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Consolidation

Date recorded:

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.

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