FYI Article – Consolidations: No More AcG-15 Headaches for Private Enterprises!
In September 2014, the Accounting Standards Board (AcSB) issued Section 1591, Subsidiaries, which replaced Section 1590, Subsidiaries, and Accounting Guideline AcG-15, Consolidation of Variable Interest Entities in Part II of the CPA Handbook – Accounting.
Why Were Changes Made?
When the standards in Part II were developed, AcG-15 was identified as causing significant difficulty for private enterprises. AcG-15 was based on parts of U.S. GAAP that were recognized as needing improvement and that were replaced subsequent to the adoption of AcG-15 by the U.S. Financial Accounting Standards Board (FASB) issuance of Interpretation 46(R), Consolidation of Variable Interest Entities. In addition, the International Accounting Standards Board (IASB) was revising its consolidation standard to replace the guidance previously in International Financial Reporting Standards (IFRSs) on broadly the same issue as that addressed by AcG-15. Therefore, the AcSB committed to taking on a project to replace the AcG-15 guidance once the IASB’s work was completed, so that the AcSB could benefit from both the work of the IASB and the FASB. Implementing multiple changes in the short term, or coming to final conclusions that were not converged, would not serve the needs of private enterprises.
The AcSB, with the advice of the Private Enterprise Advisory Committee, reviewed IFRS 10 Consolidated Financial Statements to determine how appropriate it would be for Canadian private enterprises. The AcSB chose to adopt some concepts from IFRS 10 while minimizing the changes for private enterprises.
What Has Changed?
Section 1591 includes additional guidance that requires the use of judgment to determine when control is obtained through means other than equity interests. This guidance includes a description of when an enterprise has control through contractual rights and circumstances an enterprise could consider when determining control while using professional judgment.
Based on the feedback received from stakeholders, the AcSB decided to clarify and provide additional examples and guidance concerning types of contractual arrangements and circumstances that may give one enterprise control over another. Other than this change, minor drafting changes were made to the Exposure Draft proposals as a result of the feedback received from stakeholders.
In accordance with the AcSB’s due process requirements, the AcSB discussed whether re-exposure was required as a result of the changes made. The AcSB decided it was not necessary as the only change made was to provide additional examples of contractual arrangements to consider when evaluating control over another enterprise.
What Was Not Changed?
The guidance on enterprises controlled through voting interests remained consistent, including the definition of control. As well, the AcSB thought that the accounting policy choice to account for subsidiaries using the cost or equity method should be retained. The AcSB understands that the accounting policy option is widely used in practice and that the cost/benefit rationale for providing those options remains unchanged. Therefore, the AcSB decided to modify Section 1590 by incorporating adapted guidance from IFRS 10.
Transitional Provisions and Effective Date
Section 1591 transitional guidance provides relief for enterprises that prepared consolidated financial statements previously, and those that choose to prepare consolidated financial statement for the first time, when applying the new standard.
The guidance provides a choice of methods to measure the assets, liabilities and non-controlling interests in each previously unconsolidated enterprise on a subsidiary-by-subsidiary basis, when the information is available. The option to apply the acquisition method in Section 1582, Business Combinations, would result in an enterprise preparing the most complete set of consolidated financial statements. However, the AcSB recognizes that applying the acquisition method can be time consuming and costly for some enterprises. Therefore, the guidance includes the option to use the carrying amounts of the assets and liabilities of the previously unconsolidated enterprise. When applying those options, the standard also permits an enterprise to measure any item of property, plant and equipment at fair value at the beginning of the comparative period, to be consistent with the option provided in Section 1500, First-Time Adoption.
Some enterprises that choose to prepare consolidated financial statements for the first time when applying the new standard might have subsidiaries that have not prepared financial information in accordance with accounting standards for private enterprises previously and may lack the information to do so. In those situations, the transition guidance permits the enterprise to measure the assets, liabilities and non-controlling interests by applying the acquisition method in accordance with Section 1582 without the recognition of any goodwill and intangible assets, as of the beginning of the comparative period. The AcSB excluded those assets because internally generated goodwill and intangible assets would not otherwise have been reported, and it would be difficult to distinguish between assets that were subject to acquisition accounting and those that were internally generated.
The AcSB also provided relief for enterprises that would no longer be required to consolidate an enterprise that it had consolidated previously.
The new standard is effective for fiscal years beginning on or after January 1, 2016. Earlier application is permitted.
For additional information on the revised guidance, see the Consolidations project page and watch for the Basis for Conclusions document.
Katharine Christopoulos, CPA, CA, CPA (Illinois)
Principal, Accounting Standards Board
Phone: +1 (416) 204-3270