December 2011
International Financial Reporting Standards
Introducing
IFRS 10 Consolidated
Financial Statements and
related disclosures in
IFRS 12 Disclosures
The views expressed in this presentation are those of the presenter,
not necessarily those of the IFRS Foundation or the IASB
© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Why we undertook the project
Issues – IAS 27 / SIC12
Solution – IFRS 10, 12
Inconsistencies in practice
• Tension between IAS 27
(control) and SIC 12 (risk and
rewards)
• Inconsistent application
• A single control model for all
entities
Disclosures and financial crisis
• Sufficient guidance for
structured entities?
• Reputational risk as a basis for
consolidation?
• Inadequate disclosures?
• SIC 12 performed well. Use of
existing principles to create a
sound foundation for SPEs
• Clear principles of control
• Additional application guidance
• Enhanced disclosures
particularly for unconsolidated
structured entities
The control model – overview
Definition of control:
An investor controls an investee when the investor is exposed, or
has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its
power over the investee.
 Single consolidation model for all entities, including structured
entities
 Consolidation based on control – ‘power so as to benefit’ model
 Controller must have some exposure to risks and rewards.
 Exposure is an indicator of control but is not control of itself
 Power arises from rights—voting rights (either majority or less than a
majority), potential voting rights, other contractual arrangements, or
a combination thereof.
The control model – overview
(cont’)
Assessing control of an investee:
 Consider the purpose and design
 Identify the activities of the investee that significantly affect the
returns of the investee (ie the relevant activities)
 Identify how decisions about relevant activities are made
 Determine whether the rights of the investor give it the ability to
direct the relevant activities
 Determine whether the investor is exposed, or has rights, to the
variability associated with the returns of the investee
 Determine whether the investor has the ability to use its power over
the investee to affect its own returns
Main decisions
1. “De facto” control
 Entity can control with less than 50% of voting rights.
 Factors to consider include:
–
–
–
Size of the holding relative to the size and dispersion of other vote
holders
Potential voting rights
Other contractual rights
 If the above not conclusive consider additional facts and
circumstances that provide evidence of power (eg voting patterns
at previous board meeting, etc)
2. Structured entities
 General principles apply for assessing control for all types of
entities.
Main decisions
3. Potential Voting Rights
 Substantive potential voting rights (PVR) can give the holder power
 Consider the terms and conditions, including:
–
–
–
4.
Whether there are any barriers that prevent the holder from exercising
Whether exercise of the rights would be beneficial to the holder
Whether the rights are exercisable when decisions need to be made
Agency relationships
 Consider all of the following factors:
–
–
–
–
scope of the decision-making authority
rights held by other parties (ie kick-out rights)
remuneration of the decision-maker
other interests that the decision maker holds in the investee
Main decisions
5. Disclosures
 Enables investors to assess the nature of, and changes in, the
risks associated with its interests in (un)consolidated structured
entities
6. Effective Date
 Aligned effective date for IFRS 10, IFRS 11 and IFRS 12
–
–
Annual periods beginning on or after 1 January 2013
Earlier application permitted if applied as a package
Enhanced convergence with US
GAAP in key areas
1. Convergence IFRS 10:
 Structured entities (or variable interest entities) now have the same basis for
consolidation*
 Control assessment for voting interest entities differ
– Power with less than a majority of voting rights
– Consideration of options and convertible instruments
2. Convergence IFRS 12:
 Disclosures relating to unconsolidated structured entities (or variable interest
entities) are very similar
 Generally IFRS 12 goes further because
– Information about a reporting entity’s risk exposure from involvement
with structured entities that it sponsored but with which it is no longer
involved
– More information about consolidated entities (and material joint
ventures and associates)
* Based on FASB issuing principal agent guidance
Outlook – Joint FASB/IASB
Investment Entity ED
1. Investment company level
 measure investments in controlled entities at fair value through profit or
loss
 measure investments in joint arrangements and associates at fair value
through profit or loss
2. Non investment company parent level
Difference to
FASB ED
 consolidate all controlled entities, even if controlled through an
investment entity subsidiary
 continue the use of fair value for investments in joint arrangements and
associates held by an investment entity subsidiary
3. Comment period
 Ends at 5 January 2012, Target Date for IFRS = Q2 2012
Questions or comments?
Expressions of individual
views by members of the
IASB and
its staff are encouraged.
The views expressed in this
presentation are those of the
presenter. Official positions
of the IASB on accounting
matters are determined only
after extensive due process
and deliberation.
© 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.iasb.org