Consolidation and Special Purpose Entities

Date recorded:

The Board discussed the timetable and the contents of the project on consolidation, and in particular, special purpose entities (SPEs). The staff proposed that a final Standard could be issued on March 2004 - a timeline several Board members found ambitious. The staff also proposed to address SPEs first and consolidation second. One Board member noted that the general principle should be the same and that it may be useful to reverse that order.

One Board member noted that until the IASB decides whether the underlying principle for consolidation should be legal control, latent control, or effective control, this project cannot progress. One Board member clarified that effective control means the entity currently has control, while latent control implies that the entity has the ability to obtain control (for instance, by exercising options that would give it controlling voting power). There seemed to be general agreement in favour of the effective control principle.

The staff noted that the result of this project (while still undetermined) may be a new IFRS on consolidations-replacing IAS 27.

Some Board members want to include in this project the issue of derecognition of leases and financial assets, to obtain consistency on the treatment of these transactions. All agreed that they first have to redefine the notion of control in IAS 27 - whether it is a legal or effective control - before considering SPEs. Discussion of this issue should be planned with the FASB.

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