BASIS FOR CONCLUSIONS ON IFRS 10 CONTROL ASSETS
BASIS FOR CONCLUSIONS ON IFRS 10 CONTROL ASSETS: The International Financial Reporting Standards, usually called the IFRS Standards, are standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB) to provide a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. They are the rules to be followed by accountants to maintain books of accounts which are comparable, understandable, reliable and relevant as per the users internal or external. IFRS, with the exception of IAS 29 Financial Reporting in Hyperinflationary Economies and IFRIC 7 Applying the Restatement Approach under IAS 29, are authorized in terms of the historical cost paradigm. IAS 29 and IFRIC 7 are authorized in terms of the units of constant purchasing power paradigm.
IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. However, it has been debated whether or not de facto harmonization has occurred. Standards that were issued by IASC (the predecessor of IASB) are still within use today and go by the name International Accounting Standards (IAS), while standards issued by IASB are called IFRS. IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new International Accounting Standards Board (IASB) took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards “International Financial Reporting Standards”.
BASIS FOR CONCLUSIONS ON IFRS 10 CONTROL ASSETS: without defining it, noting that an investee can comprise more than one entity. This would be the case when the legal and contractual arrangements relating to an investee give one party control of a particular set of assets and liabilities, whereas another party might have control over another set of assets and liabilities within the investee.
Respondents to ED 10 requested more guidance in order to apply the concept in practice. BC148 In response to those requests, IFRS 10 includes application requirements regarding interests in specified assets. This guidance is consistent with the current guidance in US GAAP in that it sets out when a portion of an investee is treated as a separate entity for the purposes of consolidation. The Board noted that this situation arises most often in the context of investees that are not directed through voting or similar rights. However, the Board decided that to restrict the application requirements to investees that are not directed through voting or similar rights would be contrary to the objective of developing a control model that is applied consistently to all investees. In addition, the Board was not aware of any reason for such a restriction. Therefore, the guidance regarding interests in specified assets is applicable to all investees. This is in contrast with US GAAP, which applies this guidance only to portions of variable interest entities.
BASIS FOR CONCLUSIONS ON IFRS 10 CONTROL ASSETS: The Board’s objective in issuing IFRS 10 is to improve the usefulness ofconsolidated financial statements by developing a single basis for consolidation and robust guidance for applying that basis to situations where it has proved difficult to assess control in practice and divergence has evolved (see paragraphs BC2–BC4). The basis for consolidation is control and it is applied irrespective of the nature of the investee. BC30 Almost all respondents to ED 10 supported control as the basis for consolidation. However, some noted that it can be difficult to identify an investor that has power over investees that do not require substantive continuous decision-making. They suggested that exposure to risks and rewards should be used as a proxy for control when power is not evident.
BASIS FOR CONCLUSIONS ON IFRS 10 CONTROL ASSETS: Some respondents were also concerned that applying the proposed control definition to all investees could lead to more structuring opportunities than was the case when applying the requirements in IAS 27 and SIC-12. Others did not think that ED 10 expressed with sufficient clarity the importance of risks and rewards when assessing control. BC31 The Board confirmed its view that control should be the only basis for consolidation—an investor should consolidate an investee and present in its consolidated financial statements the investee’s assets, liabilities, equity, income, expenses and cash flows, if the investor has the current ability to directthose activities of the investee that significantly affect the investee’s returns and can benefit by using that ability.
An investor that is exposed, or has rights, to variable returns from its involvement with an investee but does not have power over the investee so as to affect the amount of the investor’s return from its involvement does not control the investee. BC32 Control as the basis for consolidation does not mean that the consideration of risks and rewards is unimportant when assessing control of an investee. The more an investor is exposed to risks and rewards from its involvement with aninvestee, the greater the incentive for the investor to obtain decision-making rights that give it power.
However, risks and rewards and power are not necessarily perfectly correlated. Therefore, the Board confirmed that exposure to risks and rewards (referred to in IFRS 10 as variable returns) is an indicator of control and an important factor to consider when assessing control, but an investor’s exposure to risks and rewards alone does not determine that the investor has control over an investee. BC33 The Board observed that to conclude that exposure to risks and rewards is anything more than an indicator of control would be inconsistent with a control model that contains both a power element and a returns element. BC34 The Board confirmed that an investor must have exposure to risks and rewards in order to control an investee—without any exposure to risks and rewards ie variable returns, an investor is unable to benefit from any power that it might have and therefore cannot control an investee.
BASIS FOR CONCLUSIONS ON IFRS 10 CONTROL ASSETS: The International Accounting Standards Committee (IASC) was founded in June 1973 in London and was replaced by the International Accounting Standards Board on 1 April 2001. It was responsible for developing the International Accounting Standards and promoting the use and application of these standards.
IAS 27 (as revised in 2000) required a subsidiary to be excluded from consolidation when control is intended to be temporary or when the subsidiary operates under severe long-term restrictions.
In 2003 the Board considered whether to remove this scope exclusion and thereby converge with other standard-setters that had recently eliminated a similar exclusion. It decided to consider this question as part of a comprehensive standard dealing with asset disposals. It decided to retain an exemption from consolidating a subsidiary when there is evidence that the subsidiary is acquired with the intention of disposing of it within twelve months and that management is actively seeking a buyer. The Board’s exposure draft ED 4 Disposal of Non-current Assets and Presentation of Discontinued Operations proposed to measure and present assets held for sale in a consistent manner irrespective of whether they are held by an investor or in a subsidiary. Therefore, ED 4 proposed to eliminate the exemption from consolidation when control is intended to be temporary and it contained a draft consequential amendment to IAS 27 to achieve this.
BASIS FOR CONCLUSIONS ON IFRS 10 CONTROL ASSETS: Severe long-term restrictions impairing ability to transfer funds to the parent
The Board decided to remove the exclusion of a subsidiary from consolidation when there are severe long-term restrictions that impair a subsidiary’s ability to
transfer funds to the parent. It did so because such circumstances may not preclude control. The Board decided that a parent, when assessing its ability to
control a subsidiary, should consider restrictions on the transfer of funds from the subsidiary to the parent. In themselves, such restrictions do not preclude control.
Exemption from preparing consolidated financial statements for an intermediate parent of an in vest mententity.
In December 2014, the Board amended IFRS 10 to confirm that the exemption from preparing consolidated financial statements set out in paragraph 4(a) of IFRS 10 is available to a parent entity that is a subsidiary of an investment entity. This question came about because an investment entity may measure all of its subsidiaries at fair value through profit or loss in accordance with paragraph 31 of IFRS 10. This decision was consistent with the proposal in the Exposure Draft
Investment Entities: Applying the Consolidation Exception (Proposed amendments to IFRS 10 and IAS 28), which was published in June 2014.
BASIS FOR CONCLUSIONS ON IFRS 10 CONTROL ASSETS
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