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.