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Consolidation

Date recorded:

The staff provided a brief update on FASB's Exposure Draft (ED) to amend FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities and the IASB's draft of an ED to amend IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidations - Special Purpose Entities. The FASB released its ED on 15 September 2008, and comments are due by 14 November 2008. The FASB is holding a public roundtable to discuss the proposed amendments to Interpretation No. 46(R) and Statement No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities on 6 November 2008. The IASB staff indicated that the IASB expects to issue its ED for public comment in November 2008, with a likely comment period of 120 days.

After a brief discussion of the two consolidation models proposed by the FASB and the IASB and an acknowledgement that there are differences in the models (such as scope), a staff member suggested that the Boards consider the best path forward in developing a converged model. Given the current status of each project, the staff suggested the following three alternative approaches be considered by the Boards on how to proceed with a joint project:

  • Either the FASB or the IASB drop its consolidation model and move forward with the other Board's model.
  • Compare the FASB and IASB consolidation models to identify significant differences and converge into a single consolidation model.
  • Leave the consolidation models as currently proposed but apply each model to different example sets to determine if the models produce similar results. If similar consolidation conclusions are reached, the FASB and IASB can retain their respective model knowing that the models (while different) achieve the same ultimate conclusion.

After a significant amount of discussion, the Boards agreed on a hybrid of the second and third alternatives above. At the direction of the Boards, the FASB and IASB staff will discuss the two consolidation models and identify any potential significant differences. The staffs will apply each model to the nine examples in the FASB's ED and the five examples developed by the IASB to determine if the consolidation conclusions reached under each model are the same.

One primary reason why the FASB rejected the first alternative is the potential timing of the IASB's ED. Several FASB members pointed out that the currently proposed amendments to Interpretation 46(R) are the result of a mandate by the SEC that must be effective by 2010. These Board members expressed concern that a joint project on consolidation likely will not be effective until at best 2011 which does not satisfy the SEC's mandate. As a result, the FASB plans to proceed with its current project to amend Interpretation 46(R) but also to work with the IASB staff to ensure that any significant differences in the models are identified and resolved.

One potential significant difference that was discussed in detail relates to the concept of current control. An IASB staff member mentioned that the IASB appeared to be of the view that control should be based on the concept of current control and that potential voting rights should not be considered. While this is the view expressed in several past IASB staff drafts of the ED, the staff member acknowledged that this view was challenged at the 16 October 2008 IASB Board meeting when several IASB Board members stated that they believe potential voting rights should be considered in determining whether control exists. As support for this conclusion, those Board members pointed out that an investor that holds 60 percent of the voting interest of a particular entity would be deemed to control that entity irrespective of whether it currently exercises its voting rights. Those Board members suggest that consideration of control in this context is not consistent with ignoring potential voting rights solely because the investor has not exercised its right to obtain those voting rights. The IASB staff stated that it believes the IASB is now reconsidering its position on potential voting rights in the control assessment. However, certain IASB members stated that it did not believe the IASB is reconsidering its position on potential voting rights. The IASB will consider this issue further at a future IASB meeting. An FASB member pointed out that the discussion of current control in the context of potential voting rights is similar to the FASB's discussion of kick-out rights and that the application of current control must be consistent between both.

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