Currently, the International Financial Reporting Standard provide venture capital organisations, mutual funds, unit trusts and similar entities an option to account for their investment in associates and joint ventures at fair value through profit-and-loss, instead of applying equity method/ proportionate consolidation. However, a similar option is not available for investment in subsidiaries, which is required to be consolidated. Many users and makers of financial statements have questioned this difference in approach. They point out that for specific business objectives, an investment entity should measure all investments at fair value through profit-and-loss. To address these aspects, the International Accounting Standards Board is developing a new IFRS that will define the term ‘investment entities’; such entities will have to account for their investments in subsidiaries, associates and joint ventures at fair value. The IASB is in discussion on issues relating to such accounting and the final IFRS is expected by the second half of 2012.

New dawn for consolidated reporting

At present, IAS 27 and SIC-12 deal with requirements for preparation of consolidated financial statements. IAS 27 requires consolidation of entities controlled by a reporting entity. It defines control as power to govern the financial and operating policies of an entity so as to benefit from it. SIC-12, in the context of special purpose entities, or SPEs, stresses on risks and rewards. Hence, there is a perceived conflict between the two. To address this and concerns on SPE accounting arising from the global credit crisis, IASB has issued a new IFRS 10 Consolidated Financial Statements, which will supersede IAS 27 (consolidation requirements) and SIC-12. It does not change consolidation procedures. Rather, it revises the definition of control. This may result in changes to a consolidated group (more or fewer entities consolidated than before). To assess control under IFRS 10, an entity should have a comprehensive understanding of an investee’s purpose and design, and the investor’s rights and exposures to variable returns, as well as rights and returns held by other investors. IFRS 10 is applicable for accounting periods commencing on or after January 1, 2013.

Global convergence, not there yet

In April, the G-20 finance ministers and central bank governors met in Washington DC to assess the progress of financial regulatory reforms. In a communiqué published after the meeting, the group affirmed its support for the efforts of the IASB and FASB to achieve convergence of a globally accepted set of high-quality accounting standards. Moreover, it urged the two boards to achieve their target of issuing standards on key convergence projects by mid-2013. Previously, the G-20 had set 2011 as the target. Since 2008, the boards’ convergence efforts have continued to move forward. Overall, they have made significant progress on joint projects such as fair value measurement, revenue, and financial instruments — classification, measurement and impairment. However, more work is needed for other joint projects such as hedge accounting, leases, and insurance.

Stock exchanges raise a ‘green’ thumb

Nasdaq in the US and stock exchanges in Istanbul and Cairo recently urged their listed companies to begin measuring and reporting on environmental and social issues. Nasdaq recommends reporting on greenhouse gas emissions, water use and gender equality among others, or explaining why it can’t be done, but this isn’t a condition for listing. The exchanges announced their reporting push at a meeting of the Sustainable Stock Exchanges Initiative in June at the Earth Summit in Rio de Janeiro. The initiative, backed by the United Nations organisations and programmes, attempts to increase transparency on environmental, social and governance issues for public companies. The São Paulo, Johannesburg, Kuala Lumpur and Copenhagen exchanges already require companies to report on them or explain why they won’t. Stock exchanges surveyed for the 2012 Progress Report from the Sustainable Stock Exchanges Initiative “overwhelmingly” affirmed that they would encourage corporate responsibility on sustainability issues.

Published on September 2, 2012