Note: This article provides a focused explanation and extended discussion on a specific standard. If you’d like to see the full list of articles and short summaries for this standard, please visit the “Series Overview” page.
Since 2025, most standard‑related articles on this site have been available in both Chinese and English versions. If you’d like to read the Chinese explanation, please visit the 「系列總覽」 page and look for the corresponding article.
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.
HKAS 27’s grey areas in practice
Picture yourself reviewing a Hong Kong fund management group’s annual report: at the consolidated level, certain subsidiaries aren’t consolidated into the balance sheet but instead appear at “fair value through profit or loss”; flip to the separate financial statements and you see the same batch of subsidiary investments measured at fair value . You might ask: why aren’t these subsidiaries consolidated if they’re clearly subsidiaries? Why can’t they use the cost method in separate statements either? Behind this lies HKFRS 10’s investment entity exception and how it extends to HKAS 27 .
Similarly, when a parent company uses HKFRS 10’s exemption and doesn’t prepare consolidated financial statements, presenting only separate statements, what disclosure requirements apply ? When using the equity method in separate statements, what subtle differences exist compared to the equity method at the consolidated level ? When a new parent company is established through reorganisation, must the cost always be “carried forward from the old parent’s equity carrying amount” rather than the fair value of shares issued ? These are the relatively “grey” discussion points of HKAS 27 in practice .
What You Should Be Able To Do After Reading?
By the end, you should be able to:
- Explain in simple terms what an “investment entity” is, and why such entities measure certain subsidiaries at fair value through profit or loss in both consolidated and separate financial statements, rather than consolidating or using the cost method
- Know what key disclosures are required in separate financial statements when a parent company uses HKFRS 10’s exemption and doesn’t prepare consolidated statements, so users know “where to find the complete group statements”
- Understand why, when using the equity method in separate statements, goodwill impairment is usually assessed at the whole investment level, when to stop recognising losses once they exceed the investment carrying amount, and how to avoid unreasonable discrepancies with consolidated statement impairment conclusions
- Recognise that certain arrangements between HKAS 27 and other standards (such as HKAS 23, HKFRS 9) naturally produce different results in consolidated versus separate statements, and the key is to clearly distinguish statement levels and enhance disclosure rather than forcing “alignment”
- Remember that when a new parent company is established under common control reorganisation, under the cost method the new parent typically uses the original parent’s equity carrying amount as investment cost, rather than the fair value of shares issued, avoiding unnecessary gains/losses or revaluation differences from “shell changes”
1. Why some subsidiaries aren’t consolidated and use fair value instead
In most situations, once a parent has subsidiaries, it must “bring up” the subsidiaries’ assets and liabilities in consolidated financial statements—this is the general principle of HKFRS 10 (equivalent to IFRS 10) . But one category of companies is an exception: investment entities . Think of them as “fund-like companies” whose main job is to buy, sell and manage investment targets for investors, rather than operating those target companies’ daily businesses themselves .
For such companies, consolidating all investee companies would actually obscure investment performance, so accounting standards permit—even require—them to :
- Not consolidate certain qualifying subsidiaries
- Instead treat these subsidiaries as investments, accounted for at “fair value through profit or loss” (FVPL)—meaning share price/valuation changes are directly reflected in current period profit or loss
This exception was originally written only in the consolidation section of HKFRS 10, but was later extended to HKAS 27 : meaning if the parent measures certain subsidiaries at fair value in consolidated statements because it’s an investment entity, then in the parent’s own separate financial statements, it must use the same approach—it can’t use fair value on one side and cost method on the other, to avoid confusing readers between the two sets of statements .
2. What investment entities actually do in separate statements
Imagine a Hong Kong-listed investment company that specialises in holding equity stakes in unlisted tech companies . It meets the “investment entity” definition under HKFRS 10 :
- It obtains funds from investors
- Multiple investments are its main assets
- It evaluates performance at fair value and communicates this to investors
In consolidated financial statements, this company will :
- No longer consolidate these subsidiaries’ assets and liabilities line by line
- Only retain one line on the balance sheet: “investments in subsidiaries at fair value through profit or loss,” adjusted each period based on valuation
In its own separate financial statements, what HKAS 27 requires is straightforward :
- The same batch of subsidiary investments must be accounted for using the same fair value model—you can’t “cheat” in separate statements by switching to cost method, as this would confuse statement users about how these investments are actually managed and measured
- If one day this company no longer meets the “investment entity” definition (e.g., transforms to operating businesses itself), from that day :
- In consolidated statements, these subsidiaries will be re-consolidated
- In separate statements, the fair value at that moment becomes “deemed cost,” and afterwards can continue under cost method, HKFRS 9 or equity method
You can understand this process as :
“During the investment entity period, investments tell their story through fair value; at the moment you cease being an investment entity, fair value becomes the new starting point, and afterwards you return to the general HKAS 27 routes.”
3. Disclosure requirements when not preparing consolidated statements
This section addresses: When a parent uses HKFRS 10’s exemption and doesn’t prepare consolidated financial statements, presenting only separate statements, what must be made clear in the separate statements ?
A common scenario is this :
A Hong Kong company is a mid-tier holding company within a large group . Because a larger parent company above it already prepares consolidated financial statements, it qualifies under HKFRS 10 conditions to present only separate financial statements without preparing its own consolidation . In this situation, the standard doesn’t silently permit you not to consolidate—it requires you to make clear three things in the separate statements :
State that these are separate financial statements
The statements must clearly state that these are “separate financial statements,” and that the company is choosing not to prepare consolidated financial statements based on the standard’s exemption provisions .
Identify who prepares consolidated statements
You must disclose :
- Which entity prepares consolidated financial statements (name)
- Where it mainly operates and in which jurisdiction it’s registered
- Where its consolidated financial statements can be obtained (e.g., publicly available, companies registry, website)
Basis for the exemption
Preferably briefly explain which HKFRS 10 exemption applies (e.g., “because this company is a wholly-owned subsidiary of Group X”), so users know: it’s not that you “don’t want to consolidate,” but that the standard itself permits you to take this shortcut .
4. Practical challenges of the equity method in separate statements
This section addresses: Why can the same associate or joint venture, using the equity method in consolidated versus separate statements, appear to have slightly different results ?
In consolidated statements, we’re already familiar with :
- “Investment in associate/joint venture” is an asset
- Each year it’s adjusted for share of profit/loss and other comprehensive income
- Dividends received don’t hit income but reduce the investment
In separate financial statements, if you choose to use the equity method, the mechanics are similar but you’ll encounter several practical issues .
Goodwill impairment: Test the whole investment together
Under the equity method, goodwill within the investment is usually not separately presented but viewed as part of the entire investment . This applies in both consolidated and separate statements :
- Impairment testing assesses whether the whole “investment in associate/joint venture” is recoverable, not testing goodwill separately first
- For readers, the key point to remember: the equity method isn’t “componentised,” it’s “holistic”
Losses exceeding investment: When to stop?
When your share of losses reduces the investment carrying amount to zero, the general approach is :
- If there are no additional obligations (e.g., guarantees, long-term financial support commitments), stop recognising further losses
- If there are additional commitments, continue recognising losses according to commitment amounts, even recognising a liability
When using the equity method in separate statements, the situation is the same, except that without consolidated assets and liabilities to “dilute” these numbers, you need to make clearer in working papers :
- Why the investment was reduced to zero
- Whether the company has any additional legal/practical obligations
- When recognition of profits will resume
Impairment testing: Valuation models must be consistent
In practice, impairment testing of equity method investments typically uses :
- Future cash flows of the investee (discounted at attributable share), or
- External valuations/market prices for reference
If you’ve already performed a model at the consolidated level, it’s best to use the same assumptions in separate statements, otherwise it’s easy to have: consolidated statements saying no impairment, separate statements showing large impairment, leaving users confused about which to believe .
So the difficulty of the equity method in separate statements isn’t the “calculation” but “maintaining logical consistency with the consolidated level” .
5. Accepting differences with other standards rather than forcing alignment
This section addresses: Why can the same transaction be treated differently in consolidated versus separate statements, and why does the standard allow such differences to exist ?
A commonly mentioned example is borrowing costs (HKAS 23, equivalent to IAS 23) :
Borrowing costs: Capitalised at consolidated level but expensed in separate statements?
Assume :
- The parent borrows long-term funds for a subsidiary’s large plant construction
- At the consolidated level, this borrowing is clearly for a “qualifying asset” and meets HKAS 23’s capitalisation conditions
The result is :
- In consolidated financial statements, borrowing costs can be capitalised to the plant under construction
- But in the parent’s separate statements, if the investment in the subsidiary is classified as a financial asset (e.g., at HKFRS 9 fair value), borrowing costs generally won’t be capitalised to the “financial asset”—they’re mostly expensed directly to profit or loss
This seems contradictory: the same interest is capitalised in consolidated statements but expensed in separate statements . But the standard setters’ thinking is :
- Consolidated statements view “the whole group as an economic entity”: the interest genuinely relates to plant construction
- Separate statements view “a single legal entity”: the parent only holds “an investment,” so that interest is more like general financing cost to it
In such situations, HKAS 27 doesn’t try to use additional provisions to “align” both sides, but accepts: different levels of statements can naturally have different answers; the key is clear disclosure .
Practical reminder
For practising accountants, the point isn’t obsessing over “why no uniformity,” but :
- First ask clearly: am I now handling consolidated or separate statements?
- Then follow the standards applicable to that level (consolidated = HKFRS 10 + related; separate = HKAS 27 + HKFRS 9 / HKAS 28, etc.)
- Finally explain meaningful differences clearly in notes, e.g., differences between consolidated vs parent on interest, capitalisation, impairment
6. Special provisions for new parent reorganisation cost
The final section addresses: When a group does a “shell change” under common control—adding a new parent above the original parent—how should the new parent measure the investment cost in the old parent in separate statements ?
Picture this scenario :
- Originally parent P controls a bunch of subsidiaries
- Now shareholders establish New P, which issues shares in exchange for P’s shares
- Before and after reorganisation, ultimate owners and group assets/liabilities are essentially the same—only “the top layer” changed names
In this type of “same family, just changed nameplate” reorganisation, HKAS 27 provides a very practical approach :
- In the new parent’s own separate financial statements
- If using the cost method to account for the investment in the original parent
- The “cost” is not the fair value of shares issued, but uses the carrying amount of equity items in the original parent’s separate statement
In plain language :
The standard doesn’t want adding a shell layer to suddenly create a large “new goodwill” or revaluation reserve on the new parent’s books, so it tells you to directly carry forward the original parent’s equity numbers, keeping the entire group’s equity story coherent .
For most readers, remembering these two points is sufficient :
- When encountering “new parent shell change” reorganisations, first determine whether it’s under common control of the same shareholders with unchanged equity proportions
- If yes, and the new parent uses the cost method, use the original parent’s equity carrying amount as investment cost, referring back to HKAS 27 text for details when needed
The bottom line: Think of HKAS 27 as a “second perspective on the world”
Going through the entire series, you’ll notice HKAS 27 keeps doing the same thing: reminding you that beyond the “group perspective,” there’s actually a “single entity perspective” . Both perspectives look at the same companies and transactions, but the questions often differ :
- In consolidated statements, we care about “how much the whole group earns, asset/liability health”
- In separate financial statements, the question becomes “what investments does this company itself hold, how are these investments accounted for, how much distributable reserves are there”
The first article helped you clarify: when to use HKAS 27, what’s the difference between consolidated vs separate, how HKAS 27 divides responsibilities with other standards . The second article walked you through the main rules: cost method, HKFRS 9, fair value, equity method, plus common scenarios like dividends, held for sale and new parent reorganisation . The third article zooms into areas that are “uncommon but tricky when they appear”: investment entity exceptions, disclosures when not consolidating, equity method details in separate statements, and naturally occurring differences between consolidated and separate .
You can try asking a few simple questions in daily work or when reading annual reports, connecting all three articles :
- Am I looking at consolidated statements or a company’s separate statements?
- If separate statements, are subsidiary, associate and joint venture investments using cost method, fair value or equity method? Is one method per category achieved?
- Could this company possibly be an investment entity? If so, which subsidiaries would be accounted for at fair value through profit or loss in both consolidated and separate statements?
- If the parent doesn’t present consolidated statements, do the separate statements clearly tell me “where to find the complete group statements”?
- When encountering group reorganisations or shell arrangements, have I considered HKAS 27’s treatment of new parent investment cost, rather than instinctively going by “consideration fair value”?
When these questions become your natural reflex, HKAS 27 will no longer be a “niche standard” for you but a tool helping you switch perspectives across different statement levels . Later, if you delve deeper into investment entities, company reorganisations or more complex equity arrangements, the framework these three articles built will become a very practical foundation .
Key takeaways for students and junior accountants
- When reviewing fund or investment holding companies: Check whether they qualify as investment entities—if yes, expect to see certain subsidiaries at FVPL in both consolidated and separate statements rather than consolidated or at cost .
- In working papers for non-consolidated parents: Verify that the separate statements clearly disclose which ultimate parent prepares consolidated statements and where to obtain them—this is a common compliance requirement often missed .
- Common exam trap: Questions may give an equity method investment with losses exceeding carrying amount and ask when to stop—remember to check for additional obligations like guarantees or support commitments before stopping loss recognition .
- Most likely mistake with borrowing costs: Assuming that if interest is capitalised at consolidated level, it must also be capitalised in the parent’s separate statement—this ignores that if the investment is a financial asset under HKFRS 9, capitalisation usually doesn’t apply .
- During group reorganisations: If a new parent is inserted under common control with unchanged equity interests, check whether the special HKAS 27 cost measurement applies (using original parent’s equity carrying amount)—don’t default to fair value and create artificial goodwill .
- When using equity method in separate statements: Keep impairment assessment assumptions consistent with consolidated level—having different impairment conclusions across the two levels without good reason confuses users and raises audit questions .
If you’d like to ask me questions or chat about your learning, you can follow me on Threads / IG and send me a DM — I’ll reply as far as I can.
And if you feel these resources have helped you, you can also buy me a coffee to support me in writing more.
罔相心室: https://chinese.iamdelusionman.com/
Zero-to-Acct Substack: https://zerotoacct.substack.com/
Thread: https://www.threads.com/@yickki_mong
IG: https://www.instagram.com/yickki_mong/
