Final standards at last – but is it convergence?
The IASB and FASB are still deliberating on some fundamental standards, but they have finally concluded (or agreed to differ) on a number of other topics. So, last week we got a flurry of new standards – five on consolidation and joint arrangements; one on fair value measurement.
IFRS 10, ‘Consolidated financial statements’, provides extensive guidance to help entities decide who controls who. Although the new definition of control and additional guidance are not expected to result in widespread change, there will be some.
SIC 12, ‘Consolidation – Special purpose entities’, was notoriously difficult to interpret, but the new standard (which supersedes SIC 12) is also complex and will still require judgement in many situations. I am sure that as auditors we will be having interesting discussions with our clients about what the changes mean for them.
The objectives of the project include requiring an entity that controls another entity to prepare consolidated financial statements, and requiring disclosure of the risks and financial impact of having an interest in another entity. Has the IASB has achieved these objectives, particularly in respect of structured entities.
The layman might assume that special purpose entities are controlled by, and are the responsibility of, one of the parties to the transaction. The four indicators of control in SIC 12 tended to lead to that conclusion but have now been replaced by IFRS 10. It remains to be seen whether IFRS 10 results in more consolidation of structured entities, but early indicators suggest it may not.
The new definition of control requires the investor to have power, exposure to variable returns and the ability to use its power to affect its return. I can foresee circumstances where one of those criteria is not met by a party to the transaction, and therefore the special purpose entity will not be consolidated.
IFRS 12 will require useful additional disclosure about this interest in an unconsolidated structured entity, but will users read the disclosures or focus on the numbers in primary statements? What do you think?
It is also unfortunate that the FASB has decided not to issue the equivalent of IFRS 10 in US GAAP. The FASB did not believe it was right to consolidate an entity if holding less than 50.1% of the voting rights. So their proposed amendments to US GAAP consolidation guidance will not address ‘de facto’ control and potential rights.
There is movement but, once again, not full convergence. Some may argue that the failure to achieve convergence negates the purpose of the new standard given the levels of judgement still required. What’s your view?
On the other hand, IFRS 13, ‘Fair value measurement’, and ASU 2011-04, ‘Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs’ do provide a consistent definition of fair value and common guidance on how to measure fair value.
However, the standards only seek to achieve consistency in the measurement of fair value; they do not tackle the issue of when fair value should be used. Existing differences between IFRS and US GAAP are therefore not addressed.
Do let me have your thoughts.