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Consolidation

Date recorded:

The Board has begun using 'Control', rather than 'Consolidation', as the name of this project. The last time the Board discussed the project was at its November 2004 meeting. At that time the Board asked the staff to proceed with preparing an exposure draft to incorporate into IAS 27, sooner rather than later, the considerable material and guidance the Board has developed on the concept of control as it would apply generally.

The purpose of this session was to:

  • outline the issues the staff view as critical in determining the timing and development of a revised standard on control;
  • review the decisions to date and identify those matters on which the staff intend to bring additional analysis to the Board;
  • present a project plan for the Control Project.

The following issues were discussed:

The Board pointed out that this is not a convergence project at present, but at some point it will become so. Given the differences between IFRSs and US GAAP in this area, the IASB had decided to continue working on IAS 27 and then the FASB would consider converging at a later point in time.

It was clarified that the Board would not seek to revisit IAS 28 and IAS 31 as part of this project but would merely ensure consistency between the notion of control and that of joint control and significant influence.

Some Board members indicated their intention to consider potential issues regarding the control notion as it applies to individual assets versus the application to entities. Furthermore, the issue of whether an SPE is really an entity should be explored or whether it is merely a group of individual assets.

Concern was expressed about the tentative definition of control which some members believed would not capture certain SPEs. The tentative definition (as per the observer notes) is as follows:

"Control of an entity is the ability to direct the strategic financing and operating policies of an entity so as to access benefits flowing from the entity and increase, maintain or protect the amount of those benefits."

It was agreed that a flow chart would not be incorporated into the standard, as this would result in a 'checklist' approach to the assessment of control.

Regarding options, one Board member indicated that the right to exercise an option does not necessarily give control over the underlying entity. The current holder of the actual controlling interest is to be viewed as presently in control. Therefore, control over the option instrument does not translate to control over the underlying entity / asset. Some Board members indicated their intention to explore whether the 'benefits' requirement is fulfilled where an option has a strike price that is relatively high to the extent that the total return to the option holder is adversely affected.

The staff intends to make the disclosures consistent between investments in subsidiaries falling within the scope of IAS 27 and those that are accounted for in terms of IAS 39.

The Board noted that certain issues related to the control notion had been brought to the attention of some Board members (such as controlling minority shareholders) and directed that where these can be easily dealt with by IFRIC for the sake of timely guidance, this should be the route taken for those issues.

No decisions were made during this session.

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.