Need to Know: IFRS 10 - Consolidated Financial ... - BDO Canada

6 IFRS 10 Consolidated Financial Statements1. The IASB/FASB projectConsolidation was among the first convergence projects identified by the International Accounting Standards Board (IASB)and the US Financial Accounting Standards Board (FASB). However, although the project was added to the agenda in 2003,substantial progress was not made until 2008. This timing links to the global financial crisis, which started in 2007 andprompted additional focus on consolidation and related disclosures.1.1. Previous GuidancePrevious guidance in IFRSs for consolidation was set out in IAS 27(2008) Consolidated and Separate Financial Statements andSIC-12 Consolidation—Special Purpose Entities.IAS 27(2008) Consolidated and Separate Financial StatementsIAS 27(2008).4 stated that an entity has control over another entity:‘…when it has the power to govern the financial and operating policies of an entity so as to obtain benefitsfrom is activities.’The standard further explained that in order for control to exist, an entity needed to have the current ability to exercise thatpower. The control principle in IAS 27(2008) was based on the legal structure of the arrangement.SIC-12 Consolidation—Special Purpose EntitiesSpecial Purpose Entities (SPEs) often have predetermined narrow and well-defined objective(s). In some cases, their activitiesare largely predetermined (sometimes termed an ‘autopilot’ structure). SIC-12 required an investor to consolidate an SPE ifit was exposed to the majority of its residual or ownership risks. Essentially, the control principle in SIC-12 was based on ananalysis of risks and rewards.1.2. Rationale for changeThe project to replace the existing guidance in respect of consolidation was undertaken for the following main reasons:––Diversity arose in practice from the application of IAS 27(2008) and SIC-12. It was not always clear whether an entitymeets the definition of an SPE and, in consequence, whether IAS 27(2008) or SIC-12 should be applied. Because they werebased on different principles, the consolidation conclusion reached could differ, depending on whether the guidance inIAS 27(2008) or SIC-12 was followed– – There was a need to enhance disclosure requirements, in particular as a consequence of the global financial crisis. Thecrisis had highlighted a lack of transparency about the extent to which investors were exposed to risks associated with aninvestee’s involvement with ‘off balance sheet vehicles’. These are entities that are not consolidated, but which have thepotential to give rise to exposures in the event of losses. As a result the G20 leaders and the Financial Stability Board askedthe IASB to improve disclosure requirements for such vehicles.