An Executive Guide to IFRS: Content, Costs and Benefits to Business

Consolidation

IAS 27 Consolidated and Separate Financial Statements addresses the requirements for identifying subsidiaries and then consolidating their figures, while SIC 12 Consolidation – Special Purpose Entities, as its name implies, deals with special purpose entities (SPEs). The two will be replaced in 2011 by a new standard (IFRS10) which refines the rules without changing the main thrust of the requirements.

The key determinant of whether an investee company should be consolidated is whether they are controlled by the investor company. Control is defined by IAS 27 as ‘the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities’. The standard expands to say that control is presumed to exist when the investor has a majority of the voting shares and also:

(a) power over more than half of the voting rights by virtue of an agreement with other investors;

(b) power to govern the financial and operating policies of the entity under a statute or an agreement;

(c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or

(d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.

The issue is also addressed in SIC 12, which says that an SPE should be consolidated ‘when the substance of the relationship between an entity ...