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In the accounting realm, the word “control”

takes on a revamped identity with the release

of three new International Financial Reporting

Standards (IFRSs), namely IFRS 10 Consolidated

Financial Statements, IFRS 11 Joint Arrangements

and IFRS 12 Disclosure of Interests in Other

Entities issued by the International Accounting

Standards Board (IASB). These IFRSs are

eff ective for annual periods beginning on or

after 1 January 2013 but require retrospective

application. Hence, early planning is highly

recommended.

This new suite of five consolidation and

related standards, including the revised

International Accounting Standards (IAS)

27 Separate Financial Statements and IAS 28

Investments in Associates and Joint Ventures, is

released as part of the convergence project to

eliminate diff erences between IFRS and United

States Generally Accepted Accounting Principles

(US GAAP) and also in response to the perceived

confl ict of emphasis between IAS 27 and SIC 12

Consolidation – Special Purpose Entities, which

has led to inconsistent application of the control

concept and structuring opportunities.

IFRS 10 brings the two control models for

power (as defined in IAS 27) and exposure

to returns (as defined in SIC 12) together by

introducing an additional criterion that the

investor is capable of wielding that power to

infl uence its returns. It does not change how

an entity is consolidated but whether an entity

is to be consolidated.

IFRS 11 changes the focus of classifi cation

of joint arrangements from the legal structure

to the nature of rights and obligations arising

from such arrangements. Only equity accounting

is allowed for joint ventures under IFRS 11 and

proportionate consolidation will no longer be

an option.

IFRS 12, in a single standard, expands

the disclosures required for interests in both

consolidated entities and unconsolidated entities.

However investment entities have been excluded

from the scope of IFRS 10 and IFRS 12 as IASB

has issued an exposure draft in August 2011 for

public comments on the proposed assessment,

measurement and disclosure requirements for

such entities.

WHO IS AFFECTED?

" e entities that are most likely to be aff ected

include:

• Entities with signifi cant equity interests in

other entities but may not hold majority

interest (that is, less than 50%);

• Entities holding potential voting rights such

as options over shares or convertible debt;

• Investment, fund or asset managers;

• Entities that use structured entities

(formally known as special-purpose entities);

• Entities that account for jointly-controlled

entities using proportionate consolidation;

and

• Entities that have collaborative arrangements

that may be joint arrangements

In The Know

NEW IFRS FOR CONSOLIDATION – IFRS 10, IFRS 11 & IFRS 12

IFRS 10: CONTROL AS THE BASIS FOR

CONSOLIDATION

IFRS 10 introduces a single consolidation model that identifi es

continuous control as the basis for consolidation for all types of

entities including structured entities. It identifi es three elements

of control, as shown in Figure 1. An investor must possess all the

three elements to conclude that it has control over an investee.

Figure 1

Exposure to variability in returns:

• Potential to vary according to

the entity’s performance

• Include both ownership-type

benefi ts and synergistic returns

(e.g. tax benefi ts or

economies of

scale, dividends,

cost savings)

Ability to use power to

affect returns:• Decision-making

rights to

infl uence returns

Power overthe investee:

• Having existing substantive

rights that give investor the

current ability to direct relevant

activities (i.e. activities that

most signifi cantly affect the

entity’s returns)

• May arise from voting rights or any

other contractual arrangements

• Specifi cally excludes

protective rights

Control

Other considerations when assessing control include the following:

• Purpose and design of investee To have power, the investor must be able to direct the relevant

activities, taking into consideration the purpose and design of an

investee. ! e relevant activities for an investee whose operations

are directed through voting rights will generally be its operating

and fi nancing activities.

In the event that there are several investors who have the ability

to direct diff erent relevant activities, the investor having the current

ability to direct the activities that most signifi cantly aff ect the

returns of the investee is considered to have power. One such example

is illustrated in IFRS 10 “application examples” where an investee is

set up by two investors for the purpose of developing and marketing

a medical product. One investor is responsible for developing and

obtaining regulatory approval of the medical product while the other

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In The Know

investor manufactures and markets the approved medical

product. Accordingly, each investor needs to consider which

activity most signifi cantly aff ects the investee’s returns and

whether the investor is able to direct that activity.

• Control with less than majority voting rightsIt is also possible for an investor with less than majority

voting rights to have power when the investor can unilaterally

direct the relevant activities; this is also known as de facto

control. This would imply consideration of relative and

potential voting rights (only if they are substantive) and

any additional facts and circumstances that may be relevant,

like voting patterns at previous shareholders’ meetings.

IFRS 10, paragraph B43, contains an example of Investor A,

who has acquired 48% of the voting rights of an investee

while the remaining voting rights are held by thousands of

shareholders, none individually holding more than 1% of

the voting rights. In this case, Investor A concludes that

he has a suffi ciently dominant voting interest to meet the

power criterion without the need to consider any other

evidence of power.

• Agency relationshipsIFRS 10 provides explicit guidance on an agency relationship

where an evaluation of the decision-making rights will

determine which party holds the decision-making authority.

" e investor shall treat the decision-making rights of an

investor’s agent as if they were held by the investor directly.

" is would have a potential impact for investment and

asset managers when evaluating whether they are agents

of the fund’s board of directors. Factors to be considered in

such agency relationships would usually include the scope

of discretion of decision-making authority, rights held by

other parties, linkage of investee’s remuneration agreement

to performance and decision-maker’s exposure to variability

from interests in the investee.

IFRS 11: FOCUS ON THE NATURE OF THE

RIGHTS AND OBLIGATIONS OF JOINT

ARRANGEMENTS

As illustrated in Figure 2, a joint arrangement can either

be a joint operation or a joint venture under IFRS 11. In

determining the classifi cation of joint arrangements, the

existence of a separate vehicle is a necessary condition, but

not suffi cient for a joint arrangement to be considered a joint

venture. IFRS 11 clarifi es that other factors like terms of the

contractual arrangement and relevant facts and circumstances

are to be considered as well. Hence management may need

to re-think its current classifi cation or potential business

decisions for joint arrangements.

JOINTLY-CONTROLLED OPERATIONS

Accounting method: Its share of assets, liabilities,

income and expenses

Joint arrangement is defi ned as a contractual agreement over which

• Two or more parties have “joint control” which is defi ned as the contractually agreed sharing of control of an arrangement; and

• Exists only when the decisions about the relevant activities require the unanimous consent of the parties sharing control

IFRS 11JOINT OPERATIONS

“Rights to the assets and obligations for the

liabilities relating to the arrangement”

Accounting method:

Its share of assets, liabilities,

income and expenses

IAS 311

JOINTLY-CONTROLLED ENTITIES

Accounting method: Proportionate consolidation

or equity

JOINTLY-CONTROLLED ASSETS

Accounting method: Its share of assets, liabilities,

income and expenses

JOINT VENTURES

“Rights to net assets of the arrangement”

Accounting method: Equity

Figure 2

OR

1 IAS 31 Interests in Joint Ventures has been

superseded by IFRS 11 Joint Arrangements

Jointly-controlled entities, as previously defi ned in IAS 311,

may be classifi ed as joint ventures and hence accounted for

using the equity method in IFRS 11. � is is one signifi cant

change, where the choice of using proportionate consolidation

has been removed under IFRS 11. � e impact of changing

from proportionate consolidation to the equity method could

be signifi cant where such investments in jointly-controlled

entities are material to the fi nancial statements. � is would

in turn impact computations of key performance indicators

used to assess the performance of an entity, including

that used for the loan covenant compliance, analyst and

shareholders’ communications, and share-based payment

vesting conditions.

IFRS 12: ONE COMPREHENSIVE

DISCLOSURE STANDARD

� e disclosure requirements in IFRS 12 are more extensive

compared to those in IAS 27 as IFRS 12 provides for

one comprehensive disclosure standard for interests in

subsidiaries, joint arrangements, associates and structured

entities. Hence, management would need to exercise a certain

Figure 3

degree of judgement in determining whether an investee

is controlled and therefore consolidated. For instance,

disclosure is required for how voting rights are evaluated

and whether it is a principal or an agent etc. It also introduces

the term “structured entities” which replaces and expands

upon the concept of a “special-purpose entity” that was

previously used in SIC 12.

TO CONSOLIDATE OR NOT?

Adopting these new standards will require time, effort

and the exercise of considerable judgement based on a

comprehensive understanding of the business, operations,

and legal rights and obligations. Accounting personnel should

not make such judgement calls alone and should get input

from management, operations personnel and legal counsel.

Figure 3 shows an interaction between the new IFRSs and

IAS 28 which summarises the consolidation requirements.

This article was written by Jezz Chew, Technical Manager of

ICPAS Technical.

Source: IASB www.ifrs.org (reproduced with permission)

INTERACTION BETWEEN IFRS 10, 11, 12 AND IAS 28

Joint control?

IFRS 9

Consolidation in accordance with IFRS 10

Disclosures in accordance with IFRS 12

Defi ne type of joint arrangement in accordance

with IFRS 11

Account for an investment in accordance with IAS 28

Disclosures in accordance with IFRS 12

Account for assets, liabilities, revenues and expenses

Disclosures in accordance with IFRS 12

yes

yes

Joint VentureJoint Operation yes

no

no

no

Control alone?

Signifi cant infl uence?

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