IASB July 2009

The Board began its deliberations of the proposals in ED 10 Consolidated Financial Statements considering comments and information received from respondents to the exposure draft and from participants at the round table meetings held in Toronto, Tokyo and London in June 2009.

The Board decided tentatively that:

• control, defined to require a reporting entity to have both the power to direct the activities and the ability to benefit from that power, is the only basis for consolidation.
• exposure to risks and rewards alone does not constitute control. Exposure to risks and rewards is an indicator of control because the greater a reporting entity’s exposure to risks and rewards from its involvement with an entity, the greater the incentive for the reporting entity to obtain rights sufficient to give it the power to direct the activities of an entity.
• reputational risk does not give a reporting entity the power to direct the activities of an entity. However, the existence of reputational risk can give a reporting entity an incentive to control another entity. 
• if a reporting entity holds less than half of the voting rights of an entity, the reporting entity can have the power to direct the activities of that entity, depending on the circumstances.
• if a reporting entity holds options or convertible instruments to obtain voting rights in an entity, the reporting entity can have the power to direct the activities of that entity.

In September 2009, the Board will continue to discuss the control model, power with less than half of the voting rights, power from options or convertible instruments and control of what ED 10 describes as structured entities.