The IASB’s new standard on consolidation, IFRS 10, Consolidated Financial Statements, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of a reporting entity. The new control model looks at voting, potential voting and contractual rights and other facts and circumstances (i.e., practical ability to control, special relationships, large exposures) to assess whether an investor has control.
In order to control, a parent must now have the power to direct activities of the investee, be exposed to variable returns related to it and have the ability to use its power to affect those variable returns. The separate rules for special purpose entities have been eliminated; however, the guidance on control reflects factors to consider when special purpose or structured entities are involved. A key feature of the new requirements is the concept of ‘de facto’ control, under which holding of a large block of voting shares might be sufficient to trigger consolidation even if you don’t have a majority of votes.
The new standard is effective for years beginning on or after January 1, 2013. To learn more about this project and how it may impact your organization’s reporting, click here, or contact us.
At the same time that it issued IFRS 10, the IASB released new guidance related to disclosures of interests in other entities in IFRS 12, Disclosure of Interests in Other Entities. The new standard sets out the required disclosures for entities reporting under IFRS 10 and IFRS 11 and it replaces the disclosure requirements currently in IAS 28, ‘Investments in associates’. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities, including information about: significant judgments and assumptions, interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities.