In this week, dedicated to consolidated financial statements and the impact of international financial reporting standards, this was the underpinning for a number of lessons about implications of the new standard, and how companies can deal with it, if and when it comes.
partly aims to define the often slippery status of Special Purpose Entities, Variable Interest Entities, and other such activities. It was completed by IASB on May 12, in effect requiring multinationals to adopt it by 2013 -- and allowing for earlier application. But the standard may impact companies other than multinationals. Assuming, that is, that the Securities and Exchange Commission decides to mandate the use of international standards, in a ruling that is expected later this year.
If that happens, companies that once were concerned only with U.S. GAAP may have homework to do -- particularly real estate and investment management companies. In the U.S, these have "been living under deferrals allowed by FAS 167," according to Dave Augustine, a partner in KPMG's advisory services group. And they may in any case soon have to live up to more rigorous standards, when FASB revises the standard later this year, as is expected.
For one thing, the set of tests that a CFO has to perform -- to decide whether consolidation is necessary -- seems more complicated and subjective than the standards, both U.S. and international, that preceded it.
The test starts, for example, with determining whether the investor has actual control over the entity.
Let's say your firm has a lower-than-majority voting stake in a company for which your firm's ownership is an investment. "You might conclude that you have a dominant voting position and there is a wide dispersion of other vote holders," Karl Braun told the KPMG panel, noting that IFRS 10 would consider this a controlling stake, and therefore to be consolidated -- even if you have "98-plus percent of the other vote holders aligning against you."
On the other hand, a situation in which two of your opponents each have 26% voting rights would make it "much easier for these two to align against you," he pointed out. "The default is that you do not have power."
This may leave open the "chance that several investors may conclude that they have de-facto control, and need to consolidate," said Braun.
Differentiating IFRS on this issue is the "idea of future voting rights," which have to be considered in the mix, according to Augustine. Currently, under GAAP, he noted, "you only consider the rights you currently have."
The other tests to be imposed ask "whether the investor has power over the relevant activities of the investor," said Paul Munter, a KPMG partner and IFRS national leader in KPMG's department of professional practice. Beyond that, there are the questions of whether the investor has "exposure to variability in returns" and whether or not there is "a link between the power [of the investor] and returns," he said.
The result, according to Augustine, is "more subjective," with "no definitive gating," and a very subjective" definition of "de-facto power."