An entity with less than half the voting rights may still have sufficient power over the investee and should evaluate its consolidation decisions.
Several IFRS (International Financial Reporting Standards), transition guidance and annual improvement projects have been issued effective January 1, 2013. Applicable to all entities reporting under IFRS, the impact would vary relative to the sector. For example, IFRS11 will impact companies that have joint arrangements and currently follow the proportionate consolidation approach; IFRS10 will impact companies that have taken borderline judgments on ‘controls’; IFRS12 will result in disclosure for companies that have significant subsidiaries and/or structured entities and so on.
Chartered Accountant Sumesh E. outlines the impact of the new standards, in conversation with Grant Thornton.
What are the changes envisaged for joint venture accounting? Will this impact results significantly?
IFRS11 — Joint Arrangements supersedes IAS31 — Interests in Joint Ventures, and eliminates two categories, namely “jointly controlled operations” and “jointly controlled assets”. IFRS11 requires companies to categorise joint arrangements either as joint operations (with right to the assets and obligation for liabilities) or joint ventures (with right to the net assets). IFRS11 also eliminates the use of proportionate consolidation, which will result in a significant change for entities that adopted this policy under IAS31 and impact companies that have significant joint arrangements — particularly in the infrastructure, construction and extractive industries. In India, AS27 — Financial Reporting of Interests in Joint Ventures prescribes use of proportionate consolidation.
How does the consolidation process change with the new standards?
The consolidation process does not change and will continue to include elimination of intercompany balances, transactions, unrealised profits, accounting for foreign currency translation reserves and so on. What does change is the definition of ‘control’. IFRS10 and its accompanying guidance replace IAS27 — Consolidated and Separate Financial Statements and SIC12 — Special Purpose Entities. While IAS27 and SIC12 focused on control through voting rights and an exposure to the risk and rewards of investees, respectively, control has been re-defined with three broad elements — power over the investee; exposure or right to variable returns; and ability to use that power to obtain returns. In certain cases, an entity with less than half the voting rights may still have sufficient power over the investee and will, therefore, need to evaluate its consolidation decisions (the converse is also possible). For example, rights emanating from contractual agreements over decision-making in combination with voting rights, or cases where the other shareholders of an investee are widely dispersed, or existence of a contractual arrangement between an entity and other vote holders can empower an entity to direct the activities of an investee. Investors with all rights (including potential voting rights) may also have to evaluate whether these result in power over the investee even if the rights are not currently exercisable.
It must be noted that in October 2012, the International Accounting Standards Board created an exception for applicability of IFRS10, IFRS12 and IAS27 for investment entities such as pension funds, private equity organisations, venture capital organisations among others. This exemption has an effective date of January 1, 2014, and could greatly impact investment entities if adopted early.
Companies will have enhanced disclosure for unconsolidated entities in line with IFRS12 — Disclosure of Interest in Other Entities. This is expected to help investors assess risks from unconsolidated structured entities.
What are the other standards expected in the immediate future?
IASB’s convergence efforts with the US standard setters, FASB, covers revenue recognition, leases, insurance contracts and IFRS9 — Financial Instruments. These standards or relevant exposure drafts are expected to be released during 2013, with the final standards expected to apply from January 1, 2015. The standards are expected to have a significant impact. For instance, the leasing standard may require all leases to be reported in the statement of financial position.
How will they impact Indian companies?
Indian companies that prepare financial statements under IFRS will need to adopt these standards. For others, there is no immediate impact as there is no clarity on the convergence to IFRS or Ind AS. Ind AS is based on the IFRS existing prior to 2010. It is uncertain how these new developments, including the impact of the IASB-FASB convergence, would be incorporated, if at all, into Ind AS.