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Consolidation

Date recorded:

Agency Relationships

The Board held a preliminary discussion of the effects of an agency relationship in consolidation. The topic will be discussed at next week's joint meeting between the IASB and FASB on 26-28 October 2009.

The staff noted that the FASB had recently amended its consolidation standards with respect to variable interest entities in which it addressed the effects on consolidation of the power to remove an agent ('kick-out' rights) and the remuneration of the agent. The IASB project seeks to address the same issues, but in a wider context, since the forthcoming IFRS would apply to all entities. Crucially, the IASB staff and the FASB are in slightly different positions at the moment. This discussion was intended to gain a preliminary understanding of why the two sides were where they were and what the key differences were.

No decisions were made at this session.

Removal rights

In SFAS 167, the FASB concluded that, in the context of variable interest entities, kick-out rights should be excluded from the determination of the primary beneficiary [that is, the accounting 'parent'] unless those rights are held by a single party. A Board member noted that it was highly unlikely that the FASB would revisit this conclusion, as the FASB was very concerned that to conclude otherwise would open the standard to structuring opportunities. However, the decision had been contentious and one not taken lightly.

IASB members were troubled by the absolute nature of this conclusion but acknowledged the difficulty in some circumstances of determining whether an entity acting in an agency capacity was in control of the entity it was managing. The Board seemed sympathetic with the staff view that kick-out rights could be held by more than one party; however, the greater the number of parties that held kick-out rights, the less likely it would be that those rights were substantive. At the same time, they wanted to hear from the FASB directly their thinking on removal rights, especially to understand their concerns about structuring opportunities and other possible abuses.

Remuneration

The staff presented three potential views of how remuneration of the agent might affect the determination of control. One view put forward by some respondents to ED10, that when (for example) a fund manager held anything less than 100% of the units if a fund should not be deemed to control the fund, was rejected by all Board members and was not discussed.

View 1 would apply the definition of control to conclude that a reporting entity controls another entity when it has decision-making authority to direct the activities, and receives a variable return from its involvement with the entity. This is the FASB's view, except that in issuing SFAS 167, the FASB viewed the issue from the agent's point of view.

View 3 would acknowledge that there are situations in which a reporting entity's returns might be more than insignificant and yet that reporting entity would still use the decision-making authority delegated to it to generate returns for other parties. When there is evidence that the reporting entity uses the delegated authority for its own benefit rather than for the benefit of other parties, it would be presumed to control the managed entity.

During the discussion, it was noted that the FASB would agree that a substantive kick-out right should be included in the determination of control; and that a substantial variable interest in the returns of an entity would be indicative of control.

The Board discussed examples distinguishing Views 1 and 3 and noted that in the IASB's analysis (that is, not considering SFAS 167) the control/consolidation decision would be different only when the manager acted in a dual capacity: as a manager and as an owner. The sense of the meeting (in the absence of any votes) was that a majority of the IASB favoured the approach in View 3. One Board member noted that he favoured View 3, but was also a 'single kick-out right' person because he did not think anything else would be operational.

Another Board member noted that he was becoming uncomfortable with using kick-out rights as an indicator of control in voting interest entities (that is, not structured entities, but operating entities). He was thinking in terms of joint ownership entities in which the owners appoint one of the owners to act as operator/manager under contract. He was still thinking about how such an arrangement might be analysed using the IASB's approach.

The IASB staff noted that they continued to work with the FASB to understand issues around the tension points that cause a different conclusion in the assessment of control.

Non-contractual agency relationships

The Board held a brief discussion of whether the forthcoming IFRS should include a list of examples of parties that often act for the reporting entity (without an assumption that they always act on behalf of the reporting entity). The Board seemed to agree that such a list might be helpful, but that any list provided should not be seen as definitive.

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