IFRS – Review of New StandardsIFRS 10, IFRS 11 & IFRS 12By: Lisa Mladenovic

IFRS – IFRS 10, 11 & 12

Overview

Just when you 

thought you 

were done.......

IFRS – IFRS 10, 11 & 12

Overview - agendaIFRS – Review of IFRS 10, Consolidations, IFRS 11, Joint Arrangements and IFRS 12, Disclosure of Interests in Other EntitiesOverview of topic and review of agenda

IFRS 10Why change?Review of requirementsDefining control and power – new approachDo you have control? How to find out

• Activities• Power • Returns

Substantive vs. protective rightsPotential voting rightsDe facto power – assessingPrincipal vs. agentTransitioning to IFRS 10

IFRS – IFRS 10, 11 & 12

Overview - agendaIFRS 11Why change?Review of requirementsDefining joint control – new approachComparing IFRS 11 to IAS 31Proportionate consolidation vs. equity methodWhat type of joint arrangement do you have? How to find out

IFRS 12Why change?Objectives of IFRS 12Review of requirementsExamples of additional disclosures

Q&A portion

IFRS – IFRS 10, 11 & 12

IFRS 10 - ConsolidationsWhy change??

IAS 27 & SIC 12

Divergence in practice when applying

Assessing which standard to apply (IAS 27 or SIC 12)

Determining investees these standards were applicable to

Quantitative/”bright line” analysis vs. nature of relationship

Special situations – needed more clarity

Agency relationships

Structured entities

Potential voting rights

Control without a majority of voting rights

Goals of the IASB

Consistency

Comparability

Disclosure

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…A high level look at some new concepts…

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…Review of requirements – all about control

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…Do you have control? How to find out…

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…Consider the purpose and design of the investee

Voting rights

Majority?

Any other arrangements that affect decision-making?

Straight forward

Complex cases

Other factors in play other than voting rights

Downside risks and upside potential the investee was designed to be exposed to;

Downside risks and upside potential the investee was designed to pass on to other parties in the transaction; and

Is the investor exposed to those downside risks and upside potential

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…What are the relevant activities?Definition: “…activities of the investee that significantly affect the investee’s returns.”

Included examples in IFRS 10 are:•Selling and purchasing of goods or services;•Managing financial assets during their life;•Selecting, acquiring or disposing of assets;•Researching and developing new products or processes; and•Determining a funding structure or obtaining funding

How does “significance” factor into determining power?? When one investor makes decisions regarding relevant activities they clearly have power. What about when there are multiple investors? Consider some factors included in Appendix examples:

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…

Shared control – must co‐operate to direct 

relevant activities – joint control

All relevant activities

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…

Relevant activity 1

Relevant activ

ity 2

If both relevant activities significantly affect the investee’s returns  –

need to consider which activity most

significantly affects 

returns

Use professional judgment!!

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…How to determine which is the most significant:

“In determining which investor has power, the investors would consider:a)the purpose and design of the investee;b)the factors that determine the profit margin, revenue and value of the investee as well as the value of the medical product;c)the effect on the investee’s returns resulting from each investor’sd)decision-making authority with respect to the factors in (b); ande)the investors’ exposure to variability of returns.” [IFRS 10.B13]

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…Summary of example 1 in IFRS 10.B13Two investorsInvestee – develop and market a medical productOne investor – responsible for all decisions regarding developing the product and obtaining regulatory approval Second investor – responsible for all decisions regarding manufacturing and marketing the productBoth significant relevant activities

What needs to be considered to assess which most significantly affects investee returns?

Is there uncertainty with getting regulatory approval?Effort required to obtain approval?Is investor an expert?Which investor controls the product after completion of the development phase?

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…

What do you need to make decisions? POWERPer IFRS10.10 “An investor has power over an investee when the

investor has existing rights that give it the current ability to direct the relevant activities...”

Power is obtained from rights – consider voting rights:

1)If voting rights provide control – straightforward;

2)If voting rights are simply admin istrative and control comes from other contractual arrangements – factors to consider;

3)Variable investee returns affect ed by other factors than voting rights (eg: interest on bonds)

How are decisions made about the relevant activities?

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…What rights does the investor have? Do they give power?

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…Substantive rights

Holder of substantive rights

must have the practical ability to exercise that right

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…Is the investor exposed to variable returns from the investee?

Variable returns are not fixed & have the potential to vary as a result of the performance of the investee. Variable returns can only be positive, only negative or both positive & negative

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…

Principal vs. AgentProfessional judgement required - nature of relationship considered and how the parties interact?When an investor has the ability to direct another party to act on its behalf – that party has delegated powerExamples:

Investor’s related parties;

Party that received interest in investee from investor;

Party requiring investor approval to sell/transfer/encumber interest in investee;

Party that cannot operate without investor’s financial support;

Investee with same key management personnel as investor; &

Party with close business relationship with investor

Can the investor use its power to affect its returns from the investee?

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…Principal vs. Agent

IFRS – IFRS 10, 11 & 12

IFRS 10 – Consolidations cont…

Issued:  June, 2011

Effective:  fiscal years starting after January 1, 2013

Early adoption permitted

IFRS – IFRS 10, 11 & 12

IFRS 11 – Joint Arrangements

Why change??

IAS 31 & SIC 13

Accounting requirements may not always have reflected the rights and obligations of the parties arising from the arrangements in which they were involved

Higher number of joint venture arrangements and variety of types

Consistency in accounting for jointly controlled entities

Goals of the IASB

Consistency

Comparability

Disclosure (IFRS 12)

IFRS – IFRS 10, 11 & 12

IFRS 11 – Joint Arrangements cont…Let’s look at the IASB’s graphical illustration

IFRS – IFRS 10, 11 & 12

IFRS 11 – Joint Arrangements cont…Impact doesn’t affect determining whether or not there’s a joint 

arrangement BUT

classification has changed

IFRS – IFRS 10, 11 & 12

IFRS 11 – Joint Arrangements cont…

IFRS – IFRS 10, 11 & 12

IFRS 11 – Joint Arrangements cont…Joint operation Joint venture

Separate vehicle structure Depends on 

other 

considerations 

below

Legal form establish parties rights to assets 

and obligations for liabilities of arrangement

Contractual arrangement terms establish 

parties rights to assets and obligations for 

liabilities of arrangement

Other facts/circumstances – do the parties 

have rights to substantially all the economic 

benefits of the assets of the arrangement 

AND

does it depend on the parties on a 

continuous basis for settling liabilities?

IFRS – IFRS 10, 11 & 12

IFRS 11 – Joint Arrangements cont…Example of a joint operation:

50%

50%

Ownership

IFRS – IFRS 10, 11 & 12

IFRS 11 – Joint Arrangements cont…Another example of a joint operation:

50%

50%

Ownership

IFRS – IFRS 10, 11 & 12

IFRS 11 – Joint Arrangements cont…Example of a joint venture:

50%

50%

Ownership

IFRS – IFRS 10, 11 & 12

IFRS 11 – Joint Arrangements cont…Example of situation where contract terms do not specify rights and parties 

need to consider other facts and circumstances:

Facts:Two parties structure joint arrangement in incorporated entity50/50 ownershipPurpose of arrangement to manufacture materials for each party’s individual manufacturing operationsIncorporated entity owns its assets and liabilities (legal form)Contractual arrangement does not specify rights/obligationsJoint venture indicated

Other considerationsOutput to be sold to each party 50/50 – entity cannot sell to third parties and, therefore, is dependent on investors for generation of cash flowsOutput to be sold to each party 50/50 – investors have rights to output and, therefore, economic benefits of the entity’s assetsAssessment – Joint operation

If this clause 

changed to allow 

sales to third 

parties ‐

JV

IFRS – IFRS 10, 11 & 12

IFRS 12 – Disclosure of Interests in Other Entities

Why change??

Centralized disclosure requirements

Combines, enhances & replaces disclosure requirements for subsidiaries, joint arrangements, associates and unconsolidated structured entities.

Disclosure helps users understand reasoning behind classification of interests in other entities

Disclosure helps users understand the nature of the interests in other entities

Disclosure helps users asses the nature of the risks associated with interests in other entities

IFRS – IFRS 10, 11 & 12

IFRS 12 – Disclosure of Interests in Other Entities cont.Scope

This IFRS shall be applied by an entity that has an interest in any of thefollowing:(a) subsidiaries(b) joint arrangements (ie joint operations or joint ventures)(c) associates(d) unconsolidated structured entities.

This IFRS does not apply to:(a) post-employment benefit plans or other long-term employeebenefit plans to which IAS 19 Employee Benefits applies.(b) an entity’s separate financial statements to which IAS 27 applies. (c) an interest held by an entity that participates in, but does not have joint control of, a joint arrangement unless have significant influence (d) an interest in another entity that is accounted for in accordancewith IFRS 9 Financial Instruments.

IFRS – IFRS 10, 11 & 12

IFRS 12 – Disclosure of Interests in Other Entities cont.Scope

This IFRS shall be applied by an entity that has an interest in any of thefollowing:(a) subsidiaries(b) joint arrangements (ie joint operations or joint ventures)(c) associates(d) unconsolidated structured entities.

This IFRS does not apply to:(a) post-employment benefit plans or other long-term employeebenefit plans to which IAS 19 Employee Benefits applies.(b) an entity’s separate financial statements to which IAS 27 applies. (c) an interest held by an entity that participates in, but does not have joint control of, a joint arrangement unless have significant influence (d) an interest in another entity that is accounted for in accordancewith IFRS 9 Financial Instruments.

IFRS – IFRS 10, 11 & 12

IFRS 12 – Disclosure of Interests in Other Entities cont.Requirements:

IFRS – IFRS 10, 11 & 12

IFRS 12 – Disclosure of Interests in Other Entities cont.Requirements:

IFRS – IFRS 10, 11 & 12

Helpful Linkshttp://www.iasb.org/IFRSs/IFRS.htm

http://www.cica.ca/ifrs//index.aspx

iGAAP – IFRS for Canada, A comprehensive reference by Deloitte, 3rd Edition:http://www.cch.ca/product.aspx?WebID=100713

CCH’s IFRS for Canada – online research tool: Details: http://www.cch.ca/product.aspx?WebID=2830Trial: http://www.cch.ca/tax/FreeTrials.aspx?acct=1

IFRS – IFRS 10, 11 & 12

Contact Information

Thank you!!! Contact information:Lisa Mladenoviclisa9988m@yahoo.ca416-522-9991

IFRS – IFRS 10, 11 & 12

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