Consolidations (including SPEs)

Date recorded:

The Board discussed the basic framework the staff is developing for a proposed revised consolidation standard. A paper dealing specifically with SPE issues will be discussed at the September meeting.

The Board discussed the following informal objective:

...the entity reporting [is] to present information about the assets and liabilities, and the activities related to dealing with those assets and liabilities, for which it holds sufficient rights to be able to utilise or deal with as if they were its own.

Some Board members expressed concern about this statement due to the protective rights afforded minority shareholders in many jurisdictions. Others believed the focus should be on the objective of providing information that allows users to estimate the nature and timing of cash flows.

The Board disagreed with the staff proposal to consider the requirements for the presentation of separate financial statements on the basis that this was a significant area that would delay the overall consolidations project. Consequently, the Board agreed to consider presentation of separate financial statements as a separate project.

The Board discussed the tentative definition of 'control' (see below) as agreed by the Board previously together with staff recommendations related thereto. This discussion included various scenarios depicting de facto and latent control issues but did not make decisions. Some Board members indicated that there may be instances where the benefits arising from an entity should be assessed ahead of the power criterion, particularly as the control question relates to SPEs.

Definition of control (as tentatively agreed by the Board):

Control 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.

Although the staff believe that the basic thinking behind this definition is sound, the staff wish to amend it to focus on the assets and liabilities of the entity rather than the entity per se. The type of wording the staff is considering is as follows:

An entity has a controlling interest in another entity when it has exclusive rights over that entity's assets and liabilities which give it access to the benefits of those assets and liabilities and the ability to increase, maintain or protect the amount of those benefits.

There was general support from the Board of the staff's articulation of the control concept and the emphasis on the underlying assets and liabilities, not the entity.

The Board voted on whether the control question should be assessed on the basis of present interest; that is, not taking into account instruments / arrangements that may allow the investor to acquire an additional interest in the future (excluding the effect of options which are still being explored). The Board was unanimous, in favour of the present interest approach.

The board indicated general support for the direction taken by the staff on the issue of options over an entity. Specifically, some Board members commented that they believe this work looks promising. However, no decisions were made.

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