IASB March 2010

The Board discussed consolidations in three separate sessions, all of which were held jointly with the FASB.

The control model

The IASB and the FASB continued to deliberate the control model being developed for the purposes of determining when one entity should consolidate another, and discussed the following topics:

• When assessing control of an entity controlled by voting rights when are a reporting entity’s voting rights sufficient to give it the ability to direct the activities of the entity?
• How to determine whether a decision maker is an agent or a principal.
• Whether the involvement and interests of related parties should be considered to be those of the reporting entity.
• The description of a structured entity.

The boards tentatively decided:

• A reporting entity has the power to direct the activities of another entity when it has the current ability to direct the activities of the entity that significantly affect the returns.
• The reporting entity can have that current ability to direct the activities by different means:
• By having the contractual ability to direct the activities, which can arise from having:
  1. More than half of the voting rights in an entity controlled by voting rights
  2. Contractual rights within other contractual arrangements that related to the substantive activities of the entity
  3. A combination of contractual rights within other contractual arrangements and holding voting rights in the entity.
• By holding less than half of the voting rights in an entity considering relevant facts and circumstances. The assessment of whether a reporting entity has the current ability to direct the activities of an entity includes an assessment of both the reporting entity's rights (and whether they are sufficient to give the reporting entity power), and whether the rights held by other parties could prevent the reporting entity from having the ability to direct.
• In situations in which a reporting entity does not have the contractual ability to direct the activities (eg when it holds less than half of the voting rights in an entity), a reporting entity may need to rely on other indicators of power to provide evidence of having the ability to direct, such as whether it can obtain additional voting rights from holding potential voting rights or whether the entity's operations are dependent on the reporting entity. In some situations, considering the size of the reporting entity's holding of voting rights relative to the size and dispersion of holds of other vote holders, together with voting patterns at previous shareholders meetings, could provide sufficient evidence of having the ability to direct.

The FASB tentatively decided that the guidance for variable interest entities in Codification Topic 810 (specific to US GAAP), except for the implementation guidance, would be replaced by the control principles established within this project with the expectation that the guidance established in this project will produce consolidation results consistent with those reached under the Variable Interest Entity subsections of Topic 810.

Principal-Agency relationship

The boards tentatively decided that:

1. when assessing whether a decision-maker is an agent or a principal, the assessment should be made on the basis of the overall relationship between the decision-maker, the entity being managed and the other interest holders, and should consider all of the following factors:
   1. Scope of decision-making authority
   2. Rights held by other parties
   3. Remunerations of the decision-maker
   4. The decision-maker's exposure to variability of returns because of other interest that it holds in the entity.
2. when assessing control, the involvement and interests of a related party should be considered to be those of the reporting entity when the nature of the reporting entity's relationship with that related party is such that the related party is acting on behalf of the reporting entity. The boards tentatively agreed that this would also be the case where those that direct the activities of the reporting entity also have the ability to direct another entity to act on behalf of the reporting entity. The boards also tentatively decided that the final standard will include a list of potential related parties. The boards tentatively agreed to include guidance in the final standard that is similar to that in ASC Paragraph 810-10-25-44 to address situations in which a reporting entity, together with its related parties, as a group, meets the control requirements.
3. a description of a structured entity should be included in the next due process document. That description would incorporate some of the factors that describe a variable interest entity in US GAAP (ASC Topic 810-10, as amended by FASB Statement No.167), but the description would not include all of the current guidance that is in Topic 810-10.
   

Disclosures

The boards discussed a reporting entity's disclosures for subsidiaries. The boards tentatively decided that, subject to wording changes, as a general disclosure principle, a reporting entity should disclose information that help users of financial statements to understand:

1. the composition (and changes in the composition) of the group;
2. the effect of legal structures within the group, and changes to those structures, on the reporting entity's ability to access and use assets and resources of consolidated entities;
3. the nature of, and changes in, the risks associated with the reporting entity's involvement with structured entities.

The boards also tentatively decided that a reporting entity could provide the disclosures on an aggregated basis, unless separate disclosure would provide more decision-useful information. The final disclosure requirements will contain application guidance on how the information could be aggregated.

The boards tentatively decided that, to comply with the general disclosure principle, a reporting entity should disclose:

1. all significant judgements and assumptions in determining whether it controls another entity and any changes in its control assessments that require significant judgement and the reasons for those changes; and
2. the nature of restrictions that are a consequence of assets and liabilities by the parent or its subsidiaries.

The boards asked the staff to conduct further research on disclosures relating to:

1. summarised financial information on subsidiaries;
2. the interest that the non-controlling interests have in the group; and
3. a reporting entity's risk exposure from its involvement with subsidiaries.

The boards discussed reputational risk in the context of requiring disclosures for implicit obligations of support that a reporting entity may have with another entity. The boards tentatively decided to require disclosures regarding the provision of support to another entity when there was no contractual or constructive obligation to do so and whether it has any current intentions to provide support or other assistance in the future.

The boards will continue to deliberate disclosures for consolidated and unconsolidated entities at the April 2010 joint board meeting.