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Two Steps Backward and One Step Forward; The IASB’s response to Off - Balance
Sheet Financing through investments in other entities
Mark D. Hughes*
Faculty of Business and Government
University of Canberra
ACT 2601 Australia
Mark.Hughes@canberra.edu.au
Phone: +612 6201 2695
Simon J. Hoy
Faculty of Business and Government
University of Canberra
ACT 2601 Australia
Simon.Hoy@canberra.edu.au
Phone: +612 6201 2680
* corresponding author
22 February 2012
Thanks are due to participants at a session of the 2011 World Accounting Frontiers Series
Conference for their insight and constructive comments.
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Two Steps Backward and One Step Forward; The IASB’s response to Off - Balance
Sheet Financing through investments in other entities
ABSTRACT
In the wake of the Global Financial Crisis, a number of influential stakeholders called on the
International Accounting Standards Board to improve the quality of accounting rules that
relate to investments in other entities. This paper argues that the Board’s response to those
calls has led to an increase in off - balance sheet financing opportunities for reporting entities.
This outcome persists, even after taking into account an increase in disclosures and the
removal of a loophole which facilitated off - balance sheet financing.
The Board has legitimized off-balance sheet financing opportunities through the use of
supermajorities and potential voting rights. It is argued that this has resulted from the Board’s
focus on developing a single test for consolidation, rather than primarily considering the issue
from the perspective of providing decision useful information. This paper provides evidence
of the impact on financial data in general purpose financial reports and shows approximately
25 percent of subjects in a sample of large companies do not consolidate majority-held
investees. While it is true that the Board has increased disclosures relating to investments in
other entities, these can be easily circumvented.
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1. INTRODUCTION
There has been widespread and longstanding criticism that the accounting standard setting
process has yet to achieve its stated objective of developing standards which require decisionuseful information be provided to users of general purpose financial reports (GPFR). The
basis of this criticism relates to rules that fail to disclose information, or present it in ways that
users are unable to incorporate in their decision-making processes (Clarke, Dean & Oliver,
1997; Financial Accounting Standards Board, 2006; Graham, King & Morrill, 2003; Herz,
2005; Mackintosh, 2006; Penman, 2003; Pozen, 2007; Securities and Exchange Commission,
2007). This criticism became more pronounced in the wake of the Global Financial Crisis
(GFC) when a number of influential reports, such as the Turner Review (2009), the
Congressional Oversight Panel (2009), and the Financial Stability Forum (2008) warned that
accounting rules relating to equity investments in other entities facilitated various forms of
off-balance sheet financing (OBF). These reports link the GFC with OBF because regulators
and other equity market stakeholders were misled as to the level of risk faced by reporting
entities. These reviews had considerable impact and “in April 2008, in response to the GFC
and the recommendation of the Financial Stability Forum, the Board decided to accelerate the
consolidation project and proceed directly to the publication of an exposure draft” (IASB,
2009, p2).
The International Accounting Standards Board (IASB) duly released Exposure Draft 10
Consolidated Financial Statements (ED 10) (IASB, 2008), Staff Draft IFRS X Consolidated
Financial Statements (SD) (IASB, 2010), and International Financial Reporting Standard 10
Consolidated Financial Statements (IFRS 10) (IASB, 2011c). All of these documents specify
the use of a single control test to determine when an investor should consolidate investees. In
the Basis for Conclusions on IFRS 10, (IASB, 2011a) the Board states that it expects the use
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of this single test will reduce the potential for opportunistic structuring of transactions.
However, the illustrative examples contained in Appendix B – Application Guidance of IFRS
10 demonstrate that the control test will be applied in two ways that expands the potential for
entities to engage in OBF.1 First, IFRS 10 relaxes the rules relating to potential voting rights
and second, it formally recognizes supermajorities. Potential voting rights exist when an
investor holds financial instruments, such as options or warrants which, if exercised or
converted, would increase the number of voting rights of the holder.
Supermajorities arise through an agreement between a majority shareholder and other
shareholders stipulating that votes in relation to the operating or financing activities of an
investee require more than a simple majority. Supermajorities and potential voting rights
provide managers with considerable flexibility in selecting the desired level of disclosure to
apply to various investments. That is, managers can choose whether an investment will be
consolidated, equity accounted or accounted as financial instruments. A major advantage of
accounting for equity investments in other entities as financial instruments is that an investor
can inflate earnings in a number of ways, such as reflecting revaluations of the investment in
the Statement of Comprehensive Income (SCI) and by not having to eliminate intra-entity
transactions. Previously, this would not have been of concern, as investors generally held
small equity interests in these investees and would have found it difficult to impose their will
on other equity holders. However OBF, through supermajorities and potential voting rights,
can greatly facilitate this type of activity.
At the same time as releasing IFRS 10, the Board released International Financial Reporting
Standard 12 Disclosure of Interests in Other Entities (IFRS 12) (IASB, 2011d), which sets out
the minimum disclosures required for investments in subsidiaries, joint arrangements,
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associates and unconsolidated structured entities, with considerable emphasis on structured
entities. This rule requires more rigorous disclosures than previously required, but still has
substantial gaps which facilitate OBF.
The potential for an increase in OBF following the implementation of IFRS 10 and IFRS 12 is
a critical issue, as considerable evidence indicates managers actively seek to design
transactions that result in reduced disclosures through a range of OBF techniques (Bens &
Monahan, 2008; Mills & Newberry, 2005; Mulford & Cominskey, 2002; Partnoy, 2003;
Schilit, 2002). Further, there is substantial evidence indicating that the decision-making
ability of users is impaired when accounting rules result in opaque disclosures (Harper,
Mister, & Strawser, 1991; Hopkins, 1996; Hirst & Hopkins, 1998; Hopkins, Houston, &
Peters, 2000; Hirst, Hopkins, & Wahlen, 2004).
This paper adds to the literature by demonstrating how IFRS 10 facilitates OBF through
structuring transactions using potential voting rights and supermajorities. An analysis of the
notes to the financial reports of a sample of companies from the ASX100 (Top 100 Australian
companies) is conducted in order to ascertain how frequently entities do not consolidate a
majority-owned investee due to a supermajority agreement. The paper also uses a case study
to illustrate the impact a supermajority agreement can have on the GPFR of a reporting entity.
The remainder of the paper is arranged as follows. Section 2 comprises the literature review
and discusses the pressures facing the IASB with respect to improving the quality of
accounting rules related to equity investments in other entities. It also describes the key
elements of IFRS 10 and presents evidence in relation to the impact certain OBF techniques
can have on GPFR and specifically examines the impact of supermajority agreements and
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potential voting rights on GPFR. Section 3 describes the methods employed and provides
details with respect to data collection and analysis. Section 4 presents the results relating to
the prevalence of supermajorities and examines, through the use of a case study, the impact
supermajorities can have on GPFR. The final section presents conclusions and offers
suggestions for future research.
2. LITERATURE REVIEW
2.1 Perceived inadequacies of accounting rules
The GFC triggered a number of calls for improvement in the rules relating to equity
investments in entities. For example, the President’s Working Group (2008, p6) states that
“authorities should encourage the FASB and IASB to achieve more rapid convergence of
accounting standards for consolidation of ... off-balance sheet vehicles.” A much stronger
demand for change was made by the Financial Stability Forum (2008, p26) which suggested
that the IASB and FASB truncate their due process procedures to produce a revised rule for
investments in other entities to meet an “urgent need for improved standards.”
Standard setters have been working on a range of projects aimed at reducing deficiencies in
rules which facilitate OBF through equity investments in other entities. However, the
effectiveness of these efforts has been questioned in a number of recent reports and inquiries
that link this variant of OBF to the GFC. For example, the Congressional Oversight Panel
claims “the proliferation of off-balance-sheet entities …. undermined clarity and
understanding in the marketplace” (Congressional Oversight Panel, 2009, p14). Similarly,
the Financial Stability Forum (2008, p25) states “the build-up and subsequent revelation of
significant off-balance sheet exposures has highlighted the need for clarity about the treatment
of off-balance sheet entities and about the risks they pose to financial institutions. The use of
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off-balance sheet entities created a belief that risk did not lie with arrangers and led market
participants to underestimate firms’ risk exposures.”
2.2 IFRS 10
The IASB reacted to pressure emanating from the GFC and the Financial Stability Forum by
accelerating its work on the consolidation project (IASB, 2009), leading to ED 10, SD and
IFRS 10. These documents adopt the control test as the only criterion by which an investing
entity will assess whether to consolidate an investee. In the Basis of Conclusions on IFRS 10
(IASB, 2011a, para BC35(d)) the Board stated that it retained the control model as this would
reduce the potential for “structuring opportunities.” Paragraph 7 of IFRS 10 states that an
investor controls an investee if, and only if, all of the following three elements are present:
The investor has to show it has power over the investee, it has exposure or rights to variable
returns from its involvement with the investee, and the investor has the ability to use its power
over the investee to affect the amount of the investor’s returns.
Prior to the introduction of IFRS 10, reporting entities had to work out whether they should
apply International Accounting Standard 27 Consolidated and Separate Financial Statements
(IAS 27) (IASB, 2003) or SIC-12 Consolidation—Special Purpose Entities (IASB, 1998)
when assessing whether they controlled an investee. In the development of IFRS 10, the
Board felt that permitting different interpretations of control for different types of investees
would lead to inconsistencies and “potential arbitrage by varying investee-specific
characteristics” (IASB, 2011a para BC74), so the decision was made to combine the guidance
on the control test in IAS 27 and SIC-12 in a single rule (IASB, 2011a para BC75).
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More significantly, the Board adopted the concepts of substantive and protective rights from
EITF 96-16 Investor’s Accounting for an Investee When the Investor Has a Majority of the
Voting Interest but the Minority Shareholder or shareholders Have Certain Approval or Veto
Rights (FASB, 1996). Protective rights are defined in paragraph B26 of IFRS 10 as being
those rights that “relate to fundamental changes in the activities of an investee or apply only
in exceptional circumstances.” Examples of protective rights include restrictive loan
covenants and the rights of non-controlling interests to approve the issue of debt or equity
instruments, as well as the right to approve significant capital expenditures (para B28).
Appendix B, paragraph B9 of IFRS 10 states that “for the purpose of assessing power, only
substantive rights and rights that are not protective shall be considered.” Paragraph B22 states
that for “a right to be substantive, the holder must have the practical ability to exercise that
right.” When determining whether an entity has this ability, entities must consider a range of
factors, including whether there are any barriers, (legal, financial, contractual, operational) or
incentives which would result in the entity not exercising that right (IFRS 10, para B23). If it
is likely that the right will not be exercised, it cannot be a substantive right. It would be
expected that some kind of boundary would be set in relation to the application of the control
test. However, it appears that the Board’s interpretation of substantive rights will facilitate
OBF in a number of guises.
2.2.1 POTENTIAL voting rights
Under IAS 27, an investor assessing whether it controlled another entity would include
potential voting rights held under instruments such as options or warrants, if these instruments
are currently exercisable (IAS 27, para 14). Paragraph 15 of IAS 27 states that when
considering potential voting rights, an investor is to ignore whether its management has the
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intention or the financial capacity to convert the rights into actual votes. Paragraph B47 of
IFRS 10 restricts the application of this test, as potential voting rights are only to be included
in an analysis of control if they are substantive. In this context, the instruments have to be
currently exercisable and it has to make ‘economic sense’ for the investor to exercise or
convert the instruments into actual voting rights.
For example, assume an investor holds currently exercisable, but out of the money, options to
buy additional shares in an investee. Under IAS 27, the investor would include the voting
rights represented by those options, when assessing whether it should consolidate the investee
(IAS 27, IG8), as they are currently exercisable. Under IAS 27, the financial capacity of an
entity and the intention of management to exercise the options are ignored, as these could be
arranged so as to keep certain investments off the balance sheet. However, Application
Examples 9 and 10 of IFRS 10 indicate voting rights attaching to such options may be
excluded from the analysis, depending on how far they are out of the money. If these
instruments are “deeply” out of the money, the associated potential voting rights may not be
deemed to be substantive. However, if they are not “deeply” out of the money, the potential
voting rights may be deemed to be substantive.
In the development process for IFRS 10, the Board has consistently stated that it prefers the
principle-based control test to other metrics, such as risk and returns, which require
quantification, as these could lead to structuring opportunities (IASB 2011(a), BC 35(c),
BC36). It is therefore surprising that the Board has introduced a test (how deep an instrument
is out of the money) which implicitly requires a quantitative assessment before it can be
answered. For example, is 10 percent deeply out of the money; or does this only apply from
20 percent? This test facilitates structuring opportunities through the interpretation of
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“deeply”. For example, assume an investor owned 70 percent of the shares of an investee and
sold 30 percent of these to a hedge fund or some other entity. As part of the transaction, the
investor also bought a call option on these shares, exercisable at 10 percent above whatever
the market price is on the day the options are exercised. The investor would now own less
than 50 percent of the votes but it is unclear whether or not the investee needs to be
consolidated. The ambiguity arises because it is not clear whether the 10 percent premium
would represent an instrument that is “deeply” out of the money.
In paragraph 94 of the Basis for Conclusions of the Staff Draft (IASB, 2010), the Board states
that “the holder of potential voting rights …has to take steps to obtain its voting rights. In
each case, the question is whether those steps are so significant that they act as a barrier to
prevent the investor from having the current ability to direct the activities of an investee.”
While this seems a reasonable argument to preserve the internal consistency of the substantive
rights test, it ignores evidence that indicates investors are prepared to manufacture these
barriers in order to avoid consolidating an investment. For example, Bens and Monahan
(2008) show North American banks were prepared to pay investors returns of 25 percent for
providing a “consolidation service”. The service these investors provided was the purchase of
certain instruments which allowed banks to keep asset-backed commercial paper off their
balance sheets. Subramaniam and Mark (2010) cite similar adaptive behaviour in responses to
a Standard and Poor’s survey on the introduction of FIN 46R.2
2.2.2 SUPERMAJORITIES
In paragraph B36 of IFRS 10, the Board explicitly recognizes that having a majority of voting
rights may not constitute control, if these rights are not substantive. The Board suggests this
situation may arise in those cases where an entity is “subject to direction by a government,
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court, administrator, liquidator or regulator”(IASB, 2011c B37). It should not be inferred
from this list of examples that rights can only be deemed non-substantive due to regulatory
reasons. The Board also recognizes that an entity is able to enter into agreements with other
parties which may result in the entity not having substantive rights.
Paragraph B25 of IFRS 10 states that substantive rights “exercisable by other parties can
prevent an investor from controlling the investee to which those rights relate …. even if [those
rights] only give the holders the current ability to approve or block decisions that relate to the
relevant activities.” This echoes paragraph 25 of Exposure Draft 10 (IASB, 2008) which
states that a “reporting entity can have a majority of the voting rights of an entity but not
control that entity. This will occur if legal requirements, the founding documents or other
contractual arrangements of the other entity restrict the power of the reporting entity to the
extent that it cannot direct the activities of the entity.” The Board’s argument that a regulatory
restriction on the exercise of power results in a loss of control of an investee would seem
reasonable. However, the Board is formalizing an OBF opportunity by extending this
argument to situations where an investing entity can structure transactions so that it has the
majority of voting rights, yet have these classified as non-substantive.
2.3. IFRS 12
In 2011 the IASB released IFRS 12 in response to the GFC and requests from users for
improved disclosures regarding an investing entity’s investments in other entities (IASB,
2011b). In developing IFRS 12, the Board was particularly focused on redressing a lack of
transparency regarding the risks an entity faced when it had invested in structured entities
(IASB, 2011b, BC4). As a result, a considerable proportion of this rule is concerned with
improving disclosures relating to this kind of investment. Structured entities are defined as
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“an entity that has been designed so that voting or similar rights are not the dominant factor in
deciding who controls the entity, such as when any voting rights relate to administrative tasks
only and the relevant activities are directed by means of contractual arrangements” (IASB,
2011d, Appendix A). The Board should be applauded for improving the disclosure
requirements for this type of investment. However, IFRS 12 provides other opportunities for
managers seeking to engage in OBF.
Paragraph B12 of IFRS 12 mandates a reporting entity will make specific disclosures for each
material associate, including summarised financial information such as, current assets and
liabilities, non-current assets and liabilities, revenues, profit or loss from continuing
operations, after-tax discontinued operations, and other comprehensive income. Interestingly,
these figures will be the same as those reported in the associate’s financial statements, and are
not scaled by the investing entity’s share of those amounts (IFRS 12, B14).
However, in the case of immaterial associates that are equity accounted, entities are not
required to make any disclosures relating to the statement of financial position. In this case,
they only have to present the aggregate carrying amount for these investments and the
investor’s share of the aggregate profit or loss from continuing operations, after-tax profit on
discontinued operations, other comprehensive income and total comprehensive income (IFRS
12, B16).
The differential disclosures, particularly the lack of information on assets and liabilities for
non-material associates create an opportunity and incentive for managers who wish to
undertake OBF activities. It is important to recognise that the definition of materiality does
not prevent entities from structuring transactions in ways that result in information not being
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shown in GPFR, even though the impact of these transactions would appear to meet the
criteria.3 For example, companies which chose to structure transactions using special purpose
entities under EITF 90-15 Impact of Nonsubstantive Lessors, Residual Value Guarantees, and
Other Provisions in Leasing Transactions and similar rules did not breach the definition of
materiality.
It would be incorrect to think this definition would constrain managers from structuring
transactions in ways that would result in OBF. In the case of investments in associates, this
could be achieved by ensuring that the size of the investment remains below a given threshold
level, such as 10 percent of total assets. In the case of investments which exceed this figure,
managers of an investing company may exert influence to break the investee into smaller
companies which do not exceed the thresholds. In the past, the latter suggestion would be
unlikely to occur, as investors in associates usually held less than half of the voting rights.
However, IFRS 10 changes this, as it permits a majority shareholding in an investee to be
treated as an associate. The paper has demonstrated how potential voting rights can be used to
achieve this outcome.
3. METHOD
To explore the prevalence of supermajorities and their impact on GPFR, a two stage analysis
is conducted. Stage 1 examines a random sample of 72 companies drawn from the top 100
companies listed on the Australian Stock Exchange in 2010 to gain an understanding as to the
prevalence of companies which disclose a non-consolidated supermajority investment.4
Stage 2 adopts a case study approach and examines the annual reports of Macquarie Airports
Trust (1) (MAP) and Southern Cross Airports Corporation Holdings Ltd, the owners of
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Sydney’s Kingsford-Smith Airport (Sydney Airport) for the years ended 2003 to 2007.5 MAP
operates a suite of airports, including Sydney Airport, which is a reporting entity under
Australian GAAP. MAP and Sydney Airport were selected because they both publish GPFR,
and this allows an analysis of the impact a non-consolidated supermajority can have on an
investor’s published GPFR. The analysis concludes in 2006 due to changes in the ownership
structure of Sydney Airport in 2007 which resulted in it being consolidated in the GPFR of
MAP.
4. RESULTS
4.1 Stage 1- Prevalence of Supermajorities
Companies disclosing supermajorities in the Australian sample were spread over the Global
Industrial Classification Scheme (GICS) and included software and services, capital goods,
diversified financials, banks, insurance, energy, retailing and materials. A review of the notes
to the financial statements indicates that 24 percent of companies in this sample did not
consolidate entities in which they owned a majority of the voting rights. These companies
used a variety of justifications, including joint control, contractual arrangements, and
shareholder agreements to explain their decisions not to consolidate. These findings are
consistent with Bauman (2003), who reports that approximately 20 percent of companies in
his sample of American manufacturing firms did not consolidate majority-owned investees.
4.2 Stage 2 – Case Study
4.2.1 BACKGROUND
Note 15 of the 2005 GPFR for MAP shows that it held approximately 56 percent of the voting
interest in the equity of the entity that owns Sydney Airport. The shareholder agreement
between MAP and other investors in Sydney Airport stated that decisions relating to
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significant financing and operating activities required 75 percent of the votes in order to be
passed. Therefore, MAP was not required to consolidate this investment, as it did not have
control.
This investment was not accounted for under the relevant Australian equity accounting rule
(Accounting Standard AASB 128 Investments in Associates, equivalent to International
Accounting Standard 28 Investments in Associates) as the securities representing the
investments were held through a unit trust and this standard did not apply to investments held
by unit trusts.6 MAP was able to report its majority held investment in the unlisted securities
of this entity, and others with similar structures, as financial assets at fair value (MAP 2005).7
4.2.2 IMPACT
Table 1 shows the impact on reported earnings for 2003 to 2006. The table indicates that
supermajorities could substantially affect the statement of comprehensive income. For
example, in 2003 the reported net profit (after tax) of MAP was $382m. After deducting
$304m of revaluation income from supermajorities and taking into account the loss $256m
reported by Sydney Airport, MAP would have reported a loss of $178m. This represents a
decrease of $560m in reported profit for the year.
It is important to note that, unlike other accruals, the impact of supermajorities on earnings do
not reverse out in the short term. In this example, the cumulative affect grew monotonically
over the four year period and as a result, the reported earnings of the investor were $4,102m
greater than would otherwise be the case. This is possibly understated, as we do not know
what operating income or losses the other supermajority investees earned, as these are not
reporting entities.
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Insert Table 1 about here
Table 2 shows the reported assets and liabilities of MAP and Sydney Airport, as well as a proforma view of the combined position, if Sydney Airport had been consolidated. In 2003 the
reported net assets of MAP is $2,302m and the pro-forma consolidated figure is $2,514m. The
small difference in net assets masks a substantial difference in the composition of this figure.
For example, in 2003, the reported liabilities of MAP were $121m, while Sydney Airport
reported $6,125m.
Insert Table 2 about here
Panel A of Table 3 shows the impact on leverage (reported liabilities divided by reported
assets) if Sydney Airport had been consolidated. This indicates that the leverage ratio for
MAP was 5 percent in 2003. However, the pro-forma figure would have been 71 percent. A
similar pattern emerges in relation to the return on assets (ROA). For example, in 2003 the
ROA for MAP was 16 percent. However, the pro-forma figure indicates it would have been
closer to 1 percent, if Sydney Airport had been consolidated.
Insert Table 3 about here
These tables suggest that supermajorities can have a substantial impact on an investing
entity’s GPFR. By not consolidating the investee, the investor provides a substantially
different picture of the risks and benefits users are exposed to when making a capital
allocation decision.
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5. CONCLUSION
The Board’s interpretation of the control test has expanded the ways in which entities can
legitimately engage in opportunistic structuring of transactions resulting in OBF. This is
unlikely to address the concerns of the Financial Stability Forum and others critical of the
current rules relating to equity investments in entities. Given that approximately 24 percent of
a sample of the largest listed Australian companies are able to satisfy the exceptional
circumstances test under the current, more restrictive rule, Accounting Standard AASB 127
Consolidated and Separate Financial Statements (AASB 127) (equivalent to IAS 27), it
would be expected that the number of supermajorities will increase, as happened when other
OBF vehicles, such as SPEs, were officially recognised in accounting rules (Dharan, 2002;
Hartgraves & Benston, 2002). This is likely to have a negative impact on the utility of GPFR,
as research suggests users’ decision-making processes are impaired when information is not
presented or is presented in an opaque form.
This outcome is due to the way IFRS 10 defines the control test. It appears the Board is more
concerned with the internal consistency of its arguments in relation to this test, rather than
focusing on the utility of the accounting rule. The Board may be in jeopardy of making the
same mistake the FASB made when setting rules, such as EITF 90-15 in relation to SPEs.
That is, FASB focused on whether the rules were consistent with the control test and ignored
the strong potential the rule would be widely used as an OBF vehicle. This focus on lower
order issues threatens the Board’s goal of reducing the OBF and is at variance with the
objective of standard setting, as expressed in the Framework. As the SEC maintained in 1942,
the main issue when setting accounting standards is ‘whether the financial statements
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performed the function of enlightenment, which is their only reason for existence’ (Alexander
& Jermakowicz, 2006).
The introduction of IFRS 10 and IFRS 12 create a number of research opportunities. For
example, it would be interesting to see how entities react to the change in rules relating to
supermajorities. If supermajority investees are reporting entities, researchers may be able to
glean some insights into the motivations of managers in adopting these structures. These
studies could be analyzed from the various perspectives of the disclosure literature.
Empirical research in the case of potential voting rights is likely to be more difficult, unless
investor entities choose to, or are required to make disclosures regarding the existence of the
instruments giving rise to the potential voting rights. For example, requiring an investor to
disclose the presence of options to buy or take back specific volumes of shares it has sold in
an investee.
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FOOTNOTES
1.
The Application Guidance is an integral part of IFRS.
2.
FIN 46R was designed to result in the consolidation of variable interest entities
(previously known as special purpose entities). These entities were often utilized as part
of the securitization process.
3.
Materiality is defined in International Accounting Standard 1 Presentation of Financial
Statements (IAS 1, 2003) as relating to omissions or misstatements which by their size
or nature influence the capital allocation decisions of users.
4.
The sample did not exclude various sectors, such as banks, insurance and financial
institutions.
5.
In this discussion we use the term Sydney Airport as a shorthand term to refer to
Southern Cross Airports Holdings Limited, the entity that owns Sydney Airport.
6.
In 2011 the IASB removed this loophole when it modified IAS 28 Investments in
Associates (IASB 2000). However, this standard still allows investments made through
unit trusts and the like to be carried at fair value, with changes in the asset value being
recorded in the investor’s income.
7.
Please note we are not implying MAP has done anything wrong or illegal. It has applied
the rules quite legally to produce this result. Our criticism is not directed to MAP, rather
it is directed at the rules that allow such reduced levels of disclosure.
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REFERENCES
Alexander, D., & Jermakowicz, E. (2006). A true and fair view of the principles/rules debate.
Abacus 42, 132-164.
Australian Accounting Standards Board. (2004). Accounting Standard
AASB 127
Consolidated and Separate Financial Statements. Australian Accounting Standards Board.
Bauman, M. (2003). The impact and valuation of off-balance-sheet activities concealed by
equity method accounting. Accounting Horizons 17, 303-314.
Bens, D.A., & Monahan, S. (2008). Altering investment decisions to manage financial
reporting outcomes: asset backed commercial paper conduits and FIN 46. Journal of
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TABLE 1: Impact on Reported Earnings
Total reported NPAT MAP
Total revaluation income from supermajorities
Total NPAT without supermajorities
2003
$m
382
304
78
2004
$m
1,093
1,174
(81)
2005
$m
721
1,234
(513)
2006
$m
732
503
229
Total reported NPAT Sydney Airport
Pro forma reported NPAT if consolidated
(256)
(178)
(265)
(346)
(218)
(731)
(148)
81
560
560
1,439
1,999
1,452
3,451
651
4,102
Annual difference
Cumulative impact
TABLE 2: Impact on the Statement of Financial Position
Total assets
Total liabilities
Net assets
Pro-forma
consolidated
Total assets
Total liabilities
Net assets
2003
$m
MAP
Sydney
2,423
6,336
121
6,125
2,302
212
8,759
6,246
2,514
2004
$m
MAP
Sydney
5,679
6,258
1,206
6,310
4,473
(53)
11,937
7,516
4,420
2005
$m
MAP
Sydney
9,548
6,181
3,720
6,452
5,828
(271)
15,729
10,172
5,557
2006
$m
MAP
Sydney
16,927
6,625
11,904
6,672
5,023
(46)
23,552
18,576
4,977
TABLE 3: Impact on Select Ratios
Leverage (Liabilities/Assets)
MAP (GPFR)
Pro-forma if Sydney airport
consolidated
Return on Assets
MAP (GPFR)
Pro-forma If Sydney airport
consolidated
June 27-28, 2012
Cambridge, UK
2003
5%
2004
21%
2005
39%
2006
70%
71%
63%
65%
79%
16%
19%
8%
4%
1%
0%
1%
2%
23