristics under HKFRS 9 .
How are fair value changes reflected?
Once investments are measured under HKFRS 9, fair value changes will :
- If FVPL: Be recognised directly in current period profit or loss
- If FVOCI (equity instrument election): Be recognised in other comprehensive income, and upon disposal are not reclassified to profit or loss (but accumulated gains/losses may be reclassified to retained earnings)
The key point here is that HKAS 27 no longer handles the details of fair value measurement—it passes the work to HKFRS 9 . HKAS 27’s role is to permit you to choose this route and maintain “one method per category” consistency .
Special intersection with HKFRS 5: Held for sale doesn’t change HKFRS 9 measurement basis
One easily confused area is whether HKFRS 5 (equivalent to IFRS 5) changes the measurement basis when such investments are classified as “held for sale” .
HKFRS 5 generally requires that non-current assets or disposal groups classified as held for sale should be measured at the lower of carrying amount and fair value less costs to sell, and depreciation should cease . However, for financial assets already measured at fair value under HKFRS 9, practice and standard interpretation indicate that HKFRS 5 does not re-apply the “lower of” model to these assets—they remain under the original HKFRS 9 measurement basis .
Simply put, if you’ve already designated a certain subsidiary investment as FVPL, and later classify it as held for sale, the held for sale label mainly affects presentation and disclosure but won’t change the FVPL mode to “lower of” measurement . This is a common trap in exams and practice: seeing “held for sale” and immediately thinking “lower of cost and fair value less costs to sell,” while forgetting that financial instruments already have their own independent fair value measurement model .
4. The return and application of the equity method option
Originally, in the old version of HKAS 27, the equity method belonged only to the consolidated level (HKAS 28) scope—separate financial statements only permitted cost or financial instrument methods . Until 2014, the IASB issued the “Equity Method in Separate Financial Statements” amendments, and through amending HKAS 27 in Hong Kong, re-permitted the use of the equity method in separate statements .
Why add back the equity method?
The background to the amendments mainly includes :
- Some jurisdictions’ company laws require the equity method to be used at the individual or separate statement level to reflect investment performance in associates, joint ventures or subsidiaries
- Allowing the equity method can reduce conversion costs for some companies between local GAAP and HKFRSs, facilitating accounting standards convergence
- Using the equity method can sometimes better reflect the “economic connection” between investment and investor than pure cost method or pure fair value
Therefore, the amended HKAS 27 added the equity method back as a third option, but it remains a policy choice, not a mandatory requirement .
When using the equity method in separate statements, how does carrying amount change?
Once an entity chooses to use the equity method in separate statements, the specific operation of the equity method is still governed by HKAS 28 .
If you don’t yet have much understanding of the “equity method,” think of it this way :
- Cost method: The investment is like a “fixed deposit”—unless impaired, the carrying amount basically doesn’t move, and income is only recognised when dividends are received
- Equity method: The investment is like a “mini-consolidation”—you don’t consolidate the other party’s assets and liabilities line by line, but you share their profit, loss and other comprehensive income according to your ownership percentage, directly reflected in the “investment carrying amount”
HKAS 27 provides several key connection points :
- Initial recognition: Investment is recognised at cost
- Each subsequent period: Investment carrying amount is increased or decreased according to the investor’s share of the investee’s net assets, including its share of profit or loss and other comprehensive income
- Dividends: When the investee declares dividends to the investor, under the equity method dividends are not recognised as income but as a reduction in investment carrying amount, reflecting the “recovered” portion of the investment
- Impairment: If impairment indicators arise, an impairment test should be performed per HKAS 36, with impairment loss if necessary
In other words :
The equity method doesn’t “fully consolidate” the other party—it treats that company as an “investment unit,” adjusting the investment carrying amount and share of profits each year according to your attributable share, letting the statements reflect your “economic share” changes in this company. (That is, retaining the “investment in Company X” line, but this line’s amount is adjusted each year by “share of profit + other comprehensive income – dividends.”)
So using the equity method in separate statements has an effect somewhat like “bringing down the equity method from the consolidated level,” allowing the single entity level to also reflect investment performance .
The dividing line for dividend treatment
After amendments, the amendment explanation document clearly states: in general circumstances, dividends from subsidiaries, joint ventures or associates should be recognised in profit or loss in separate financial statements when the entity has the right to receive them; but if the entity adopts the equity method, dividends are not recognised in profit or loss but directly reduce the investment carrying amount .
For practice, this dividing line is important :
- Cost method or HKFRS 9: Dividends go to profit or loss
- Equity method: Dividends reduce investment cost—the investor’s share of profit is already reflected in the equity method adjustment, avoiding “double counting”
In typical work scenarios, if you see the same associate’s dividends listed in “other income” in the parent company’s separate statement in one year, but in another year only reflected as a reduction in “investment in associate” carrying amount, you should ask: did the accounting policy change midway from cost method to equity method ? Is there disclosure of policy change and restatement per HKAS 8 (equivalent to IAS 8) requirements ?
5. Held for sale and the intersection with HKFRS 5
When investments are classified as “held for sale,” HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations enters the picture . The key question is: how does HKAS 27 coordinate with HKFRS 5 ?
Under cost method or equity method: Switch to HKFRS 5 model
Relevant guidance indicates that if investments in subsidiaries, joint ventures or associates in separate statements are measured using the cost method or equity method, once the investment meets HKFRS 5’s held for sale or held for distribution conditions, it should be treated according to HKFRS 5’s provisions .
This typically includes :
- Reclassifying the investment as “non-current assets held for sale” or “disposal group held for sale”
- Ceasing to depreciate or amortise under the original model (if applicable)
- Measuring at the lower of carrying amount and fair value less costs to sell, and recognising impairment loss for any write-down
In other words, HKFRS 5 “takes over” the measurement of investments under the cost method and equity method until the transaction is completed or conditions no longer meet the held for sale classification .
Investments measured under HKFRS 9: Maintain original measurement basis
Conversely, if investments are already measured at fair value under HKFRS 9 (e.g., FVPL), HKFRS 5 generally does not change the measurement basis . Investments are still measured according to HKFRS 9’s fair value model, and the held for sale classification mainly affects presentation and disclosure .
This creates an important contrast :
- Cost method / equity method → After held for sale, switch to HKFRS 5’s “lower of” measurement
- HKFRS 9 model → Held for sale doesn’t change fair value measurement; HKFRS 5’s main effect is on presentation and notes
For exam preparation or working papers in practice, you can add a small checkpoint when handling held for sale investments: first ask “which HKAS 27 method was this investment originally using?” then decide the impact of HKFRS 5 .
6. Dividend income recognition and impairment testing
Dividend income seems like an “entry-level” topic, but within the HKAS 27 framework it actually involves method choice and impairment judgement .
When are dividends recognised in separate statements?
The amended HKAS 27 clearly states: dividends from subsidiaries, joint ventures or associates should be recognised in the entity’s separate financial statements “when the right to receive is established” . Generally, this means when the shareholder meeting or board of directors formally declares the dividend, and you as investor have the right to receive it .
Under the cost method or HKFRS 9 model, dividends typically :
- Are recognised in current period profit or loss as income
- Correspondingly increase cash or dividend receivable
Under the equity method model, as previously mentioned: dividends are not recognised in profit or loss but reduce the investment carrying amount, because the investor’s share of profit is already reflected in the equity method adjustment .
Impairment testing: No longer splitting “pre-acquisition / post-acquisition retained earnings”
In early cost method practice, there was sometimes confusion over “whether dividends come from pre-acquisition or post-acquisition retained earnings” to determine whether dividends should be treated as recovery of cost . But with amendments and the prevalence of HKAS 36 Impairment of Assets, modern practice tends toward :
- Dividends are recognised according to the above principles (except under equity method)
- If dividend levels or other indicators suggest the investment may be impaired (e.g., investee sustains long-term losses, net assets decline), an impairment test should be performed per HKAS 36, rather than making complex divisions at the dividend level
The advantage of this approach is putting focus on “whether the investment overall has recoverability issues,” reducing formalistic splitting of retained earnings sources, and staying closer to economic substance .
In common scenarios, if a parent company receives large dividends from a subsidiary for consecutive years, but the subsidiary simultaneously experiences asset impairment or increased leverage, you should consider during audit: whether an impairment test is needed for that investment, rather than simply treating dividends as “stable income” .
7. Special provisions for new parent company reorganisation cost
HKAS 27 has a section many people overlook but which is crucial during group restructuring: when a new parent company is established through issuing equity instruments and certain strict conditions are met, how should the new parent measure the investment cost in the original parent under the cost method .
What is a “new parent company reorganisation” scenario?
A typical scenario is: a new parent New P is inserted above original parent P, with New P issuing shares in exchange for acquiring the original parent’s equity, so that the group’s substantive assets and economic benefits remain unchanged—only the controlling level is “moved up one layer” .
HKAS 27 considers that such “common control reorganisations” should not create artificial gains/losses or new cost, provided that :
- The new parent and original parent are controlled by the same group of owners
- Owners’ absolute and relative interests in the group’s net assets are unchanged before and after reorganisation
- The new parent’s only significant asset is the investment in the original parent
How is cost measured?
If the above conditions are all met, and the new parent’s investment in the original parent in its separate financial statements is accounted for using HKAS 27’s cost method, the standard specifies: the new parent should use the carrying amount of equity items in the original parent’s separate statement as its investment cost .
In other words :
- Not measured at “market fair value” for this investment cost
- Not at some artificially determined reorganisation consideration
- But directly carrying forward the original parent’s equity carrying amount (e.g., total of share capital, reserves, etc.) and recording it as cost in the new parent
This ensures that accumulated reserves for the entire group are not reset or distorted due to “shell change” operations before and after reorganisation .
Understanding through a simplified example
Assume :
- Original parent P’s total equity (share capital plus reserves) is $500 million
- Now New P is established, acquiring all of P’s share capital through issuing shares, with owners’ relative interests in the group completely unchanged before and after reorganisation
Under HKAS 27 conditions, in New P’s separate financial statements, the investment cost in P is not some “transaction price” but directly $500 million as the cost carrying amount .
In typical work scenarios, such reorganisations often appear before group IPO or during tax / regulatory restructuring . Mastering this provision avoids mistaking reorganisation for “genuine acquisition” and incorrectly recognising goodwill or new reserves .
The bottom line: Remember HKAS 27 through one “method main thread”
If the previous article (on HKAS 27’s positioning and scope) helped you clarify “where HKAS 27 appears, what it governs and doesn’t govern,” this article zooms in to one practical main thread :
When you handle investments in subsidiaries, joint ventures and associates in separate financial statements, first classify by “category,” then within each category choose cost method, HKFRS 9 or equity method, and maintain one method per category; then according to scenarios, connect with HKFRS 5, dividend recognition and impairment testing, plus the special provision for new parent company reorganisation.
Next time you encounter similar issues in working papers or exam questions, try following these steps :
- First determine: Is this statement consolidated or separate? If separate, this is an HKAS 27 scenario
- In separate statements: For subsidiaries, joint ventures and associates, which method is currently used? Is one method per category already achieved ?
- Look for any “special labels”: Such as held for sale (HKFRS 5), investment entity (HKFRS 9 + HKFRS 10), or group reorganisation establishing a new parent
- When encountering dividends or large distributions, ask: “Could this trigger an investment impairment test?” rather than staying stuck in the old “pre-acquisition / post-acquisition retained earnings” mindset
When you get used to thinking through this main thread, HKAS 27 is no longer a pile of scattered provisions but a practical “investment measurement toolkit,” helping you handle various investments in separate financial statements in a stable and consistent manner .
Key takeaways for students and junior accountants
- In working papers and audit files: Always identify at the start which method the entity uses for each investment category in separate statements—this drives your expectations for dividend treatment, impairment indicators and subsequent measurement adjustments .
- When preparing journal entries: If you’re recording subsidiary or associate transactions, check whether you’re in consolidated or separate statements—dividend treatment differs radically (income under cost/HKFRS 9, versus investment reduction under equity method) .
- Common exam trap: Questions may state “the parent received dividends of $X from subsidiary Y”—you must first identify whether the statement is separate or consolidated, and under which method, before deciding whether dividends hit profit or loss or reduce investment carrying .
- Most likely mistake for held for sale scenarios: Assuming all held for sale investments automatically use “lower of carrying amount and fair value less costs to sell”—this only applies to cost/equity method investments; FVPL investments keep their HKFRS 9 measurement .
- During group reorganisations: If a new parent is inserted above the existing parent, check whether the special HKAS 27 cost measurement rule applies (using original parent’s equity carrying amount)—don’t assume it’s a market-value acquisition that creates new goodwill .
- When reviewing dividend sustainability: If a subsidiary distributes large dividends year after year while its net assets decline or leverage rises, flag this for potential impairment testing of the investment in separate statements—dividends alone don’t prove value .
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