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.