Consolidation
Mr Tham Sai Choy
Deputy Chairman, Accounting Standards
Council of Singapore
September 30, 2010
Outline of the Agenda

Introduction

Presentation of AOSSG Discussion Paper
- key issues identified from the overall proposals in the
Consolidation project

Questions and Answers

Conclusion
2
Presentation of AOSSG Discussion Paper
1.
Consolidation model for structured entities
2.
Dominant shareholder approach
3.
Limited scope exception for investment entities
4.
Proposed disclosure requirements for involvement
with structured entities
3
Q1: Consolidation Model for Structured
Entities

Single cohesive standard for consolidation of voting interest
entities and structured entities



Guidance applicable to structured entities should also be
relevant for voting interest/ non-structured entities
Retaining indicators under SIC-12

Risks and Rewards as an indicator of Control

Autopilot mechanism- irreversible predetermination of
strategic operating and financing policies is a form of power
AOSSG recommendation: To adopt a single control model and
retain the Risks & Rewards and Autopilot Mechanism as
indicators.
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Q2: Dominant shareholder approach

Dominant shareholder approach – control is dependent on the
relative size, dispersion and level of activism of the remaining
vote holders:
 Application
challenge and inconsistent interpretation
 Consolidation
based on temporary control and presumption that
remaining vote holders would not collectively vote in future
meetings
 Introduction
of fine line between significant influence and
control
 Impairment
of decision-usefulness of consolidated financial
statements as a results of potential unnecessary volatility and
consolidation of entities with large non-controlling interest
5
Q2: Dominant shareholder approach

AOSSG Recommendations:

Control should be based primarily on the relationship between
the reporting entity and the other.

Consolidation should apply only where there is evidence of
effective control currently and there is no evidence that such
control might be lost in the foreseeable future.

Incorporation of requirement that reporting entity has control
where there is evidence of its ability to direct the activities of
another entity that significantly affect returns

Emphasis should be placed on the potential substantive kick
out or preventive rights held by other parties when
determining who has control.
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Q3: Limited scope exception for investment
entities


Definition of investment entities

Relevance and appropriateness of unit of ownership and
pooling of interests as criteria for single owner investment
entity or sovereign funds

Proposed criteria may allow certain entities such as private
equities/ venture capitalists that actively managed their
investments to be investments entities
AOSSG Recommendation: Review the proposed criteria
including removing unit ownership and pooling of interest
7
Q3: Limited scope exception for investment
entities


Parent company accounting of an investment entity

Decision-usefulness of information - investments managed at
fair value basis are consolidated at parent company level

Inconsistency compared to recent IFRIC decision to allow
portion of the investment of an associate measured at fair
value at the subsidiary level to flow through to the
consolidated account at parent company level
AOSSG Recommendation: Extend the limited scope exception
in consolidation to the parent entity regardless of whether it is an
investment entity itself.
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Q4:Proposed
Proposed disclosure
disclosure requirements
Q4:
requirementsfor
for
involvementwith
with structured
structured entities
involvement
entities

Disclosure of involvement with structured entities

Conflict the objective of having single control model

Unclear definition of structured entities and unclear guidance
of what is meant by “involvement with structured entities”

Practical difficulty to obtain information for disclosure and
additional cost to align potentially different reporting periods
as these entities are not controlled by the reporting entity

Onerous requirement to disclose three years comparative
information on the current income and assets transferred to
structured entities sponsored or set up by the reporting entity
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Q4:Proposed
Proposed disclosure
disclosure requirements
Q4:
requirementsfor
for
involvementwith
with structured
structured entities
involvement
entities

AOSSG recommendation:

Single model of disclosure requirements

Require only specific risk disclosure for significant
involvement with unconsolidated structured entities

Exempt the requirements for entities that have accounted the
non-consolidated structured entities as associate

Remove the requirement for three years comparative
disclosures on structured entity set up or sponsored by the
reporting entity
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Questions and Answers
1.
Consolidation model for structured entities
2.
Dominant shareholder approach
3.
Limited scope exception for investment entities
4.
Proposed disclosure requirements for involvement
with structured entities
Any other questions for discussion?
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Conclusion

Summary of discussion

Generally supportive of the tentative decisions

Clear defined control principles and application guidance are
critical

Useful indicators under the existing standard should be retained

Proposals on dominant shareholder approach, definition of
investment entities and parent company accounting for
investment entities need to be reviewed based on decisionusefulness of the information to users

Disclosure requirements should be objective-based and practical
Approval of discussion paper for submission to IASB?
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Conclusion

Thank you!
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