IASB´s investor perspectives: “At long last – a single model for consolidation”
19 May 2011
Patrick Finnegan as a Board member of the IASB contributed with the article “At long last – a single model for consolidation” to IASB´s investor perspectives. The views expressed in this article are about two new standards dealing with consolidation accounting and disclosures.
Patrick Finnegan is persuaded that investors will benefit from these new standards (IFRS 10 'Consolidated Financial Statements' and IFRS 12 'Disclosure of Interests in Other Entities') because they make the approach to consolidation accounting more understandable, comparable and consistent, and, he hopes, the new standards will ensure that the balance sheet provides a complete picture of what is under the control of a parent company and its management.
Patrick Finnegan mentioned in his article that “one of the most important lessons from the global financial crisis was that investors were exposed to significant risks from their involvement with structured entities, even though they believed such risks had been transferred to other parties. This was especially true for institutions that had established or sponsored structured entities. During our deliberations of the responses to the disclosure proposals, we chose to combine the disclosure requirements for interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities into a single comprehensive standard, IFRS 12 'Disclosure of Interests in Other Entities'.
In response to the concerns of investors who wanted us to make the risks associated with both consolidated and unconsolidated investees more clear and comprehensive, the standard establishes disclosure objectives to help investors:
- understand the significant judgements and assumptions (and changes to those judgements and assumptions) about whether a reporting entity controls, or does not control, another entity;
- understand the claims that non-controlling interests have on a consolidated group’s activities and cash flows;
- evaluate the nature and effect of significant restrictions on a parent’s ability to access and use assets of a group, and on its obligation to settle liabilities of the group;
- evaluate the nature of, and changes in, the risks associated with a parent’s interests in consolidated structured entities;
- evaluate the nature and extent of a reporting entity's interests in, and risks associated with, unconsolidated structured entities; and
- evaluate the accounting consequences of changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control.
The risk disclosures required for interests in unconsolidated structured entities ask for information about an entity’s expected and maximum exposure to loss. They also ask sponsors of structured entities to disclose information about risks from, and income that it has derived from, sponsoring those structured entities.”
Full paper
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