International Financial Reporting Standards_guide.pdf

Chapter 7 Consolidated and Separate Financial Statements (IAS 27) 85
7.7 COMMENTARY
7.7.1 The application of the requirements of IAS 27 and SIC 12 in identifying transactions
that result in control being obtained is a matter of substance over form, which requires a
degree of judgment, especially in the case of a special-purpose vehicle. Specific entities to
closely consider are securitization or conduit vehicles, insurance cells, employee benefit
trusts, and specialized funding vehicles.
7.7.2 Group structures can become complicated and difficult to understand. Complicated
structures can have a ripple effect on the accounting for numerous transactions, specifically
intergroup transactions and balances. Consolidation procedures, specifically in large entities
with complex structures, can be difficult to execute in practice and could be time consuming
and costly.
7.7.3 Different countries may have differences in legislation related to group statements, for
example company law, taxation law, regulatory reporting, and securities regulations.
Consolidation and control may be defined differently as opposed to IFRS and could result in
conflicting accounting practice not only between entities in different countries but also by
one entity that is required to apply several forms of regulations.
7.7.4 The IASB and FASB embarked on a consolidations project to address the basis and
process of consolidation and to provide more guidance around the concept of “control.” The
end of the project is expected to be an amendment to or replacement of IAS 27 and SIC 12. In
December 2008 the IASB issued an exposure draft of proposed amendments to IAS 27.
7.7.5 The main proposals in this exposure draft include:
■ A new principle-based definition of control that is easier to apply to a wide range of
situations and is more difficult to evade by special structuring. The proposed definition
of control is “the power to direct the activities of another entity to generate returns.”
Power over “activities” is broader than that over “operating and financial decisions”
and thus broadens the scope.
■ Enhanced disclosure requirements to enable investors to assess the extent of the
involvements and related risk of the entity in special structures.
7.8 IMPLEMENTATION DECISIONS
The following table sets out some of the strategic and tactical decisions that should be considered
when applying IAS 27.
Strategic decisions Tactical decisions Problems to overcome
Investments in subsidiaries must be
identified by applying the definition of
control, with specific identification of
special purpose entities.
If the entity is exempt from preparing
consolidated financial statements,
whether it wants to apply the
exemption.
Where separate financial statements are
prepared, an accounting policy decision
must be made for the recognition and
measurement of the investment.
Processes must be in place to identify
such transactions.
Intention and related accounting effects
that could arise must be considered
when entering into investment
transactions.
Control is based on substance over legal
form and all circumstances would need
to be carefully considered to identify the
true substance of the transaction.
Care must be taken in applying IAS
39 with regards classification. The
accounting policy chosen could have
various implications on issues such as
future impairments that may arise.