Consolidations

BACKGROUND

A simpler approach to identify and account for variable interest entities (VIEs) will be developed.

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AcG-15 Consolidation of Variable Interest Entities has been seen in practice as problematic, requiring significant effort to understand and apply.

The IASB has issued IFRS 10 Consolidated Financial Statements that deals with consolidation on a single comprehensive basis. The AcSB will consider this and other consolidation standards to develop appropriate guidance for the consolidation of interests in variable interest entities by private enterprises. This project will not affect those private enterprises that use the accounting policy options to account for subsidiaries using the cost or equity methods of accounting. 

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PROJECT NEWS

Basis for Conclusions – Subsidiaries – Section 1591
March 30, 2015. This document sets out how the AcSB reached its conclusions. As well, it sets out significant matters arising from comments received in response to its Exposure Draft and indicates how the Board dealt with the issues raised.

FYI Article – Consolidations: No More AcG-15 Headaches for Private Enterprises!
December 19, 2014. This article discusses key aspects of the AcSB’s recently issued Section 1591, Subsidiaries.

Final Standard – Consolidations
September 5, 2014. The AcSB issued the new Section 1591, Subsidiaries, which replaces Section 1590, Subsidiaries, and AcG-15, Consolidation of Variable Interest Entities. Section 1591 includes additional guidance to judge when control is obtained through means other than equity interests. This standard is effective for fiscal years beginning on or after January 1, 2016 with earlier application permitted.

AcSB Decision Summary – March 18-19, 2014
The AcSB approved the issuance of Section 1591, Subsidiaries, subject to final drafting and a written ballot.  The new standard will replace Section 1590, Subsidiaries, and Accounting Guideline AcG-15, Consolidation of Variable Interest Entities.  Section 1591 will provide new guidance on circumstances in which an enterprise controls another entity through mechanisms other than voting rights associated with a majority shareholding.

The AcSB decided to clarify and provide additional guidance concerning which types of contractual arrangements may give one entity control over another. The AcSB agreed that, other than drafting improvements, no other changes to the Exposure Draft proposals were required as a result of the feedback received from stakeholders.

The AcSB expects to issue Section 1591 in the third quarter of 2014. The new standard will be effective for fiscal years beginning on or after January 1, 2016. Early adoption will be permitted.

Private Enterprise Advisory Committee Notes – February 24, 2014
The Committee finished its discussion on outstanding issues regarding the responses received on the Exposure Draft, “Consolidations,” issued in August 2013.

AcSB Decision Summary – January 15, 2014
The AcSB considered responses to its August 2013 Exposure Draft, “Consolidations.” The AcSB agreed to clarify and provide additional guidance concerning which types of contractual arrangements may give one entity control over another. The AcSB agreed that, other than drafting comments, no other changes to the Exposure Draft proposals were required as a result of the feedback received from stakeholders. The AcSB will review a revised draft of the standard at its March 2014 meeting.

Private Enterprise Advisory Committee Notes – December 10, 2013
The Committee discussed the responses received on the Exposure Draft, “Consolidations,” issued in August 2013. The Committee agreed that the types of contractual arrangements that provide control should be clarified. The Committee agreed to recommend to the AcSB that the proposals set out in the Exposure Draft be finalized substantially as exposed, with the addition of this clarification.

Roundtable Discussions – Stakeholders’ Views Sought on Proposals on Consolidations and Joint Arrangements
October 24, 2013. Register to attend a roundtable discussion to share your views on the AcSB’s Exposure Drafts.  

Webinar – Revised Standards on Consolidations, Joint Arrangements and Investments
August 22, 2013. Tune in to this webinar on September 16 (English) or October 18 (French) to get details about the AcSB’s Exposure Drafts on these topics. The webinar will help you prepare your responses to the proposals, due November 11, 2013.

Exposure Draft – Consolidations
August 8, 2013. The AcSB has issued an Exposure Draft that proposes to include guidance on consolidation of subsidiaries in Section 1591, Subsidiaries. Stakeholders are encouraged to submit their comments, on the form provided, by November 11, 2013.

AcSB Decision Summary – March 19-20, 2013
The AcSB finished discussing how to revise Section 1590, Subsidiaries, to address enterprises that are controlled through mechanisms other than voting rights.  The AcSB agreed with the recommendations of its Private Enterprise Advisory Committee that the revised guidance should not apply to contractual arrangements between enterprises under common control. Control of enterprises under common control is generally in the form of a voting interest. Requiring an assessment of whether control arises through contractual arrangements would not satisfy the cost/benefit criterion.

The AcSB discussed and reconfirmed the guidance on transitional provisions, including the option to fair value any item of property, plant and equipment at the beginning of the comparative period, as recommended by the Advisory Committee. The AcSB also decided to incorporate the transitional provisions from the revised guidance into Section 1500, First-time Adoption, so that first-time adopters are provided relief when preparing consolidated financial statements for the first time. 

The AcSB decided to provide general guidance on protective and participating rights, rather than guidance on specific fact patterns such as franchises, in order to make the guidance broadly applicable. Intercompany transactions may arise between an enterprise and subsidiaries controlled through means other than voting interests. When the enterprise is preparing non-consolidated financial statements and control is the only basis for the related party relationship, the AcSB reconfirmed that Section 3840, Related Party Transactions, should not apply to such transactions.

The AcSB approved the proposed revisions for public exposure, subject to final drafting and a written ballot. The exposure draft is expected to be issued in the third quarter of 2013.

Request for Examples – Subsidiaries Controlled Through Contract
January 30, 2013. The AcSB is seeking examples of contractual arrangements commonly used by private enterprises that could provide an enterprise with control over another enterprise. Examples will be used to test proposed guidance. Submit your examples by February 25, 2013.

Private Enterprise Advisory Committee Meeting Notes – December 11, 2012
The Committee continued its discussions on developing new guidance to replace Accounting Guideline AcG-15, Consolidation of Variable Interest Entities.

The Committee discussed the application of the new guidance to common control scenarios. The Committee agreed that, in most circumstances, voting control is the key factor for determining control when considering common control scenarios and that requiring these enterprises to complete an assessment of control could be excessive. On this basis, the Committee recommended that enterprises preparing consolidated financial statements should not be required to assess enterprises are under common control.

AcSB Decision Summary – November 7-8, 2012
The AcSB approved amendments to other standards that would arise from the proposals to replace Accounting Guideline AcG-15, Consolidation of Variable Interest Entities, including amendments to Section 3840, Related Party Transactions. The AcSB decided that the requirements of Section 3840 should not apply to intercompany transactions between an enterprise and subsidiaries controlled through means other than voting interests when the enterprise is preparing non-consolidated financial statements and control is the basis for the related party relationship.

The AcSB also reassessed the proposed disclosure requirements in Section 1590, Subsidiaries, as a result of its September 2012 decision not to use the description “special purpose enterprise”.  The AcSB decided that the AcG-15 requirements to disclose significant restrictions on access to the assets of subsidiaries should be retained and applied to all subsidiaries when an enterprise is preparing consolidated financial statements.

Private Enterprise Advisory Committee Notes – September 21, 2012
The staff updated the Committee on the discussions on this project at recent AcSB meetings. The Committee agreed with the current approach and will continue to discuss this project at future meetings.  

AcSB Decision Summary – September 5-6, 2012
The AcSB considered how to revise Section 1590, Subsidiaries, to address enterprises that are controlled through mechanisms other than voting rights.  The AcSB decided to provide additional guidance for enterprises to evaluate whether contractual arrangements confer control over another enterprise and the ability to obtain future economic benefits from it.  The AcSB decided to modify a decision reached in its July 2012 discussion and not use the description “special purpose enterprise” because it could be read as excluding some subsidiaries.  Instead, the AcSB concluded that it would be practical for enterprises to look directly to whether they have the continuing power to determine the strategic operating, investing and financing policies of another enterprise.  When an enterprise is considering whether it has control and the ability to obtain future economic benefits, it would be required to consider all facts and circumstances, such as its involvement in the design of the other enterprise and any call or liquidation rights.

The AcSB decided to include guidance on franchise arrangements in the revised standard, based on the guidance in IFRS 10 Consolidated Financial Statements. The AcSB directed that the exposure draft be accompanied by examples to demonstrate the application of the guidance.

The AcSB also decided that an enterprise that applies the new guidance, or chooses to begin preparing consolidated financial statements when the guidance becomes effective, should:

  • assess which enterprises it controls as at the date of transition;
  • restate its comparative information for the immediately preceding period;
  • use financial information of subsidiaries that has been prepared in accordance with accounting standards for private enterprises; and
  • decide, for each subsidiary separately, whether to: account for the subsidiary retrospectively when the information to do so is available; use the carrying value of the subsidiary’s assets and liabilities, if determinable; or measure the subsidiary’s recognized tangible assets and liabilities at fair value as of the beginning of the immediately preceding period.  

The AcSB also asked the staff to assess whether the same relief should be provided to enterprises on the first-time adoption of accounting standards for private enterprises.

The AcSB expects to issue an exposure draft in the third quarter of 2013 after additional testing of the proposed guidance.

AcSB Decision Summary – July 11, 2012
The AcSB discussed the recommendations of its Private Enterprise Advisory Committee regarding proposed guidance on an enterprise controlled through a mechanism other than voting rights. The AcSB decided that the guidance should apply when an enterprise controls another enterprise through factors other than ownership of an equity interest. The AcSB agreed that using a description of these arrangements should provide a practical way to identify arrangements for which an entity would then need to judge whether it controls the other enterprise. The proposed guidance should also include elements from IFRS 10 Consolidated Financial Statements and the IASB’s IFRS for Small and Medium-sized Enterprises. These arrangements should be referred to as special purpose entities. The AcSB also directed the staff to conduct additional testing of the proposed guidance for evaluating special purpose entities and identifying those that are controlled.

The AcSB reiterated that the objective of the project on consolidations is to eliminate Accounting Guideline AcG-15, Consolidation of Variable Interest Entities, from Part II of the Handbook and replace it with simplified guidance on when an entity consolidates special purpose entities.

Private Enterprise Advisory Committee Notes – June 18th, 2012
The Committee continued its discussions on how to account for variable interest entities. It noted the AcSB’s objective of ensuring that the standard provides guidance to enable preparers to use judgment when determining the special purpose entities an enterprise controls and that the guidance to be created should be consistent with the control model in IFRS 10 Consolidated Financial Statements.

The Committee discussed the description of a special purpose entity currently found in the IFRS for Small and Medium-sized Entities, issued by the International Accounting Standards Board, noting that it contains a two stage process – first determining entities that are “special purpose” and then addressing whether these are controlled by the entity. The Committee thought that a narrower, more focused description would make it easier for private enterprises to identify relevant special purpose entities and reduce the number of special purpose entities for which the existence of control had to be examined. The Committee suggested that elements from the criteria for determining whether control exists be incorporated into the description of a special purpose entity.

The Committee began discussions of transition. It recommended that entities should assess control at the date of transition and comparative information should be provided. The Committee recommended initial measurement of assets, liabilities and non-controlling interests at carrying value with an option to allow measurement at fair value. It was also noted that entities changing their accounting policy choice to prepare consolidated financial statements should be provided with one-time relief to account for voting interests at transition rather than mandatory retrospective application.

AcSB Decision Summary – May 9-10, 2012
The AcSB discussed recommendations from its Private Enterprise Advisory Committee regarding what an entity should disclose about entities it controls through a mechanism other than voting rights. The AcSB emphasized the importance of an entity disclosing information about these arrangements in the financial statements to enable users to identify the nature and risks of these arrangements. The AcSB tentatively decided to retain the disclosure requirement in Accounting Guideline AcG-15, Consolidation of Variable Interest Entities, regarding limits on access to the assets of an entity controlled through a mechanism other than voting rights and limits on recourse by the creditors or other parties against such an entity. The AcSB also began discussions regarding transitional provisions that would be required in the revised standard. The AcSB directed the staff to consult with the Committee on those recommendations. The AcSB expects to issue an exposure draft on this topic later this year.

Private Enterprise Advisory Committee Notes – March 22, 2012
The Committee continued its discussions on how to account for variable interest entities. The discussions focused on disclosures and transition provisions for a revised consolidation standard. The Committee came to preliminary recommendations, agreeing to revisit disclosures once a draft of the revised standard has been prepared. The Committee will continue discussions on this topic at a future meeting.

AcSB Decision Summary – March 20-21, 2012
The AcSB agreed with the Private Enterprise Advisory Committee’s assessment that Accounting Guideline AcG 15, Consolidation of Variable Interest Entities, often requires significant effort to apply and is inconsistent with more recent international consolidation guidance. To address the concerns, the AcSB tentatively decided to develop guidance in Section 1590, Subsidiaries, on how to determine whether an enterprise controls an entity through a mechanism other than voting rights. That guidance would be based on the language in the IASB’s IFRS for Small and Medium-sized Enterprises and consistent with the principle in IFRS 10 Consolidated Financial Statements. The AcSB requested the staff to work with the Private Enterprise Advisory Committee to develop the guidance.

Private Enterprise Advisory Committee  Notes – February 3, 2012
The Committee continued its discussions on how to account for variable interest entities.

The Committee agreed that adding a requirement to Section 1590, Subsidiaries, to describe a controlled variable interest entity may permit significant simplification to the accounting treatment. It also agreed that using the description of a special purpose entity as stated in the IFRS for Small and Medium-sized Enterprises would be a good starting point for revising Section 1590.

The Committee also discussed the possibility of including a separate option to consolidate only entities controlled through voting interests in Section 1590. Members noted that there is a risk of significantly harming the quality of accounting standards for private enterprises, as a whole, if issues are addressed by adding more optional accounting treatments. Accordingly, the Committee decided that adding an option to consolidate only entities controlled through voting interests would be undesirable.

Private Enterprise Advisory Committee Notes – December 13, 2011
The Committee reconfirmed that applying Accounting Guideline AcG-15, Consolidation of Variable Interest Entities, is a significant problem in practice. Consistent with its earlier discussion on incorporation of IFRSs, the Committee agreed that requirements for consolidating variable interest type arrangements should be incorporated into existing consolidation standards, rather than replacing the existing standards with a new standard based on IFRS 10 Consolidated Financial Statements. The Committee requested staff to develop this approach for discussion at a future meeting.

Private Enterprise Advisory Committee Notes – September 15, 2011
The Committee continued its discussion of how IFRS 10 Consolidated Financial Statements should be incorporated into Part II of the Handbook. The recommendations of the Committee will be provided to the AcSB. Discussions focused on a number of individual technical aspects set out as follows:

Accounting Policy Choice
The Committee concluded that the existing accounting policy choice in Section 1590, Subsidiaries, should be retained.

Loss of Control
The Committee agreed that after a loss of control an investment should be measured at cost. The Committee noted that measuring an investment at fair value would not meet a cost/benefit test for private enterprises.

Reciprocal Shareholdings
The Committee concluded that this issue was rare amongst private enterprises; however, it agreed that the existing guidance in accounting standards for private enterprises should be retained as it is useful if and when these situations occur.

Common Control Transactions
The Committee concluded that existing guidance in Accounting Guideline AcG-15, Variable Interest Entities, should not be retained.

Franchise Agreements
The Committee noted that guidance on franchise agreements is provided in IFRS 10 and concluded the existing guidance in AcG-15 should not be retained.

Additional Accounting Policy Options
The Committee discussed two additional accounting policy options suggested by stakeholders:

  • allowing a private enterprise to pick and choose the entities it wishes to consolidate; and
  • allowing consolidation of only entities that are controlled based on voting rights.

The Committee noted that a “pick and choose” option would be inconsistent with the conceptual framework and could also be confusing to financial statement readers. The Committee recognized that users sometimes request financial statements that only consolidate certain entities but noted that this can usually be addressed by producing combined financial statements. The existing standards adequately address combined statements. The Committee did not support a pick and choose approach.

The Committee asked staff to perform additional analysis of an option to permit consolidation of only entities that are controlled based on voting rights and present the results of such research at a future meeting.

Private Enterprise Advisory Committee Notes – June 21, 2011
The Committee confirmed that the new consolidation model, as set out in the recently issued IFRS 10 Consolidated Financial Statements, should be included in accounting standards for private enterprises.

The Committee agreed that, based on cost/benefit considerations, the control model in IFRS 10 should be incorporated into accounting standards for private enterprises. The Committee noted the target date for an exposure draft is 2012 and agreed to consider other issues in respect of adopting IFRS 10 at a future meeting.

 

Disclaimer: This project summary has been prepared for information purposes only. Decisions reported are tentative and reflect only the current status of discussions on this project, which may change after further Board deliberations. Decisions to publish Handbook material are final only after a formal ballot process.