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A simpler approach for determining whether one enterprise controls another through means other than equity interests, such as through contractual arrangements


Published on June 22, 2015

The Canadian Accounting Standards Board issued a new standard, Section 1591, Subsidiaries, for enterprises that apply ASPE. This new section replaces the current guidance for determining control (Section 1590, Subsidiaries) and also results in the withdrawal of AcG‑15, Consolidation of Variable Interest Entities. It is effective for fiscal years beginning on or after January 1, 2016, with early adoption permitted.

It is important to note that these changes will mainly impact private enterprises that apply the consolidation model for subsidiaries.

What are the key changes?

The new requirements do not change the existing guidance for determining whether an enterprise controls another through equity interests (i.e. the voting control model), nor the definition of “control.” However, one of the key changes is the withdrawal of AcG-15, Consolidation of Variable Interest Entities, in response to concerns that it is too difficult to apply in practice. Instead, the standard introduces a simpler approach for determining whether one enterprise controls another through means other than equity interests, such as through contractual arrangements. This revised standard is applicable to all enterprises that prepare consolidated financial statements.

The following are the primary changes to the consolidation model introduced in the new section:

  • Introduction of factors to be considered to identify situations when voting shares may not be the dominant factor in determining control.
  • Examples of other types of contractual arrangements that may include rights that could confer control or that supersede the equity share voting rights. Examples include supply arrangements, management contracts, lease agreements, royalty contracts and finance arrangements.
  • Identification of facts and circumstances to consider when evaluating whether the rights in the contractual arrangements are sufficient to indicate that control exists, which include factors such as purpose and design and how strategic decisions are made.
  • Other factors to consider such as protective rights, options to buy or sell interests in the entity, liquidation rights and how to address entities with little or no ongoing decision-making activities.

Overall, the determination of control will require a facts and circumstances analysis when there are contractual arrangements that include rights or powers that may provide the counterparty with control.

What are the potential impacts for enterprises that prepare consolidated financial statements?

The withdrawal of AcG-15 and the introduction of this simpler approach to determine when control may exist in contractual arrangements may result in different conclusions than were previously reached about whether an enterprise controls, and thus consolidates, another enterprise.

Key performance indicators and other financial indicators, including debt covenants may be impacted by any changes to the enterprises that were included in the consolidated financial statements under the prior consolidation requirements.

Are there any transition provisions?

The new requirements will have to be applied retrospectively. Some transitional relief is available to ease the initial adoption of these new requirements when the enterprise previously prepared consolidated financial statements or chooses to prepare the consolidation model to subsidiaries for the first time when they adopt the new section.

What are the next steps?

An enterprise preparing consolidated financial statements when considering the impact of this new section should take the following steps:

  • Determine whether the consolidation model will be applied to subsidiaries after the effective date, either as a continuation of the current accounting policy or as a result of a voluntary change in accounting policy to commence application of the consolidation model to subsidiaries;
  • Identify enterprises that are currently subsidiaries that may have contractual arrangements with other enterprises that confer rights or powers to another enterprise, which may indicate that a more detailed control analysis is required;
  • Identify contractual arrangements that confer rights or powers on unconsolidated enterprises in order to determine if those arrangements may indicate that a more detailed control analysis is required; and,
  • Reconsider any enterprises previously consolidated under the AcG-15 guidance.

As always, please don’t hesitate to reach out to your Deloitte Private Business Advisor for more information.

Diana De Acetis Diana De Acetis
Partner, National Services

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