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Significantly, IFRS 11 Joint Arrangements prescribes new accounting rules that prohibit proportionate consolidation for what are now defined as ‘joint ventures'. For structures that are classified as ‘joint operations', a method similar to proportionate consolidation is now required. The rules became effective in 2013 (mandatory from 2014 for EU countries).
A Fitch survey of 24 large European non-financial corporates found that 13 of these entities had been using proportionate consolidation to account for interests in jointly controlled entities. IFRS 11 will force companies to use equity accounting instead for structures that are classified as ‘joint ventures.’
Fitch’s survey also found that IFRS 10 Consolidated Financial Statements, another new standard, will not have a significant effect for most companies. The changes introduced by the standard were targeted in particular at off-balance sheet structured entities and most of the group relationships that non-financial corporates have will be unaffected by the new rules.
The accounting changes introduced by IFRS 10 and 11 should not affect underlying credit quality. Therefore Fitch does not anticipate any ratings effect.
A further range of disclosures will be provided by a third new standard, IFRS 12. These will be useful in assessing the transferability of cash flows within a group and risks arising from interests in structured entities. Where this provides fresh information about these factors it could be relevant to credit analysis and may possibly affect ratings.