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.

Discussion at the July 2009 IASB Meeting

The Board discussed the principle that 'control' should be the basis for consolidation, in particular the extent to which risks and rewards (including reputational risk) should be considered when assessing control of an entity. The staff recommended that:

• control, defined to require a reporting entity to have power and the ability to benefit from that power, be retained as the only basis for consolidation.
• the final standard should include exposure to risks and rewards as an indicator of control such that, the greater a reporting entity's exposure to risks and rewards from its involvement with an entity, the greater the incentive for the reporting entity to obtain rights sufficient to give it the power to direct the activities of that entity.

A Board member questioned whether this recommendation was operational and proposed a structured transaction in which he suggested that power was surrendered but all the risks and rewards were retained. Several Board members and senior staff challenged this hypothetical transaction, suggesting that it was unrealistic to expect an entity to accept all risks and rewards without retaining some power. The original Board member remained unconvinced, but was willing to work with the staff to develop guidance that might satisfy his concerns.

The Board agreed that 'reputational risk' was not a factor that indicated 'control', but was a factor to consider whether an entity was exposed to benefits: that is, reputational risk is a specific type of business risk. Board members noted that several financial institutions had stepped in to rescue structured entities citing 'reputational' reasons: these were often business decisions aimed at avoiding litigation.

The Board had an extended and inconclusive discussion of options and whether options were indicative of control. The staff stated that they would be bringing issues related to 'kick-out rights', call and put options and similar matters to the September meeting.

Power to direct the activities on an entity without a majority of the voting rights

The Board affirmed the position in the Consolidation ED that to have 'power' the reporting entity should be able to direct the activities of another entity currently. That does not mean that the mechanism that provides a reporting entity with power could not have timing delays, but it should be in place (for example, an entity might have power currently even though it might have to wait for the next shareholder meeting to enforce its will; this does not negate the presumption of power). The Board agreed that, in the absence of contra-indicative factors, a passive majority shareholder is presumed to meet the power element of the control definition.

The Board discussed the presence of power in the absence of a majority of voting rights. After a protracted debate, the Board reaffirmed the view in the ED that a 'dominant' minority shareholder might be able to satisfy the power element of the control definition, but must be able to demonstrate that this shareholding allows it to exercise that power to effect control. This determination would need to assess all facts and circumstances. In particular, the dispersion of the other shareholdings would need to be assessed. The final IFRS would provide further application guidance on this issue.

Power to direct the activities of another entity: Options and convertible instruments

The Board discussed the situations in which an unexercised option would give the holder of the option the power to direct the activities of another entity.

A bare majority of the Board preferred the Alternative View expressed in the ED: that the holder of an option over a sufficient number of voting rights that is capable of being exercised currently meets the power element of the definition of control. The Board agreed that a currently exercisable option might give the holder the power to direct the activities of an entity but other factors should be considered to assess whether there are any barriers to exercise.

A Board member noted that the fact that a conversion feature that was out-of-the-money should not be excluded from the assessment of control solely on that basis: often the exercise of such an option was cheaper than other alternatives open to the holder, such as bankruptcy or litigation.

Discussion at the October 2009 IASB Meeting

The activities of the entity

The staff reminded the Board that ED10 proposed the following definition of control:

A reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity.

The Board discussed a staff recommendation that the IFRS should clarify that 'the activities' in the control definition refers to those activities of an entity that significantly affect the returns.

Several Board members expressed concerns with this clarification: some thought it too narrow and some did not think it captured common securitisation structures. One Board member noted that the Board (and staff) was often schizophrenic when using the term 'power': at the entity level, the returns were for the entity; but when layering the 'so as to benefit' criterion when assessing whether the entity should be consolidated, the returns had to benefit the owner, not the entity.

That Board member agreed that if [a parent] had both power and benefits, consolidation of the entity would be required. In addition, other Board members noted that synergies were indicative of control – an entity could not take advantage of synergies without having control of another entity – but they came after control was obtained and need not be present.

Another Board member challenged the main definition, and urged that the well-established notion of power to direct the strategic financial and operating policies of another entity should not be lost.

The Board accepted the staff recommendation without a vote.

Returns for the reporting entity

The Board agreed the staff recommendation that the definition and description of 'returns' should be retained in a manner similar to that in ED10. However, the Board would clarify which returns are relevant when assessing control.

The staff recommend that the final standard should also clarify that:

• (a) to control another entity, a reporting entity must be exposed to variability of returns from its involvement with that entity. Without exposure to variability, a reporting entity is unable to benefit from any powers that it might have.
• (b) returns received in the past are not relevant when assessing control. If a reporting entity is not exposed to variability of returns in the future, it is unable to benefit from any power that it might have. In such situations, a reporting entity uses any powers that it might have solely for the benefit of others, and therefore, would be acting as an agent.
• (c) returns have the potential to be wholly positive, wholly negative or either positive or negative. Therefore, a reporting entity controls another entity if it has the power to direct the activities of that entity, and any of the following three possibilities exist:
  • (i) the reporting entity's future returns from its involvement could only ever be positive (e.g. a beneficial interest holder in an entity that has bought insurance to cover all potential losses).
  • (ii) the reporting entity's future returns from its involvement could only ever be negative (e.g. a reporting entity that provides a guarantee of payments to beneficial interest holders when assets default).
  • (iii) the reporting entity's future returns from its involvement could be either positive or negative (e.g. an equity shareholder in an entity)

A Board member was concerned about the use of 'variability in returns' and the opportunities for defeasance trusts and similar structures to be used once again to achieve off-balance sheet treatment for items. The staff acknowledged the potential difficulty, but was trying to avoid too definitive guidance.

Power to direct: protective and participating rights

The Board discussed a staff recommendation that the IFRS characterise 'power' as follows:

• Power refers to a reporting entity's current ability to enforce its will in directing the activities of an entity that significantly affect the returns. A reporting entity has that current ability if a mechanism is in place that ensures that the reporting entity has substantive decision-making rights that mean that it can enforce its will in directing the activities that matter as and when decisions are required to be taken or the reporting entity would like decisions to be taken.
• Power need not be exercised.
• Power need not be absolute.
• Power is assessed on the basis of current facts and circumstances.

A Board member noted that 'current ability' would be the tension point and that the staff's proposed wording would not resolve the tension that exists. The staff responded that much of that tension concerns the effect of options, a topic that would be addressed later.

The Board did not object to this clarification, subject to its forthcoming discussion of options.

Rights of a reporting entity

The Board discussed whether to:

• add guidance discussing participating rights as follows:
  • participating rights are rights that, if held by one party, are sufficient to give that party the ability to enforce its will in directing the activities of an entity that significantly affect the returns. If their exercise requires agreement by more than one party, participating rights prevent other parties from controlling the entity to which they relate.
  • participating rights must be substantive
  • rights that are exercisable only when specified circumstances arise or events happen are participating rights in some circumstances and protective rights in others
• include the guidance on protective rights included in B1 and B2 of ED10

A Board member thought that the discussion focussed too much on rights and omitted any discussion of obligations – if an entity has rights it must have obligations to another entity.

In addition, Board members were concerned that some of the discussion of operational barriers to exercising an entity's rights to exercise control over another might have significant unintended consequences for entities in administration/ bankruptcy protection and urged the staff to investigate this further.

Subject to other minor clarifications, the staff recommendations were agreed.

Sharing power

The staff prefaced this discussion by noting that they did not want to change the definition of 'joint control'. Rather, this discussion was about situations in which multiple parties had decision-making authority over the activities of an entity. In particular, the discussion focussed on situations in which entities have discrete and unilateral power over bundles of activities (sometimes called 'silos').

The Board agreed the staff recommendation that when two or more parties have discrete decision-making authority over the activities of an entity, the party that has the ability to direct the activities that most significantly affect the returns meets the power element of the control definition.

In doing so, several Board members expressed grave concern about how the discussion of shared power (the Consolidation IFRS) and joint control (the Joint Activities IFRS) were explained and distinguished, given that the expected release date of the two IFRSs were different and that the forerunner could not refer to conclusions in an IFRS that was not yet balloted: it could only refer to existing IFRS. The staff acknowledged that the two standards were not scheduled to be released at the same time and noted the concern raised.

Involvement in the design of a structured entity

The Board discussed a staff recommendation that the IFRS clarify that understanding the purpose and design of an entity was an important factor to consider when assessing control of that entity, and that involvement in the design of an entity is not, in isolation, sufficient to conclude that the reporting entity controlled that entity. The staff's intention was that involvement in the design of a structured entity was indicative but not determinative of control.

Board members were uncomfortable with the recommendation as drafted. Control of the risks and benefits was often the more crucial assessment to be made. It was necessary to understand the entity's purpose and who controls those policies.

The Board agreed that, in assessing control of any entity, including a structured entity, a full understanding of all relevant facts and circumstances was necessary. This could include who designed the structure and why, the source of assets and financing, as well as who controls the operating policies and which entity has the risks and benefits.

The staff agreed to rework its proposals and return at a subsequent Board meeting.

Continuous assessment of control

With little discussion, the Board affirmed that a reporting entity should assess control continuously and that the IFRS should clarify the application of that requirement.

Discussion at the October 2009 Joint IASB-FASB Meeting

The purpose of this session was to (1) discuss the convergence approach, if any, to be taken by both Boards in finalising their projects on consolidation and (2) identify consolidation issues for deliberation by both Boards at future joint meetings.

Convergence Project Plan

The staff recommended that the Boards work together and ultimately issue a converged standard on consolidations.

The Boards deliberated various options for proceeding to finalise their respective projects. The Boards agreed with the staff on working together to issue a converged standard on consolidation. Going forward, the Boards would jointly deliberate the various consolidation issues identified before the IASB finalises its new consolidation standard. The FASB would then expose the final IASB standard, redeliberate the guidance based on public comments received on the exposure draft, and then proceed to issue a final FASB standard. The IASB final standard and FASB exposure draft should be completed by late March or early April 2010, with both Boards issuing their final standards by the end of 2010.

The IASB noted that its current model provides the same criteria for voting interest entities as it does for structured entities. The FASB indicated that in proceeding with the project, the same criteria should apply to both voting interest entities and variable interest entities.

Issues for Redeliberation

The staff pointed out that while the basic control models were converged between FASB Statement 167 and IASB ED 10, there remained differences between the IASB's and FASB's guidance on kick-out rights that should be deliberated at future joint meetings. There are also a number of issues that both Boards had yet to consider or deliberate which also would require discussion over the next few months.

The Boards held preliminary discussions on kick-out rights regarding when they can be ignored, when they can be considered substantive, and how the kick-out right provisions should be applied to various scenarios. In particular, the IASB asked many questions about why Statement 167 requires kick-out rights be ignored unless they are held by a single enterprise. The FASB indicated that it is an anti-abuse provision because they believe kick-out rights are generally non-substantive. The Boards asked the staff to finalise the list of issues that should be deliberated and prepare to present these issues with examples at the next joint meeting in December 2009.

Discussion at the December 2009 IASB Meeting

The Boards had a short session on consolidation where they discussed the current state of the project and the decisions made by both Boards until now. The Boards discussed the remaining agenda for deliberations and discussed the high-level differences between US GAAP and IFRS requirements and the proposals being discussed. The Boards agreed to deliberate all issues jointly in January and February 2010. The main areas for deliberations include control with less than half of the voting rights, assessment of control with options and convertible instruments, agent-principal analysis, investment companies and disclosures for consolidated and unconsolidated entities.

This was an educational session, no decisions were made.

Discussion at the January 2010 Joint IASB-FASB Meeting

Control through voting rights

Both Boards agreed that, when assessing control of entities controlled through voting rights, in the absence of other arrangements, a reporting entity that holds more than half of the voting rights in an entity meets the power element of the control definition.

The Boards also decided that a reporting entity with less than half of the voting rights in an entity that has the legal or contractual ability to direct those activities of the entity that significantly affect the returns meets the power element of the control definition.

The real point of the discussion was whether an entity with less than half of the voting rights meets, in absence of other contractual arrangements, the power element of the control definition. Different opinions were expressed by various Board members in this respect.

Some Board members preferred the 'contractual view' that assumed that in such situation the reporting entity would not meet the power element of the control definition without the contractual ability to direct the activities of the entity. Supporters of this view were particularly concerned with the possibility of change of assessment from one period to another resulting in frequent consolidation and de-consolidation. In addition, they expressed their concerns that consolidation in these circumstances would lead to multiple reporting issues, mainly related to a significant increase in Non-controlling interest (NCI) balances in the financial statements and would confuse the users which assets are available to which shareholders.

Other Board members preferred the 'dominant shareholder' approach (based on holding significantly more voting rights than any other party as well as wide dispersion of the other shareholders). In response to the proponents of the contractual view these Board members argued that this approach better depicted economic reality. They were of the view that this approach would not lead to frequent changes of consolidation/de-consolidation as this did not reflect economic reality. They cited the experience from some countries where similar changes were adopted and these changes led to decrease in structuring opportunities for entities. In addition, some of these Board members believed that this approach was conceptually sounder as it was in line with the definition of an asset.

In response to the concerns that the 'dominant shareholder approach' would not be practicable they argued that usually it is very clear from the individual facts and circumstances who was in control. These members also believed that large NCI balances in the financial statements depicted economic reality and disclosures would address the concerns raised in that respect.

In the following discussion, two particular modification of the 'dominant shareholder approach' were discussed. Some, mainly IASB members supported the 'pure' view that would not require the dominant shareholder to demonstrate that it actually directed the activities significantly affecting returns. These Board members were of the view that the ability was sufficient to qualify for the consolidation and this ability did not have to be exercised.

Other Board members believed that the definition of the dominant shareholder should be strengthened to include evidence of actual exercise of the power element. They noted that the power element should not be assessed only in the short term but should be perpetuated.

On voting, both Boards supported the 'dominant shareholders approach' (IASB unanimously, FASB 3:2), with majority of the IASB members in the pure dominant shareholders view. On the other hand, the FASB narrowly supported the dominant shareholders view based on the need for additional evidence of exercise of control. The Boards noted that the differences between these two approaches should not be insurmountable as it related only to a narrow subset of cases.

Options and convertible instruments

The Boards briefly discussed the effects of options and convertible instruments on the overall control model developed. Most Board members agreed that options and convertibles were used in many different situations. They noted that these instruments were often used in structuring and expressed their view that these instruments were evidence of power; nonetheless, they differed whether these instruments should be currently exercisable.

Finally, the Boards agreed that options and convertible instruments should be considered when assessing power. In this assessment, the entity should consider all facts and circumstances not limited to these instruments and their impact on voting rights.

Kick-out rights

The Boards continued their discussion with considering the role of kick-out rights in determining which entity should consolidate another entity and whether kick-out rights should be considered in determining whether a reporting entity was agent or principal.

Although the Boards discussed this issue separately, they agreed that assessment of kick-out rights was dependent on all the economic and contractual facts and circumstances and that it was only one of the factors to be consider when deciding whether to consolidate an entity.

In general, two views were shared by the Board. The first view ('View 1') was based on the guidance in FASB Statement No. 167 that limits the consideration of kick-out rights in the power analysis to situations in which only a single entity had a unilateral ability to remove the decision maker.

On the other hand, the second view ('View 2') would not limit the consideration of kick -out right to these situations but would include all the relevant facts, thus in effect allowing kick-out rights held by more than one party to be considered in determining which reporting entity had the power over another entity.

Some Board members felt uncomfortable to consider this issue in isolation as they did not believe that holding of substantive kick-out rights would necessarily lead to consolidation of an entity by holder of these rights. Other Board members were of the view that they would support 'View 2' if the shareholders having these kick-out rights were organised, but would otherwise prefer 'View 1'.

One IASB member suggested that the reporting entity should consider what was the incentive for shareholders to exercise these kick-out rights and include these considerations in the power analysis.

One FASB member suggested that the whole power and benefit analysis has to be performed to consider the agency relationship. Finally, most of the Board members agreed that decision on which view to support really depended on analysis of control through voting rights already discussed (i.e. which of the views is consistent with the dominant shareholder view). The Board thus asked the staff to provide additional analysis of these considerations for the next Board meeting.

In an indicative vote, majority of the IASB members preferred 'View 2', whereas majority of the FASB members supported 'View 1'.

Agency Relationships

The Boards very briefly discussed the issue of agency relationship. This was an initial session on the topic, no decisions were taken.

From the discussion it was clear that the Boards would prefer the view in which the overall relationship was considered, including, but not limited, to the range of decision made and latitude in decision making, kick-out rights as well as benefits (for example, the amount of fees and overall fee structure, other interests, guarantees). In addition, most of the Board members suggested that this analysis should include also explicit consideration of the fee variability (to consider whether the fees varied in the same way or differently with the other investors) as well as any disproportionate exposure to losses below the most senior investors.

Most of the Board members did not support the view that would be based solely on the significant variability of returns from its involvement in the entity.

In the subsequent discussion, some Board members suggested that the staff considered in its analysis also the following factors with particular impact on the fund managers: consequences of the consolidation of funds and whether their consolidation would result in providing more useful information to investors, existence of significant leverage as well as loss recoupment.

The staff would provide its additional analysis at the next joint meeting in February. At that meeting the Boards would also consider application of the consolidation guidance to investment companies.

Discussion at the February 2010 IASB Meeting

Disclosures

The staff noted that as part of their preparations for joint IASB/ FASB deliberations (in March 2010) of proposed disclosures in ED 10 and those in FAS 167, they had identified issues to be decided by the IASB in advance of the March meeting:

• whether the proposed disclosures in ED 10 and ED 9 Joint Arrangements could be combined into a comprehensive disclosure standard for a reporting entity's involvement with other entities that is not in the scope of IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments;
• whether a reporting entity should disclose information about its risk exposure from its involvement with unconsolidated entities; and
• whether those disclosures should be integrated into the proposed comprehensive disclosure standard for involvement with other entities.

A single disclosure standard

After a brief debate, the Board agreed that the proposed disclosure requirements in ED 10 and ED 9 should be combined with the disclosures in IAS 28 within a comprehensive disclosure standard that addresses a reporting entity's involvement with other entities that are not in the scope of IAS 39/IFRS 9. In addition, the Board agreed that such a combined disclosure standard should include the proposed disclosure requirements for joint operations that might not relate to an involvement with another entity.

Disclosures – Unconsolidated structured entities

The staff noted that ED 10 proposed disclosure requirements for both subsidiaries and unconsolidated structured entities. While there was general agreement among respondents that additional disclosures about subsidiaries would assist users in their understanding of consolidated financial statements, many questioned the proposal to require disclosures about the nature of, and risks associated with, the reporting entity's involvement with structured entities that the reporting entity does not control.

In another brief debate, the Board:

• Agreed that a reporting entity should disclose information that enables users of its financial statements to evaluate the nature of, and risks associated with, structured entities that the reporting entity does not control.
• Agreed that these disclosures should be integrated into the proposed combined disclosure standard for a reporting entity's involvement with other entities, rather than IFRS 7.

The Board resisted the temptation to address disclosures for separate financial statements as part of this project.

A Board member also noted that the proposed disclosure standard would also be the appropriate place for any disclosures arising from the Board's Derecognition project.

Discussion at the February 2010 Joint IASB-FASB Meeting

Investment Companies

The Boards discussed possible guidance for investment companies that would exempt them from the requirement to consolidate entities they control. The aim of the discussion was to consider the implications on accounting for an investment company (fund) that holds various investees. The discussion did not consider accounting by a fund manager for its interest in the investment company (fund). That issue is planned to be discussed by the Board at the March joint meeting.

The Boards received feedback from constituents that in a great majority disagreed with the requirement to apply the control principle in ED 10 Consolidated Financial Statements to investment companies. The industry organisations argued for an amendment to ED 10 that would require an investment company to account for all of its investments at fair value even if controlling interest is held. The industry representatives argued that the consolidation view is often ignored in practice as it does not provide useful information for users, particularly in cases when the investment is held only to receive income and capital appreciation (such as investments held by a mutual fund or unit trust).

The Boards argued that even if special requirements for investment companies are agreed, all entities should apply the requirements of the consolidation standard to assess control of an entity. Only if the control exists, the entity shall determine if it meets the criteria for an investment company and, therefore, is required to measure its investments using fair value with changes in fair value recognised in profit or loss.

Given the arguments of the industry, the majority of the IASB was prepared to consider that fair value measurement could be the appropriate measurement for all investments held by investment companies. Nonetheless, some IASB members argued that conditions for this exception should be extremely tight to avoid possible structuring opportunities. In addition, some IASB members thought that consolidation would be more appropriate when control exists despite the existence of self-imposed restrictions on the ability to direct assets and liabilities. Such restrictions could, in many cases, be revoked by the reporting entity.

The IASB then considered two possible criteria for investment companies: one based on the US GAAP requirements (ASC Topic 946, formerly the AICPA Investment Company Guide), or a second based on a new set of criteria that would capture the proposals by the industry.

Most of the Board members agreed that the US GAAP guidance is an established base that works in the practice. Some Board members were concerned with the US-specific requirements and definitions and how those could be carried forward in a standard in the international context. Finally, the IASB and the FASB agreed to develop a generic international guidance based on the current US GAAP requirements that would exclude US specific references (for example, to the Investment Company Act).

The Boards discussed also the application of this guidance by venture capital companies and some private equity funds, as those entities are within the scope of ASC Topic 946 by direct reference to Investment Company Act of 1940. The Boards discussed a set of potential criteria and directed the staff to provide additional analysis for the next joint meeting. The Boards noted that a possible solution could include a specific reference to genuine external investors.

Some Board members raised the possibility of structuring opportunities by creating an 'internal' venture capital structure to avoid consolidation. A way to prevent those structuring opportunities was a consideration that such fair value accounting would be reversed by the parent of the investment company, unless the parent is Investment Company itself. The staff would provide additional analysis of the issue at the next meeting.

Finally, the Boards agreed that investment companies required to report investments at fair value should provide additional disclosures. One Board member suggested that in addition to an overview of all individual investments, separate financial statements of the investees might be provided. The Boards agreed that such disclosures should be developed in the context of the overall disclosure package for consolidation. Nonetheless, the Boards noted that the focus should be on disclosures about the relationship between the investment company and the investee that are different from disclosures required for in a normal parent-subsidiary relationship.

One IASB member noted that the changes proposed to ED 10 are fundamental and therefore, in his opinion, would require re-exposure of ED 10. The IASB Chairman agreed.

Discussed at the March 2010 Joint IASB-FASB Meeting

The Boards started their discussion by assessing consistency of the control model. The staff presented the Boards an overview of the control model and noted that all outstanding issues in the control model should be addressed during two sessions at this joint meeting.

The staff pledged that the next due process document (Exposure draft for the FASB and draft of the Standard for the IASB) was planned to be published in Q2 2010 (most probably in May).

Consistency within the control model

The Boards re-discussed the concept of power in the context of power with less than half of the voting rights in an entity that the Boards discussed at the January 2010 meeting. At the January meeting it was obvious that different Board members held different views, and the Boards asked the staff to provide an analysis which of the four views presented was most internally consistent with the overall control model.

The four discussed views were as follows:

1. The 'contractual rights' view that asserts that a reporting entity must have legal or other contractual right to direct in order to have power. As the staff clarified this is a basic view that is embedded in all other views (that is, the most narrow scope of consolidation)
2. The 'exercise of power' view that asserts the notion of active managing. The view stated that if a reporting entity was actively directing the activities of the entity, it has the power unless kick-out right prevent the reporting entity from directing the activites.
3. The 'ability to' view with evidence that asserts an ability view supported by evidence that the reporting entity directs the activities.
4. The 'ability to' view that did not require any evidence or demonstration.

The staff clarified these concepts by a comprehensive set of examples and application of all four views to each of them.

In a replay of the January debate the Boards discussed thoroughly the issue, reflecting multiple arguments for and against each view.

One FASB member noted that the staff should consider a broader definition of contract that would reflect not only control by voting rights but also impact on policies or decisions.

Some IASB and FASB members noted that all facts and circumstances should be considered in assessment of control and judgement would be required in application of any (b) to (d) views to depict the economic reality better. In addition some of the Board members did not see much difference between (b) and (c) and (c) and (d) views.

One IASB member noted that he would be able to support the contractual rights view (that is simple and clear) but only on the condition that equity method accounting was abolished and all interest in non-consolidated entities were measured at fair value through profit or loss.

Some Board members tried to incorporate some refining concepts in the discussion as perpetuation of control and its persistency. Nonetheless, these concepts did not gain widespread support.

Finally, majority of the IASB supported the 'ability to' view with evidence. Nonetheless, the IASB members interpreted the evidence as 'evidence to have the ability' (that is, no demonstration is required). The narrow majority of the FASB was also in the 'ability to' view with evidence. Nonetheless, the FASB members understood the evidence as 'evidence of control' (evidence of what is demonstrated to be done). Remaining two FASB members remained firmly in the contractual rights view.

The IASB Chairman noted that despite remaining differences, the Boards managed to bridge the gap in their two views. He stressed that the remaining difference is relatively narrow. The Boards agreed that the staff would prepare clarification of these two views and its application for the continuation of the discussion the following week.

Control model

The Boards continued their deliberations of control in the context of power with less than half of the voting rights in an entity that the Boards discussed at their meeting on 15 March 2010.

The Boards discussed the remaining two views that were supported by the respective majorities of the IASB and FASB. The staff clarified that the for the 'Ability view' the analysis of the situation is sufficient for determining the power element of control. On the other hand the 'Evidence view' (or 'Ability view with evidence') would require evidence of directing of activities in addition to the requirements of the 'Ability view'.

Despite improved articulation of views and discussion of examples the Boards remained split along the lines established in January and the previous Tuesday.

As one Board member described it, the main difference was whether or not to consolidate a 49% interest in an entity that the company did not actively direct.

One IASB member was concerned by the impact of each of these views on consolidation of structured entities. The staff clarified that as structured entities are usually not governed by voting rights and rights and obligations of all the parties are usually contractually defined narrowly, this discussion should have only limited impact on structured entities. Moreover, the structured entities would be assessed based on the control over the most significant activity rather than based on voting rights.

Another Board member was concerned by the issue of control in a transition stage (when a control shifted from one party to another). The staff responded that such issue is not unique for power with less than half of the voting rights in an entity (but is the same when a majority stake is transferred but the Board of Directors remain the same in a transition stage). As such the Boards did not decide to address this issue.

The Boards also discussed the nature of kick-out rights, noting that these might be assessed at the same time for determining who is not in control and in some circumstances also help to identify who is in control.

Some IASB members were concerned by the structuring opportunities when there was a need to evidence direction in case of a 49%-owned entity but not in case of a 51%-owned entity. The staff suggested that the level of the evidence should be viewed as operationalising the power element of control definition given the uncertainty of the below 50% voting rights in the entity. As such the staff suggested that the evidence need to be more detailed the lower was the ownership interest of the dominant shareholder.

Some FASB members expressed their concerns by the presentation of large non-controlling interest in the statement of financial position in case of interest of the dominant shareholder below 30%.

On voting the IASB supported the 'Ability view' and the FASB voted for the 'Evidence view'. The FASB then suggested that it would discuss both proposals in the Exposure draft.

The Boards continued the discussion with the aim to reconcile their positions. One IASB member suggested that the ability should be defined as a probable inaction of the shareholders (i.e. not just attendance at the meeting as some issues might increase their willingness to participate). Other IASB members disagreed as they believed that such guidance would be not operational (that is, would lead to consolidation only in over 50% situations). As one Board member noted, for some decisions supermajority (such asw 75%) is required and that did not mean that 51% shareholder would not consolidate.

One FASB member suggested including specific consideration of other contractual and non-contractual arrangements and not only voting rights (e.g. level of vertical integration etc.). The Boards would re-discuss the issue at the end of the Consolidation debate. The Boards continued their discussion with the assessment of the potential voting rights on the control model. Most of the Board members agreed that judgement was needed to be applied to assess whether potential voting rights are substantive by considering whether there are barriers that would prevent the holder from exercising its rights on the basis of current facts and circumstances.

One Board member suggested that the assessment should include the consideration of whether the entity does the decisions as soon as substantive decisions need to be made.

Some Board members suggested that the assessment of options should consider whether they are in the money or out of the money. The staff clarified that judgement would have to be applied as sometimes the assessment is not that clear (the assessment would not capture the expected synergies or specific value). In their opinion, all circumstances (and not just the options) have to be assessed to determine control as there is a great variety of different economic circumstances which might be interpreted differently.

The staff also clarified that the assessment of potential voting right would be further integrated in the model (and did not constitute a standalone criterion).

One IASB member discussed a fact pattern in which a company obtained an option to get 100% of another company (option deeply in the money) and asked the staff to assess whether to consolidate. Based on the discussion the Boards noted that the answer to this question would not be straightforward. One FASB followed up and asked how such a transaction would be accounted for under the Business Combinations guidance. The Boards agreed that they would need to consider the application of the purchase method to such scenario at a future meeting.

Agency relationship

The Boards followed up the discussion of the agency relationship from the January 2010 meeting. The Boards agreed that the evaluation whether a decision maker is an agent or a principal should be made on the basis of the following four factors that focus on the nature and design of the relationship:

1. decision-making authority
2. rights held by other parties
3. remuneration of the decision maker
4. the decision maker's exposure to variability of returns because of other interests that it holds in the entity.

The Boards noted that both power and risk and rewards (benefits) elements have to be fulfilled in the control model. The staff also clarified that all these four conditions for assessment of the agency relationship have to be considered as a whole package and not assessing separately fulfilment of the power and benefits elements of control.

Most of the further discussion of the Boards focused on detailed concerns of the individual Board members about the wording of the guidance. In particular, several Board members disagreed with the assumption that constraint of power within a narrowly defined remit (by contract, statue or law) does not necessarily mean to the entity acted as an agent. The staff clarified that it tried to capture the influence of the entity over the strategic policies and designed on the structure. Some FASB members were concerned by incorporation of the notion of probability or expectations into the model (for example, probability of fulfilment of the obligation, expected returns etc.).

Most of the Board members agreed that to conclude that an entity acts as an agent the fee structure must be aligned between the entities and variability of returns does not necessarily mean that the entity acts as a principal. They also agreed that one of the considerations in the fees structure would be whether or not it is market based.

Finally, the Boards confirmed that the all facts and circumstances must be considered in assessment of the agent/principal relationship (e.g. explicit as well as implicit guarantees, risks etc.).

One IASB member asked how these conditions on agent/principal relationship fit into the decisions made within the insurance project. The Boards decided to address this issue at a following meeting.

Related parties

Without much discussion the Boards agreed that:

• when assessing control, the involvement and interests of a related party should be considered to be those of the reporting entity when the nature of the reporting entity's relationship with that related party is such that the related party is acting on behalf of the reporting entity (that is, when the relationship is such that the reporting entity, or those that direct the activities of the reporting entity, have the ability to direct the related party to act on behalf of the reporting entity in relation to its involvement with the other entity).
• the list of potential related parties should include an entity for which the majority of the members of its governing body is the same as that of the reporting entity.

The IASB agreed that a party would often act for the reporting entity only if it cannot finance its operations without subordinated financial support from the reporting entity. It also agreed that 'a party that has a close business relationship like the relationship between a professional service provider and one of its significant clients' is a de facto agent. The IASB agreed to include these parties as related parties in the new consolidation standard.

Finally, the IASB agreed to include in the Standard the guidance on what to do when a related party is deemed to act for the reporting entity (similar to that in Topic 810 in the U.S. GAAP).

Guidance for Structured Entities

The Boards considered whether to provide a specific guidance for structured entities, what should be status of such guidance and how much level of detail it should provide.

Some Board members acknowledged the need for some sort of guidance but noticed that detailed guidance that would include bright lines would serve as a 'roadmap for structuring opportunities'.

The IASB members were concerned that by providing a specific guidance for structured entities might undermine the perception of the single control model for consolidation. The staff clarified that the additional guidance for structured entities would be a supplemental guidance that would just apply the control model in a particular situation (similar to voting rights guidance for entities with voting rights) rather than compete with it.

In general, the Boards were vary of providing too detailed guidance and asked the staff to incorporate only some of the ideas of the proposed separate guidance (that was inspired by the current guidance in the U.S. GAAP) in the overall control model. The Boards asked the staff to shorten the guidance that would fit into the overall control model, would avoid any rules or bright lines and supplement the generic guidance with a list of examples how this guidance would be applied.

Control model

The Boards revisited the issue of control in the context of power with less than half of the voting rights in an entity that the Boards discussed at their meeting earlier that week.

After a brief discussion, the majority of FASB members agreed to proceed with the ability view but suggested that an alternative view shall be described in the FASB Exposure Draft.

The Board members were concerned by implications of the model but supported it as they believed that if appropriately worded (specifically stating that all facts and circumstances and not only voting rights are to be considered), they might be able to support it.

The IASB Chairman noted that the discussed views are not that far apart (they render a different answer only in one of the 13 illustrative examples, and both are based on ability model) and the remaining difference might be addressed by drafting.

Some Board members disagreed and voiced their previously stated objections – shareholder activism, potential for frequent changes of control, lack of operationality, and potentially large balances of non-controlling interest on the statement of financial position.

Disclosures

The Boards started to discuss the disclosure package for the consolidation Standard (even though that disclosure package would be merged to a single standard with disclosures related to associates and joint ventures).

Principles and Objectives

The staff presented a proposal for articulation of concise disclosure objectives that would require a reporting entity to disclose information that enables users of financial statements to understand:

1. the composition (and changes in the composition) of the group;
2. the effect of legal structures within the group, and changes to those structures, on the reporting entity's ability to access and use assets and resources of consolidated entities; and
3. the nature of, changes in, the risks associated with the reporting entity's involvement with structured entities.

The Board agreed in principle with proposed disclosure objectives. Nonetheless, several Board members expressed concerns with the wording of the principle: they considered it to be, on one hand, too general, but in some circumstances too restrictive (for example, focused only on legal structure and not covering also contractual and regulatory limitations).

One Board member was concerned about a separate set of disclosures of structured entities and suggested requiring them for all entities as they are mostly risk disclosures (rather than specific disclosures for structured entities).

Finally, the Board asked the staff to better articulate those objectives in the drafting of the Standard/Exposure Draft.

The Boards also agreed with a aggregation principle that would allow the reporting entity to aggregate disclosure for similar items but would not allow it to combine disclosures for consolidated entities with those for unconsolidated entities.

Disclosures for Subsidiaries

After a brief discussion in which several Board members questioned the relevance and usefulness of the disclosures, the Boards agreed that a reporting entity should disclose:

1. all significant judgements and assumptions in determining whether it controls another entity; and
2. any changes in its control assessments that require significant judgement and the reasons for those changes.

The Boards also agreed not to require the reporting entity to disclose accounting consequences of its significant judgements and assumptions in determining whether it controls another entity.

The Boards continued to discuss the requirement to disclose the interest that the non-controlling interests have in the performance, cash flows, and net assets. After a brief discussion, the Boards concluded that the proposed disclosures would be too vague and asked the staff to provide more specific disclosures (that is, cash flows from dividends that would go to non-controlling interests).

Subject to drafting suggestions and concerns about exact wording, the Boards agreed that a reporting entity should disclose the nature of restrictions that are a consequence of assets and liabilities being held by the parent or its subsidiaries. As part of those disclosures the reporting entity should disclose the nature of rights held by the NCIs that go beyond typical protective rights set out in legislation.

Finally, the Boards agreed that a reporting entity should be required to disclose the lack of recourse of creditors (or beneficial interest holders) to the general credit of other entities within the group.

The Boards were split on the requirement to disclose a list of significant subsidiaries including the name, country of incorporation, proportion of ownership interest, proportion of voting rights held, and summarised financial information about the subsidiary. Many Board members thought that these requirements were onerous and might be meaningless and confusing, as many subsidiaries are created for tax reasons and this legal structure is not the same as business structure.

The Boards asked the staff to narrow down the required disclosures to significant subsidiaries and consider the level of information required.

The Board also asked the staff to reconsider and specify the requirement to disclose qualitative and quantitative information about its involvement with a consolidated structured entity and related explicit financial support arrangements.

Implicit obligations to provide support

The Board agreed to require disclosure of support provided by the reporting entity to structured entities to ensure structured entities continue operating as designed. In particular, the reporting entity should disclose:

1. the type and amount of support provided, including situations in which the reporting entity assisted the structured entity in obtaining another type of support;
2. an explanation of why the support was provided; and
3. an explanation of how the provision of support resulted in the reporting entity controlling the structured entity, if applicable.

The Boards were split on the requirement to disclose information about the reporting entity's current intention to provide non-contractual support in the future. Some Board members were concerned that such disclosure could trigger various legal arrangements that in effect might make the implicit support enforceable. In their opinion, only an actual decision should create disclosure (and potentially even liability). The Boards briefly discussed the tie between this requirement and the disclosure requirements of IAS 37. Some Board members were concerned that the decision on classification and measurement of financial liabilities could be based on intent whereas this disclosure could not.

Finally, the FASB agreed to present both views in the forthcoming Exposure Draft. The IASB would discuss the issue at a future meeting.

Discussion at the April 2010 Joint IASB-FASB Meeting

Investment Companies

The Boards continued their discussions from the February joint meeting in assessing how an investment company should account for its investments that it controls. At the February joint meeting the Boards agreed that an entity that is considered an 'investment company' should be exempted from consolidating entities that it controls and, instead, should measure investments in such controlled entities at fair value through profit or loss.

The Boards started their discussion by determining what indicators should be used to identify an investment company.

The Boards agreed that an investment company is an entity that met all of the following conditions:

• Express Business Purpose. The express business purpose of an investment company is investing for current income, capital appreciation, or both. The entity shall make a commitment, to a group of unrelated investors, that the purpose of the entity involves investing in assets, usually in the securities of other entities not under common management, in order to generate and distribute income, and/or capital appreciation, or both. An exit strategy must also be included in the investment plans.
• Investment activity. To meet the express business purpose requirement, substantially all of the entity's activities shall be investment activities carried out for the purpose of generating current income, capital appreciation, or both. Operating activities related to services provided to the entity do not preclude an investment company from meeting this criterion. To be an investment company, an entity must not obtain benefits from its investees that would be unavailable to other investors or unrelated parties of the investee.
• Unit Ownership. Ownership in the entity is represented by units of investments, such as shares of stock or partnership interests, to which proportionate shares of net assets can be attributed.
• Pooling of Funds. The funds of the entity's owners are pooled to avail owners of professional investment management.
• Fair value. All of the investments of the entity are managed, and their performance evaluated, on a fair value basis. Information about the entity's investments is provided internally on a fair value basis to the entity's key management personnel and externally on a fair value basis to its investors.
• Debt. Any providers of debt to the investees of the entity shall not have direct recourse to any of the entity's other investees.

The staff originally proposed that the entity must be a separate legal entity. Nonetheless, at the start of the meeting, the staff noted that it proposed to change that requirement to the definition of reporting entity (as defined in the exposure draft on Reporting Entity chapter of the Conceptual Framework). Several Board members strongly disagreed with that suggestion as they believed that such interpretation could lead to structuring opportunities – for example, divisions of multinational conglomerates would qualify for the fair value exception from consolidation. Other Board members did not share those concerns as they believed that the remaining conditions are rigorous enough to preclude such structuring (especially the unit ownership condition).

Finally, after significant level of discussion, the Boards agreed with the suggestion of one Board member to tie the reporting entity condition with the unit ownership condition. For the staff the elimination of separate legal entity condition was important as the staff believed that such condition could preclude the usage of the exception by some unit trusts. On the other hand, some Board members were extremely concerned with unintended consequences of such change. One Board member even suggested that such a decision might lead to introduction of the legal isolation concept by the back door.

The Boards decided to include several additional requirements to the list of conditions for classification as an investment company. Those additional requirements included an explicit condition related to substantial investments by outside investors, prohibition of usage of call and put options, and better articulation of the range of companies that are considered to be affiliates to the entity.

The Boards also considered the scenario in which the parent company directly owns a share in an entity (such as 25%) and owns the remaining 75% through investment companies that are measured at fair value. The Boards considered how to adjust the balances on consolidation, or alternatively whether to scope out investment companies from the fair value exception proposed when the ultimate parent owns partial interest in the investments held by the investment company. Finally, the Boards decided that they needed to consider the consequences of the fair value exemption on consolidation adjustments more broadly (for example, intra-group sales, intra-group loans, etc).

Nonetheless, several Board members remained concerned that the new guidance would be subject to structuring and would not fulfil the objectives the Board expected.

The Boards also clarified that all investments that fulfil the criteria would be measured at fair value through profit or loss.

The Boards considered the consequences on the accounting by the parent of the investment company. Several Board members supported the guidance that parent entity would not be permitted to retain fair value accounting for any controlled investees of an investment company subsidiary in the parent's consolidated financial statements. Those Board members believed that only such restriction would eliminate the structuring opportunities.

On the other hand, the majority of the Board believed that it would be appropriate to retain the accounting for an investment company subsidiary if a parent has multiple separate activities (that is, report investment activities at fair value and consolidate operating activities). The Boards agreed that when the information is relevant and useful on the investment company level it would be useful also on the parent level.

Finally, the Boards clarified that involvement of the management company in management of the investees (for example, representation on the Board level) is consistent with the definition of the investment company.

The Boards agreed that an entity that previously was not considered an investment company, but met the revised definition of an investment company, should report the effect of the change in status as of the date that they first applied the revised consolidation requirements as an adjustment to retained earnings in the period in which the change occurred. The adjustment to retained earnings would represent the difference between the previous carrying amount of the net assets of the investee and the fair value of the investee as of the date of first applying the new consolidation requirements.

The staff noted that the IASB plans to publish a limited exposure draft of guidance related to investment companies. Even though the Board did not officially vote, several Board members indicated that they intend to dissent from that ED and would present an alternative view.

The Boards will continue their discussions on disclosure requirements at later sessions.

Discussion at the 4 May 2010 Special Joint IASB-FASB Meeting

Investment companies – disclosures

The Boards discussed the disclosure package for investment companies. The Boards agreed that, in addition to the information currently required to be disclosed (related to fair value under IFRS 7 Financial Instruments: Disclosures), an investment company should be required to disclose whether it has provided any financial or other support to any of its controlled investment that it was not previously contractually required to provide.

The Boards also agreed that an investment company should disclose the nature and extent of any significant restrictions on the ability of its controlled investees to transfer funds to the investment company.

The Boards discussed the proposal to require disclosures of the most recently available summarised financial information for any individually material controlled investee that otherwise would have been consolidated. The Boards disagreed with the proposed disclosures as they noted that if fair value is the most relevant measure, fair value is also the right attribute to be disclosed. As it would often be a level 3 fair value calculation, additional disclosures relevant to the calculation would have to be provided.

One Board member noted that the disclosures on related partiy transactions should be applied in that scenario as they will not be eliminated. The Boards agreed.

The Boards also discussed additional disclosures that are currently required under US GAAP for investment companies. These requirements under US GAAP are standalone requirements for investment companies, whereas under IFRS presentation and disclosure requirements of all other IFRSs would apply to investment companies. The IASB asked the staff to perform a detail comparison of the requirements required under US GAAP and the requirements currently required under IFRSs. The Boards will re-discuss this issue at one of the following meetings.

Disclosures for subsidiaries and unconsolidated structured entities

The Boards continued their discussion about a disclosure package for subsidiaries as well as unconsolidated structured entities. The Boards started by discussing the general disclosure principle. Nonetheless, it was soon clear that the Boards did not agree with the proposed principle as they believed that it confused structured and operating entities as well as consolidated and non-consolidated entities. The FASB members suggested taking the principle in Statement 167 as the basis. The Boards will revisit the principle at the following Board meeting.

On more specific disclosures, the IASB members tentatively agreed to require disclosure of a list of individually material subsidiaries containing the name, country of incorporation and as well as proportion of interest and summarised financial information. The FASB members were reluctant to require such disclosure.

With regards to the unconsolidated structured entities, the Boards decided that a reporting entity has an involvement with an unconsolidated structured entity that is relevant for disclosure purposes when it is exposed to the variability of returns of that entity.

The Boards discussed whether the disclosure requirements for unconsolidated structures entities should apply only to a reporting entity's involvement with entities that exposes the reporting entity to significant variability of returns. Many Board members were uncomfortable with inclusion of the word significant. The FASB members noted that under US GAAP, the reference to significant has been recently deleted. The Boards preliminary agreed not to refer to significant in the next due process document. The IASB asked the FASB to undertake an outreach on the practicalities of that change under US GAAP. Based on the results of such outreach, the Boards would re-discuss the issue at one of the next meetings.

After a brief discussion the IASB agreed to require disclosure of income from involvements with structured entities that the reporting entity has set up or sponsored as well as the fair value of assets recognised by those structured entities at the time that these structured entities are established. Both these disclosures would be requires regardless of whether the assets of the structured entities were acquired from a third party.

The FASB disagreed with this disclosure requirement as they believed it should be covered by the general disclosure principle.

The Boards agreed that the further specific disclosures will be discussed at a next meeting together with the general disclosure objective. In particular the Boards would like the staff to address the question when the financial instruments disclosures are relevant and when the consolidation guidance should apply. Some Board members were uncomfortable with prescribing these disclosures to normal commercial truncations (such as an insurance policy or bank guarantee).

Discussion at the May 2010 Joint IASB-FASB Meeting

Sweep issue: Accounting by the parent of an investment company

The IASB agreed that the IFRS on Consolidation would address the situation in which a controlled investee of a consolidated investment company holds an equity interest in the ultimate parent. Currently, under IFRS, the investment in the parent held by the investee would be treated as treasury shares in the Parent's consolidated financial statements. Whether this treatment should be retained if the investee was accounted for at fair value was unclear. The FASB would not address this issue specifically: in their view, there was existing guidance in US GAAP and facts and circumstances would determine the appropriate accounting treatment.

In a supplemental vote, the IASB agreed (12 in favour) the parent of an investment company would consolidate all controlled investees, including those held by investment company subsidiaries. The fair value accounting applied by the investment company subsidiary to its investment in the Parent when the Parent entity prepares its consolidated financial statements would be prohibited.

Agency relationships: Regulated funds

The Boards discussed the appropriate consolidation conclusions when a fund being managed is governed strictly by law or regulation to ensure that the fund is operated in the best interests of all investors.

The Boards considered an example in which the reporting entity establishes a mutual fund and acts as the fund manager, selling units in the fund to external investors. Although the fund manager determines the type of fund, the parameters of the fund within which the fund manager operates are determined by regulation.

After a short discussion, the Boards agreed unanimously that restrictions placed on a fund manager's decision-making authority by law or regulation would not prevent the fund manager from controlling (and thus consolidating) the fund.

Separate presentation/ Transition guidance

The Boards did not have time to discuss papers on whether any or all of the elements of a consolidated entity should be permitted or required to be classified separately from other elements in a reporting entities' consolidated financial statements; and proposed transition requirements when a reporting entity concludes, when transitioning to the new Standard on consolidation, either that consolidation of a previously unconsolidated entity, or discontinuing consolidation of a previously consolidated entity is appropriate. These papers will be discussed by the Boards separately and only if the conclusions differ will they be discussed at a joint meeting.

Discussion at the May 2010 IASB Meeting

Investment companies: Consequential amendments to IAS 28 and IAS 31

The Boards considered the implications of the decision to provide a fair value exception from consolidation to investment companies for associates and joint ventures.

Most Board members felt that the current scope exceptions for mutual funds, unit trusts, investment-linked insurance funds, and venture capital organisations to use fair value in IAS 28 and IAS 31 should be aligned to the decision on investment companies. The Board noted that two sets of exceptions would be complex and confusing. Nonetheless, some Board members noted that the investment company exemption narrows the set of companies benefiting from fair value accounting in comparison with current requirements. In particular, concerns were raised with the treatment of investment linked insurance funds that usually do not operate as reporting entities. The Board asked the staff to consider the implication of narrowing of the set of companies in this context. Notwithstanding the further analysis, the Board tentatively decided to include the proposed criteria for an investment company, developed within the consolidation project, to replace the list of entities benefiting from the fair value exception in the scope paragraphs of IAS 28 and IAS 31.

The Board further considered implications of the decision made the previous day on accounting by the parent of the investment company. The Board decided that, consistently with the guidance proposed within the Consolidation project, normal rules for measurement of associates and joint ventures should apply (that is, fair value accounting should be reversed unless the parent itself is an investment company).

Finally, the Board confirmed its decision that partial use of fair value for measurement of associates and joint ventures would be allowed (in other words, different measurement bases can be applied to portions of an investment in associate or joint venture when part of the investment fulfils the fair value exemption). Nonetheless, some Board members were deeply unhappy with such outcome.

Investment companies: First-time adoption in 2011

The Board considered a request from a jurisdiction that will require entities to prepare their financial statements in accordance with the IFRSs for the first time from 1 January 2011 to provide a temporary relief from the current requirement to consolidate the investment in entities similar to investment companies as defined in the Consolidation project and allow them to be carried at fair value. Under the local GAAP the existing requirements are to measure those investments at fair value. The Board expressed some sympathy to the request as under current requirements those entities would have to consolidate the investment companies on adoption of IFRSs, but when the investment companies guidance is finalised under IFRSs, change the accounting back to fair value. Nonetheless, the Board noted that the investment companies guidance is not finalised and such guidance would presume some decisions what would be inconsistent with due process. Moreover, the Board felt that it is a regulatory issue and a local regulator might address it, rather than ithe Board. Therefore, the Board decided not to address the issue.

The Board considered the package of decisions related to the investment companies that will be re-exposed. Two Board members indicated that they would express alternative view, with further three Board members considering such option.

ED 10: Transition

The Board considered the overall transition requirements for the new Consolidation IFRS. The Board decided that the new requirements for consolidation should be applied retrospectively in accordance with IAS 8 (that is, presume that these entities were always consolidated). Nonetheless, the Board noted that full retrospective application might require hindsight is some cases, when the fair values at the date of acquisition were not available. The Board thus decided that the newly consolidated entities should use the calculation that was prepared on acquisition (e.g. were required when accounted for the acquisition as associate). When such calculations were not made, the Board decided to grant an impracticability exception to avoid the hindsight. The Board agreed that in that case the acquisition method should be used in the current reporting period.

The Board also decided to allow early application of the consolidation guidance.

Separate presentation

The Board considered whether to require separate classification of elements of a consolidated entity in the reporting entity's consolidated financial statements. The US GAAP requires that a reporting entity separately classify, on the face of its balance sheet, those assets of a consolidated Variable Interest Entity (VIE) that can only be used to settle obligations of the consolidated VIE, and those liabilities of a consolidated VIE for which creditors (or beneficial interest holders) do not have recourse to the general credit of the reporting entity. Some Board members considered this requirement to be inconsistent with the concept of a single economic entity in consolidated financial statements. These members argued that such requirements would clutter the primary financial statements and would not provide useful information. On the other hand, some Board members believed that such disclosures might be useful for users.

As most Board members felt that the US GAAP requirements were too onerous, the Board asked the staff to consider whether disclosure in the notes of restrictions on assets might serve the purpose. The Board would discuss the issue with the FASB at a following Board meeting.

Discussion at the 1 June 2010 Special Joint IASB-FASB Meeting

Disclosure principles

The Boards discussed staff proposals for disclosure principles that might put into effect the disclosure objective agreed at a previous meeting. The proposed disclosure principles were:

1. The significant judgements and assumptions (and changes to those judgements and assumptions) made by the reporting entity in determining whether it controls (or does not control) another entity and/or about the reporting entity's involvement with structured entities.
2. The interest that the non-controlling interests (NCI) have in the group's activities.
3. The effect of restrictions on the reporting entity's ability to access and use assets or settle liabilities of consolidated entities, as a result of where the assets or liabilities are held in the group.
4. The nature of, and changes in, the risks associated with the reporting entity's control of consolidated structured entities or involvement with unconsolidated structured entities.

None of the disclosure principles received universal support. Item (a) was criticised because several Board members thought that the 'and/or about the reporting entity's involvement with structured entities' was misplaced: it confused consolidation with the particular challenges of structured entities. Some FASB members were concerned that (a) had a parent company-only bias that was not appropriate.

Item (b) was criticised because, in the explanatory text that accompanied the proposal, the staff had suggested that a reporting entity should be required to disclose 'the non-controlling interests' proportionate interest in dividends paid for each individual subsidiary'. IASB members in particular were concerned that in jurisdictions in which non-controlling interests in consolidated groups are commonplace, the disclosures would be both voluminous and virtually meaningless. In addition, it was unclear whether NCI should be assessed for materiality at an individual entity level or at a group level. Analysts on both Boards stressed that users were interested in the effect of NCI on the reporting entity's ability to access benefits in the consolidated group.

Similar concerns existed with respect to (c). It was noted that the domicile of subsidiaries was important information as this would often give users a clue about the ability to repatriate earnings.

However, item (d) was most criticised because of the requirement to discuss 'involvement with unconsolidated structured entities'. Board members had sympathy with the intent, but not in a standard directed to consolidated entities.

These criticisms aside, the IASB thought that the disclosures related to unconsolidated interests best belonged in IFRS 7, with other risk disclosures. However, the staff cautioned the Board that IFRS 7 had a slightly different perspective and that, in outreach activities, they had been told that the legal perspectives in (d) were also important.

Ultimately, the Boards did not vote on the disclosure objectives, but proceeded to discuss a number of specific issues identified as sweep issues.

Disclosures – sweep issues

Basis of control

The Boards agreed that, when a reporting entity has a significant investment in an entity but concludes that it does not have the power to direct the activities of the other entity, the reporting entity should disclose the surrounding facts and circumstances that underlie the basis for its conclusion.

At least one IASB member was concerned that this disclosure would provide a basis for second-guessing the judgements made by management in difficult situations.

The interests that non-controlling interests have in the group's activities

The Boards discussed whether, with respect to subsidiaries with non-controlling interests that are individually material to the reporting entity, the reporting entity should disclose:

• the name;
• the country of incorporation or residence;
• the proportion of ownership interest and, if different, proportion of voting interest held; and
• summarised financial information.

Board members noted that in multinational groups, the information about domicile was very important. There were concerns about the level of disaggregation that might be involved, and that this might conflict with the disclosure required by IFRS 8 Operating Segments.

Other IASB members were concerned about the requirement to provide summarised financial statements and whether such a requirement would be operational and provide useful information. What was most important to those Board members was information about restrictions or limitations on assets and liabilities and cash flows. That type of information might be better suited as part of IFRS 8.

Another IASB member was concerned whether (c) was operational, especially with respect to ownership interests in structured entities.

The FASB members were in a different place altogether and were more concerned about restrictions and limitations within the consolidated group generally, irrespective of whether non-controlling interests were involved.

The proposal was not voted on. The analysts on the two Boards were tasked to work with the staff to prepare revised disclosures that might satisfy the Boards.

Risk disclosures for consolidated entities

The Boards agreed that a reporting entity should disclose the terms of an arrangement that could require the reporting entity to provide financial support (for example, liquidity arrangements and obligations to purchase assets) to any consolidated entity, including events or circumstances that could expose the reporting entity to a loss. This would be an extension of the current US GAAP requirements (which apply to consolidated structured entities).

Risk disclosures for unconsolidated structured entities with which the reporting entity has an involvement

The Boards agreed to require a reporting entity to disclose a comparison of the carrying amount of the assets and liabilities of the reporting entity that relate to the reporting entity's involvement with unconsolidated structured entities and the reporting entity's maximum exposure to loss. The disclosures would be similar to those in US GAAP, although US GAAP has a different scope.

Risk disclosures for unconsolidated structured entities that the reporting entity has set up or sponsored

The Boards agreed that a reporting entity should be required to disclose income from its involvement with unconsolidated structured entities that it has sponsored.

A staff proposal that a reporting entity should also disclose the carrying amount of assets held by those structured entities at the time that the structured entities are established was referred for further study by the staff.

Discussion at the 1 June 2010 Special IASB Meeting

Disclosures – investment companies

The IASB debated whether to require investment companies to make a disclosure similar to that which is currently required by US GAAP: a financial highlights schedule. This schedule presents per share investment income or loss, realised and unrealised gains and losses per share, distributions to shareholders, purchase premiums, redemption fees, payments by affiliates, expense and net investment income ratios, total return, and capital commitments.

The staff admitted that the US GAAP requirements are incorporated in US GAAP by way of AICPA guidance, which in turn interprets the 1940 Investment Companies Act. A Board member noted that he was not enthusiastic about the proposal, but would support it in the spirit of convergence.

Other Board members spoke in favour of the proposal, noting that North American analysts see the financial highlights schedule as 'more important' than earnings per share information provided in the financial statements.

After a brief debate, the Board agreed that an investment company should disclose a financial highlights schedule. The schedule would present per share investment income or loss; realised and unrealised gains and losses per share; distributions to shareholders; purchase premiums; redemption fees; payments by affiliates; expense and net investment income rations; total return; and capital commitments.

Discussion at the July 2010 IASB Meeting

In the last step of the consolidation standard, the staff discussed with the Board various disclosure issues raised. One concern related to the disclosures for structured entities and why those disclosures were not required for risk exposure with all entities rather than just limited to structured entities. While the staff agreed with these disclosures could be relevant to all entities, including the disclosure requirement for all entities could involve expanding the scope of the standard and delay its issuance. The Board agreed to proceed with the disclosures only for the involvements with structured entities.

Another concern expressed was whether those disclosure requirements for structured entities was broader than those required under U.S. GAAP. The staff conducted a review of the proposed disclosure requirements with those in ASU 2009-17 (FAS 167) and outreach of U.S. constituents. The analysis determined that although there may be slight differences due to such definitions as "structured entities" versus "variable interest entities" or "involvements" versus "variable interests" the disclosure requirements are substantially similar and U.S. constituents generally agreed with the scope of the disclosures. The Board agreed to proceed with the disclosures as drafted.

In June 2010, the Board had agreed to include a disclosure objective requiring financial statements to include information that helps users understand the impact of noncontrolling interests on the entity. The staff has proposed to supplement the disclosure objective with specific disclosures similar to those exposed within ED 9 Joint Arrangements which includes the name of the subsidiary, their country of incorporation or residence, the method for allocating profit and loss and summarised financial information for the subsidiary (while considering a materiality threshold in preparation of these disclosures). The Board agreed with the staff's proposed disclosures.

The staff has also proposed additional disclosures for unconsolidated structured entities in which the reporting entity is the sponsor but no longer has continuing involvement as of the reporting date. In those instances, the reporting entity would disclose any income earned from its sponsorship and the carrying amount of any assets transferred to the structured entity during that period (carrying amount as of the time the transfer was made). The Board agreed with the staff's proposed disclosures.

The Board then voted for the staff to proceed with drafting in preparation for balloting of a final consolidation standard and a final disclosure standard (including disclosures for joint ventures, associates, etc.) and for drafting of an exposure draft on investment companies.

September 2010: Staff draft of a forthcoming IFRS on consolidation

The IASB has posted to its website a staff draft of a forthcoming IFRS on consolidation that reflects the tentative decisions made to date by the IASB. The draft IFRS has been prepared by the staff of the IASB for the board’s project to replace IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities with a single standard on consolidation. The staff draft reflects the cumulative tentative decisions made by the board, concluding with the meeting in May 2010. The board’s deliberations are complete, apart from considering the effective date of the forthcoming IFRS. However the tentative decisions reached may be subject to change before the board issues the final consolidation standard.

The Financial Accounting Standards Board (FASB) will hold public roundtables on 25 October 2010 to elicit input from its stakeholders and help the FASB decide whether to proceed with an exposure draft that is consistent with the IASB’s published requirements.

Click for:

• Staff draft of the forthcoming IFRS on consolidation on the IASB's website (PDF 1,080k)

Discussion at the December 2010 IASB Meeting

Feedback received through FASB roundtables

The IASB staff provided the IASB with a summary of the feedback received from participants during the FASB's two public roundtables held on 22 November 2010. The FASB roundtables consisted of a morning session for non-financial institutions and an afternoon session for financial institutions (primarily asset managers) with participants including preparers, auditors and analysts.

The analysts were generally supportive of a model that requires more consolidation, however stated they were ultimately more interested in increased disclosure that supplement consolidation decisions.

Roundtable participants expressed concern on the IASB's proposals regarding the "ability" approach to control. In particular, they had concerns when an investor held less than 50% of the voting rights of an investee with no other contractual rights evidencing control but could be considered to have control based on the inactivity of other shareholders. Other concerns over the control principle included the requirement for investors to reconsider control based on factors outside of the investor's control. However, some participants felt that the issues under de facto control were likely less relevant in the US capital markets than in other jurisdictions around the world.

Another area where roundtable participants expressed concern was on potential voting rights (i.e., unexercised options or convertible instruments). Participants were particularly concerned that changes in valuations of such instruments (i.e., moving from in- or out- of the money) could impact consolidation conclusions from period to period.

Roundtable participants generally supported the principal/agent guidance but requested additional guidance and illustrative examples to help ensure consistent application. Areas within the principal/agent relationship guidance that most needed additional clarity were 1) how to assess decision-making ability when law or regulation imposes restrictions or when no ongoing decisions are required, 2) how liquidation rights should be assessed, and 3) how removal rights exercisable by a board of directors should be evaluated.

The IASB agreed to retain their existing proposals on the ability approach to control and potential voting rights. However, they did agree to incorporate clarifying language in the final standard to attempt to address some of the concerns expressed. On the topic of ability to control, the basis for conclusion of the final standard will mention that 1) a local jurisdiction's regulatory and security laws will influence the rights of shareholders and 2) an investor considers all available evidence, but does not have to search endlessly for evidence of control; in the absence of evidence of control, then control is not presumed as the default position. On the topic of potential voting rights, the standard will clarify that changes in market conditions, the economics of the entity or other entity specific conditions driven by market conditions would not typically change the consolidation conclusion and that the purpose and design of both the entity and the investor's involvement should be considered when assessing control.

The IASB also agreed to include application examples on the principal/agent guidance based on examples included in previous board meetings which should help to address the concern on assessing decision-making ability under regulatory or legal restrictions. The IASB also plans to clarify that consideration of the purpose and design of an entity would include any rights given to an entity's board of directors by its investors and that liquidation rights would be considered in a similar manner to removal rights.

One IASB member asked the FASB what their intentions were with regard to the consolidation project. The FASB staff confirmed their intention to issue an exposure draft during early 2011 after the final IASB standard is issued. The FASB will be discussing consolidation during a meeting in January to conclude on the proposals in the exposure draft, but the preliminary intention of the FASB staff is to recommend a single consolidation model based on current control (50% + 1 vote) and including principal/agent guidance. The current control model would be inconsistent with the IASB's ability approach to control; however the principal/agent guidance would be largely similar.

An IASB member questioned why the FASB staff planned to recommend a control model inconsistent with that of the model in the forthcoming IASB standard as he interpreted that roundtable participants generally supported the ability approach to control. The FASB staff clarified that roundtable participants had both theoretical and operational concerns over the ability approach to control.

Another IASB member questioned whether preparers would reach different consolidation conclusions for special purpose entities (e.g., securitisation trusts) when applying the IASB standard and the proposals the FASB staff anticipated recommendations. The FASB staff mentioned that assuming they reach the same place on the principal/agent guidance and depending on how related parties factor into the analysis, they would likely reach similar conclusions.

Effective date for IFRSs on consolidation, joint arrangements and disclosure of involvement with other entities

The IASB staff recommended that the effective dates for IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Involvement with Other Entities and IAS 28 Investments in Associates be 1 January 2013 with retrospective application. The staff also proposed allowing early application as this permits first time adopters of IFRS to implement the consolidation standard only once rather than transitioning to IFRS and then immediately implementing new standards only one or two years after initial transition. However, if early application was selected for any of the standards then all four standards would need to be applied early.

One IASB member asked if it were possible to defer the decision on the effective date of the proposals until the comments on the request for views on effective dates have been considered. The IASB Chairman mentioned that they should at least put in a date of "not before 1 January 2013" as issuing the standards without an effective date may raise questions on whether application could be required during 2012.

Two IASB members expressed concern over the recommendation for early application because of the resulting lack of comparability. One of those Board members also expressed concern that the requirement do adopt all four standards at the same time may result in entities not providing enhanced disclosures in accordance with IFRS 12 early because of not wanting to early adopt the changes in accounting for the other three standards.

The IASB tentatively agreed to an effective date of no earlier than 1 January 2013, subject to reconsideration based on feedback from the effective date request for views. The Board also plans to permit early application for those first time adopters of IFRS but would reconsider the early application and transition provisions at a future meeting.

Discussion at the January 2011 IASB Meeting

As part of the drafting of IFRS 10 (the forthcoming Consolidation Standard), Board members questioned whether the language in paragraphs 8 and 9 of IAS 28 regarding potential voting rights when assessing significant influence should be amended so that it is consistent with IFRS 10. The inconsistency results from the fact that IAS 28 discusses consideration of potential voting rights which is consistent with the current guidance in IAS 27 but would no longer be consistent with the amended consolidation guidance in IFRS 10.

The Board has intentions of re-examining the guidance in IAS 28 in the near future and therefore the Board tentatively agreed to wait until a decision has been made on if and how to amend IAS 28 rather than conforming IAS 28 now in order to be consistent with IFRS 10.

One Board member expressed significant reservations with the decision and thought the Board should address these inconsistencies now rather than waiting for future agenda decisions but stated he would not dissent from the forthcoming Consolidation and Joint Arrangements Standards as a result.

Discussion at the February 2011 IASB Meeting

Effective date and early application of forthcoming IFRS 10, IFRS 11, IFRS 12, IAS 27 (revised 2011) and IAS 28 (revised 2011)

The IASB is finalising drafting of the pending standards IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Involvement with Other Entities, IAS 28 (revised) Investments in Associates and IAS 27 (revised) Separate Financial Statements. However, the IASB had delayed discussion on effective date for the five pending standards until the comment period on the Request for Views Effective Date and Transition Methods closed on 31 January 2011.

The preliminary summary of the feedback received in the request for views was that consolidation and joint ventures would generally not represent a significant cost to implement, except for those in the energy, financial services and asset management industries. Respondents also generally supported linking the five standards so that their effective dates were synchronised. Respondents also generally supported permitting early application and requiring limited retrospective application in accordance with IAS 8.

Based on the feedback received in the request for views and the fact that the consolidation and disclosures standards were driven by the financial crisis at the request of the G20, the staff recommended an effective date of 1 January 2013 with early application permitted provided that all of the five standards were also early applied (with an exception for the disclosure requirements in IFRS 12) and require limited retrospective application in accordance with IAS 8 for IFRS 10 and IFRS 11.

Several Board members asked the staff about the related project on consolidation for investment companies. They stated their support for including the effective date of that potential standard at the same time as the other five related projects rather than having one year of one approach and another approach applied the following year. The staff mentioned their intention is for the exposure draft on investment companies to be issued in April with redeliberations beginning during the summer. They felt that it is possible that a final standard could be issued during 2011 giving entities at least one year to prepare for adoption.

One Board member questioned the staff's proposal that would allow for any of the disclosures required under IFRS 12 to be included in financial statements prior to the effective date. He specifically asked about the inconsistency as some of the disclosure requirements in IFRS 12 use terminology included in the new standards (e.g., joint arrangements). The staff clarified their intention is that, in accordance with IAS 1, entities would be permitted to disclose additional information above those required. They were concerned that not including specific language to that effect may result in entities believing they were prohibited from including those disclosures unless all the other four standards were also early adopted. They also clarified that any or all of the IFRS 12 disclosures could be provided prior to adoption of all five standards.

The Board unanimously agreed to require an effective date of 1 January 2013 with early application permitted if all five standards are early adopted and limited retrospective application. The staff also mentioned they would post to the IASB website a "not before date" of when the five standards will be issued to assist companies with their IAS 8 disclosures, but the intention is that they would be issued in early March.

April 2011: Near final draft of forthcoming IFRSs on consolidation (IFRS 10 and IFRS 12)

On 21 April 2011, the IASB published a 'near final draft' of the forthcoming package of five new and revised standards addressing the accounting for consolidation, involvements in joint arrangements and disclosure of involvements with other entities. The final standards are expected to be published in the next few weeks.

Each of the five standards will have an effective date for annual periods beginning on or after 1 January 2013, with earlier application permitted so long as each of the other standards in the 'package of five' are also early applied. However, entities will be permitted to incorporate any of the disclosure requirements in IFRS 12 into their financial statements without technically early applying the provisions of IFRS 12 (and thereby each of the other four standards).

The near final drafts are available to eIFRS subscribers (link to IASB website).

May 2011: IASB publishes final standards on consolidation, joint ventures and disclosures

On 12 May 2011, the IASB published its "package of five" new and revised standards addressing the accounting for consolidation, involvements in joint arrangements and disclosure of involvements with other entities.

Each of the five standards have an effective date for annual periods beginning on or after 1 January 2013, with earlier application permitted so long as each of the other standards in the 'package of five' are also early applied. However, entities are permitted to incorporate any of the disclosure requirements in IFRS 12 into their financial statements without technically early applying the provisions of IFRS 12 (and thereby each of the other four standards).

The standards are available to eIFRS subscribers (link to IASB website).

Click for

• IASB press release (link to IASB website)
• Our detailed summaries of
  • IFRS 10 Consolidated Financial Statements
  • IFRS 11 Joint Arrangements
  • IFRS 12 Disclosure of Interests in Other Entities
  • IAS 27 Separate Financial Statements (2011)
  • IAS 28 Investments in Associates and Joint Ventures (2011)
• Deloitte podcasts on the newly published standards
   

Discussion at the June 2011 IASB Meeting

The IASB discussed the investment entities project, specifically whether to permit early application of the proposals and the comment period for the upcoming exposure draft.

Effective date and early application

The Board tentatively decided that as these proposals would amend IFRS 10 that the same early application provisions in IFRS 10 would be allowed for these proposed amendments (i.e., IFRS 11, IFRS 12 and the amended IAS 27 and IAS 28 would also have to be early applied). The Board also tentatively agreed that the effective date of these proposals would align with those other standards (i.e. 1 January 2013).

Comment period

The Board also tentatively decided to allow for a comment period of 120 days after the issuance of the exposure draft.

The Board also agreed to allow the staff to proceed to balloting the exposure draft. The three retiring Board members each expressed their intention to dissent to the proposals in the exposure draft.

August 2011: IASB proposes consolidation exemption for 'investment entities'

On 25 August 2011, the International Accounting Standards Board (IASB) published Exposure Draft ED/2011/4 Investment Entities, proposing to define 'investment entities' as a separate type of entity that would be exempt from the consolidation accounting requirements in IFRS 10 Consolidated Financial Statements.

The proposals arise from the consultation process around the issue of IFRS 10, where many respondents questioned the usefulness of the financial statements of investment entities if IFRSs continued to require the consolidation of entities that an investment entity controls.

In summary terms, the exposure draft proposes:

• criteria for an entity to qualify as an 'investment entity' (see below)
• an investment entity to measure its investments in controlled entities at fair value through profit or loss in accordance with IFRS 9 Financial Instruments (exceptions would apply to investees providing services that relate only to the entity's own investment activities, and investment entities that take control of collateral as a result of defaults related to its investments)
• additional disclosures to enable users to evaluate the nature and financial effects of its investment activities
• not to permit a parent of an investment entity to retain fair value accounting applied by its subsidiary, unless the parent itself qualifies as an investment entity, i.e. the parent would consolidate all entities in the group
• amendments to IAS 28 Investments in Associates and Joint Ventures to require an investment entity to measure its investments in associates and joint ventures at fair value through profit or loss in accordance with IFRS 9 (replacing the concept of 'venture capital organisation, mutual fund, unit trust and similar entities' with 'investment entity')
• entities which apply the investment entity guidance early would also be required to apply all aspects of IFRS 10, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 (as amended in 2011).

The IASB is undertaking this project jointly with the FASB with the objective of improving existing US GAAP requirements and achieving convergence in the accounting for these types of entities. The FASB is expected to issue equivalent proposals shortly.

Comments on the exposure draft are due by 5 January 2012. Click for:

• Press release (link to IASB website)
• Exposure Draft ED/2011/4 (link to IASB website).

December 2011: IASB publishes proposed amendments to IFRS 10

The IASB has published Exposure Draft ED/2011/7 Transition Guidance (Proposed amendments to IFRS 10) for public comment. The proposed amendments address the transition guidance in IFRS 10 by clarifying retrospective application. Comments on the exposure draft are due by 21 March 2012.

Click for:

• IASB press release (link to IASB website)
• Exposure Draft ED/2011/07 Transition Guidance — Proposed amendments to IFRS 10 (PDF 170k, link to IASB website).