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.