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Consolidation

Date recorded:

The staff introduced the new consolidation draft highlighting the changes made to the previous draft. It noted that the term 'significant involvement' was dropped due to the similarity to 'significant influence' as used in IAS 28.

General comments

Some of the Board members expressed their concern over the emphasis that was put on beneficial interest which was mentioned before control. The Board reminded the staff that control is the underlying principle for consolidation and that the draft should reflect this. The staff agreed that the section on beneficial interest would be moved in part to the section on structured entities and elaborated on in the Appendix.

The Board also decided to replace the core principle paragraph on control with a paragraph from the section on control:

A reporting entity controls another entity when it has the power to direct the activities of that entity for its benefit.

Some Board members objected to the extended use of adjectives that blurred the core principles and made the text unnecessarily long. The staff agreed once the structure of the document was stabilised the wording would be cleaned up. It was also agreed to make clear where there are presumptions and when these presumptions are rebuttable.

The staff agreed with comments received from the Board that benefits in some paragraphs of the draft seemed to be positive only. This would be made clear. This would also avoid any interpretation that once an interest has not the ability to create profits anymore (just losses) that this would indicate a loss of control.

Control of an entity

The Board had some debate on this aspect of the draft. The issue of options was discussed. The draft indicated that options that could be exercised for little or no consideration would be included in the assessment of control. Some Board members disagreed, arguing that control means 'current control' whereas options require that further action must be taken. In their view, the control principle means present control rather than the ability to obtain control?

One Board member noted that he sees no merit in considering the purpose of the entity for the assessment of control.

Assessing control

The Board agreed that the principle in assessing control was the controlling of the strategic operating and financing policies of an entity. Again, it was discussed whether this control must be actually exercised or whether the entity merely had the ability to exercise this control. Furthermore, the Board asked the staff to make clear what factors were indicative and which were presumptive. The staff was also directed to make consistent use of terms meaning the same thing throughout the document. It was also unclear to some Board members what was meant by 'performance of the entity', a term whose definition is proving difficult in the financial statement project.

Some Board members had difficulties with the guidance on de facto control. The underlying principle was that an entity must have more power than anyone else, but the words would need some redrafting.

Structured entities

Some Board members reemphasised their reservations about having a separate section on something that was not defined. This section will be redrafted incorporating some of the guidance on beneficial interests.

Next steps

The staff informed the Board that they will test the principle of this draft with the nine examples set out in the proposed US GAAP guidance and five of the staff's own examples. A new draft would be sent to the Board very shortly.

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.