Project
In June 2003, the IASB added a project on consolidation to its agenda. The objective of the project is to publish a single IFRS on consolidation to replace the consolidation requirements of IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities. The project addresses a revision of the control definition in order to apply the same control criteria to all entities and enhanced disclosures about consolidated and unconsolidated entities.
In April 2008, in response to the global financial crisis 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. The Board published the exposure draft in December 2008 (ED10). The comment deadline for the exposure draft ended on 20 March 2009.
Round tables were held in conjunction with the derecognition project in North America, Asia and Europe in June 2009 and deliberations commenced in July. In October 2009, the IASB and the FASB agreed to conduct their respective consolidation projects jointly, though with different time lines.
The IASB published the final consolidation and disclosure requirements on 12 May 2011. The FASB decided in January 2011 that it would not change the consolidation requirements relating to voting interest entities at this time. The FASB did however tentatively decide that it would propose changes to the consolidation requirements relating to variable interest entities in the context of assessing whether a decision-maker is a principal or an agent. Those proposals would be similar to the proposed requirements developed jointly by the IASB and the FASB regarding the principal agent assessment, which will be included in the IASB’s forthcoming consolidation standard.
Main decisions
The following paragraphs summarise the main decisions made by the boards.
Definition of control
A reporting entity controls another entity when it is exposed, or has rights, to variable returns from its involvement with the other entity and has the ability to affect those returns through its power over the entity. A reporting entity has power over another entity when the reporting entity has existing rights that give it the current ability to direct the activities that significantly affect the entity’s returns. Returns have a wide meaning and include, for example, dividends, interest, valuation gains or losses, service fees and other forms of remuneration as well as synergies.
Power with less than a majority of the voting rights
A reporting entity can have power over another entity by different means. A reporting entity generally has that power when it holds the majority of the voting rights in another entity, in the absence of factors to the contrary. A reporting entity can also have that power, even though it holds less than a majority of the voting rights, because of agreements with other vote holders, other contractual agreements, potential voting rights, its current voting rights or a combination thereof. To assess whether a reporting entity has power over another entity because of its voting rights, even though it holds less than a majority of the voting rights in that entity, the reporting entity considers all available evidence. The evidence to be considered includes the size of the reporting entity’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders, voting patterns at previous shareholders meetings, options and convertible instruments and other contractual arrangements.
Potential voting rights
A reporting entity should consider potential voting rights (eg options and convertible instruments) when assessing whether it has power over another entity. Therefore, the assessment of whether a reporting entity has power includes not only a reporting entity's voting rights in another entity, but also consideration of all the facts and circumstances associated with potential voting rights instruments.
Principal-agency relationships
An agent is a party engaged to act on behalf of another party or parties (the principal) that delegate some decision-making authority to the agent. When assessing its power over another entity, the principal considers the decision-making authority that it has delegated to agents. The agent does not automatically have power over another entity because decision-making authority has been delegated to it. When assessing whether a party acts as an agent or a principal, the reporting entity considers all facts and circumstances, including the overall relationship between that party, the entity being managed and the other interest holders.
Disclosures
A reporting entity should disclose information that helps users of financial statements to understand:
a. the significant judgements and assumptions (and changes to those judgements and assumptions) made by the reporting entity in determining whether it controls (or does not control) another entity;
b. the interest that the non-controlling interests have in the group’s activities;
c. the effect of restrictions on the reporting entity’s ability to access and use assets or settle liabilities of consolidated entities;
d. the nature of, and changes in, the risks associated with the reporting entity’s interests in consolidated structured entities and unconsolidated structured entities.
The disclosure requirements for subsidiaries, joint arrangements and associates will be combined within a comprehensive disclosure standard that addresses a reporting entity's involvement with other entities. The disclosure standard will also contain disclosure requirements for unconsolidated structured entities (special purpose entities).