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Consolidation

Date recorded:

Control model

The Boards revisited the issue of control in the context of power with less than half of the voting rights in an entity that the Boards discussed at their meeting earlier that week.

After a brief discussion, the majority of FASB members agreed to proceed with the ability view but suggested that an alternative view shall be described in the FASB Exposure Draft.

The Board members were concerned by implications of the model but supported it as they believed that if appropriately worded (specifically stating that all facts and circumstances and not only voting rights are to be considered), they might be able to support it.

The IASB Chairman noted that the discussed views are not that far apart (they render a different answer only in one of the 13 illustrative examples, and both are based on ability model) and the remaining difference might be addressed by drafting.

Some Board members disagreed and voiced their previously stated objections - shareholder activism, potential for frequent changes of control, lack of operationality, and potentially large balances of non-controlling interest on the statement of financial position.

Disclosures

The Boards started to discuss the disclosure package for the consolidation Standard (even though that disclosure package would be merged to a single standard with disclosures related to associates and joint ventures).

Principles and Objectives

The staff presented a proposal for articulation of concise disclosure objectives that would require a reporting entity to disclose information that enables users of financial statements to understand:

  1. the composition (and changes in the composition) of the group;
  2. the effect of legal structures within the group, and changes to those structures, on the reporting entity's ability to access and use assets and resources of consolidated entities; and
  3. the nature of, changes in, the risks associated with the reporting entity's involvement with structured entities.

The Board agreed in principle with proposed disclosure objectives. Nonetheless, several Board members expressed concerns with the wording of the principle: they considered it to be, on one hand, too general, but in some circumstances too restrictive (for example, focused only on legal structure and not covering also contractual and regulatory limitations).

One Board member was concerned about a separate set of disclosures of structured entities and suggested requiring them for all entities as they are mostly risk disclosures (rather than specific disclosures for structured entities).

Finally, the Board asked the staff to better articulate those objectives in the drafting of the Standard/Exposure Draft.

The Boards also agreed with a aggregation principle that would allow the reporting entity to aggregate disclosure for similar items but would not allow it to combine disclosures for consolidated entities with those for unconsolidated entities.

Disclosures for Subsidiaries

After a brief discussion in which several Board members questioned the relevance and usefulness of the disclosures, the Boards agreed that a reporting entity should disclose:

  1. all significant judgements and assumptions in determining whether it controls another entity; and
  2. any changes in its control assessments that require significant judgement and the reasons for those changes.

The Boards also agreed not to require the reporting entity to disclose accounting consequences of its significant judgements and assumptions in determining whether it controls another entity.

The Boards continued to discuss the requirement to disclose the interest that the non-controlling interests have in the performance, cash flows, and net assets. After a brief discussion, the Boards concluded that the proposed disclosures would be too vague and asked the staff to provide more specific disclosures (that is, cash flows from dividends that would go to non-controlling interests).

Subject to drafting suggestions and concerns about exact wording, the Boards agreed that a reporting entity should disclose the nature of restrictions that are a consequence of assets and liabilities being held by the parent or its subsidiaries. As part of those disclosures the reporting entity should disclose the nature of rights held by the NCIs that go beyond typical protective rights set out in legislation.

Finally, the Boards agreed that a reporting entity should be required to disclose the lack of recourse of creditors (or beneficial interest holders) to the general credit of other entities within the group.

The Boards were split on the requirement to disclose a list of significant subsidiaries including the name, country of incorporation, proportion of ownership interest, proportion of voting rights held, and summarised financial information about the subsidiary. Many Board members thought that these requirements were onerous and might be meaningless and confusing, as many subsidiaries are created for tax reasons and this legal structure is not the same as business structure.

The Boards asked the staff to narrow down the required disclosures to significant subsidiaries and consider the level of information required.

The Board also asked the staff to reconsider and specify the requirement to disclose qualitative and quantitative information about its involvement with a consolidated structured entity and related explicit financial support arrangements.

Implicit obligations to provide support

The Board agreed to require disclosure of support provided by the reporting entity to structured entities to ensure structured entities continue operating as designed. In particular, the reporting entity should disclose:

  1. the type and amount of support provided, including situations in which the reporting entity assisted the structured entity in obtaining another type of support;
  2. an explanation of why the support was provided; and
  3. an explanation of how the provision of support resulted in the reporting entity controlling the structured entity, if applicable.

The Boards were split on the requirement to disclose information about the reporting entity's current intention to provide non-contractual support in the future. Some Board members were concerned that such disclosure could trigger various legal arrangements that in effect might make the implicit support enforceable. In their opinion, only an actual decision should create disclosure (and potentially even liability). The Boards briefly discussed the tie between this requirement and the disclosure requirements of IAS 37. Some Board members were concerned that the decision on classification and measurement of financial liabilities could be based on intent whereas this disclosure could not.

Finally, the FASB agreed to present both views in the forthcoming Exposure Draft. The IASB would discuss the issue at a future meeting.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.