ED 10 consolidated financial statements

Comments from ACCA to the International Accounting Standards Board, March 2009.

ACCA is pleased to have this opportunity to comment on the exposure draft (ED) on the above subject, which has been considered by ACCA's Financial Reporting Committee.


We acknowledge there are concerns over consolidation in the context of the current financial crisis, especially with regards financial institutions. We also support the broad objectives of the ED, which aims to converge the current standards on consolidation (IAS27 and SIC12), and provide appropriate disclosure requirements in this area.

However, we remain uncertain as to whether the proposals as they are set out in the ED will in fact provide a considerable improvement to the existing IFRS, which do in general appear to be applied consistently and effectively. We strongly believe that any amendments to standards should provide tangible cost benefits to users and preparers. As such we are also concerned that some of the concerns from the Financial Stability Forum, which prompted the timing of this ED, may in fact not be appropriately dealt with through these proposals. In particular we believe it is questionable just how much difference these proposals will make to the boundary of consolidation, and more importantly, the removal of some of the risk and reward criteria in SIC12, could result in some entities being deconsolidated.

While we agree that disclosure in this area of financial reporting is important, we also have some concerns about the level of disclosure expected, and the lack of guidance on minimal disclosure requirements.



Do you think that the proposed control definition could be applied to all entities within the scope of IAS27 as well as those within the scope of SIC12?

If not what are the application difficulties?

We believe that the proposed definition of control in the draft IFRS could be applied to all entities within the scope of IAS27 as well as those within the scope of SIC12. We certainly consider the replacement of the term 'benefits' when defining control under the current definition in IAS27, with 'returns' to be more appropriate in this context.


Is the control principle as articulated in the draft IFRS an appropriate basis for consolidation?

While overall we consider the control principle in the draft IFRS should be an appropriate basis for consolidation, we have concerns about losing some of the specific requirements related to risks and rewards explicitly considered in SIC12. We believe that these have played an important role in ensuring that many special purpose entities (SPEs), especially those that operate on 'auto-pilot', are kept on balance sheet.

We also have concerns about the issue of de facto control, where an entity holding less than a majority share of the voting rights is deemed to have control solely by virtue of the disparate nature of the other holdings. While we agree that all relevant facts and circumstances are relevant to arriving at such a conclusion, the ED presumes that the other holdings being dispersed is in it self a reason to assume power and control. We have reservations about ignoring the ability of these other parties to 'consolidate' their rights when it comes to key decisions of the entity, and thereby negate the power of the reporting entity to make such decisions independently.


Are the requirements and guidance regarding the assessment of control sufficient to enable the consistent application of the control definition?

If not, why not? What additional guidance is needed or what guidance should be removed?

Please refer to our response to Q2.


Do you agree with the Board's proposals regarding options and convertible instruments when assessing control of an entity?

If not, please describe in what situations, if any, you think that options or convertible instruments would give the option holder the power to direct the activities of an entity.

We agree that the reporting entity should consider all facts and circumstances when assessing whether options and convertible instruments give the holder the ability to exercise control. As stated in paragraph BC82, using the mechanical approach in IAS27, which focuses on currently exercisable options or convertibles to assess control, could result in inconsistency in consolidations.


Do you agree with the Board's proposals for situations in which a party holds voting rights both directly and on behalf of the other parties as an agent?

If not, please describe the circumstances in which the proposals would lead to an inappropriate consolidation outcome.

We agree that where an entity holds voting rights either directly or indirectly through other parties, and exercises these in order to generate returns for itself, it has control over these parties and should therefore consolidate.


Do you agree with the definition of a structured entity in paragraph 30 of the draft IFRS?

If not, how would you describe or define such an entity?

We believe that the definition in paragraph 30 is not particularly helpful, especially if the aim of the ED is to provide a coherent single principle for consolidation. The proposed definition is limited to what a structured entity is not, rather than explicitly focusing on a positive definition of a structured entity. We would prefer an expansion of the focus of paragraphs 26 and 27 to provide a more robust definition which would incorporate elements of the risk and reward model included within SIC12, to deal with the specific features of structured entities.


Are the requirements and guidance regarding the assessment of control of a structured entity in paragraph 30-38 of the draft IFRS sufficient to enable consistent application of the control definition?

If not, why not?

What additional guidance is needed?

We believe that the requirements and guidance regarding the assessment of control for structured entities should result in consistent application. However, we would note that treating structured entities as a separate category in the draft IFRS, essentially maintains the current IAS27 and SIC12 requirements, rather than merging them. In order to achieve this main objective, we believe that a general (and robust definition) should be used for all forms of entities, which is supplemented with examples and rationale for indicators of control.

The requirements and guidance in the draft IFRS are extensive, and should ensure that structured entities are consolidated appropriately. However, we do have concerns that the exclusion of the risks and rewards tests included within SIC12, could mean that some entities may not be captured on the reporting entity's balance sheet, despite them being controlled, in substance, by it.


Should the IFRS on consolidated financial statements include a risk and rewards 'fall back' test?

If so, what level of variability of returns should be the basis for the test and why?

Please state how you would calculate the variability of returns and why you believe it is appropriate to have an exception to the principle that consolidation is on the basis of control.

As stated in our response to Question 7, we certainly believe that the qualitative assessment as per the current requirements should be the basis for assessing control. As we cannot be certain that this would in all cases prove conclusive, we would support additional guidance on assessing risk and reward as well as power. This could include the incorporation of the 'indicators of control' within SIC12, which do appear to have kept most structured entities on balance sheet in practice.

We understand that this might be construed as the inclusion of a set of rules to a standard which we believe should be dealt with through the application of a coherent principle. However, if in the form of appropriate guidance, these would be useful in ensuring the key aim of determining whether structured entities should (or should not) be consolidated.


Do the proposed disclosure requirements described in paragraph 23 provide decision-useful information?

Please identify any disclosure requirements that you think should be removed from, or added to, the draft IFRS?

We agree in principle with the objectives of the disclosure requirements outlined in paragraph 23, and that they would provide decision-useful information. However, we believe that in practice many of the extensive requirements will be quite burdensome, both in terms of information relating to consolidated entities and where assessment has been made not to consolidate when non-controlling interests (and claims) exist.

We certainly believe that attention should be drawn to paragraph B31 of the ED which helpfully reminds the reporting entity to ensure that the details provided in the disclosures should balance usability and relevance. However, we do have concerns that much of the subsequent application guidance in the ED will essentially be treated as a necessary requirement, moving away from the principle outlined in paragraph B31.


Do you think that reporting entities will, or should have available the information to meet the disclosure requirements?

Please identify any of those requirements with which you believe it will be difficult for reporting entities to comply, or that are likely to impose significant costs on reporting entities.

While we believe that some of the disclosure requirements are extensive, in general, we would expect that the relevant information should be available. Even in the case of non-consolidated interests, we would expect management to be able to access sufficient information to fulfil those requirements. We would expect management to be using such information to manage their interests in any case.


Do you think that reputational risk is an appropriate basis for consolidation?

If so, please describe how it meets the definition and how such a basis of consolidation might work in practice.

Do you think that the proposed disclosures in paragraph B47 are sufficient?

If not, how should they be enhanced?

We agree with the Board, that reputational risk is not an appropriate basis for consolidation on the basis of the rationale outlined in paragraphs BC37-39.

We believe that the additional disclosure requirements in paragraph B46, where an entity has provided support to a structured entity without contractual or constructive obligation, does provide useful information.


Do you think that the Board should consider the definition of significant influence and the use of the equity method with a view to developing proposals as part of separate project that might address the concerns raised relating to IAS28?

While we would support the development of a cohesive set of requirements for investments in all entities, should the Board pursue the consolidation project outlined in this ED, we would agree that it would be appropriate to conduct a separate project for defining significant influence and the equity method.