Post on 25-Dec-2015
– more than meets the eye?
Colin Parker
Head of GAAP Consulting
www.gaap.com.au
For the Strategy Group
Melbourne 2 December 2013
Disclaimer
© GAAP.com.au Pty Ltd Oct 2013 – all rights reserved
This presentation is intended for instruction. It is general information only, and is not specific business advice or financial advice and no person should rely on the contents without first obtaining advice from a qualified professional person acting in that role or reference to source materials such as accounting standards.
Nevertheless, all care has been taken in preparing this information to the time of its distribution at the training event. GAAP Consulting, related entities, officers and employees do not accept any contractual, tortuous or other form of liability for this content or for any consequence arising from its use or for omissions or errors, including responsibility to any person by reason of negligence.
Blockbuster snapshot
Standard Transition1/1/ 2012
(3rd Balance Sheet date)
Comparatives 31/12/2012
Financial Statements31/12/2013
• AASB 10 Consolidated financial statements
• Investment entities• NFPs affected
YES
1/1/20131/1/2013
YES
31/12/201331/12/2014
YES
31/12/201431/13/2014
AASB 11 Joint arrangements
YES YES YES
AASB 12 Disclosures of interests in other entities
NA YES YES
AASB 13 Fair value NA YES YES
“The potential effect of these Standards is yet to be fully determined” a listed for 30 June
2013
4
Today’s focus is on AASB 10 – understand the basics
1. Key concepts only – its about identification!
2. Investment entity exemption
3. NFP guidance
4. Disclosure
5. YOUR actions now!
Context
• The Problem– Practice varied– Perceived differing concepts in IAS 27
(control) and SIC-12 (indicators of control)– GFC
• Objective• Key features• Changed/unchanged• Result• Retrospectivity under AASB 108
– Third balance sheet
Interaction between AASB 10,11,12, and AASB 128
Control alone?
Significant influence?Joint arrangement – AASB 11
Joint control?Consolidation – AASB 10
Disclosures in accordance with AASB 12
AASB 9
Disclosures in accordance with AASB 12
Yes
Yes
YesNo
No
No
Associate - AASB 128
Disclosures in accordance with AASB 12
Where does AASB 10 have impact?
Special purpose vehicles
• Used to consolidate based on exposure to risks• Now control = power + exposure to variable returns
Agent or principal?
• Is investor / decision-maker acting as agent or principal?• e.g. Investment managers / asset managers
De Facto control (< 50%)
• New model – consider all facts and circumstances• Relationships without contracts may be judged as giving control
Potential voting rights
• AASB 127 – currently exercisable• AASB 10 – determine if substantive
Silos guidance• Are specified assets a separate entity for control purposes if investee has
power over those assets only?
Elective, exemptions & transition
• Elective for a parent where conditions met:
1. WOS or partly sub, all owners informed, no objection
2. Debt or equity instruments not traded in a public market
3. Not a ‘filer’ for purpose of issuing any class of financial instruments in a public market
4. Ultimate or intermediate parent produces CFS• Available for public use• Comply with IFRS
• Exclusions – ‘Employee benefits’ & Investment entities
• Transition – business combinations
AASB 10 Consolidated financial statements
• If an entity is a parent, it prepares consolidated financials• An entity is a parent if it controls an investee• An entity controls another if:
“it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.”
The change:Previously, AASB 127 defined control as control is the power to
govern the financial and operating policies of an entity so as to obtain benefits from its activities
What is the difference?
New elements in deciding control
POWER OVER RELEVANT ACTIVITIES:
Is it decided just by voting rights?
- I hold the majority- What have the others got?
- I don’t hold the majority- Agreements with other voters- Contractual agreements- Potential voting rights- De facto control
Control• Investor must
– Determine nature of involvement in investee– Identify whether it is parent who controls investee
• An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with investee and has ability to affect those returns through its power over investee
• Consider all facts and circumstances
Element 1 – power
• Existing rights that give it current ability to direct relevant activities
• Rights– Straight forward (directly and solely thru voting rights)– Complex (many factors to consider)
• Current ability• Two or more investors ‘most significantly’• Protective rights do not result in power
Element 2 & 3 – returns and ability
• Returns vary with performance• Only one can control but• More than one party can share in returns• Investor with decision-making rights – principal or agent
determination
Assessing control
Clear
1. Purpose and design of investee?– Equity instruments Vs. voting rights not dominant
More Complex
2. Relevant activities and how decisions-made?
3. Rights give current ability to direct relevant activities?
4. Investor exposed, or has rights, to variable returns from its involvement?
5. Investor has ability to use its power over investee to affect amount of investor’s returns?
6. Consider nature of relationship with other parties?
Continuous assessment needed
Facts change
Power change
EventChanges to exposure or
rights
Principal or agent
Investment entities –excluded from consolidation
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Investment entities amendments
• Avoid consolidation• Measure eligible subsidiaries at FVTPL instead• Must consider all facts and circumstances when
assessing whether it is an investment entity
Private equity entity
Venture capital entity
Superannuation funds
Sovereign wealth funds
Other investment funds
Criteria for an investment entity
Obtains funds from one or more investors for purpose of providing those investor(s) with investment management services
Commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, and
Measures and evaluates performance of substantially all of its investments on a fair value basis
Typical characteristics
1. More than one investment
2. More than one investor
3. Investors that are not related to entity or other members of group containing entity
4. Ownership interests, typically in form of equity or similar interests (e.g. partnership interests), to which proportionate shares of net assets of the investment entity are attributed
NFP guidance – just released
Element NFP context
Control Financial interest not necessaryIts about the relationship
Power Deploy assets or incur liabilitiesProviding G&S to investor/other partiesMight arise from legislation
Rights Policy directionsVeto rights over budgetNo need to have day-to-day responsibility
Exposure Financial and non-financialDirect and indirectFurtherance of investor’s objectives
Disclosure of interests in other entities – its complex!
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Disclosure of interests in other entities
• Objective– Significant judgements and assumptions about interest another
entity and type of joint arrangement– Information: subsidiaries, joint arrangements and associates,
and structured entities– Additional disclosures to meet objective– Level of detail (aggregate and disaggregate)
• Application– 1 January 2013– Disclosures in AASB 12 limited to operative dates of AASB 10
and 11– No transitionals; AASB 101 (comparatives) applies
‘Interest’ in another entity
• “A contractual and non-contractual involvement that exposes entity to variability of returns from performance of other entity”; evidenced by:– Holding equity or debt instruments– Other forms of involvement (e.g., provision of funding, liquidity
support, credit enhancement and guarantees)
• Includes means by which entity has control or joint control of, or significant influence over, another
• Normally excludes a typical customer supplier relationship
Significant judgements and assumptions
• Disclose information (and changes) in determining: – Controls another entity – Joint control of an arrangement or significant influence over
another entity– Type of joint arrangement when the arrangement has been
structured through a separate vehicle
• Examples– Does not control another entity even though it holds more than
50% of voting rights – Controls another entity even though it holds less than 50% of
voting rights. – An agent or a principal – Significant influence (yes/no at 20% threshold)
Subsidiaries
• Disclose information that enables users of consolidated financial statements to: – Understand: composition of group and interest that NCI have in
group’s activities and cash flows
• Evaluate: – Nature and extent of significant restrictions on its ability to
access or use assets, and settle liabilities, of group– Nature of, and changes in, risks associated with its interests in
consolidated structured entities – Consequences of changes in its ownership interest in a
subsidiary that do not result in a loss of control – Consequences of losing control of a subsidiary during the
reporting period.
Interests in unconsolidated structured entities
• Designed so that voting or similar rights are not dominant factor in deciding who controls entity
• Disclose information that enables users:– Understand nature and extent of its interests in unconsolidated
structured entities– Evaluate nature of, and changes in, risks associated with its
interests in unconsolidated structured entities
Some implications
1. Knowledge acquisition
2. May change previous consolidation conclusions
3. Dual role an investor in manager of investment fund
4. Update systems and processes (including detailed accounting policies)
5. Debt covenants
6. Stakeholder engagement (Remember Centro responsibilities)
7. Reduced structuring opportunities
8. Opening balances now
Action – AASB 101. Understand AASB 10 and differences from AASB 127
2. Design a template for AASB 10 determinations that will need to be applied ‘involvement with an entity’
3. Review all involvements against template
4. Decide on control or not
5. Fine judgements (apply significant judgement rules)
6. Consider independent review of decisions made
7. Apply transition arrangements
8. Revisit information and decision-making process continuously
9. Watch for AASB’s NFPs guidance
Action – AASB 12
1. Understand AASB 12 and start ASAP
2. Identify all interests in other entities (documentation vital)
3. Organise other entities to supply required information in a timely manner
4. Consider aggregating and disaggregating information
5. Remember you are unique (no cutting and pasting)
6. Draft notes well in advance
7. Consider independent assurance
8. Revisit for each reporting period
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Further assistanceColin Parker Founder and head of GAAP Consulting Network
Team leader advisory & litigation support Former member of AASBcolin@gaap.com.auwww.gaap.com.auLinkedIn Colin Parker0421 088 611
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