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KPMG is warning that the latest standards* published by the International Accounting Standards Board (IASB) could have a significant impact on consolidation evaluation and joint venture accounting for many companies.
Mike Metcalf, technical accounting partner at KPMG in the UK said: “The introduction of IFRS 10 and 11 could change the shape of the balance sheet for organizations in industries such as the mining, property and financial sectors, requiring preparers and investors to adjust to a new financial reporting regime”.
Under IFRS 10 Consolidated Financial Statements, an investor will consolidate another entity when it has de facto control over it, even if it does not control a majority of the shares. KPMG says this could mean 45% of the votes would be a sufficiently dominant interest to trigger consolidation, if the other votes are widely dispersed.
Additionally, under the new standard more potential voting interests such as options and conversion features will be considered and these, coupled with other interests, could result in consolidation of an investee even before those rights are exercisable.
Metcalf said: “The question of whether or not an investor consolidates an investment has significant consequences on the assets, liabilities, revenues and expenses that are included in the company’s financial statements. If an investor has control it will include all of the subsidiary’s amounts in the group accounts, albeit with potentially a significant non-controlling interest amount in the case where control is achieved while holding a minority of the voting rights”.
IFRS 10 also will affect companies using special purpose entities, such as financial institutions and other entities dealing with securitization structures.
IFRS 11 Joint Arrangements addresses cases where an entity has joint control, rather than sole control over an investee or operation. Under IFRS 11, a company will no longer have a free choice between a one-line pick-up of their net share of a joint venture entity or inclusion of its share of each asset, liability, revenue and expense individually.
IFRS 11 requires that certain joint arrangements be equity accounted while for others, the investor’s interest in the individual assets, liabilities, revenues and expenses will be recognized.
Metcalf said: “Moving from proportionate consolidation to equity accounting will affect each of a company’s financial statement line items, notably decreasing both revenue and gross assets, even though the net amount at the bottom line should be unaffected”.
Source: GAAP.ru
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