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Basis for conclusions on IFRS 12 interest in unconsolidated structured entities

Basis for conclusions on IFRS 12 interest in unconsolidated structured entities

Basis for conclusions on IFRS 12 interest in unconsolidated structured entities

The need for the disclosure requirements

IAS  27  did  not  require  disclosures  relating  to  interests     in  unconsolidated entities. The Board was asked by users of financial statements, regulators and others (such as the G20 leaders and the Financial Stability Board) to improve the disclosure requirements for what are often described as ‘off balance sheet’ activities. Unconsolidated structured entities, particularly securitisation vehicles and asset-backed financings, were identified as forming part of such activities

The Board concluded that when an entity has an interest in    an unconsolidated structured entity, users of financial statements would benefit from information about the risks to which the entity is exposed from that interest. Such information is relevant in assessing the amount, timing and uncertainty of the entity’s future cash flows.

As proposed in ED 10, IFRS 12 requires an entity to disclose information that enables users of financial statements to evaluate the nature of, and risks associated with, the entity’s interest in unconsolidated structured entities.

Basis for conclusions on IFRS 12 interest in unconsolidated structured entities

Virtually all respondents to ED 10 agreed that there is a need for improved disclosures about an entity’s exposure to risk from ‘off balance sheet’ activities. However, respondents expressed differing views on the nature and amount of information that should be disclosed. Some, including users of financial statements, supported the approach proposed in ED 10 to require disclosure of risks arising from interests in unconsolidated structured entities.

Other respondents pointed out that an entity can be exposed to the   same risks from having interests in all types of entities. Therefore, they questioned why an entity should be required to provide particular information about its exposure to risk from its interests in unconsolidated structured entities, but not with other unconsolidated entities.

Some  respondents  were  also  concerned  that  the  proposals  would duplicate the risk disclosures in IFRS 7 Financial Instruments: Disclosures. IFRS 7 requires an entity to disclose qualitative and quantitative information  about  risks  arising  from financial instruments that the  entity  holds.  Those  respondents  expressed the view that ED 10 proposed disclosures about the counterparties of financial instruments to which the disclosure requirements in IFRS 7 already apply.

Basis for conclusions on IFRS 12 interest in unconsolidated structured entities

In  addition,  some  respondents  disagreed  with  the  proposals    because  they suspected that the Board had included the proposed disclosures as a ‘safety net’ because it was concerned that some structured entities might fail the consolidation criteria in ED 10, even though, in their view, consolidation would be appropriate.

When  deliberating  the  responses  to  ED  10,  the  Board  agreed      with  those respondents who emphasised that disclosures about unconsolidated structured entities cannot replace robust consolidation requirements. The disclosures proposed were never intended to compensate for weaknesses in the control definition. IFRS 10 documents the Board’s determination to develop appropriate and robust consolidation criteria. Rather, the disclosure proposals were intended to complement the consolidation criteria, focusing on an entity’s exposure to risk from interests in structured entities that the entity rightly does not consolidate because it does not control them.

Basis for conclusions on IFRS 12 interest in unconsolidated structured entities

The Board believes that information from both perspectives assists users of financial statements in their analysis of an entity’s exposure to risk—the disclosures in IFRS 7 by identifying those financial instruments that create risk, and the disclosures in IFRS 12 by providing, when relevant, information about:

  • the extent of an entity’s transactions with structured entities;
  • concentrations of risk that arise from the nature of the entities with which the entity has transactions; and
  • particular transactions that expose the entity to

Accordingly, the Board concluded that although the disclosures in IFRS 7 and IFRS 12 regarding unconsolidated structured entities might overlap to some extent, they complement each  other.

Basis for conclusions on IFRS 12 interest in unconsolidated structured entities

The Board was also persuaded by information received from users   of financial statements in the US, who had been using the disclosures required by US GAAP for variable interest entities in their analysis. Those users confirmed that the new disclosures provided them with information that was not previously available to them, but which they regarded as important for a thorough understanding of an entity’s exposure to risk.

Many of those users referred also to the global financial crisis    and emphasised that a better understanding of an entity’s interests in unconsolidated structured entities might have helped to identify earlier the extent of risks to which entities were exposed.         Accordingly, those users stated that the new disclosures had significantly improved the quality of financial reporting and strongly encouraged the Board to require similar disclosures for IFRS preparers.

Basis for conclusions on IFRS 12 interest in unconsolidated structured entities

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.

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