Consolidations and joint ventures

Consolidations and joint ventures

Typical coverage of US GAAP
Scope Combined financial statements Consolidation model Presentation of consolidated financial statements Non-controlling interest (minority interest) Variable interest entities (VIE) and special purpose entities Joint ventures Disclosures

Executive summary IFRS and US GAAP are fairly well converged with respect to business consolidations. US GAAP has two models for consolidation – one for voting interest entities and one for variable-interest entities (VIEs), while IFRS has one model for all entities. The general consolidation model is basically the same under IFRS and US GAAP, with some differences related to the determination of control. In certain circumstances, both IFRS and US GAAP allow up to a three-month difference between the reporting dates of a parent and a subsidiary. Significant events during this gap period require adjustment under IFRS, while US GAAP only requires disclosure. IFRS requires that accounting policies be conformed between a parent and its subsidiaries, while differences are permitted under US GAAP. Upon initially obtaining control, IFRS provides two options for the parent in valuing non-controlling interests (NCI) (full fair value or fair value of identifiable assets), while under US GAAP, only the full fair-value method is allowed.

Executive summary Structured entities (previously referred to as special-purpose entities (SPEs) under IFRS and variable-interest entities under US GAAP are evaluated for consolidation. For these entities, IFRS is focused on control while US GAAP is focused principally on determining the primary beneficiary based on both the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits. The accounting guidance for joint ventures is similar under IFRS and US GAAP with both requiring the use of the equity method of accounting.

Primary pronouncements
US GAAP ASC , Consolidations IFRS IFRS 10, Consolidated Financial Statements (effective January 1, 2013, with early adoption permissible) IAS 27 (amended), Separate Financial Statements – After amendment in 2011, the remaining guidance is limited to accounting for subsidiaries, jointly controlled entities and associates in separate financial statements. IFRS 11, Joint Arrangements (effective January 1, 2013, with early adoption permissible) IFRS 12, Disclosure of Interests in Other Entities (effective January 1, 2013, with early adoption permissible)

Progress on convergence
The Boards’ objectives were to develop one consolidation model that could be applied consistently for all types of entities and produce globally comparable results. The IASB issued its guidance in May 2011. IFRS 10 addresses the accounting guidance for consolidation and addressed inconsistencies in practice between IAS 27 and SIC 12 when an entity controls less than a majority of the voting rights but still controls that entity. IFRS 11 requires a party to a joint arrangement to determine the type of joint arrangement by assessing its rights and obligations. It also eliminates the option of proportionate consolidation as a method of accounting for a joint arrangement. IFRS 12 addresses users’ requests for improvements in the disclosure of a reporting entity's interests in other entities.

The FASB issued an ED on November 3, 2011, with comments due January 17, 2012, proposing to: Not move forward with a single consolidation model but retain two distinct consolidation models, one for voting entities and one for VIEs. The ED would continue to require an evaluation of whether a decision maker has a variable interest in an entity. However, it would also require a separate determination of whether an entity is using its power in a principal or an agent capacity. While US GAAP would have two models, it would more closely align the consolidation requirements with IFRS by: Requiring a principal-agent determination: a reporting entity’s decision maker would need to make an principal-agent determination using three qualitative factors: (1) its compensation, (2) variability of returns from other interests it holds and (3) the rights held by others. If it is determined that the decision maker acts as a principal, demonstrating that it uses its power to effectively control, it would be required to consolidate. Substantive rights (such as kick-out or participating) held by others may affect the decision maker’s ability to direct the activities that significantly impact an entity’s economic performance and may indicate the decision maker is an agent and not than a principal. This approach in the ED would align the consideration of kick-out and participating rights to eliminate the current inconsistency between the voting and variable interest models.

In February 2010, ASU No , Consolidation (Topic 810): Amendments for certain Investment Funds, was issued, which defers the effective date of SFAS No. 167 for certain investment funds. The ED issued on November 3, 2011 (with comments due January 17, 2012) would rescind this deferral. On August 25, 2011, the IASB issued a proposal to exempt investment entities from the consolidation requirements of IFRS 10. Instead, these entities would be required to account for their investments at fair value through income. On October 21, 2011, the FASB issued an ED on investment companies with comments due January 5, The proposal would change the definition of an investment company. While the definition would be similar to IFRS, there are some important differences, which are beyond the scope of this material. Investment companies that have controlling interests in other investment companies would be required to consolidate their investment company subsidiaries. On December 20, 2011, the IASB issued an ED to clarify the transition guidance in IFRS 10. The proposed effective date coincides with the effective date of IFRS 10. Comments on the ED are due by March 21, 2012.

Scope US GAAP IFRS Consolidated financial statements are required when consolidation criteria are met with some exception, such as for employee benefit plans. Similar

Scope US GAAP US GAAP provides certain industry exceptions to the application of consolidation guidance, which currently includes investment companies. IFRS IFRS provides a limited exception for a parent to not present consolidated financial statements if the following criteria are met: It is a subsidiary of another entity and the shareholders of its parent do not object. It does not have any debt or equity instruments traded in public markets, and it is not in the process of registering public debt or equity. The immediate or ultimate parent must prepare and publish consolidated IFRS financials.

Combined financial statements
US GAAP Combined financial statements are permitted under US GAAP if the entities being combined are under common control or management. IFRS Combined financial statements are generally not acceptable as general purpose financial statements under IFRS, except under rare circumstances requiring a true and fair override.

Consolidation model US GAAP IFRS
An entity is generally required to consolidate entities it controls. Similar Control is presumed to exist if the parent owns more than 50% of the voting stock. Similar A full elimination of revenues, expenses and asset transfers between companies of a consolidated group is required Similar

Consolidation model Distinction of voting interest entities and VIEs
US GAAP US GAAP has a distinct consolidation model for voting interest entities and a distinct model for VIEs. All entities are first evaluated for consolidation as potential VIEs. If the entity is not a VIE, then it is evaluated for consolidation based on voting control. An entity is considered to be a VIE if any of the following exist: It has insufficient equity to carry on its operations without additional financial support. As a group, the equity holders are unable to make decisions about the entity’s activities. The entity has equity that does not absorb the entity’s losses or receive its benefits IFRS IFRS has a single consolidation model applicable to all entities, including structured entities.

Consolidation model Definition of control – US GAAP
VIE: The primary beneficiary is determined to have control based on: The power to direct the activities of the VIE that most impact the performance of the VIE. The obligation to absorb losses or the right to receive benefits of the VIE. Note that in the event that an entity does not have both power and benefits, it should be determined if a related party or de facto agent individually has power and benefits to assess control or, if these parties collectively have power and benefits, the party most closely associated with the VIE would have control. Voting interest entity: a majority voting interest is determined to have control with some exception such as when a single party has substantive kick-out or participating rights.

Consolidation model Definition of control – IFRS
Under IFRS, it is critical to understand the purpose and design of an investee to assess control. A decision maker that acts on behalf of another party is deemed to be an agent and does not have control. A decision maker that acts on its own behalf is deemed to be a principal and may have control. An investor controls an investee if the investor has all of the following: Power over the investee: Investor has existing rights that give it the current ability to direct relevant activities Relevant activities are those that significantly affect the returns of the investee. Relevant activities might include determining operating policies, making capital decisions, appointing key management personnel, etc.

Consolidation model Definition of control - IFRS
Exposure or rights over variable returns from its involvement with the investee. Returns might include dividends, remuneration, returns that are not available other interest holders, etc. The ability to use its power to impact the amount of its returns. Power might include voting rights, potential substantive voting rights (e.g., options or convertible instruments), rights to appoint key personnel, decision-making rights within a management contract, removal or “kick-out” rights, etc.

Consolidation model Definition of control – defacto control
Defacto control can occur when there is only one significant shareholder that owns less than 50% of the voting stock and other shareholders are disbursed and generally don’t exercise their voting rights. IFRS considers defacto control while US GAAP does not have a similar concept.

Consolidation model US GAAP IFRS
Because the IFRS definition of control is much broader than US GAAP, it is possible to reach different conclusions as to control. However, for public companies, the SEC has a much broader notion of control, which is similar to IFRS. Under the SEC’s definition, control exists when one entity possesses the power to direct policies of another entity, either by ownership of voting shares, by contract or by other means.

Consolidation considerations – voting rights example
Company A owns 49% of the voting stock of Company B. Company A has a currently exercisable option to purchase an additional 2% of the voting stock at a cost of $50 per share. The shares are currently valued at $30. Would Company A consolidate Company B under US GAAP or IFRS? Explain your answer.

Consolidation considerations – voting rights example
Example 1 solution: US GAAP: Company A would not have to consolidate Company B since under US GAAP potential voting rights are not considered. IFRS: Company A would have to consolidate Company B under IFRS because potential voting rights must be considered if they are exercisable, regardless of the intent or ability to exercise those rights.

Consolidation considerations – de facto control example
The Rich family started a local bank in The family still owns 40% of the stock of the local bank through its Rich Holding Company (RHC). The remaining stock is widely dispersed and these stockholders typically do not participate in the annual meetings and exercise their voting rights. RHC prepares it financial statements under IFRS. RHC may need to consolidate the local bank because of the de facto control. Is this statement true or false?

Consolidation considerations – de facto control example
Example 2 solution: True. Under IFRS, a company should consolidate if defacto control is present. In this scenario, the Rich Family has a majority share less than 50% but the remaining shares are widely dispersed and these shareholders are not expected to exercise their voting rights.

Consolidation considerations example – combined financial statements
The Summer family owns and operates a ball bearing company and a drug store. The family is seeking a bank loan. The bank has requested combined financial statements be prepared. Is this presentation acceptable under US GAAP and/or IFRS? Explain your answer.

Consolidation considerations example – combined financial statements
Example 3 solution: US GAAP: Yes. Combined financial statements would be acceptable under US GAAP since the ball bearing company and the drug store are under common control and common management. IFRS: No. Combined financial statements are generally not acceptable as general purpose financial statements under IFRS, except under rare circumstances requiring a true and fair override.

Presentation of consolidated financial statements
US GAAP IFRS In certain instances, up to a three-month difference is allowed between the reporting dates of a parent and a subsidiary. Similar

Presentation of consolidated financial statements Reporting date
US GAAP Allows up to a three-month difference between the year-end of the parent and the subsidiary. IFRS IFRS requires that the reporting date of the parent and the subsidiary should be the same unless it is impractical to do so. In the event that it is impractical, IFRS permits up to a three-month lag. Possible examples of impractical situations might arise when a subsidiary’s accounting systems are manual or there are significant estimation processes that require additional time to prepare and evaluate.

Presentation of consolidated financial statements Subsidiary year-end precedes parent year-end
US GAAP Significant events during this time period must be disclosed in the financial statements of the parent, but adjustments are not typically made to the financial statements. IFRS Requires adjustment of the financial statements to reflect the impact of significant events during this period.

Presentation of consolidated financial statements Accounting policies
US GAAP A parent and a subsidiary are permitted to have different accounting policies. This is most likely to occur when the subsidiary is following some specialized industry guide. IFRS The accounting policies of the subsidiary must be the same as its parent. When they differ, it will result in the need for top-side adjustments in consolidation to conform the subsidiary’s accounting policies to those of its parent.

Difference in year-end example
Low Tech, a US-based company, has a June year-end. It acquired Company B in the Amazon Basin in August. Company B lacks a sophisticated accounting system and requires 60 to 70 days to close its books at the end of each quarter. Part of the reason for the delay in closing the books is there are several complex accounting estimates that must be re-evaluated each quarter. Low Tech has evaluated the accounting systems and the estimation processes, but has not been able to find a way to expedite the quarterly closing process. Can Low Tech consolidate Company B based on a May year-end under either US GAAP or IFRS? Explain your answer.

Difference in year-end example
Example 4 solution: US GAAP: US GAAP allows up to three months difference between the year-end of the parent and the subsidiary, thus a May year-end for Company B would be acceptable. IFRS: IFRS permits up to a three-month lag if it is impractical to prepare subsidiary statements as of the same date. IAS 1.7 states, “... a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so.” It appears the impractical requirement has been met so a May year-end for Company B would be acceptable.

Significant events during a difference in year-end example
The Parent Company has a June 30 year-end and its wholly owned subsidiary has a May 31 year-end. Assume all the requirements for different reporting dates have been met. On June 15, a competitor introduces a new technology-enhanced product which makes obsolete $10.0 million of Parent Company’s inventory and $2.0 million of the subsidiary’s inventory. What would be the impact on the consolidated June 30 financial statements under US GAAP and IFRS? Show any required journal entries as of June 30.

Example 5 solution: US GAAP: US GAAP requires significant events during this time period to be disclosed in the financial statements of the parent. Adjustments for significant events that occur in the gap period generally are not recorded under US GAAP. As such, only the entry to record the obsolescence of Parent Company’s inventory is necessary. Cost of sales of parent $10,000,000 Inventory of parent $10,000,000

Example 5 solution (continued): IFRS: IFRS requires adjustment of the financial statements to reflect the impact of significant events during the gap period. Cost of sales of parent $10,000,000 Inventory of parent $10,000,000 Cost of sales of subsidiary $2,000,000 Inventory of subsidiary $2,000,000

NCI (non-controlling interest formerly minority interest)
Both US GAAP and IFRS utilize the concept of a non-controlling interest (NCI). ASC defines this concept as: “A non-controlling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.” US GAAP and IFRS generally are converged as it relates to NCI. US GAAP IFRS Changes in the ownership interest of a subsidiary (that does not result in loss of control) will generally be accounted for as an equity transaction (paid-in capital) and will have no impact on goodwill, nor will they give rise to a gain or loss. Similar

NCI (non-controlling interest)
US GAAP IFRS Upon a loss of control of a subsidiary, a new basis recognition event occurs, where essentially a gain or loss is recognized on 100% of the interest held. The retained NCI will be remeasured to fair value and will impact the gain or loss recognized upon disposal. The gain or loss is calculated as follows: proceeds plus the fair value of any retained interest plus the carrying amount of NCI in the former subsidiary minus the carrying amount of the former subsidiary’s net assets, plus or minus components of equity reclassified to profit or loss. Similar

US GAAP IFRS Losses applicable to NCI are allocated to those interests even if that results in a deficit position. Similar NCIs are generally classified on the balance sheet as equity, separate from the equity of the parent, and both present income from NCIs as an allocation of that period’s comprehensive income. Similar

US GAAP Upon obtaining control, the acquisition of NCI must be measured at fair value, including goodwill. IFRS Upon obtaining control, there is a choice to initially measure NCI at fair value, including goodwill, on the date of acquisition (fair value method) or at the fair value of the NCI’s proportionate share of the acquiree’s identifiable net assets as measured at the acquisition date (without goodwill) (proportionate method). This choice is to be made for each business combination.

Consolidation considerations – general example
Under both US GAAP and IFRS, which of the following is not a consideration related to consolidations? Focus on control Restrictions on NCIs being negative Elimination of revenues and expenses between members on a consolidated group None of the above

Consolidation considerations – general example
Example 6 solution: There is no restriction on NCI (minority interest) being negative under US GAAP or IFRS.

NCI – fair-value method example
A parent owns 70% of a subsidiary. The carrying amount of the NCI of 30% is $150 million under the full fair-value method. There are no amounts accumulated in other comprehensive income for this subsidiary. The parent acquires an additional 10% from the NCI for $60 million in cash. Assume the parent used the full fair-value method to initially measure the NCI upon obtaining control of the subsidiary. Prepare the required journal entries to record the acquisition of the additional 10% interest in the subsidiary under US GAAP and IFRS.

NCI – fair-value method example
Example 7 solution: In recording the acquisition of the additional 10% interest in the subsidiary, under US GAAP and IFRS, the carrying amount of the NCI is adjusted to reflect the change in ownership interests in the subsidiary’s net assets since the transaction does not result in a change in control. Any difference between the amount by which the NCI is adjusted and the fair value of the consideration paid is attributed to the parent. The journal entry to record the additional 10% interest in the subsidiary under both US GAAP and IFRS would be as follows: NCI $ 50,000,000(1) Additional paid-in capital ,000,000 Cash $60,000,000 (1) (10%/30% = 33.33%) x $150,000,000 (rounded)

NCI – fair-value and proportionate methods example
In the current year, Company A acquires 70% of the voting stock of Company S for $770,000 in cash. At the date of acquisition by Company A, the fair value the identifiable net assets of Company S is $900,000. The fair value of the 30% NCI is $300,000. Company A paid a $70,000 control premium to obtain control over Company S. Show the calculations and journal entries to record Company A’s investment in Company S under the fair-value method and the proportionate method.

Example 8 solution: Proportionate method: Cash $770,000 Company A’s portion of the fair value of the identifiable net assets in Company S (630,000)(1) Goodwill $140,000 (1) $900,000 x 70% = $630,000 Journal entry: Fair value of identifiable net assets $900,000 Goodwill 140,000 Cash $770,000 NCI 270,000(2) (2) $900,000 x 30% = $270,000

Example 8 solution (continued): Fair-value method: Cash $770,000 Fair value of the NCI ,000 Fair value of the identifiable net assets of Company S (900,000) Goodwill $170,000 Journal entry: Fair value of identifiable net assets $900,000 Goodwill 170,000 Cash $770,000 NCI 300,000

VIEs and Structured Entities
US GAAP Under US GAAP, upon the initial consolidation of an entity that is not a business a gain or loss is recognized for the difference between: (1) The fair value of the consideration paid, the fair value of any NCI and the reported amount of any previously held interests. (2) The VIE’s net assets. No goodwill is recognized if the VIE is not a business. IFRS Under IFRS, the cost of the entity is allocated to identifiable assets and liabilities (no goodwill is recorded) on the basis of their fair value at the date of purchase. Therefore, under IFRS, there is no gain or loss.

VIEs and Structured Entities
US GAAP Under US GAAP, they are focused principally on the primary beneficiary of the VIE (determined based on the consideration of both the power to direct the activities of the entity and the obligation to absorb losses or the right to receive benefits). IFRS In general, the criteria used to determine whether or not to consolidate the structured entity are somewhat different under US GAAP and IFRS. Under IFRS, the consolidation criteria are focused more on control.

Voting control versus primary at-risk example
A franchisor invests money in the preferred stock of a franchisee that is in financial difficulty. The franchisee is in a deficit position and has no other source of equity. The franchisor has no voting interest in the franchisee. Should the franchisor consolidate this franchisee under US GAAP and/or IFRS? Explain your answer.

Voting control versus primary at-risk example
Example 9 solution: US GAAP: The franchisee would appear to be a VIE since it has insufficient equity to carry on its operations. A determination of whether the franchisor is the primary beneficiary (determined based on the consideration of both the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits) needs to be made. The franchisor, as an equity owner of non-voting preferred stock is unable to make decisions about the entity’s activities. There may be control of some sort through the franchisee agreement, which will need to be evaluated. The franchisor likely receives some benefits from the franchisee (either from selling its products or from fees). Additionally, it could be argued the franchisor is absorbing losses because it is investing money in a financially troubled franchisee. It would appear that there may be an argument for consolidating this franchisee. The particular facts and circumstances would need to be carefully evaluated.

Voting control versus primary at risk example
Example 9 solution (continued): IFRS: Under IFRS, whether the franchisee should be consolidated is less clear. There is no voting control so, from that perspective, one might conclude that consolidation is not required. If there is control of some sort through the franchisee agreement and the franchisor receives some benefits from the franchisee (either from selling its products or from fees), there may be an argument for consolidating this franchisee. The particular facts and circumstances would need to be carefully evaluated.

VIE that is not a business example
Company A makes an initial $100,000 cash investment in a VIE (structured entity) that is not a business. It is determined that Company A should consolidate this VIE. At the time of the initial investment, the fair value of the VIE’s assets is $120,000 and the fair value of its liabilities is $40,000. The fair value of the NCI is $10,000. Show the accounting entries to record the consolidation of this VIE on Company A’s books under both US GAAP and IFRS.

Example 10 solution: US GAAP: Company A recognizes a gain or loss for the difference between: (1) the sum of the fair value of the consideration paid, the fair value of any NCI and the reported amount of any previously held interests; and (2) the VIE’s net assets. No goodwill is recognized if the VIE is not a business. VIE assets $120,000 Loss ,000 VIE liabilities $ 40,000 Cash ,000 NCI ,000

Example 10 solution (continued): IFRS: Under IFRS, the cost of the entity is allocated to identifiable assets and liabilities (no goodwill is recorded) on the basis of their fair value at the date of purchase. Therefore, under IFRS, there is no gain or loss. VIE assets $150,000 VIE liabilities $ 50,000 Cash ,000 Note: cash paid of $100,000/(net assets $120,000 - $40,000) = This 1.25 x $120,000 = $150,000 and 1.25 x $40,000 = $50,000.

Joint arrangements US GAAP IFRS
The equity method of accounting for joint arrangements is allowed. The equity method of accounting for joint arrangements is required Similar

Joint ventures IFRS defines a joint arrangement as a contractual arrangement over which multiple parties have joint control. Joint control is now defined per IAS 11, paragraph 7, as: “The contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.” IFRS addresses the accounting for two categories of joint arrangements: Joint operations Joint ventures

Joint ventures Joint operation
US GAAP IFRS A joint operation is an arrangement where the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is an arrangement where the parties have joint control of the arrangement and have rights to the net assets of the arrangement. An example of a joint operation would be when two companies agree to develop a new garbage disposal unit. One company is developing the motor and the other company is developing the rest of the unit. Each company would pay its own costs and they would share the revenue, based on a contractual agreement. Does not specifically address the accounting for joint operations.

Joint arrangements Joint venture
US GAAP IFRS For a joint venture, a separate vehicle with an identifiable financial structure is generally established . An example of a joint venture would be when two companies set up a separate entity to manufacture fan blades and neither company has rights to the assets and obligations for the liabilities of the separate entity. Each company would contribute assets to the joint venture. Similar

Joint ventures Joint venture contribution
US GAAP A venturer generally records its contribution to a joint venture at cost. There are some exceptions to this general rule (such as when the other venturers contribute cash or commonly considered cash equivalents). IFRS Under IFRS, the contribution of non-monetary assets is recognized at fair value, with any gains or losses being recognized to the extent of the other parties’ interest in the joint arrangement.

Joint ventures Method of accounting for joint arrangements
US GAAP Generally requires using the equity method of accounting for jointly controlled entities. Proportionate consolidation is only allowed where it is industry practice (for example, in the extractive and construction industries). IFRS Joint operations: requires the parties that have joint control to recognize their share of the assets, liabilities, revenue and expenses. Joint ventures: requires the equity method accounting for joint ventures. Proportionate consolidation is not allowed.

Joint arrangement example
Three companies form a manufacturing joint arrangement. Company A owns 40%, Company B owns 30% and Company C owns 30% of the voting shares of the joint arrangement. Income and losses of the joint arrangement are shared equally. Any resolutions require approval of at least 60% of the shareholders. Each company can appoint one member to the board of directors. Discuss how the joint arrangement should be accounted for on each company’s books under both US GAAP and IFRS.

Joint arrangement example
Example 11 solution: US GAAP: Under US GAAP, the equity method of accounting for the joint venture should be used by each company. IFRS: Under IFRS 11, this joint arrangement would be accounted for as a joint venture because no single company can control this joint arrangement. Therefore, the equity method should be used by each company to account for its interest in the joint venture.

Joint venture example Example 12
Company A and Company B form a joint venture. Company A contributes a subsidiary with separable net assets with a book value of $50.0 million (fair value of $60.0 million). Company B contributes a subsidiary with separable net assets with a book value of $70.0 million (fair value of $90.0 million). Company A will own 40% of the joint venture and Company B will own 60% of the joint venture. How should this transaction be accounted for by Company A under US GAAP and IFRS? Show all required journal entries.

Joint venture example Example 12 solution: US GAAP:
No gain would be recorded and the investment in the joint venture would be recorded at the cost of the assets given up. Investment in joint venture $50,000,000 Net assets of subsidiary $50,000,000 IFRS: Under IFRS, the contribution of non-monetary assets is recorded at cost, with any difference between this cost and the fair value of its share of the assets and liabilities of the joint venture recorded as a gain or loss. Company A now owns 40% of the joint venture with a fair value of $150.0 million ($60.0 million plus $90.0 million), worth $60 million. Investment in joint venture $60,000,000 Net assets of subsidiary $50,000,000 Gain on disposal ,000,000

Disclosures US GAAP IFRS
Disclosure of the general consolidation policy is required. Similar If a consolidated subsidiary has a different year-end than the parent, disclosure is required. The reason for the different year-end also should be disclosed. Similar Disclosure of any changes in the subsidiaries being consolidated is required. Similar

Disclosures US GAAP If a subsidiary has a year-end that precedes the parent’s year-end, significant events during this time period must be disclosed in the financial statements of the parent, but adjustments typically are not made to the financial statements. No similar required disclosures. Does not have this option. IFRS Requires adjustment of the financial statements to reflect the impact of significant events during this period. IFRS 12 now requires disclosure of the judgments made in determining whether or not another entity is controlled. IFRS 12 also requires summarized financial for material joint ventures and associates as well as expanded disclosures on restrictions on their assets and liabilities. Provides for limited circumstances when a parent does not have to present consolidated financial statements, if certain criteria are met. Disclosure that the financial statements reflect the exemption from consolidation is required.

Identifying activities
IFRS 10 overview Activities Activities that significantly affect returns Examples: Operating policies Capital decisions Appointing key management Management of underlying investments Power Current ability to direct those activities Examples: Voting rights Potential voting rights Right to appoint key management Decision making rights “Kick out” rights Returns Exposed to variable returns Examples: Dividends Remuneration Returns that are not available to others (scarce products, cost reductions, synergies, economies of scale, proprietary knowledge) Identifying activities Evaluating power Assessing returns Assessing whether you have control In many cases, it is clear that an investee is controlled by voting rights, and obvious that whoever holds a majority of those voting rights controls the investee. However, in other cases, it may not be so clear. In those cases, further analysis is needed and each of the factors on the slide need to be considered in more detail to determine which investor controls the investee (if any). When it is not clear – helpful to think about these three steps, which underpin the definition of control, in the context of understanding the purpose and design. Activities – The ‘relevant activities’ are those activities of an entity that significantly affect the returns Power - Power arises from rights. Power need not be exercised. An investor with the current ability to direct the relevant activities has power even if its rights to direct have yet to be exercised. Embodies the notion of the “capacity” to direct Returns - Returns can be positive, negative, or both. Returns are often an indicator of control. This is because the greater an investor’s exposure to the variability of returns from its involvement with an investee, the greater the incentive for the investor to obtain rights that give the investor power For many companies, the activities that significantly affect returns are the strategic operating and financing activities, which are controlled by management, and ultimately the board. However, whoever has the majority ownership (e.g., 51%) may not have power when there are : Other legal requirements, founding documents or other contractual arrangements that restrict the ability to direct the relevant activities Activities that are subject to direction by government, court, administrator, receiver, liquidator, or regulator

Assurance | Tax | Transactions | Advisory
Ernst & Young LLP Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit Ernst & Young LLP is a client-serving member firm of Ernst & Young Global and of Ernst & Young Americas operating in the US. © 2011 Ernst & Young Foundation (US). All Rights Reserved. SCORE No. MM4122C.

Consolidations and joint ventures

Similar presentations

Presentation on theme: "Consolidations and joint ventures"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Consolidations and joint ventures

Similar presentations

Presentation on theme: "Consolidations and joint ventures"— Presentation transcript:

Similar presentations

About project

Feedback