01 June 2012

EFRAG: Consolidation of Special Purpose Entities under IFRS 10 'Consolidated Financial Statements'

In May 2011, the IASB published IFRS 10 'Consolidated Financial Statements' (IFRS 10) which establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 changes the scope of consolidation, meaning that a reporting entity may:

(a) have to consolidate certain Special Purpose Entities (SPEs) that were previously not consolidated under existing IAS 27 'Consolidated and Separate Financial Statements' and SIC-12 'Consolidation – Special Purpose Entities'; and

(b) no longer consolidate certain other SPEs that were previously consolidated.

Whether a reporting entity will have to consolidate more SPEs or fewer SPEs will depend on various factors, and will generally be driven by the nature of its interests in the SPE being evaluated. The application of a uniform consolidation principle based on ability to control (which incorporates risks and rewards but requires power over those risks and rewards to have control) is intended to provide robust guidance in situations where it has proved difficult to assess control in practice and divergence had evolved. As explained below, this report gives an overview of how participants of the supplementary study are expected to be impacted by IFRS 10.

Executive Summary

1. The EFRAG secretariat was asked by the European Commission to conduct a supplementary study to assist them in collecting evidence, intended to describe the impact of IFRS 10 on the scope of consolidation of SPEs.
2. The 14 companies that participated in the supplementary study are listed European groups, of which eight are also listed in the United States. The total balance sheet assets of the fourteen participants are in excess of €13 trillion.
3. The findings indicate that the new guidance will result in more informative financial statements in relation to SPEs.
4. The findings demonstrate that the overall quantitative impact from adopting IFRS 10 on the scope of consolidation, compared to current requirements for SPEs, is likely to be relatively limited for total assets and total consolidated SPEs as reported by participants. The seven participants that provided quantitative information reported being involved with approximately 10,500 SPEs in total. This included funds, securitisation vehicles, asset-repackaging vehicles, finance and leasing SPEs and other types of SPEs. In aggregate, IFRS 10 results in the consolidation of an additional 50 SPEs with a corresponding net increase in total assets of €4.4 billion, mainly of funds that were previously not consolidated.
5. The total SPE assets consolidated under IFRS 10 increased by 1.3 per cent compared to the total SPE assets consolidated under IAS 27 'Consolidated and Separate Financial Statements' and SIC-12 'Consolidation – Special Purpose Entities'. This comprises a net increase of 1.4 per cent related to the consolidation of additional funds that is offset by a net decrease of 0.1 per cent related to deconsolidation of other types of SPEs.
6. The direction of these findings was confirmed by the responses from the other seven participants that provided a qualitative assessment based on their IFRS 10 implementation work.
7. In addition, some participants reported that although IFRS 10 did not necessarily result in consolidation of considerably more or of less SPEs, the standard should not be considered in isolation, but should be assessed in conjunction with the disclosure requirements of IFRS 12. Some of these participants specifically noted that the new disclosure requirements in IFRS 12 would require them to provide significantly more narrative information about their interests in unconsolidated SPEs.
8. Some participants also pointed out that even if certain SPEs were deconsolidated, they would still be required to continue to recognise the assets of those SPEs because of the risks and rewards model underlying IAS 39’s 'Financial Instruments: Recognition and Measurement' derecognition criteria.

Full paper

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