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IASB ED on consolidation

  • IASB Exposure Draft (original) Image

19 Dec 2008

The IASB has issued an exposure draft (ED) of proposed amendments to IAS 27 'Consolidated and Separate Financial Statements'.

The objective is to strengthen and improve the requirements for identifying which entities a company controls and, therefore, must include in its consolidated financial statements.

The proposals form part of the IASB's comprehensive review of off balance sheet activities and address an area cited in a Declaration of the G20 Leaders at their 15 November meeting. The proposals also respond to the recommendations contained in a Report by the Financial Stability Forum published in April 2008.

Further proposals on off balance sheet items, covering the derecognition of assets and liabilities, are due to be published in the first quarter of 2009, consistent with the G20 target date of 31 March 2009. The new standard would replace IAS 27 Consolidated and Separate Financial Statements and Interpretation SIC-12 Consolidation - Special Purpose Entities. The proposal ED 10 Consolidated Financial Statements, may be downloaded without charge from the IASB's website.

The comment letter deadline is 20 March 2009. The proposed effective date is 1 July 2009. Click for press release (PDF 48k).

Proposed definition of control of an entity

The consolidation ED proposes a new, principle-based, definition of control of an entity that would apply to a wide range of situations and be more difficult to evade by special structuring. The proposals also include enhanced disclosure requirements that would enable an investor to assess the extent to which a reporting entity has been involved in setting up special structures and the risks to which these special structures expose the entity. The proposed definition:

A reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity.

Under IAS 27, the definition is 'power to govern the financial and operating policies'. 'Power to direct the activities' is broader than 'power to govern the financial and operating policies' and, therefore, would broaden the scope of consolidation. The ED also clarifies that a reporting entity can have power even if it has not exercised its voting rights or options to acquire voting rights, or is not actively directing the activities of another entity. The ED proposes guidance on how to assess power and returns when:
  • a reporting entity has less than a majority of the voting rights
  • assessing control of a structured entity (called special purpose entity in SIC 12)

Correction list for hyphenation

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