Practical Guide Ifrs Consolidated Jul11

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    pwc.com.au

    Practicalguide to IFRSConsolidated financialstatements: redefining

    control

    July 2011

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    Practical guide to IFRSConsolidated financial statements:

    redefining control

    At a glance

    The IASB released IFRS 10,Consolidated nancial statements, on12 May 2011, introducing new guidanceon control and consolidation.

    The new approach combines theconcepts of power and exposure tovariable returns to determine whethercontrol exists. Control exists underIFRS 10 when the investor has power,exposure to variable returns and theability to use that power to affect itsreturns from the investee.

    IFRS 10 contains guidance on thefollowing issues when determining whohas control:

    4 Assessment of the purpose anddesign of an investee;

    4 Nature of rights substantive orprotective in nature;

    4 Assessment of existing and potentialvoting rights;

    4 Whether an investor is a principalor agent when exercising itscontrolling power;

    4 Relationships between investors andhow they affect control; and

    4 Existence of power over speciedassets only.

    The new standard is available for earlyadoption, with mandatory applicationrequired from 1 January 2013.

    Management will need to evaluate theimpact of the new standard in theirassessment of the entities that they arerequired to consolidate.

    Changes to the composition of the groupcould arise and impact key investormetrics (including debt covenants) such

    as gearing, liquidity and protabilityratios.

    July 2011

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    Contents

    Page

    At a glance 1

    Introduction 3

    Scope 3

    Control 4

    Framework for assessment of control 4

    Purpose and design of the investee 5

    Power 5

    Relevant activities 6 Power over relevant activities 8 Substantive or protective rights 9 Voting and potential voting rights 12 Structured entities 20

    Variable returns 23

    Link between power and returns principal vs agent 23

    Other issues 29

    De facto agent 29 Silos 29 Frequency of reassessment 29

    Accounting requirements 30

    Disclosures 30

    General objective of IFRS 12 30 Scope of disclosures 30 Aggregation of disclosures 31 Signicant judgements and assumptions 32

    Transition 32

    Potential business impacts 33

    Industry insights 33

    Where to go for more information 33

    Appendix A: Disclosure checklist 34

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    Introduction

    1. IFRS 10 is the major output of theconsolidation project, resulting ina single definition of control for allentities. The IASB continues work on

    a project that will propose changes tohow investment entities account forentities they control. An exposure drafton investment entities is expected inthe third quarter of 2011. A separatestandard, IFRS 12 Disclosure of interestsin other entities, sets out disclosures forinvestor/investee relationships.

    PwC observation:The consolidationproject has been on the IASBs agendasince June 2003. The objective was to

    develop a standard to replace IAS 27 andSIC 12. IFRS 10 revises the denition ofcontrol and provides detailed applicationguidance so that a single control modelcan be applied to all entities. Theproject was developed partly to addressperceived inconsistencies betweenIAS 27 and SIC 12, and also to enhanceconvergence with US GAAP. The projectwas accelerated in 2008 as a result of theglobal nancial crisis.

    2. The key principle in the new standard isthat control exists, and consolidation isrequired, only if the investor possessespower over the investee, has exposureto variable returns from its involvementwith the investee and has the ability touse its power over the investee to affectits returns.

    PwC observation:The new standard willaffect some entities more than others. Theconsolidation conclusion is not expected

    to change for most straightforwardentities. However, changes can resultin complex cases. Entities that are mostlikely to be affected potentially includeinvestors in the following entities: entities with a dominant investor

    that does not possess a majority votinginterest, where the remaining votes areheld by widely-dispersed shareholders(de facto control);

    structured entities; entities that issue or hold signicant

    potential voting rights; and asset management entities.

    In difcult cases, the precise facts andcircumstances will affect the analysisunder IFRS 10. IFRS 10 does not providebright lines and requires consideration ofmany factors.

    3. The new standard also sets outconsolidation principles and guidancefor measuring non-controlling interests,potential voting rights and accountingfor loss of control.

    Scope

    4. IFRS 10 applies to all parent entitiesthat need to present consolidatednancial statements, except for post-employment benet plans or other long-term employee benet plans to whichIAS 19 applies (IFRS 10.4b).

    5. Parent entities are exempted from havingto consolidate if:(a) the parent is a wholly or partially-

    owned subsidiary in which all ownersdo not object to non-consolidation;

    (b) the parents debt or equity securitiesare not publicly traded;

    (c) the parent did not le, and is notling, its nancial statements to issuepublicly-traded instruments; and

    (d) the ultimate or any intermediateparent of the parent entity producesIFRS consolidated financialstatements that are available forpublic use.

    (IFRS 10.3)

    PwC observation:The exemptions

    from consolidation and the how-to ofconsolidation have not changed fromIAS 27.

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    Control

    Control

    Power Variable returnsAbility to use power to

    affect returns

    Illustration 1: The elements of control

    6. Control exists when an investor has allthree of the following elements:(a) power over the investee;(b) exposure or rights to variable

    returns from its involvement withthe investee; and

    (c) the ability to use its power over

    the investee to affect the amount ofthe investors returns.

    (IFRS 10.7)

    PwC observation:Previously, controlthrough voting rights was addressedby IAS 27, while exposure to variablereturns was an important considerationwithin the SIC 12 framework. However,the relationship between these twoapproaches to control was not always

    clear. IFRS 10 links power and returnsby introducing an additional requirementthat the investor is capable of wieldingthat power to inuence its returns.

    Assess purpose and design (para 8-9)

    Assess power (illustration 3)

    What activities significantly affect the investees returns (relevant activities)?

    How are decisions about relevant activities made?

    Do investors rights provide ability to direct relevant activities?

    Assess ability to use power to influence variable returns

    Principal/agent assessment (illustration 20)

    De facto agent assessment (para 49-51)

    Assess exposure to variable returns (para 42-44)

    Illustration 2: Framework for assessment of control

    7. Reassessment of control is required if facts and circumstances indicate that any of the

    elements have changed (IFRS 10.8).

    Framework for assessment of control

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    Purpose and design ofthe investee

    8. The purpose and design of an investeecould impact the assessment of whatthe relevant activities are, how thoseactivities are decided, who can directthose activities, and who can receivereturns from those activities(IFRS 10.B5). The consideration ofpurpose and design may make it clearthat the entity is controlled by votingor potential voting rights (IFRS 10.B6).

    9. Voting rights in some cases may notsignicantly impact an investeesreturn. The investee may be onauto-pilot through contractualarrangements. In those cases, thefollowing should be considered inassessing the purpose and design of anentity (IFRS 10.B8):(a) downside risks and upside

    potential that the investeewas designed to create;

    (b) downside risks and upsidepotential that investee wasdesigned to pass on to otherparties in the transaction; and

    (c) whether the investor is exposedto those risks and upside potential.

    Power

    Power

    10. An investor has power over aninvestee when the investor has existingsubstantive rights that giveit the current ability to direct therelevant activities (IFRS 10.10,

    IFRS 10.B9). Relevant activities arethe activities that signicantly affectthe investees returns.

    The diagram below summarisesthe considerations involved in theassessment of power.

    Assess purpose and design

    of entity (para 8-9)

    Illustration 3: Conceptual flowchart for assessment of power

    * Whether rights are substantive or protective is dealt with in illustration 7.

    Determine relevant activities

    (paras 12-13, illustration 4b)

    Determine how relevant activities are directed (paras 14-15)

    Does entity own >50% of substantive*

    voting rights (illustration 9)?

    Is there de facto control(illustration 10)?

    Do substantive* potential voting rights give

    controlling power (illustration 14)?

    Do other contr