Date recorded:

Options, warrants and convertible instruments

The Board considered an analysis about whether and, if so, under what circumstances potential voting rights are sufficient for a reporting entity to have control of another entity; and whether a reporting entity should assess potential voting rights continuously when determining whether it controls another entity.

The Board held a lengthy debate during which they debated two views presented by the staff, characterised as the 'economic power view' (having an option for which it is beneficial for the holder to exercise is, of itself, power); and the 'related rights view' (for an option to give the holder the power to direct the activities of the underlying entity the option holder will need to have related rights). Board members expressed support for aspects of each view, but did not favour either view as expressed by the staff.

A majority of the Board agreed that holding an option that would, if exercised, give the holder control of an entity did not represent control (that is, there is a difference between owning an option and owning the underlying interest); however you could not ignore it either. All facts and circumstances needed to be assessed before a conclusion as to whether an entity controlled another.

A Board member was concerned and frustrated that the Board seemed content to use 'control' to mean one thing in relation to an asset and another thing in the context of consolidation. He wanted the Board, at a minimum, to acknowledge the inconsistency.

The Board agreed (10 in favour) that all facts and circumstances needed to be assessed to determine whether an entity controlled another; this assessment would consider the effects of options that would give an entity a controlling interest in another entity. However, options by themselves would not be determinative. The real test, which would be subjective in certain circumstances, was which entity is 'effectively in control' of the subsidiary. A question on this position would be included in the Invitation to Comment.

Parties acting in the role of a principal and an agent

The Board noted a previous discussion that, when assessing control, a reporting entity considers whether it acts as an agent for another party or parties. Sometimes a reporting entity might act simultaneously as a principal and agent (for example, a reporting entity might invest in a fund and simultaneously act as manager of that fund). This raises questions as to whether the fund manager controls the find and thus should consolidate that fund.

The Board noted that many of the troublesome issues in the previous discussion were present in this issue as well, and that it was critical to understand whether the fund manager's actions benefited all fund participants equally or whether its actions would benefit the fund manager disproportionately (for example, because of a performance fee).

As with all structured vehicles, it was important to understand (i) who was able to direct the strategic financial and operating decisions of the fund so as to obtain benefits. In the case in discussion, a critical issue was which parties benefited. If the fund manager's and the investors' interests were aligned, then it was likely that the find manager was acting as agent; if not, then the fund manager was likely to be acting as principal and consolidation would be appropriate.

Several Board members were of the view that in many situations, fund managers should consolidate the funds they managed-although that would not be a popular answer.

The Board agreed that find managers should apply the principles agreed in the previous section to determine whether an entity was acting as principal or agent; if acting as principal then consolidation would be required. Again, this issue would be addressed in the Invitation to Comment.

Assessing control of a structured entity

The Board discussed a staff proposal to remove from the ED the rebuttable presumption relating to the assessment of control of a structured entity, and replace it with wording that would require the assessment of both power and returns when assessing control of a structured entity.

While agreeing to remove the rebuttable presumption, the Board did not think the staff's alternative suggestion could be made operational. To make the staff's idea operational, it would be vital to assess what activities are important in the context of the structured entity and which were not.

Board members were wary of introducing invitations for structuring into the ED and discussed how best to avoid excessive rules and detailed quantitative thresholds. They were clearly struggling to find an answer that could be seen to be within the principles in the ED, yet strong enough to withstand the structuring implied in a 'structured entity'.

After some debate, the Board agreed that whether an entity would be required to consolidate a structured entity depended on:

  • (a) whether an entity held an interest in a structured entity that gave it significant influence and that interest was greater than any other individual interest; and
  • (b) whether an entity had the power to make critical operational and financial decisions in the event that things went wrong.

The Board agreed that in making this assessment, an entity would need to understand all aspects of the structured entity-it was not a mere 'counting of votes' exercise-it was an assessment of all facts and circumstances and all situations.

Board members suggested that the IASB staff should review the FASB qualitative tests proposed in its ED of revisions to FIN 46R and determine whether it would be possible to bring the US approach closer to that being proposed by the IASB.


The staff presented proposals for disclosure that were categorised as disclosure about the structure of the group, including 'individually material subsidiaries'; and restrictions within the group. While understanding the intent of these disclosures, the Board thought that the principles underlying the suggested disclosures were not clear.

Board members agreed that what was important to users was to understand the location within a group of business and other risks (such as currency or political risk) and the effect of those risks on the assets, liabilities and cash flows available to the parent entity's shareholders.

In addition, the effects of non-controlling interests on the assets, liabilities and cash flows available to the parent company shareholders was important and should be explained in the financial statements.

The Board noted that some of the disclosures might already be required or implied by the requirements in IFRS 7 and IFRS 8 and the staff should be satisfied that there was no unnecessary duplication before they proposed additional disclosures as a result of this project.

Separate financial statements

The Board agreed that the new IFRS would address consolidated financial statements only and that IAS 27 would address only separate financial statements. The new IFRS would be titled Consolidated Financial Statements; and IAS 27 would be renamed Separate Financial Statements.

Comment period

The Board agreed that in order to meet its obligations to respond to requests from the Financial Stability Forum and other high-level groups to address consolidation as a matter of urgency, the comment period deadline would be 20 March 2009. Based on the staff's estimated publication date (subject to satisfactory resolution of matters decided at this meeting), that would mean a comment period of between 90-100 days, slightly shorter than the IASB's usual 120 days. In the circumstances, the Board agreed to this shorter period.


The Board agreed that the ED would propose that the new IFRS would apply prospectively from the effective date. Retrospective application would be prohibited.

Indication of the intent to present Alternative Views in the Exposure Draft

Three Board members (Messrs Garnett, Leisenring and Smith) indicated that they are likely to present an Alternative View in the Exposure Draft. In particular, they were concerned that the Board had not articulated clearly what is the objective of consolidation and that the Board was being inconsistent about the treatment of options as between the ED and other IASB authoritative material.

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