joint control
The potential for greater earnings vola- tility exists under IFRS.
Upon the loss of significant influence or joint control, any retained interest is measured at the carrying amount of the investment at the date of the change in status.
If an entity loses significant influence or joint control over an equity method investment and the retained interest is a financial asset, the entity should measure the retained interest at fair value. The resultant gain or loss is recognized in the income statement.
In contrast, if an investment in an associate becomes an investment in a joint venture, or vice versa, such that the equity method of accounting continues to apply, no gain or loss is recognized in the income statement.
Disclosure
Disclosures
US GAAP and IFRS both require extensive disclosure about an entity’s involvement in VIEs/ structured entities, including those that are not consolidated.
Guidance applies to both nonpublic and public enterprises.
The principal objectives of VIE disclosures are to provide financial statement users with an understanding of the following:
• Significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement in a VIE
• The nature of restrictions on a consoli- dated VIE’s assets and on the settle- ment of its liabilities reported by an enterprise in its statement of finan- cial position, including the carrying amounts of such assets and liabilities
• The nature of, and changes in, the risks associated with an enterprise’s involve- ment with the VIE
• How an enterprise’s involvement with the VIE affects the enterprise’s finan- cial position, financial performance,
IFRS has disclosure requirements for interests in subsidiaries, joint arrange- ments, associates, and unconsolidated structured entities which include the following:
• Significant judgments and assump- tions in determining if an investor has control or joint control over another entity, and the type of joint arrangement
• The composition of the group and interests that non-controlling inter- ests have in the group’s activities and cash flows
• The nature and extent of any signifi- cant restrictions on the ability of the investor to access or use assets, and settle liabilities
• The nature and extent of an inves- tor’s interest in unconsolidated structured entities
Consolidation
Impact US GAAP IFRS
Disclosures (continued) The level of disclosure to achieve these objectives may depend on the facts and circumstances surrounding the VIE and the enterprise’s interest in that entity. Additional detailed disclosure guidance is provided for meeting the objectives described above.
Specific disclosures are required for (1) a primary beneficiary of a VIE and (2) an entity that holds a variable interest in a VIE (but is not the primary beneficiary).
• The nature of, and changes in, the risks associated with an investor’s interest in consolidated and unconsolidated structured entities
• The nature, extent and financial effects of an investors’ interests in joint arrangements and associates, and the nature of the risks associated with those interestsThe consequences of changes in ownership interest of a subsidiary that do not result in loss of control
• The consequences of a loss of control of a subsidiary during the period An entity is required to consider the level of detail necessary to satisfy the disclosure objectives of enabling users to evaluate the nature and associated risks of its inter- ests, and the effects of those interests on its financial statements.
Additional detailed disclosure guidance is provided for meeting the objectives described above.
If control of a subsidiary is lost, the parent shall disclose the gain or loss, if any, and: 1. Portion of that gain or loss attributable
to recognizing any investment retained in former subsidiary at its fair value at date when control is lost
2. Line item(s) in the statement of comprehensive income in which gain or loss is recognized (if not presented separately in the statement of compre- hensive income)
Additional disclosures are required in instances when separate financial state- ments are prepared for a parent that elects
Impact US GAAP IFRS
Technical references
IFRS IAS 1, IAS 27 (Amended 2011), IAS 28, IAS 28 (Amended 2011), IAS 36, IAS 39, IFRS 5, IFRS 10, IFRS 11, IFRS 12, SIC 13 US GAAP ASC 205, ASC 323, ASC 323–10–15–8 through 15-11, ASC 325–20, ASC 360, ASC 810, ASC 810–10–25–1 through 25–14,
ASC 810–10–60–4, SAB Topic 5H, SAB Topic 5–H (2)–(6) Note
The foregoing discussion captures a number of the more significant GAAP differences. It is important to note that the discussion is not inclusive of all GAAP differences in this area.
Recent/proposed guidance
In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of
Interests in Other Entities, IAS 27 (Amended), Separate Financial Statements, and IAS 28 (Amended), Investments in Associates and Joint Ventures. These standards are effective for annual periods beginning on or after January 1, 2013, with earlier application
permitted. Please note that IFRS 10, IFRS 11, IFRS 12, IAS 27, and IAS 28 have been endorsed for application in the European Union for annual periods beginning on or after 1 January 2014 with early adoption allowed.
IASB amendments to IFRS 10, Consolidated Financial Statements, IFRS 12, Disclosure of Interests in Other Entities, and IAS 27 (Amended), Separate Financial Statements—Investment Entities
In October 2012, the IASB issued a final standard defining an investment entity. This definition was developed jointly with the FASB although some differences exist. That standard provides an exception to the consolidation requirements in IFRS 10 for certain controlled investments held by an investment entity, and instead requires the investment entity to measure those investments at fair value through profit or loss. New disclosures are also required. Note that the exception from consolidation only applies to the finan- cial reporting of an investment entity and that exception does not carry over for the financial reporting by a non-investment entity parent. The amendments are effective from January 1, 2014 with early adoption permitted.
FASB Accounting Standards Update No, 2013-08, Financial Services—Investment Companies (Topic 946)
In June 2013, the FASB issued its standard defining an investment company. The standard amends the current definition and further specifies that entities registered under the Investment Company Act of 1940 would qualify as investment companies. Investment companies would continue to measure their investments at fair value, including any investments in which they have a controlling financial interest. The amendments are effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Early adoption is prohibited.
While the FASB and the IASB standards are substantially converged in most areas, there are several key differences. In contrast to the IASB standard, the FASB guidance retains the specialized investment company accounting in consolidation by a non-investment company parent. Further, while all portfolio investments will be accounted for at fair value through net income under the FASB’s requirements, the IASB only provides an exception from the consolidation requirement for controlled investments with all other investments being subject to other applicable guidance. In addition to other differences, the IASB standard also does not have a specific inclusion for entities under the Investment Company Act of 1940 or other similar legislation.
IASB proposed amendments to IAS 28 (Amended), Investments in Associates and Joint Ventures—Equity Method:
Consolidation
share of the changes in the net assets of an investee that are not recognized in profit or loss or other comprehensive income of the investee, or that are not distributions received. The exposure draft proposes that the investor should recognize its share of these other net asset changes in its own equity. A final standard is expected in the fourth quarter of 2013.
IASB proposed amendments to IFRS 10, Consolidated Financial Statements, and IAS 28(Amended), Investments in
Associates and Joint Ventures
In December 2012, the IASB issued an exposure draft to address the inconsistency between the requirements in IFRS 10
Consolidated Financial Statements, and IAS 28 Investments in Associates and Joint Ventures, in dealing with the loss of control of a
subsidiary that is contributed to an associate or a joint venture. IAS 28 (2011) restricts gains and losses arising from contributions of non-monetary assets to an associate or a joint venture to the extent of the interest attributable to the other equity holders in the associate or joint venture. IFRS 10 requires full profit or loss recognition on the loss of control of the subsidiary. The proposal would amend IAS 28 so that the current requirements regarding the partial gain or loss recognition for transactions between an investor and its associate or joint venture only apply to the gain or loss resulting from the sale or contribution of assets that do not constitute a business as defined in IFRS 3; and the gain or loss resulting from the sale or contribution of assets that constitute a business as defined in IFRS 3 between an investor and its associate or joint venture is recognized in full. Similarly, IFRS 10 would be amended to indicate that the gain or loss resulting from the sale or contribution of a subsidiary that does not constitute a business as defined in IFRS 3 between an investor and its associate or joint venture is recognized only to the extent of the unrelated investors’ interests in the associate or joint venture. A full gain or loss would be recognized on the loss of control of a subsidiary that constitutes a business as defined in IFRS 3, including cases in which the investor retains joint control of, or significant influence over, the investee. A final standard is expected in the fourth quarter of 2013.
IASB proposed amendments to IFRS 11, Joint Arrangements—Acquisition of an Interest in a Joint Operation In December 2012, the IASB issued a proposal to amend IFRS 11 to address the accounting for the acquisition of an interest in a joint operation that constitutes a business. The IASB proposes that acquirers of such interests apply the relevant principles on busi- ness combination accounting contained in IFRS 3, Business Combinations and other standards, and disclose the related information required under those standards. A final standard is expected in the fourth quarter of 2013.
FASB Proposed Accounting Standards Update, Consolidation (Topic 810)—Agent/Principal Analysis
In 2011 the FASB issued an exposure draft proposing changes to the consolidation guidance for VIEs and partnerships that are not VIEs. The proposal provided that a reporting entity t-hat has a variable interest in a VIE and decision-making authority would need to assess whether it uses its decision-making authority to act in a principal or an agent capacity. A decision maker determined to be an agent would not consolidate the entity. The principal versus agent analysis would also apply in determining if the entity is a VIE. In addition, the presumption that a general partner controls a partnership that is a voting interest entity could be over- come by applying the same principal versus agent assessment and determining that the general partner is using its power in an agent capacity.
The proposal would rescind ASU 2010-10, Consolidation (Topic 810), Amendments for Certain Investment Funds, which deferred application of the VIE model in ASC 810 for certain types of investment entities. If an entity meets the conditions for the deferral, the reporting enterprise currently continues to apply the previous VIE model that was based on a quantitative analysis of the risks and rewards of the entity or other applicable consolidation guidance when evaluating the entity for consolidation. The proposal could also impact the consolidation conclusion for other entities and partnerships that were not subject to the deferral. The effective