– 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

17

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 context

21

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!

23

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

Implications and actions

29

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

GAAP Consulting Network‘Excellence in Financial Reporting’

www.gaap.com.au

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

• • Independent advice on accounting, auditing & superannuation• Litigation and regulatory support• Briefing on contemporary issues• Training• GAAP and GAAS information services

Free fortnightly newsletter• GAAP Alert reports changes in financial reporting, auditing and professional

standards Twitter: gaapconsulting – over 1100 tweets!