Comparison between U.S. GAAP and International ... - Grant Thornton

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Comparison between U.S. GAAP and International Financial Reporting Standards 108 IFRS U.S. GAAP applies to all subsidiaries. Therefore, potential differences could occur in situations in which • A subsidiary is not a business or nonprofit activity • A subsidiary is involved in the sale of in substance real estate or the conveyance of oil and gas mineral rights That IFRS guidance also does not address whether it applies to transactions with nonsubsidiaries that are businesses or nonprofit activities. See (ASC 810-10-40-3A through 40-5). 8.3 Special purpose entities/variable interest entities IFRS Relevant guidance: SIC-12 U.S. GAAP Relevant guidance: ASC 810-10 “Variable Interest Entities” subsections Introduction IAS 27 requires a parent to consolidate all entities that it controls. However, it does not provide explicit guidance on the consolidation of special purpose entities (SPEs). That guidance is in SIC-12. According to SIC 12, an SPE is an entity created to accomplish a narrow and well-defined purpose. It may take the form of a corporation, trust, partnership, or unincorporated entity. The legal arrangements governing SPEs often impose strict limits on the decision-making powers of the governing body over the operations of the SPE. These provisions may specify that policies cannot be modified other than by the entity's creator or sponsor (for example, they operate on “autopilot”) (SIC 12.1). ASC 810-10 requires a parent to consolidate all entities in which it has a controlling financial interest unless control does not rest with the majority owner. The usual condition for a controlling financial interest is ownership of a majority voting interest (voting interest model). However, majority ownership in some entities does not convey a controlling financial interest. For such entities, called variable interest entities (VIEs), the guidance in ASC 810-10, “Variable Interest Entities” subsections shall be applied to determine if a reporting entity’s variable interests give it a controlling financial interest in the VIE. A reporting entity that holds a direct or indirect (explicit or implicit) variable interest in a legal entity must determine whether the guidance in the “Variable Interest Entities” subsections of ASC 810-10 applies to that legal entity before considering other consolidation guidance. However, the recognition and measurement provisions in ASC 810-10 are indefinitely deferred for certain investment funds (ASC 810-10-65-2). Under the amended guidance in ASC 810-10, “Variable Interest Entities” subsections, a legal entity is a variable interest entity (VIE) if any of the following conditions exists: • The total equity investment at risk is not sufficient to allow it to finance its activities without additional subordinated financial support • The legal entity’s total equity investment at risk does not provide its holders, as a group, with all of the © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
Comparison between U.S. GAAP and International Financial Reporting Standards 109 IFRS U.S. GAAP following characteristics The power through voting or similar rights to direct the activities that most significantly impact the legal entity’s economic performance The obligation to absorb the expected losses of the legal entity The right to receive expected residual returns of the legal entity • Voting rights of some equity investors are not proportional to their obligation to absorb expected losses and / or right to receive expected residual returns and substantially all the activities of the legal entity involve, or are conducted on behalf of, a single investor with disproportionately few voting rights (ASC 810-10-15-14) IFRS does not have the concept of VIEs. Although a special purpose entity (SPE) could be a VIE, the definition of a VIE in the ASC 810-10 differs from an SPE in SIC-12. Differences could occur because the scope and guidance in the ASC 810-10 differ from SIC-12. In addition, the guidance in ASC 810-10 applies only to legal entities (ASC 810-10-15-14). Consolidation evaluation An SPE shall be consolidated when the substance of the relationship between a reporting enterprise and the SPE indicates that the SPE is controlled by the reporting enterprise (SIC-12.8). In addition to the situations listed in IAS 27.13 (discussed in the section above on Basic requirements for group accounts), factors which may indicate that the reporting enterprise controls an SPE include the following (SIC-12.10 and Appendix to SIC-12): • The SPE's activities are conducted on behalf of the enterprise according to its specific business needs so that it obtains the benefits from the SPE's activities • The enterprise in substance has decision-making powers to obtain the majority of the benefits of the activities of the SPE or has delegated them through An enterprise has to determine whether it has an explicit or implicit variable interest in another entity. A variable interest is a contractual, ownership, or other financial interest in an entity that changes with changes in the fair value of the entity’s net assets exclusive of variable interests. (ASC 810-10-05, “Variable Interests” and ASC 810-10-55-16 through 55-41). If the reporting entity concludes that it has variable interests in another legal entity, it should determine if the other entity is a VIE. If the legal entity is a VIE, it needs to be evaluated for consolidation (ASC 810-10-15-14). A reporting entity that holds a variable interest in a VIE and has both of the following characteristics of a controlling financial interest in a VIE is the primary beneficiary of the VIE (ASC 810-10-25-38A): • Power: The power to direct the activities of the VIE that most significantly affect the VIE’s economic performance • Economic interest: The obligation to absorb losses, or the right to receive benefits that could potentially be significant to the VIE The primary beneficiary of a VIE must consolidate the VIE. Regardless of whether a reporting entity consolidates © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
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Comparison between U.S. GAAP and International ... - Grant Thornton

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