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Consolidation

Date recorded:

The Boards started their discussion by assessing consistency of the control model. The staff presented the Boards an overview of the control model and noted that all outstanding issues in the control model should be addressed during two sessions at this joint meeting.

The staff pledged that the next due process document (Exposure draft for the FASB and draft of the Standard for the IASB) was planned to be published in Q2 2010 (most probably in May).

Consistency within the control model

The Boards re-discussed the concept of power in the context of power with less than half of the voting rights in an entity that the Boards discussed at the January 2010 meeting. At the January meeting it was obvious that different Board members held different views, and the Boards asked the staff to provide an analysis which of the four views presented was most internally consistent with the overall control model.

The four discussed views were as follows:

  1. The 'contractual rights' view that asserts that a reporting entity must have legal or other contractual right to direct in order to have power. As the staff clarified this is a basic view that is embedded in all other views (that is, the most narrow scope of consolidation)
  2. The 'exercise of power' view that asserts the notion of active managing. The view stated that if a reporting entity was actively directing the activities of the entity, it has the power unless kick-out right prevent the reporting entity from directing the activites.
  3. The 'ability to' view with evidence that asserts an ability view supported by evidence that the reporting entity directs the activities.
  4. The 'ability to' view that did not require any evidence or demonstration.

The staff clarified these concepts by a comprehensive set of examples and application of all four views to each of them.

In a replay of the January debate the Boards discussed thoroughly the issue, reflecting multiple arguments for and against each view.

One FASB member noted that the staff should consider a broader definition of contract that would reflect not only control by voting rights but also impact on policies or decisions.

Some IASB and FASB members noted that all facts and circumstances should be considered in assessment of control and judgement would be required in application of any (b) to (d) views to depict the economic reality better. In addition some of the Board members did not see much difference between (b) and (c) and (c) and (d) views.

One IASB member noted that he would be able to support the contractual rights view (that is simple and clear) but only on the condition that equity method accounting was abolished and all interest in non-consolidated entities were measured at fair value through profit or loss.

Some Board members tried to incorporate some refining concepts in the discussion as perpetuation of control and its persistency. Nonetheless, these concepts did not gain widespread support.

Finally, majority of the IASB supported the 'ability to' view with evidence. Nonetheless, the IASB members interpreted the evidence as 'evidence to have the ability' (that is, no demonstration is required). The narrow majority of the FASB was also in the 'ability to' view with evidence. Nonetheless, the FASB members understood the evidence as 'evidence of control' (evidence of what is demonstrated to be done). Remaining two FASB members remained firmly in the contractual rights view.

The IASB Chairman noted that despite remaining differences, the Boards managed to bridge the gap in their two views. He stressed that the remaining difference is relatively narrow. The Boards agreed that the staff would prepare clarification of these two views and its application for the continuation of the discussion the following week.

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