BASIS FOR CONCLUSIONS ON IFRS 10 ACCOUNTING REQUIREMENTS

BASIS FOR CONCLUSIONS ON IFRS 10 ACCOUNTING REQUIREMENTS

Accounting requirements

Consolidation procedures

The application requirements in IFRS 10 explain how potential voting rightsshould be accounted for in the consolidated financial statements.

Non-controlling interests (2003 revision and 2008 amendments)

The 2008 amendments to IAS 27 changed the term ‘minority interest’ to‘non-controlling interest’. The change in terminology reflects the fact that the owner of a minority interest in an entity might control that entity and,conversely, that the owners of a majority interest in an entity might not control the entity. ‘Non-controlling interest’ is a more accurate description than‘minority interest’ of the interest of those owners who do not have a controlling interest in an entity.

Non-controlling interest was defined in IAS 27 as the equity in a subsidiary not attributable, directly or indirectly, to a parent (this definition is now in IFRS 10).Paragraph 26 of IAS 27 (as revised in 2000) required minority (non-controlling)interests to be presented in the consolidated balance sheet (statement of financial position) separately from liabilities and the equity of the share holders of the parent.

BASIS FOR CONCLUSIONS ON IFRS 10 ACCOUNTING REQUIREMENTS

As part of its revision of IAS 27 in 2003, the Board amended this requirement to require minority (non-controlling) interests to be presented in the consolidated statement of financial position within equity, separately from the equity of the shareholders of the parent. The Board concluded that a minority(non-controlling) interest is not a liability because it did not meet the definition of a liability in the Framework for the Preparation and Presentation of Financial Statements (replaced in 2010 by the Conceptual Framework for Financial Reporting).

Instead, the Board noted that minority (non-controlling) interests represent the residual interest in the net assets of those subsidiaries held by some of the share holders of the subsidiaries within the group, and therefore met the Framework’s definition of equity.

BASIS FOR CONCLUSIONS ON IFRS 10 ACCOUNTING REQUIREMENTS

Attribution of losses (2008 amendments)

IAS 27 (as revised in 2003) stated that when losses attributed to the minority (non-controlling) interests exceed the minority’s interests in the subsidiary’s equity, the excess, and any further losses applicable to the minority, is allocated against the majority interest except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

In 2005 the Board decided that this treatment was inconsistent with its conclusion that non-controlling interests are part of the equity of the group, and proposed that an entity should attribute total comprehensive income applicable to non-controlling interests to those interests, even if this results in the non-controlling interests having a deficit balance.

BCZ162 If the parent enters into an arrangement that places it under an obligation to the subsidiary or to the non-controlling interests, the Board believes that the entity should account for that arrangement separately and the arrangement should not affect how the entity attributes comprehensive income to the controlling and non-controlling interests.

BASIS FOR CONCLUSIONS ON IFRS 10 ACCOUNTING REQUIREMENTS

Other respondents disagreed, often on the grounds that controlling andnon-controlling interests have different characteristics and should not be treated the same way. They argued that there was no need to change the guidance in IAS 27 (as revised in 2003) (ie that an entity should allocate excess losses to the controlling interest unless the non-controlling interests have a binding obligation and are able to make an additional investment to cover the losses).

The reasons given by those respondents were:

(a) The non-controlling interests are not compelled to cover the deficit (unless they have specifically agreed to do so) and it is reasonable to assume that, if the subsidiary requires additional capital in order to continue operations, the non-controlling interests would abandon their investments. In contrast, respondents asserted that in practice the controlling interest often has an implicit obligation to maintain the subsidiary as a going concern.
(b) Often guarantees or other support arrangements by the parent protect the non-controlling interests from losses of the subsidiary in excess of equity and do not affect the way losses are attributed to the controlling and non-controlling interests. Respondents argued that allocating those losses to the parent and non-controlling interests and recognising separately a guarantee would not reflect the underlying economics, which are that only the parent absorbs the losses of the subsidiary. In their view, it would be misleading for financial statements to imply that the non-controlling interests have an obligation to make additional
investments.
(c) Recognising guarantees separately is contrary to the principle of the non-recognition of transactions between owners.
(d) Loss allocation should take into account legal, regulatory or contractual constraints, some of which may prevent entities from recognising negative non-controlling interests, especially for regulated businesses (eg banks and insurers).

BASIS FOR CONCLUSIONS ON IFRS 10 ACCOUNTING REQUIREMENTS

The International Financial Reporting Standards Foundation, or IFRS Foundation, is a nonprofit accounting organization. Its main objectives include the development and promotion of the International Financial Reporting Standards (IFRSs) through the International Accounting Standards Board (IASB), which it oversees.^[1][3]

The foundation was formerly named the International Accounting Standards Committee (IASC) Foundation until a renaming on 1 July 2010, and as of 2012 is governed by a board of 22 trustees.

The IFRS Foundation also develops and maintains the IFRS Taxonomy, which is the representation of the IFRSs in eXtensible Business Reporting Language (XBRL), via its XBRL team. The team is supported by the XBRL Advisory Council and the XBRL Quality Review Team, which respectively provide strategic advice and reviews developed taxonomies.Additionally, in 2012 the foundation issued a call for industry participants in a project to develop “common industry practice concepts” for the taxonomy.

XBRL provides a “common, electronic format for business and financial reporting”, which will contribute to the global convergence of accounting standards towards IFRS; the director of XBRL activities at the IFRS Foundation, Olivier Servais, hopes that “everybody will be using it” in future.As of March 2012, the IFRS Taxonomies have “considerably fewer” tags than GAAP taxonomies, and the Security and Exchange Commission has not approved the IFRS Taxonomy for use in XBRL filings in the United States.

BASIS FOR CONCLUSIONS ON IFRS 10 ACCOUNTING REQUIREMENTS

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