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IASB’s new ‘suite’ of standards

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16th May 2011
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This month should see the IASB introduce a ‘package’ of five new international financial reporting standards (IFRS) relating to consolidation, joint ventures and disclosures.

Each of the five new standards has an application date for accounting periods beginning on or after 1 January 2013, (i.e. December 2013 year-ends) with early adoption is permitted. Users of my book, The Interpretation and Application of International Standards on Auditing should use this brief article in conjunction with Appendix 1: Overview of Financial Statements.  Users of AccountingWEB.co.uk Guide to IFRS should use this article in conjunction with Chapters 27 (IAS 27), 28 (IAS 28) and 30 (IAS 31).

The package of the five standards consists of:

  • IFRS 10 Consolidated Financial Statements
  • IFRS 11 Joint Arrangements
  • IFRS 12 Disclosures of Involvement with Other Entities
  • IAS 27 Separate Financial Statements (2011)
  • IAS 28 Investments in Associates and Joint Ventures (2011)

IFRS 10 Consolidated Financial Statements

The consolidation guidance currently in IAS 27 will be replaced by IFRS 10. It will also incorporate the requirements in SIC 12 Consolidation – Special Purpose Entities. The objective of this new IFRS is to introduce a single consolidation model for all entities which is based on control regardless of the nature of the investee. This new IFRS will base control on whether the investor has:

  • Power over the investee
  • Exposure, or rights, to variable returns from its involvement with the investee
  • The ability to use its power over the investee to affect the amount of returns

The board of the IASB considers this new standard to remove ‘accounting arbitrage’ opportunities which will also provide much clearer and more consistent guidance for more complex structures.

IFRS 11 Joint Arrangements

Currently IAS 31 Interests in Joint Ventures deals with the issues of joint ventures. The current IAS 31 allows proportionate consolidation to be used in accounting for joint ventures (as well as the equity method of accounting). The new IFRS 11 will prohibit the use of proportionate consolidation, thus leaving only the equity method of accounting available to investors in respect of their joint arrangements. 

IAS 31 currently recognises three sorts of joint venture:

  • Jointly-controlled operations
  • Jointly-controlled assets
  • Jointly-controlled entities

IFRS 11 has eliminated jointly-controlled assets to now only differentiate between joint operations and joint ventures. It defines a joint operation as:

“A joint arrangement whereby the parties that have joint control have rights to the assets and obligations for the liabilities.”

It defines a joint venture as:

“A joint arrangement whereby the parties that have joint control have rights to the net assets.”

As a consequence of this new standard, the accounting requirements for joint ventures will also be incorporated into IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The board recognises that around half of entities which report under IFRS use proportionate consolidation as a method of accounting for joint ventures. As a consequence of the withdrawal of proportionate consolidation in the new IFRS 11, entities will have to change their accounting policy (hence bringing such requirements into IAS 8). While the board accepts that the majority of entities which use proportionate consolidation will be unhappy about the change in accounting for joint arrangements, the board believes that this new standard will improve financial reporting.

IFRS 12 Disclosures of Involvement with Other Entities

This new IFRS requires enhanced disclosures concerning consolidated and unconsolidated entities in which an entity has involvement. Its objective is to enable users of the financial statements to evaluate the basis of control as well as any restrictions on consolidated assets and liabilities, risk exposures arising from involvements with unconsolidated entities and non-controlling interest (minority interests) holders’ involvement in the activities of consolidated entities.

IAS 27 Separate Financial Statements (2011)

This standard has been revised to remove the consolidation guidance into IFRS 10 (see above). Currently the standard deals with both consolidated and separate financial statements and users should take note that the requirements relating to separate financial statements remains unchanged. 

IAS 28 Investments in Associates and Joint Ventures (2011)

This IAS will be amended as a consequence of the issuance of IFRSs 10, 11 and 12 and will be re-published as IAS 28 Investments in Associates and Joint Ventures.

Also see: IFRS 13 unites fair value standards

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates and the author of ‘The Interpretation and Application of International Standards on Auditing’ (Wiley 2011) and ‘The AccountingWEB.co.uk Guide to IFRS’ (Sift Media 2011). He also lectures on financial reporting and auditing issues.

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