Discussion at the Board's December 2003 Meeting

The staff noted that the Board had previously agreed that when an entity (the 'Investor'):

• (a) has the power to determine the strategic operating and financing policies of another entity ('Power Criterion ');
• (b) has the ability to benefit ('Benefit Criterion'); and
• (c) is able to use that power so as to increase, protect or limit the risk of downside in that benefit

The Board discussed how this definition would apply to an entity (called an SPE for discussion purposes) where the policies and significant decisions are predetermined and the predetermination is effectively permanent and immutable or unchangeable.

The staff proposed that the entity that predetermines the policies and significant decisions would meet the Power Criterion in the definition.

The Board agreed but noted that this may only be applied to a small set of circumstances and will need to be developed further.

The staff further proposed that an entity that subsequently accepts the predetermined issues will also meet the Power Criterion.

The Board agreed.

The staff noted that circumstances may exist where it is difficult to determine the application of the Power Criterion. The staff asked the Board to consider that in these circumstances control could be determined based on who is exposed to the residual risks of the SPE's assets.

The Board noted that this could be considered in determining who controlled the particular individual asset but highlights the difference in control over entities and individual assets.

The Board noted that an identification of risks and rewards within the SPE approach may have merit and should be explored further.

Discussion at the February 2004 IASB Meeting

The staff noted that the Board had previously agreed that when an Investor has the power to determine the strategic operating and financing policies of another entity ('Power Criterion'), has the ability to benefit ('Benefit Criterion'), and (c) is able to use that power so as to increase, protect or limit the risk of downside in that benefit, the Investor has control of that other entity and should consolidate it.

Potential Voting Rights and Control

The staff requested the Board to consider the circumstances when unexercised or unconverted instruments that on exercise/conversion will give the holder voting power or reduce another entity's voting power over the financial and operating policies of an investee ('potential voting rights') are relevant to a present assessment of control.

The staff proposed:

• a. that the following potential voting rights be considered in an assessment of current Power. Instruments that are:
  • i. presently exercisable (that is, not reliant on the further passage of time or the occurrence of a future event);
  • ii. for which there are no impediments to exercise (such as exercise being contingent on regulatory approval); and
  • iii. where the option has economic substance (it is not for example set at a strike price that is artificially high so that exercise is not possible in any foreseeable circumstances);

• b. in addition, potential voting rights should be considered in assessing Power if they enable their holder to determine an investee's strategic operating and financing policies in practice.

• c. that an entity with a current ability to determine strategic operating and financing policy as a result of a holding of relevant potential voting rights can only meet the Power Criterion in the absence of a third party with a present enforceable right to dominate policy determination;

• d. that presently exercisable / convertible instruments with no impediments to exercise should always be considered to determine if they are relevant to current control. However, it should not be compulsory that all such holdings actually be included in the final assessment of control (that is, they should all be considered for inclusion but if for example, a holder has no ability to benefit they would not ultimately be included in the assessment of control).

The Board discussed various concerns as to the different circumstances in which potential voting rights could be applied to consolidate (and consequently deconsolidate) entities and how this would be applied in practice. The Board indicated that they did not believe the concept of potential voting rights could be used to determine whether passive influence amounted to control.

The Board did not reach any conclusions.

Strawmen

The staff requested the Board to consider the circumstances when the holdings of entity's strawmen (being entities that effectively hold interests as some form of agent for another entity), should be included with those of an entity in assessing whether that entity meets the Power Criterion.

The staff proposed including a requirement that the holdings of strawmen be considered. This would clarify that Power can be held both directly and indirectly, so consideration must be given both to an investor's direct sources of Power and those that it may have available through the holdings of third parties.

The Board indicated a preference for a rebuttable presumption rather than a requirement as they believed that an indication of who might be considered Strawmen could be wider in those circumstances.

Discussion at March 2004 IASB Meeting

The Board considered the notion of "effective control" and guidance on how to assess the power to control when potentially conflicting notions of power occur simultaneously.

The staff recommended that the following be clarified:

• An entity with a current ability to determine strategic operating and financing policy only meets the power criterion in the absence of a third party able to dominate policy determination.
• An entity that does not dominate the determination of strategic operating and financing policy in practice but that has the ability to dominate such determination meets the power criterion. This is the case even if the entity has a history of not utilising its ability to dominate and/or has no intention of utilising this ability.

The staff noted that even if an entity is currently able to dominate policy determination, in some circumstances it may be difficult to determine whether that entity has power when potential voting rights can reduce its proportionate interest in the investee such that it would not have an enforceable right to power (sometimes referred to as 'legal control'). The staff recommended that a case-by-case assessment should be made, rather than concluding that an entity can never have power where taking into account potential voting rights, its proportionate interest in an investee is reduced and it will not have an enforceable right to power.

The Board agreed with the staff's recommendations but noted that care needs to be taken to assess the current situation and not whether the power to control will exist in the future.

Discussion at the May 2004 IASB Meeting

The purpose of the discussion was to explore consolidation issues related to entities with a fiduciary responsibility. The discussions will guide the staff in developing the overall approach to the consolidations project. Therefore, further consideration will have to be given to the US guidance in FIN 46. There were no decisions taken.

Discussion at the June 2004 IASB Meeting

The Board discussed a paper considering the characteristics of a fiduciary relationship that indicate that a controlling relationship does not exist, and agreed that the exposure draft on this issue should focus on the impact of those characteristics, rather than being based on a definition of 'fiduciary relationship', as such a definition may not be relevant to all jurisdictions.

The staff recommended, and the Board agreed, that the following observations about the control test should be included in the Exposure Draft:

a. An entity need not have unrestricted power to satisfy the power criterion. In particular, restrictions on the entity's decision-making that only have the effect of providing protection to third parties are not inconsistent with the entity having power;

b. An entity with the following characteristics does not satisfy the control test:

(i) it has power but is explicitly required by agreement or at law to use its power for the benefit of third parties. This requirement prevents the entity acting in its own interests to the detriment of those third parties;

(ii) the entity's ability to benefit from the assets over which power is held is limited. In particular, its entitlement must be agreed between itself and the third parties in whose benefit it must act (or entities representing those interests); and

(iii) its benefits from the assets over which it has power are, in effect, limited to a fee for services provided.

The Board asked staff to consider whether it might be possible to issue authoritative guidance on whether a fund manager that does not have a dual relationship is considered to control an investee in a more timely manner than they expect to complete this project.

At its September meeting the Board will consider a paper on structures of Special Purpose Entities.

The Board agreed that active communication with the FASB on the progress of this project should be maintained. This topic will be discussed at the joint IASB-FASB meeting to be held in October.

Discussion at the July 2005 IASB Meeting

The new name for the project being used by the IASB is: Control (including Special Purpose Entities).

The last time the Board discussed the Control Project was at its November 2004 meeting. At that time the Board asked the staff to proceed with the preparation of an exposure draft to incorporate into IAS 27, sooner rather than later, the considerable material and guidance the Board has developed on the concept of control as it would apply generally.

The purpose of this session was to:

• outline the issues the staff view as critical in determining the timing and development of a revised standard on control;
• review the decisions to date and identify those matters on which the staff intend to bring additional analysis to the Board;
• present a project plan for the Control Project.

The following issues were discussed:

The Board pointed out that this is not a convergence project at present, but at some point it will become so. Given the differences between IFRS and US GAAP in this area, the IASB had decided to continue working on IAS 27 and then the FASB would consider converging at a later point in time.

It was clarified that the Board would not seek to revisit IAS 28 and IAS 31 as part of this project but would merely ensure consistency between the notion of control and that of joint control and significant influence.

Some Board members indicated their intention to consider potential issues regarding the control notion as it applies to individual assets versus the application to entities. Furthermore, the issue of whether an SPE is really an entity should be explored or whether it is merely a group of individual assets.

Concern was expressed about the tentative definition of control which some members believed would not capture certain SPEs. The tentative definition (as per the observer notes) is as follows:

It was agreed that a flow chart would not be incorporated into the standard, as this would result in a 'checklist' approach to the assessment of control.

Regarding options, one Board member indicated that the right to exercise an option does not necessarily give control over the underlying entity. The current holder of the actual controlling interest is to be viewed as presently in control. Therefore, control over the option instrument does not translate to control over the underlying entity / asset. Some Board members indicated their intention to explore whether the 'benefits' requirement is fulfilled where an option has a strike price that is relatively high to the extent that the total return to the option holder is adversely affected.

The staff intends to make the disclosures consistent, between investments in subsidiaries falling within the scope of IAS 27 and those that are accounted for in terms of IAS 39.

The Board noted that certain issues related to the control notion had been brought to the attention of some Board members (such as controlling minority shareholders) and directed that where these can be easily dealt with by IFRIC for the sake of timely guidance, this should be the route taken for those issues.

No decisions were made during this session.

Discussion at the October 2005 IASB Meeting

'De facto' control

The staff introduced a topic that had emerged recently. The issue being whether one party that holds a substantial interest in another entity (but not a majority interest) and the remaining shares are held by a large number of other shareholders controls the investee. The other shareholders are typically dispersed, both demographically and geographically.

The question was whether the 'power to appoint' in paragraph 13(c) of IAS 27 requires that the entity has the legal power to exercise more than half the votes available or whether the 'power to appoint' is a matter of fact? That is to say, does the fact that an entity is able to dominate the voting because the remaining shares are held by parties who are not organised together and are unlikely to be able to be organised together, constitute the power to appoint?

It was noted, that most preparers do not consider the above to be a control relationship and hence were not consolidating. The majority of Board members indicated that their intention in IAS 27 was to include the notion of de facto control (that is, control in the above circumstances would exist and therefore consolidation would be required). Board members acknowledged how constituents had arrived at their understanding of IAS 27 given the wording of that Standard.

The Board decided to make a statement via the IASB Update and its website indicating that it is aware of this divergence in practice and acknowledge the different interpretations until such time that the Board clarifies the control notion in its broader project on this issue.

Autopilots - control versus risks and rewards

The Board has asked the staff to develop consistent control criteria and a single comprehensive IFRS (to replace IAS 27 and SIC-12) for all entities, including SPEs. The Board discussed at this meeting one characteristic common to many SPE's: the setting onto autopilot of its operating and financing policies.

The Board discussed some of the tensions between the control model in IAS 27 and the risk and reward emphasis implicit in SIC-12.

In discussing the objective of presenting group accounts, which was suggested to be the presentation of the results of the operations and the financial position as if any legal boundaries did not exist; some Board members questioned the focus on legalities, as trusts and partnerships are generally not considered to be legal entities in many jurisdictions. Consequently, the guidance in ARB 51 was offered as supplementary material in developing the objective.

It was suggested that consolidated financial statements should reflect the activities and position of an economic entity. The Board discussed the concept of an 'economic entity' in the context of single source supplier and customer relationships which invariably result in a close association between the reporting entity and the supplier / customer. Board members indicated that they did not envisage the control notion capturing such relationships. On the issue of autopilot mechanisms, the Board made the following points:

• If management decisions have to be made on an ongoing basis, it is not an autopilot mechanism (otherwise any entity could be put onto an 'autopilot' mechanism)
• In a pure autopilot mechanism, the power criteria can in most cases be assessed as immaterial in assessing whether an entity is a subsidiary of another entity (versus the notion that power has already been exercised by setting up the autopilot mechanism).
• In the context of an example presented to the Board (paragraph 37 of the Observer Notes), it was noted that generally, certain autopilot mechanisms will represent interests in undivided assets, consequently the Board may require legal assistance in order to explore that further, noting that global applicability of that legal guidance will be problematic. However, Board members indicated that the example did not have the full facts and did not explore whether the arrangement is in fact a joint venture.

The Board noted that given the tensions between the control model in IAS 27 and the risk and reward emphasis implicit in SIC-12 it was difficult to envisage moving away from a risks and rewards model.

Further observations on the accounting for potential voting rights

The Board was asked to provide input on additional examples of the accounting for the consequences of consolidating an entity on the basis of potential voting rights. The staff indicated that they had found these examples helpful in the development of the control project, because they reflect the application of the concepts agreed to by the Board to date. It is important that the accounting for effective control is intuitive and consistent with the Framework. Working through examples also highlights potential inconsistencies with other standards that may require decisions by the Board.

A dual purpose of tabling these examples was to place them in the public domain via the Observer notes. Board members indicated that comments had been sent to the staff.

Discussion at the November 2005 IASB Meeting

The Board discussed a proposed staff approach to developing disclosure principles with regard to the judgement exercised in determining whether one entity controls another entity. Two principles were proposed:

• The first is disclosure of information that would help an investor assess the appropriateness of the decision. The type of information this involves might include the important facts and circumstances relevant to the decision and the assessments and judgements that the entity made in reaching its decision.

  Under this approach, some of the deliberation processes themselves are explained in the financial statements, and not just the results of those deliberations, as is generally the case under the current IAS 27 model.

• The second type of disclosure is information that would help an investor assess the impact of that decision. The type of information this involves might include summary information about the resources and activities of the investee such as assets, liabilities, revenue and expenses. The staff noted that disclosures that allow users to assess the impact of the control decision might need to be extensive (and for each material subsidiary). The current disclosures for associates (total assets and total liabilities, for example) are unlikely to be sufficient.

  Symmetry in the disclosure requirements about the control decision is important. That is to say, if the decision requires the exercise of judgement then users may need information to assess the impact of that decision whether the investee is consolidated or not.

Board members expressed broad support for the proposed staff approach, but had concerns about symmetry of disclosure: that is, the idea that disclosure of why consolidation is appropriate when the entity holds less than 50 per cent of the voting shares is as important as disclosure of why consolidation is not appropriate when an entity holds more than 50 per cent of the shares in another entity. One Board member expressed disbelief that management would not know whether they controlled another entity, and would not be sympathetic to an argument that it was not possible to determine whether control existed. Board members were also concerned that any disclosures in the financial statements should not be predicated on providing sufficient information for users to 'audit' management decisions.

A Board member noted that the critical issue was not management's assessment of the power criterion in the developing control model, but the benefit criterion. This issue was acute in a range of special purpose entities that run on 'autopilot' (that is, the power criterion is non-operative) but which expose the sponsor to risks and benefits. These were the situations that should be of concern.

Discussion at the March 2006 IASB Meeting

The Board discussed the general approach the Staff is intending to take on this project and, in particular, how it intends to monitor and interact with the concurrent project to revisit the IASB's Framework.

Timing and interaction with the Framework project

The Board agreed that the Framework was the appropriate location of the general concepts (e.g., that financial statements should present the financial position, etc, of the parent and all entity that it controls) and that the standards on consolidation should house the detail of how that concept is made operational. The Board agreed that it would be ideal if the application dates for the proposed replacement for IFRS 3 and the amendments to IAS 27 under the current phase of the Business Combinations project were aligned with the proposed replacement of IAS 27 under the consolidations project.

The Board also agreed that the consolidation project should not delay the completion of the project to replace IFRS 3, which is currently scheduled for completion in 2Q 2007. The staff currently intends to proceed directly to an exposure draft, on the basis that the overall approach to consolidation will not change (it will still be control), rather the Board will be providing greater specificity around how the control model is applied. While giving their tentative approval to this approach, Board members warned the staff that constituents might not see the proposals in the same manner.

Special purpose entities

The Board was notified that Ed Trott, an FASB member, will present an educational session on the development and problems of FIN 46(R) during the April Board meeting. Several Board members noted that the session should help to convince the Board that the FASB model is not an optimal answer.

Discussion at the April 2006 IASB Meeting

Ed Trott, A Member of the US Financial Accounting Standards Board, led the IASB in a discussion of FASB Interpretation FIN 46(R) Consolidation of Variable Interest Entities. He explained what the FASB aimed to achieve through the Interpretation and shared some of the experience that the FASB has gained. The session concentrated on general principles and on six examples of applying those principles to a variety of common situations.

The session highlighted that within both the FASB and IASB standards there is a tension between the various aspects of the boards' definitions of control. For example, some standards focus on the 'power' aspect of control while others focus on the 'so as to benefit' criterion, often with contradictory results.

The session also noted that in FIN 46(R), the FASB used the word 'expected' in the way the term in used in FASB Concepts Statement 7, meaning a 'probability-weighted outcome', rather than the commonly-used meaning of 'most likely.' The examples used during the session demonstrated that the probability-weighted outcome was critical in assessing which entity had a majority of the variable interests in many situations.

No decisions were made.

Discussion at the September 2006 IASB Meeting

Staff presented to the Board the application of the proposed consolidation framework to entities that are currently within the scope of SIC 12. The aim of the session was to apply the work to date to common transaction types. No decisions were taken.

Staff's intention is not to have a separate Standard (or Interpretation) for special purpose entities (SPEs). The aim is to have a single consolidation standard that can be applied to all entities. In addition, staff does not intend to define an SPE. Instead, the control model should capture those entities that are controlled through traditional methods, such as voting rights, and those that are controlled through exposure to risks and benefits. It is presumed that those entities with exposure to risk/benefit will generally have control in order to protect their exposure to risk/benefit.

The proposed approach recognises that entities that are not consolidated through voting rights (known as strategic control) may be consolidated through exposure to the variability in the cash flows of the entity. This approach is very similar to FIN-46R in US GAAP. The proposed approach would differ from US GAAP, as bright lines would not be created to distinguish between voting interest entities, variable interest entities, and QSPEs as in US GAAP. The one other significant difference between the approach in FIN-46R and the staff's proposed approach is that under FIN-46R, an entity will consolidate a variable interest entity if it has the majority of the overall variability of the entity, even when the holder may not have exposure to certain assets within the SPE. The staff considered such an approach to be inconsistent with the concept of control, as the entity consolidating may have no ability to control certain assets within the entity. The staff therefore proposed a different approach from FIN-46R in this respect that, in certain cases, would allow a holder of an interest in an SPE to consolidate only certain assets within the vehicle.

The staff described three scenarios: (i) asset backed securitisation; (ii) synthetic lease; and (iii) multi-seller conduit. Staff and Board members discussed those scenarios and how the proposed approach could be applied. It was evident from discussions of these three summarised fact patterns that determining whether consolidation would result, and which factors would lead to consolidation, was very difficult. The staff agreed to spend further time producing a paper that would include the principles of the control model, and how it would be applied to common fact patterns. The aim is to provide many common transaction types that illustrate the factors that would need to be assessed in determining control.

Discussion at the December 2006 IASB Meeting

Managed funds and investment companies

The Board discussed issues surrounding consolidation in the context of managed funds and investment companies.

The Board noted that, by law, many mutual funds and unit trusts cannot hold interests that exceed a certain percentage of an entity, something that usually prevents consolidation from being an issue. However, the question of control does arise at the fund manager level. Of more concern to some Board members were private equity funds, for which the risks may be quite different.

The Board did not appear sympathetic to providing an exception from consolidation based on where within the group a shareholding resides. Board members saw that approach as leading to inconsistencies in a parent's consolidating entities that it controls.

The Board then addressed 'investment companies'. The staff was of the view that if an entity controls another, it should consolidate the controlled entity. The staff was also concerned about the consequences of not consolidating on other aspects of financial reporting, such as the elimination of inter-company transactions.

The staff noted that IFRS 8 provides entities an opportunity to explain how they managed their investment operations, but they do not recommend excluding those operations from the consolidation model.

Those constituents most concerned about this issue want consistency with US GAAP. However, US GAAP uses a definition of 'investment companies' that is in securities legislation, not accounting standards. It was also noted that the American Institute of Certified Public Accountants had issued recently a document of well over 200 pages that sought to clarify the US investment company material. This was not considered an example of principles-based standard setting.

The Board noted that the investments of private equity and venture capital funds are often classic subsidiaries, actively managed by the investor. As such, the Board thinks that consolidation, not fair value, is the appropriate accounting treatment. The Board agreed that the forthcoming discussion paper should state this conclusion.

Discussion at the November 2007 IASB Meeting

The Board participated in an education session on the application of the proposed consolidation framework to structured entities (for example, special purpose entities) held by the consolidation project team. The purpose of this session was to receive feedback from the Board members about the principles for assessing the rights one entity has in another. A further request for input was in relation to the approach presented was helpful for an entity to decide if it should recognise all assets and liabilities of another entity (that is, consolidate) or only those assets and liabilities that it holds a direct interest in.

This was an education session and accordingly no decisions were made.

Although the session was educative, the Board had considerable discussion on certain aspects of the two Agenda Papers provided by the staff (which can be downloaded from the IASB's website).

In relation to the first Agenda Paper, the staff presented existing guidance on the accounting treatment for structured entities (namely, SIC-12 and FIN 46R) and possible other approaches. The staff also presented a proposed approach to consolidation of such entities. This approach would focus on a 'single control model' and not on a 'risk and rewards model', but this model would often involve assessing control by analysing risks and rewards. Some Board members saw no fundamental difference in this approach to a 'pure' risks and rewards approach. The staff pointed out that the ultimate goal is the recognition of all assets it controls and all obligations for which it is responsible, which is similar to the approach taken in ED 9 Joint Arrangements.

The second Agenda Paper presented specific (and simplified) fact patterns to show how the proposed consolidation model could be applied. The Board had some discussions on the examples presented and concluded that they do not extract the distinguishing feature that triggers consolidation or the partial recognition of assets and liabilities. Some Board members also noted that they had difficulties in identifying a principle in the examples. A number of Board members also expressed concerns that the examples might be too simplistic. The Board also suggested other fact patterns that the staff might want to consider in the course of the project.

The staff informed the Board that it will bring the issues back to the Board for consideration at a future meeting.

Discussion at the April 2008 IASB Meeting

Over the past few months IASB staff have been analysing financial statements, meeting with representatives from investment banks and accountancy firms and assessing statements from regulators about what they perceive to be good practice and good disclosure relating to consolidation. The purpose of this session was to provide the Board with an overview of this analysis and to describe how the staff expects this analysis to translate into new proposals to replace IAS 27 Consolidated and Separate Financial Statements and SIC 12 Consolidation – Special Purpose Entities.

The IASB staff introduced Agenda Paper 8A and indicated that the issues relating to consolidation also encompassed disclosures around securitisations, for example, those in IFRS 7. As a consequence, the project is also likely to result in change to disclosure requirements.

The underlying issue that the project is attempting to address is the potential conflict between the requirements of IAS 27 and SIC-12, with the ultimate goal of producing a single model of control as an approach to the consolidation of all entities.

The staff the introduced a diagram representing a framework for the questions and issues being resolved as part of the project (copied below from Agenda Paper 8A, paragraph 17):

One Board member noted that the term 'critical accounting policy' was misleading as consolidation is not an accounting policy; rather it is a question of fact whether an entity controls another entity. The point was noted by staff and it was clarified that the staff intended the statement to mean that there was a requirement to make a judgement. The staff also clarified that joint control is not intended to be part of this project as the focus of the project is on consolidation; however, the project team does meet with the project team dealing with joint arrangements on a regular basis.

The staff highlighted that the focus of the project was on consolidation (right hand side of the diagram) rather than anything on the left hand side of the diagram. However, the staff also clarified that they were not ignoring the other aspects and consideration may also be relevant as part of the project, in particular relating to disclosure. One Board member added that disclosure is an essential part of the project to solve the overall problem. Just focusing on the top right box does not solve the problem as the Board needs to come to a coherent solution. A Board member suggested this was an expansion of the consolidation project. Another Board member noted that the Board didn't want to lose focus on this project.

The Board then moved on to discuss specific aspects of the agenda paper. One Board member highlighted that some of the disclosures suggested in the paper were simply segment information from a legal entity focus. Some other Board members agreed.

Another Board member then suggested that the focus of the project is on whether an entity should consolidate or not, that is, the application of control. A second Board member added that the biggest question the Board needs to answer is around consolidation, but they also need to consider disclosure; in particular, the Board needs to decide what to do about significant involvement and possible involvement. The staff responded to this suggestion by clarifying that the term significant involvement is merely a descriptor, not a category. It was not the intention of the staff to redefine anything. The staff also noted that it is important to understand the effect the legal structure have on the overall group, for example, whether there are any restrictions over use of assets. The question that may need to be addressed is whether the Board currently has the right level of detail in IFRS 7. The staff then moved on to explain their working definition of control:

A reporting entity controls another entity when it has sufficient rights that it has the power to be able to use or manage the assets and liabilities of that entity as if they are its own. That power must give the reporting entity the ability to affect the financial variability of the entity and the benefits from, or exposure to, that financial variability.

The staff also introduced the working principles on which this definition is based:

• a. Only one party can control an entity. The party that controls an entity is able to exclude others from using or managing the assets and liabilities of that entity and from the related benefits.
• b. Assessing whether a reporting entity controls another entity is a continuous process. A reporting entity begins consolidating the financial statements of another entity with its own financial statements when it achieves control and ceases consolidation when it loses control
• c. Control refers to the 'present ability' to control another entity; it is not based on whether the reporting entity controlled yesterday or might control tomorrow.

It was noted by one Board member that in many circumstances an entity would not know if another entity is claiming to have control over a subsidiary. So, it is not possible to always avoid the scenario where two entities claim control over a subsidiary.

The Board then discussed some of the consequences of the principles highlighted by the staff. It was noted that there were some apparent inconsistencies in the consequences; for example, one consequence noted by the staff is 'A reporting entity does not control another entity if action must be taken for it to gain control. For example, holding an option or convertible instruments that would give the holder control if exercised is not the same as having control after exercise', whereas another consequence is noted as 'One entity's ability to terminate the activities of another entity for its own benefit (perhaps by having the right to acquire all assets of the entity at any time) is like to constitute control. It was noted by one Board member that the ability to terminate was like an option and therefore the two statements were in conflict. Further, the Board did not agree with the first consequence (relating to options), and the staff agreed that more work needed to be done in this area to clarify the consequences.

The staff indicated that they expect that the next due process document over the next few months. The staff expects to bring back the proposals to the Board as one complete package, rather than as piecemeal issues. The staff concluded the discussion by stating that the intention of the staff was to make the next due process document an exposure draft rather than a discussion paper. The Board agreed.

Discussion at the July 2008 IASB Meeting

Guidance on consolidation is one of the IASB's high priority items in the light of the credit crunch. The purpose of this session was to get the Board's input on the staff working draft for a revised consolidation Standard that ultimately would replace IAS 27 and SIC-12. The goal is to develop this staff draft to be discussed at round-tables later this year and finally, issue an exposure draft.

The staff started to talk the Board through the proposals based on a presentation that was not part of the observer notes. It was noted that the draft was developed working under the assumption that IAS 27 and SIC-12 were not fundamentally flawed and that any earlier decisions by the Board are still valid. The need for a revision resulted from inconsistent application of IAS 27 and SIC-12 and the inherent tensions of both documents due to the IAS 27 control model and the risk and rewards approach emphasised in SIC-12. Also, items that were 'close' to consolidation would be caught by introducing the notion of significant involvement triggering additional disclosures.

The staff informed the Board on the timeline for this project and highlighted that it would bring back papers between this meeting and September on certain topics with the aim to have roundtables in September and finally publish an exposure draft in Q4/2008. The Board agreed to the timetable.

The staff then turned to the working draft. It was noted that this is an early draft and that the staff would welcome any drafting comments offline so to focus on the principles at this session. One Board member highlighted that the draft would conclude that consolidated financial statements are the only relevant set of financial information. This Board member also expressed his concerns over the notion of significant involvement and noted that the definition of the reporting entity that is used in the draft would be an issue in the deliberations as this is still work in progress in the framework project.

The Chairman asked the Board members if the core principles and their thrust would be appropriate. The majority of the Board members seemed to agree. The Chairman also noted that the introduction of the significant involvement notion along with the additional disclosures would offer the opportunity to abandon the specific accounting for associates (that is, IAS 28). The Board members seemed to agree to include such a proposal in the ED.

Another Board member asked what would be the difference between significant influence and significant involvement. The staff answered that this would be made clear in the guidance.

The Board also had a lengthy discussion on what represented a subsidiary and why the notion of legal entity was used. Some Board members expressed their concerns over the subtlety of the draft. They asked the staff to make any principle as clear as possible. One Board member commented that a consolidation standard would be the worst place for subtlety.

The staff then turned to the notion of power and benefits as described in the staff draft. Again, some Board members struggled with the subtlety of the words used to describe the principle. Others were concerned over the application on securitisation transactions. It was also noted that benefits are usually defined as a 'net' term. The guidance on reputation risk was considered not appropriate as drafted by some Board members.

On the issue of de facto control, one Board member noted that the indicators of control once the reporting entity does not have the majority of the voting rights in the draft was not operational enough.

The guidance on the term 'expected return' was considered by one Board member as too close to the approach taken in FIN 46R. This Board member also asked what its actual relationship with the control notion was.

The staff informed the Board that it planned to skip the last part of the staff draft as it mainly consists of existing guidance, notably the guidance on separate financial statements. Also, the staff informed the Board that it asked for input on the five examples that were provided as part of the session's agenda papers. The goal was to understand how the principles in the staff draft would be applied to these scenarios and if the results are considered appropriate.

The disclosure section was considered work in progress and not discussed in detail. One Board member noted that there was no concept of aggregation of the disclosures for entities where the reporting entity has significant involvement, which might prove difficult in practice.

Another Board member asked whether the issue of accounting and consolidation for fund managers had been addressed. The staff responded that this will be considered as part of the agency section which will be brought back at a later point in time to the Board.

September 2008: IASB holds consolidation roundtable

On 17 September 2008, the IASB conducted a public roundtable on the issues in its current project on consolidation including special purpose vehicles. The roundtable was conducted in two sessions. The IASB made available on its website two documents – a staff draft of an exposure draft and discussion notes raising 15 questions to which roundtable participants were invited to respond. We have posted the preliminary and unofficial Notes Taken by Deloitte Observers at the Roundtable (PDF 37k). The notes include links to download the two documents from the IASB's website. The 15 questions were as follows:

Discussion at the Special October 2008 IASB Meeting – Disclosure of Off-Balance Sheet Risks

The Board then started deliberations on the off-balance sheet risk disclosures that are part of the Consolidation project.

Disclosure objective

The staff presented the Board with the proposals starting with the disclosures objective. The aim was to enable users to understand the risks arising as a consequence of its activities with structured entities. Staff acknowledged that 'structured entity' is an undefined term but is intended to be wider than 'special purpose entity'. It was noted that the proposals include a 'capture all'-clause that would require entities to provide additional disclosures if the minimum requirements in IFRS were not sufficient to meet the disclosure objective.

The Board agreed.

Disclosures about structured entities

The staff then turned to disclosures about structured entities that the reporting entity created or sponsored. Staff does not propose to define the term 'set up' or 'sponsor' in the standard, because these terms are frequently used and well understood in the banking community. Some Board members were concerned over the use of undefined terms that might mean different things to different people.

The required disclosures on fee income and assets held by the structured entity were aimed to enable users to understand the level of income and the level of activities from such relationships. The staff noted that the requirement to provide information for two comparative years was somewhat arbitrary, but staff believe that an extended period is necessary to allow a comprehensive risk assessment. Staff acknowledged that retrospective application in connection with such a requirement would be onerous for some entities as they possibly do not have the data readily available. Some Board members responded that there should be no 'undue cost or effort' exemption and that IAS 8 already provided an impracticability exemption. One Board member asked the staff whether it would be useful to require entities to provide more comparative information if this was considered necessary to get the full picture.

Others were concerned about the term 'retained interests' used throughout the document. The staff responded they would use a term like 'continuing interest', but will tidy up the wording in due course.

The Board also asked whether other (non-financial) entities could be subsumed under the 'structured entities' umbrella, for example, an R&D vehicle. The staff confirmed that this is the case and agreed to include such entities in the examples.

The staff confirmed that the disclosure to be made about the assets securitised in unconsolidated entities were the cumulative securitisations during the reporting period, not only at the reporting date. Also, it was acknowledged that fee income would have to be defined for the purpose of this disclosure as it was not clear what this would encompass. However, it was clear that this would include set up and ongoing fees.

Overall, the Board seemed to concur with the staff proposals.

Risks

The staff introduced its proposal on off-balance sheet disclosures for relationships that are within the scope of IFRS 7. The disclosures would aggregate carrying amounts of the relationships, maximum losses and assets held by the entity (at the reporting date). It noted that whenever disclosures about relationships scoped into IFRS 7 required the disclosure of amounts, these were current amounts. While the majority of the Board agreed, there was some concern about practicability to provide current information for entities the reporting entity did not control, due to different reporting dates and different accounting frameworks. One Board member responded that he wanted to have a red flag if an entity invoked the impracticability exemption as users should know when a reporting entity had relationships where it could not assess the risks properly. The staff agreed to include words reflecting this concern.

Furthermore, Board members expressed concerns that the disclosures about leverage (that is, exposures that were disproportionally higher than one would expect from the relationship) was not appropriate and not extensive enough.

The staff asked the Board whether it was necessary to use the word 'significant' for some disclosure requirements. The Board decided that it considered such a requirement not necessary, but decided to raise this question in the Invitation to Comment.

Generally, the Board seemed to agree with the direction.

Off-balance sheet relationships outside the scope of IFRS 7

The final relationships to be addressed were off-balance sheet relationships that were not captured by IFRS 7. The staff noted that reputational risk was hard to disclose without ending up in boilerplate notes. Many Board members agreed noting that reputational risk is a subset of general business risk. Again, the Board discussed certain aspects but seemed to agree with the majority of the staff proposal set out in the agenda paper

Discussion at the Special October 2008 IASB Meeting – Consolidation

The staff introduced the new consolidation draft highlighting the changes made to the previous draft. It noted that the term 'significant involvement' was dropped due to the similarity to 'significant influence' as used in IAS 28.

General comments

Some of the Board members expressed their concern over the emphasis that was put on beneficial interest which was mentioned before control. The Board reminded the staff that control is the underlying principle for consolidation and that the draft should reflect this. The staff agreed that the section on beneficial interest would be moved in part to the section on structured entities and elaborated on in the Appendix.

The Board also decided to replace the core principle paragraph on control with a paragraph from the section on control:

A reporting entity controls another entity when it has the power to direct the activities of that entity for its benefit.

Some Board members objected to the extended use of adjectives that blurred the core principles and made the text unnecessarily long. The staff agreed once the structure of the document was stabilised the wording would be cleaned up. It was also agreed to make clear where there are presumptions and when these presumptions are rebuttable.

The staff agreed with comments received from the Board that benefits in some paragraphs of the draft seemed to be positive only. This would be made clear. This would also avoid any interpretation that once an interest has not the ability to create profits anymore (just losses) that this would indicate a loss of control.

Control of an entity

The Board had some debate on this aspect of the draft. The issue of options was discussed. The draft indicated that options that could be exercised for little or no consideration would be included in the assessment of control. Some Board members disagreed, arguing that control means 'current control' whereas options require that further action must be taken. In their view, the control principle means present control rather than the ability to obtain control?

One Board member noted that he sees no merit in considering the purpose of the entity for the assessment of control.

Assessing control

The Board agreed that the principle in assessing control was the controlling of the strategic operating and financing policies of an entity. Again, it was discussed whether this control must be actually exercised or whether the entity merely had the ability to exercise this control. Furthermore, the Board asked the staff to make clear what factors were indicative and which were presumptive. The staff was also directed to make consistent use of terms meaning the same thing throughout the document. It was also unclear to some Board members what was meant by 'performance of the entity', a term whose definition is proving difficult in the financial statement project.

Some Board members had difficulties with the guidance on de facto control. The underlying principle was that an entity must have more power than anyone else, but the words would need some redrafting.

Structured entities

Some Board members reemphasised their reservations about having a separate section on something that was not defined. This section will be redrafted incorporating some of the guidance on beneficial interests.

Next steps

The staff informed the Board that they will test the principle of this draft with the nine examples set out in the proposed US GAAP guidance and five of the staff's own examples. A new draft would be sent to the Board very shortly.

Discussion at the October 2008 IASB Meeting

US consolidation amendments (Education Session)

A member of the FASB staff made a presentation of the proposed amendments to FASB Interpretation 46(R) Consolidation of Variable Interest Entities. The FASB released the proposals in September 2008. The FASB has proposed amendments to the guidance in FIN 46(R) for determining whether an enterprise must consolidate a Special-Purpose Entity (SPE), including those previously considered qualifying SPEs (Q-SPEs). This was an information/education session in relation to the IASB's forthcoming exposure draft on consolidation, and no decisions were asked for or made.

The FASB staff led the IASB through the FASB's rationale for the changes and the proposed changes themselves. In particular, the staff explained that the removal of the 'Q-SPE' concept in FAS 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities will remove the scope exception contained in FIN 46(R), which in turn is expected to result in a significant increase of entities subject to the Interpretation.

Much of the discussion focussed on the determination of the 'primary beneficiary' and the proposal that the test in FIN 46(R) be amended such that it is primarily a qualitative one rather than a quantitative one. An entity would be the primary beneficiary of another if it has:

• The power to direct matters that most significantly impact the activities of a variable interest entity, including, but not limited to, activities that impact the entity's economic performance; and
• The right to receive benefits from the variable interest entity that could potentially be significant to the variable interest entity or the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity.

Only if this assessment is inconclusive would the entity be required to perform an expected loss calculation using the current expected loss model.

Board members asked for clarification of these proposals, in particular whether the IASB staff's draft consolidation exposure draft was consistent (or as near as possibly consistent) with what the FASB had proposed. The IASB's consolidation project leader noted that, although the words were different, the concepts of control being the power to direct/govern the entity and the rights to benefits (including 'negative benefits') were the same. The IASB's proposals would be directed to a broader class (the IASB does not have the concept of a Variable Interest Entity).

Several Board members were concerned about the effect of a put option in the special purpose entity. They noted that although, when established, the likelihood that the put would be exercised is assessed to be remote, much of the stress in the structured vehicle environment currently has been caused by those puts being exercised. Thus, there is a concern that the presence of a put option in the SPE might defeat derecognition and hence the SPE would always be consolidated.

The Board discussed briefly the proposed disclosure requirements. It was noted that these were controversial, especially among preparers. The Board will be considering disclosures later this week.

Consolidation – Staff draft of ED

The Board discussed an updated Staff Draft of the forthcoming Consolidation exposure draft. The draft incorporates comments received at the Board meeting of 2 October as well as other comments received. The staff noted the following changes in particular:

• references to 'beneficial interests' had been removed;
• the 'power and benefits' discussion were moved from the application guidance to the main body of the draft IFRS, and integrated with the characteristics of control;
• the section on structured entities had been rewritten;
• disclosure requirements had been added.

Several Board members were sympathetic to what the staff was trying to achieve, but remained unconvinced that the proposed approach was operational. In particular, the drafting was seen as very subjective. In addition, some thought that the section addressing structured investment vehicles (in particular paragraph 43) might result an entity being able to derecognise assets but, because there was a financing relationship with the entity because the entity continued to sell receivables to the structured entity, the structured entity would continue to be consolidated (that is, through the sale of receivables the structured entity provides 'a source of long-term financing' to the entity).

The discussion of 'benefits' (paragraphs 23-27) also attracted comment. In particular, the staff noted that the IASB draft uses 'benefit' to imply both positive and negative returns. Several Board members noted that many readers would not expect that result; 'benefits' is usually used to describe positive returns only (and US GAAP uses 'benefit' in this way). In addition, 'risk' is used to imply negative returns. Professor Barth noted that academics see 'risk' as addressing both positive and negative returns: risk is both variance and outcomes above and below the mean. However, the Board agreed that the drafting should be amended such that it did not suggest that the IASB was unaware of finance literature and research, as well as avoiding creating unintended differences between IFRS and US GAAP. The Board asked the staff to re-order the discussion in paragraphs 23-27 and search for a word or phrase that could be used instead of 'benefits'.

The Board also suggested that the general principle of control ('A reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity for the benefit of the reporting entity') needed re-wording (or perhaps a footnote) to explain that it encompassed the reporting entity, it agents or related parties.

The Board discussed the characteristics of control, in particular the concept that control must be current for consolidation to be required (paragraphs 10-14). Some were concerned that the discussion of predetermination was not sufficient to capture the Board's intent with respect to structured entities. Another issue in this section was the effect of options. A Board member expressed his view that in-the-money options can create control, but acknowledges that this creates an inconsistency between 'ordinary' inter-corporate investments and structured entities.

The Board debated this issue for a while. Most of the debate centred on whether holding such an option established a presumption of control, triggering consolidation. However, late in the debate a Board member asked whether an entity writing a put option for the whole of its holding in a subsidiary would trigger a loss of control and thus cessation of consolidation? Board members thought this was a very good question.

The Chairman closed this part of the debate by reminding his colleagues that the staff needed direction from the Board on this issue. The Board was asked whether the exposure draft should state that in assessing whether an entity controls another at the reporting date options that represent a current legal right and that the holder can exercise should be considered in that assessment. The Board agreed (one dissent) that such options should be assessed.

Board members and the project staff discussed how best to structure the exposure draft such that the Board's intent that the assessment of whether control exists should be an holistic assessment, rather than a linear assessment or checklist. One suggestion was to re-cast the general principle such that 'control should be current, not shared and continuous' and then elaborate on that principle in the supporting paragraphs. The staff will work on this out of session.

The Board discussed paragraph 53(c), which proposes disclosure of 'the nature of and risks associated with its involvement with structured entities that it does not control'. One Board member was particularly concerned that users should know the 'leverage' of the first loss in a structured entity and asked how this could be articulated in the disclosure requirements. The Chairman asked the staff to review the guidance in IAS 27 and SIC-12 to ensure that nothing the Board intends to retain had been omitted from the exposure draft.

In addition, a Board member suggested that the project staff should review the structured entity examples in the proposed FASB Interpretation 46(R) and provide their view on whether the consolidation conclusions were consistent with the US answers. The staff noted that this work had been started and was progressing as quickly as possible. The Board member suggested that this analysis should be included in the exposure draft as an appendix as constituents would expect to see it!

Discussion at the November 2008 IASB Meeting

Options, warrants and convertible instruments

The Board considered an analysis about whether and, if so, under what circumstances potential voting rights are sufficient for a reporting entity to have control of another entity; and whether a reporting entity should assess potential voting rights continuously when determining whether it controls another entity.

The Board held a lengthy debate during which they debated two views presented by the staff, characterised as the 'economic power view' (having an option for which it is beneficial for the holder to exercise is, of itself, power); and the 'related rights view' (for an option to give the holder the power to direct the activities of the underlying entity the option holder will need to have related rights). Board members expressed support for aspects of each view, but did not favour either view as expressed by the staff.

A majority of the Board agreed that holding an option that would, if exercised, give the holder control of an entity did not represent control (that is, there is a difference between owning an option and owning the underlying interest); however you could not ignore it either. All facts and circumstances needed to be assessed before a conclusion as to whether an entity controlled another.

A Board member was concerned and frustrated that the Board seemed content to use 'control' to mean one thing in relation to an asset and another thing in the context of consolidation. He wanted the Board, at a minimum, to acknowledge the inconsistency.

The Board agreed (10 in favour) that all facts and circumstances needed to be assessed to determine whether an entity controlled another; this assessment would consider the effects of options that would give an entity a controlling interest in another entity. However, options by themselves would not be determinative. The real test, which would be subjective in certain circumstances, was which entity is 'effectively in control' of the subsidiary. A question on this position would be included in the Invitation to Comment.

Parties acting in the role of a principal and an agent

The Board noted a previous discussion that, when assessing control, a reporting entity considers whether it acts as an agent for another party or parties. Sometimes a reporting entity might act simultaneously as a principal and agent (for example, a reporting entity might invest in a fund and simultaneously act as manager of that fund). This raises questions as to whether the fund manager controls the find and thus should consolidate that fund.

The Board noted that many of the troublesome issues in the previous discussion were present in this issue as well, and that it was critical to understand whether the fund manager's actions benefited all fund participants equally or whether its actions would benefit the fund manager disproportionately (for example, because of a performance fee).

As with all structured vehicles, it was important to understand (i) who was able to direct the strategic financial and operating decisions of the fund so as to obtain benefits. In the case in discussion, a critical issue was which parties benefited. If the fund manager's and the investors' interests were aligned, then it was likely that the find manager was acting as agent; if not, then the fund manager was likely to be acting as principal and consolidation would be appropriate.

Several Board members were of the view that in many situations, fund managers should consolidate the funds they managed-although that would not be a popular answer.

The Board agreed that find managers should apply the principles agreed in the previous section to determine whether an entity was acting as principal or agent; if acting as principal then consolidation would be required. Again, this issue would be addressed in the Invitation to Comment.

Assessing control of a structured entity

The Board discussed a staff proposal to remove from the ED the rebuttable presumption relating to the assessment of control of a structured entity, and replace it with wording that would require the assessment of both power and returns when assessing control of a structured entity.

While agreeing to remove the rebuttable presumption, the Board did not think the staff's alternative suggestion could be made operational. To make the staff's idea operational, it would be vital to assess what activities are important in the context of the structured entity and which were not.

Board members were wary of introducing invitations for structuring into the ED and discussed how best to avoid excessive rules and detailed quantitative thresholds. They were clearly struggling to find an answer that could be seen to be within the principles in the ED, yet strong enough to withstand the structuring implied in a 'structured entity'.

After some debate, the Board agreed that whether an entity would be required to consolidate a structured entity depended on:

• (a) whether an entity held an interest in a structured entity that gave it significant influence and that interest was greater than any other individual interest; and
• (b) whether an entity had the power to make critical operational and financial decisions in the event that things went wrong.

The Board agreed that in making this assessment, an entity would need to understand all aspects of the structured entity-it was not a mere 'counting of votes' exercise-it was an assessment of all facts and circumstances and all situations.

Board members suggested that the IASB staff should review the FASB qualitative tests proposed in its ED of revisions to FIN 46R and determine whether it would be possible to bring the US approach closer to that being proposed by the IASB.

Disclosure

The staff presented proposals for disclosure that were categorised as disclosure about the structure of the group, including 'individually material subsidiaries'; and restrictions within the group. While understanding the intent of these disclosures, the Board thought that the principles underlying the suggested disclosures were not clear.

Board members agreed that what was important to users was to understand the location within a group of business and other risks (such as currency or political risk) and the effect of those risks on the assets, liabilities and cash flows available to the parent entity's shareholders.

In addition, the effects of non-controlling interests on the assets, liabilities and cash flows available to the parent company shareholders was important and should be explained in the financial statements.

The Board noted that some of the disclosures might already be required or implied by the requirements in IFRS 7 and IFRS 8 and the staff should be satisfied that there was no unnecessary duplication before they proposed additional disclosures as a result of this project.

Separate financial statements

The Board agreed that the new IFRS would address consolidated financial statements only and that IAS 27 would address only separate financial statements. The new IFRS would be titled Consolidated Financial Statements; and IAS 27 would be renamed Separate Financial Statements.

Comment period

The Board agreed that in order to meet its obligations to respond to requests from the Financial Stability Forum and other high-level groups to address consolidation as a matter of urgency, the comment period deadline would be 20 March 2009. Based on the staff's estimated publication date (subject to satisfactory resolution of matters decided at this meeting), that would mean a comment period of between 90-100 days, slightly shorter than the IASB's usual 120 days. In the circumstances, the Board agreed to this shorter period.

Transition

The Board agreed that the ED would propose that the new IFRS would apply prospectively from the effective date. Retrospective application would be prohibited.

Indication of the intent to present Alternative Views in the Exposure Draft

Three Board members (Messrs Garnett, Leisenring and Smith) indicated that they are likely to present an Alternative View in the Exposure Draft. In particular, they were concerned that the Board had not articulated clearly what is the objective of consolidation and that the Board was being inconsistent about the treatment of options as between the ED and other IASB authoritative material.

December 2008 Exposure Draft

On 18 December 2008, the IASB issued an exposure draft (ED) of proposed amendments to IAS 27 Consolidated and Separate Financial Statements. The objective is to strengthen and improve the requirements for identifying which entities a company controls and, therefore, must include in its consolidated financial statements. The proposals form part of the IASB's comprehensive review of off balance sheet activities and address an area cited in a Declaration of the G20 Leaders at their 15 November meeting. The proposals also respond to the recommendations contained in a Report by the Financial Stability Forum published in April 2008. Further proposals on off balance sheet items, covering the derecognition of assets and liabilities, are due to be published in the first quarter of 2009, consistent with the G20 target date of 31 March 2009.

The new standard would replace:

• IAS 27 Consolidated and Separate Financial Statements and
• Interpretation SIC-12 Consolidation - Special Purpose Entities.

The proposal ED 10 Consolidated Financial Statements, may be downloaded without charge from the IASB's Website. The comment letter deadline is 20 March 2009. The proposed effective date is 1 July 2009. Click for Press Release (PDF 48k).

The Deloitte IFRS Global Office has published an IAS Plus Update Newsletter (PDF 124k) explaining the proposals in ED 10.

Discussion at the March 2009 IASB-FASB Joint Meeting

The purpose of the session was to discuss the strategic options available to the boards in meeting the MoU commitments relating to consolidation and derecognition. Staff presented the current state of play on these topics at both boards. They noted that the financial crisis lead to significant pressure to get the projects accelerated. Staff highlighted that the ideal would be both boards develop common requirements, but they concluded this was not achievable at present.

The staff presented both boards with two strategic options:

1. FASB to complete its projects on consolidation and derecognition, then join the IASB in developing common standards. IASB to slow down its projects so the FASB has the opportunity to join the due process.
2. FASB to complete its projects on consolidation and derecognition, then use the IASB exposure drafts as starting point. IASB to finalise its documents. This approach is similar to the one taken on Fair Value Measurements (where the IASB used SFAS 157 as a starting point).

Board members asked the staff about differences between the current FASB proposals and the direction the IASB is taking in the two areas. They discussed possible approaches that could result in converged guidance in the longer term while allowing for the current pressure on both boards to produce overhauled guidance in the short-term. This could avoid significantly changing the same guidance again within a short time frame. Staff confirmed that both sides are monitoring progress and trying to identify differences between the current thinking of the boards on these issues as early as feasible, but this process takes time and resources.

The boards finally agreed to pursue an approach where the FASB finalises its current proposals and then exposes the IASB documents, once finalised, as exposure drafts (FASB would already allocate resources during the redeliberation and finalisation phase of the IASB documents). If any issues were identified during the FASB redeliberations, they could be addressed via the two-year post-implementation review that is part of the IASB's due process.

Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter – Proposals for a New Standard on Consolidation (PDF 124k).

Discussion at the IASB's May 2009 Board Meeting

High-level discussion of comments received on ED 10

The staff noted that 148 comment letters had been received in response to ED 10, and that there was a significant level of support for the concept of consolidation based on control. However, there was also a significant level of disagreement about how the IASB had articulated the control concept.

A Board member noted that many of the comment letters he had read demonstrated that constituents were schizophrenic about whether control meant that an entity was in control of another now and whether that control could be perpetuated. He thought that the ED had been as clear as possible on that issue, but it was obvious that constituents did not believe the Board mean what it said. Other Board members echoed these comments.

The main item of discussion in this part of the debate was the concern expressed by several constituents that the Board should coordinate its work on consolidation and derecognition so that the two standards are consistent. Board members were sympathetic to this idea, but noted that it was possible that something might be removed from the balance sheet under the proposed derecognition standard only to be consolidated.

Project plan

The Board discussed how best to proceed with the project. The staff presented three alternatives to completing the project: (i) proceed as planned and issue a final IFRS by the end of 2009 if possible; (ii) align the publication date of the consolidation IFRS with that for derecognition; and (iii) split the consolidation project in two and issue a standard enhancing disclosures as soon as possible and then work on the control model, publishing that portion by 2011.

Board members discussed the alternatives, but ultimately concluded that now was not the time to make such decisions. The Board directed the staff to continue work on the project as it is. Any decision to split the project would be taken in September or October, that is, after the initial analysis of comments on the derecognition project was available to the Board.

Discussion of Consolidation at the IASB Roundtable 15-16 June 2009

The IASB held a series of roundtable discussions with constituents focusing on its recent proposals in ED 10 Consolidation and ED/2009/3 Derecognition. Roundtables have been held in North America and Asia. The European roundtables were held in London on 15 and 16 June 2009, in conjunction with the regular meeting of the IASB. Presented below are the preliminary and unofficial notes taken by Deloitte observers during discussion of consolidation at the roundtables.