6. IFRS 10 - Consolidated Financial Statements

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Transcript of 6. IFRS 10 - Consolidated Financial Statements

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    The IASB recently published 3 new and 2 revised standards dealing with group issues and

    off-balance sheet activities. We will cover the 3 new standards and the consequential

    amendments reflected in the two revised standards. This module is not intended to discuss

    these new standards in their entirety. Rather, it will focus on areas that will be most relevant

    to you in understanding how the new provisions will impact their financial reporting.

    We will provide a general background on the new standards. Then, we will discuss each new

    standard in turn to cover what it tries to achieve, its key provisions, how it will affect IFRS

    users and the relevant transition provisions.

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    Presentation of consolidated financial statements

    9 A parent, other than a parent described in paragraph 10, shall presentconsolidated financial statements in which it consolidates its investments in subsidiaries inaccordance with this Standard.

    10 A parent need not present consolidated financial statements if and only

    if:

    (a) the parent is itself a wholly-owned subsidiary, or is a partially-ownedsubsidiary of another entity and its other owners, including those not otherwiseentitled to vote, have been informed about, and do not object to, the parent notpresenting consolidated financial statements;

    (b) the parent's debt or equity instruments are not traded in a public market (adomestic or foreign stock exchange or an over-the-counter market, including localand regional markets);

    (c) the parent did not file, nor is it in the process of filing, its financialstatements with a securities commission or other regulatory organisation for thepurpose of issuing any class of instruments in a public market; and

    (d) the ultimate or any intermediate parent of the parent produces consolidatedfinancial statements available for public use that comply with International FinancialReporting Standards.

    11 A parent that elects in accordance with paragraph 10 not to present consolidatedfinancial statements, and presents only separate financial statements, complies withparagraphs 3843.

    Extracted from IAS 27, Consolidated and Separate Financial Statements. IASCFoundation.

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    Power is the key issue not exercise of that power.

    Included in the assessment will be for example any shares that have vested already

    even though they have not actually been exercised. Intentions are irrelevant.

    This consideration is only valid in deciding whether to consolidate. Actual current

    holdings are used to determine shares of post acq profits for group and minority.

    Benefits

    dividends, interest, valuation gains or losses, service fees and other forms of

    remuneration as well as synergies

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    Control is presumed to exist when the parent owns, directly or indirectly through

    subsidiaries, more than half of the voting power of an entity unless, in exceptional

    circumstances, it can be clearly demonstrated that such ownership does not

    constitute control.

    - power over more than half of the voting rights by virtue of an agreement with

    other investors;

    - power to govern the financial and operating policies of the entity under a statute

    or an agreement;

    - power to appoint or remove the majority of the members of the board of directors

    or equivalent governing body and control of the entity is by that board or body; or

    - power to cast the majority of votes at meetings of the board of directors or

    equivalent governing body and control of the entity is by that board or body.

    The existence and effect of potential voting rights that are currently exercisable or

    convertible, including potential voting rights

    held by another entity, are considered when assessing whether an entity has the

    power to govern the financial and operating policies of another entity. Potential

    voting rights are not currently exercisable or convertible when, for example, they

    cannot be exercised or converted until a future date or until the occurrence of a

    future event.

    In assessing whether potential voting rights contribute to control, the entity

    examines all facts and circumstances (including the terms of exercise of the

    potential voting rights and any other contractual arrangements whether considered

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    August 2015/09/20

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    In some cases, additional care needs to be taken to identify a control relationship

    where there is no direct ownership interest, as is the case with many special purpose

    entities. SIC 12 provides guidance and indicators of control of SPEs if control

    exists, the SPE must be consolidated in accordance with IAS 27. More detailed

    examples of the indicators on the slide are given in SIC 12 to demonstrate.

    Issue addressed by SIC 12

    1 An entity may be created to accomplish a narrow and well-defined

    objective (eg to effect a lease, research and development activities or a

    securitisation of financial assets). Such a special purpose entity ('SPE') may take the

    form of a corporation, trust, partnership or unincorporated entity. SPEs often are

    created with legal arrangements that impose strict and sometimes permanent limits

    on the decision-making powers of their governing board, trustee or management

    over the operations of the SPE. Frequently, these provisions specify that the policy

    guiding the ongoing activities of the SPE cannot be modified, other than perhaps by

    its creator or sponsor (ie they operate on so-called 'autopilot').

    2 The sponsor (or entity on whose behalf the SPE was created)

    frequently transfers assets to the SPE, obtains the right to use assets held by the SPE

    or performs services for the SPE, while other parties ('capital providers') may

    provide the funding to the SPE. An entity that engages in transactions with an SPE

    (frequently the creator or sponsor) may in substance control the SPE.

    3 A beneficial interest in an SPE may, for example, take the form of a

    debt instrument, an equity instrument, a participation right, a residual interest or a

    lease. Some beneficial interests may simply provide the holder with a fixed or stated

    rate of return, while others give the holder rights or access to other future economic

    benefits of the SPE's activities. In most cases, the creator or sponsor (or the entity

    on whose behalf the SPE was created) retains a significant beneficial interest in the

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    problem with first bullet - relies on identifying control relationship before disclosures are

    required. In practice, what came out of the financial crisis was lots of special relationships

    that did in fact represent control but which had not been consolidated as control had not

    been identified

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    The new standards were issued as a package and aim to provide consistent, principles-

    based standards for the accounting of an entity's interest in other entities, commonly referred

    to as investees. These new standards use common terminology and definitions (for example,

    control and relevant activities) which can be applied for all types of investees.

    These new standards also enhance convergence with US GAAP in key areas - for example,the option to use proportionate consolidation in accounting for an interest in what was

    previously referred to as a jointly controlled entity has now been eliminated. This will increase

    consistency of accounting for such type of interests.

    More importantly, the publication of these standards is an important part of the IASB's

    response to the financial crisis. It addresses concerns about the current consolidation

    standards relating to whether the right things are being brought onto companies' statements

    of financial position and whether financial statements sufficiently convey an entity's full

    exposure to risks from its involvement with its investees, including unconsolidated entities.

    Together with the enhanced disclosure requirements of IFRS 12, the IASB hopes that thenew standards will reduce structuring incentives, promote consistency in accounting and

    improve transparency.

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    Before we get into the details of each standard, let us look at the interaction of the

    related standards. Understanding this relationship is key to identify the appropriate

    IFRS to be applied in accounting for interests in an investee.

    Assessment of control remains to be the key driver in determining how an investeewill be