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Consolidations

Date recorded:

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.