ifrs 10 consolidated financial statements · pwc slide 5 2012 ifrs update 2012 ability to use power...
TRANSCRIPT
Agenda
Introduction
What is control?
Power
• Relevant activities
PwC
• Ability to direct relevant activities
Variable returns
Questions
Slide 220122012 IFRS Update
Introduction – Replacing IAS 27 and SIC-12
Criticism of
IAS 27 and SIC- 12
How addressed?
Perceived conflict of emphasis
Single control definition and criteria
PwC Slide 320122012 IFRS Update
Diversity in practice on defacto control, agency
relationships, etc
Lack of transparency around off-balance sheet
vehicles
Explicit guidance included
Explicit guidance on structured entities.
Disclosures in IFRS 12
Introduction – Effect analysis
Are there new consolidation requirements?
Will there be more or less
• No new concepts introduced. Builds on existing control guidance.
• Adds additional context and application guidance
• Most consolidation decisions may be unaffected
• May result in more consolidation or de-consolidation depending on
• Control without a majority of voting rights
• Structured entities – Banks and financial institutions
Consistent application of
PwC Slide 420122012 IFRS Update
Will there be more or less consolidation?
Who will be most impacted?
application guidance
• IFRS 10 will change the way control is assessed – focus on all three elements of control
consolidation depending on bright lines applied under IAS 27/SIC 12
• Will result in more appropriate consolidation
• Potential voting rights
• Agency relationships – Fund or asset managers
application of concept of control!!
What is control?
Power
What activities significantly affect returns (“relevant activities”)?
How are decisions about relevant activities made?
Do investor’s rights provide current ability to direct relevant activities?
Control
PwC Slide 520122012 IFRS Update
Ability to use power to affect returns
Do investor’s rights provide current ability to direct relevant activities?
Principal/agent assessment
Exposure or rights to variable returns
Relevant activities – illustrative example 1
A, who is professional debt collector, is
B is responsible for asset selection i.e.
C is responsible for servicing the
Investors A, B and C set up an SPV to hold a portfolio of mortgages.
SPV is financed by equity equally shared by A, B and C.
Founding documents specify the following:
PwC
debt collector, is responsible for all debt collection and recovery decisions upon default of a receivable.
asset selection i.e. deciding on which mortgages to purchase, in accordance with specified guidelines.
servicing the receivables on a day-to-day basis, including collection and allocation of principal and interest payments proportionately between A, B and C.
20112011 IFRS UpdateSlide 6
Relevant activities – illustrative example 1
“Activities of the investee that significantly affect the investee’s returns.”
Default of receivable
B: Asset selection
SPV
PwC
A: Collect on defaulted receivables
C: Service receivables
B: Asset selection
Who controls the relevant activities of SPV?
Slide 720122012 IFRS Update
Solution to illustrative example 1
Do the activities significantly affect investee’s returns?
Consider only the activities that significantly affect
returns.
No
Yes
More information is required.
PwC Slide 820122012 IFRS Update
Which activity most significantly affect returns?
General considerations:
a. purpose and design of investee;
b. factors determining profit, revenue , value;
c. effect on returns of decision power over factors in (b); and
d. exposure to variability of returns.
Relevant activities – illustrative example 2
A, who is professional debt collector, is
B responsible for asset selection but is only
C is responsible for servicing the
SPV was set up to generate above market returns by applying superior
debt collection expertise to junk bonds. Asset selection guidelines in the
founding documents are highly restrictive.
Founding documents specify the following:
PwC
debt collector, is responsible for all debt collection and recovery decisions upon default of a receivable.
selection but is only allowed to selected C-rated junk bonds trading at 28% to 30% of par value at the date of inception of the SPV. No changes to portfolio after inception.
servicing the receivables on a day-to-day basis, including collection and allocation of principal and interest payments proportionately between A, B and C.
20112011 IFRS UpdateSlide 9
Solution to illustrative example 2
Purpose and design of SPV A
IFRS 10 factors
PwC20122012 IFRS Update
Slide 10
Decision powers over factors affecting profit, revenue , value of SPV
Exposure to variability of SPV
A
All
Ability to direct relevant activities –Substantive rights
Is there the practical ability to exercise?
Are there barriers to exercise of those rights by holder?
Do practical mechanisms exist for collective exercise of rights?
� Only consider substantive rights
•financial penalties or incentives;•exercise/conversion prices that deter exercise/conversion;•terms and conditions that prevent exercise of rights (e.g. conditions
PwC Slide 112012
Is the right exercisable when decisions need to be made?
Yes
Substantive rights
Yes
Will the holder benefit from the exercise of those rights?
•terms and conditions that prevent exercise of rights (e.g. conditions that narrowly limit timing of exercise); •the lack of an explicit, reasonable mechanism through which holders can exercise their rights; •inability to obtain information needed to exercise rights;
A has 60% voting rights in an investee, thus A has control even when the day-to-day operations are carried out by the remaining 40% investor. However if A does not have the ability to exercise that voting right, A does not have control.Potential voting rights are more likely to be substantive if:
•they are in the money; or •investor will benefit for other reasons from exercise (e.g. realise synergies).
Represents a change from IAS 27
Ability to direct relevant activities –Potential voting rights
Substantive
“…rights to obtain voting rights of an investee…”
Changes from IAS 27:
- in/out of money options
- timing of exercise
IFRS 10 requires consideration of
investors
PwC Slide 1220122012 IFRS Update
Substantive or
protective?
Purpose & design of instrument
and involvement
Other voting or decision
rights
Potential voting rights
- timing of exercise
Changes from IAS 27:
- Intention to exercise
Continuous reassessment!
More guidance now in IFRS 10
IFRS 10 allows non-currently
exercisable options to be considered
investors expectations, motives and reasons for
accepting the terms
Ability to direct relevant activities –Structured entities
1. Purpose and design; exposure to variability of investee
2. Involvement at inception; inception decisions that provide power
3. Contracts providing rights over closely-related activities
Indicator of in
vestor
power
“…voting or similar rights are not the dominant factor in deciding who controls the entity…”
•Downside risks and upside potential that the investee was designed to create. •Downside risks and upside potential that the investee was designed to pass onto other parties in the transaction.
•Whether the investor is exposed to those risks and upside potential. Decisions made at the investee’s inception should be evaluated to determine whether the transaction terms provide any participant with rights that are
PwC Slide 1320122012 IFRS Update
3. Contracts providing rights over closely-related activities
4. Rights over relevant activities upon contingent events
5. Commitment to ensure investee operates as designed
6. Other factors
Indicator of in
vestor
power
Yes
Consider factors in aggregate Complex!
•Whether the investor is exposed to those risks and upside potential. whether the transaction terms provide any participant with rights that are sufficient to constitute power.
Even if those circumstances have not yet arisen, control could exist.
On its own, this factor is insufficient to demonstrate power or prevent other parties from having power
Variable returns
“…investor’s returns from its involvement have the potential to vary as a result of the investee’s performance…”
• Many possible forms, e.g.
� Dividends
� Servicing fees
Could be positive or negative
PwC Slide 1420122012 IFRS Update
� Servicing fees
� Tax benefits
� Economies of scale
• Assessment made based on the substance of the arrangement regardless of legal form of returns
Variable returns – Absorber vs. contributor
• For assessing exposure to variable returns – consider instruments that absorb variability (e.g. shares) of investee’s performance
• Contributors of variability (e.g. debtors) are irrelevant.
• Assessment can get complex
PwC Slide 1520122012 IFRS Update
• Assessment can get complex
• Swap/derivative contracts
• Leasing arrangements ( Residual value guarantees, extensions option)
• Shareholder being a creditor to the investee
Complex – Please consult!
Key points
• Control comprises all of power, exposure to variable returns, and the ability to use power to influence returns
• Relevant activities significantly affect investee’s returns
� Consider power over relevant activities only.
• Consider only substantive rights
PwC
• Consider only substantive rights
• Structured entities are not controlled by voting rights
� Potentially complex consolidation analysis
• Contributors of variability are not exposed to variable returns
20122012 IFRS UpdateSlide 16
Agenda
Principles of classification
Focus on ‘other facts and circumstances’
PwC
Case studies
Slide 192012 IFRS Update
Recap: Types of joint arrangements
IAS 31 types IFRS 11 typesContractual rights and obligations
Accounting
Jointly- Own/ Share of
Joint control- contractually agreed sharing of control - unanimous consent over ‘relevant activities’
PwC
Jointly-controlled
assets
Jointly-controlled operations
Jointly-controlled entities
Joint operations
Joint ventures
Rights to assets; liabilities for obligations
Rights to net assets
Own/ Share of assets,
liabilities, revenue, expenses
Equity accounting
(proportionate consolidation not allowed)
Slide 20
Joint arrangement classificationJoint operation versus Joint venture [IFRS 11 para B21 and B33]
- Does legal form give the parties rights to the assets, and
PwC
-Do the activities primarily aim to provide an output to the parties ? and- Does the entity depends on the parties for settling the liabilities relating to the activities?
assets, and obligations for the liaiblities?
- Does contract give parties rights to asset and obligation for liabilities in the normal course of business?
Slide 2131 May 2012IFRS Advisory Meeting
Yes No
Classification
Legal form of separate vehicles
• Many types of vehicles:
� partnerships
� unincorporated entities
PwC
� unincorporated entities
� limited companies
� unlimited liability companies
• Legal form may not provide for separation
• Joint operations if no legal separation
2012 IFRS Update
Slide 22
e.g. Partnerships does not create separation from partners
Classification
Contractual terms
• Contractual terms may reverse /modify legal form
• Consider only rights and obligations in ‘normal course of business’
• Liquidation and bankruptcy rights less relevant
Limited application expected, normally were a local requirement for operations to be conducted in limited
liability company needs to be over written.
PwC
• Liquidation and bankruptcy rights less relevant
2012 IFRS Update
Slide 23
liability company needs to be over written.A limited liability company will never be able to over ride the net asset rights on liquidation as such less emphasis has to be placed on liquidation requirements, as this is not within
the normal course of business, to ascertain appropriate classification.
Focus on ‘other facts and circumstances’
Assess purpose and design of arrangement
Operation set up to provide all output to venturers?
Rights to all economic benefits from assets
Yes
PwC
Rights to all economic benefits from assets
Dependence on venturers for cash � obligation for liabilities
JOINT OPERATION
Slide 24
2012 IFRS Update
The parties have an indirectly obligation to the liabilities
Focus on ‘other facts and circumstances’ Some complexities
Output readily saleable in market
• Important factor to consider – but not conclusive
• If venturers are obligated to take the output – most likely a joint operation
• Reassess if facts and circumstances change
PwC2012 IFRS Update
Slide 25
• Reassess if facts and circumstances change
Pricing of product – how relevant?
• Important factor to consider – but not conclusive
• If venturers are obligated to take the output– most likely a joint operation
• Does not have to operate at break-even level
Focus on ‘other facts and circumstances’ Some complexities
Arrangement borrows money independently – how relevant?
• Important factor to consider – but not conclusive
• If venturers are obligated to take the output – arrangement continues to be dependent on parties for funds to repay borrowings and interest
PwC2012 IFRS Update
Slide 26
borrowings and interest
Varying levels of output taken by venture partners each year
• Assess intent of setting up the arrangement
• Assess economics– how does it correlate to investment by venture partners
• Assess impact on share of assets/liabilities
Key learning points
Classification is key to accounting for joint arrangements
Assess purpose and design for ‘other facts and circumstances’
PwC2012 IFRS Update
Slide 27
If venturers are obligated to take the output - pricing of output, ability to sell to third parties and borrowings are less relevant
When facts and circumstances change, re-assess classification.
Questions
© 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. "PwC" refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm's professional judgment or bind another member firm or PwCIL in any way.
The training was brought to you by PwC’s Business School.
The content of this presentation is based on the current status of International Financial Reporting Standards (IFRS), its exposure drafts, interpretations and best practice. The information, comments and material presented in this document are provided for information purposes only and are not to be used or considered as specific advice to account for transactions. When determining the proper accounting treatment the specific circumstances of each entity or transaction need to be taken into account. The presentation is not addressing all possible technical aspects and does not claim to be complete or exhaustive.
PricewaterhouseCoopers (PwC) will not accept any liability related to the information provided in this presentation and its interpretation. This document may not be reproduced in whole or part or made available without prior written consent of PwC.