The Accounting Adviser

March 2013

Time for Transition: Will IFRS 10 affect your business?
New approach, new intricacies. 

By Edwin Ng, Senior Manager, Accounting Advisory Services and Lianne Hannaway, Partner, Accounting Advisory Services

Some businesses will already have analyzed the impact of adopting the new consolidation standard. Others, however, will have been putting it off until the period of adoption – perhaps with other pressing issues taking precedence. But those that believe the impact on their business will be straightforward may be in for a surprise, because the full implications of the new standard may not be immediately obvious.

Many old concepts have been given a new twist. Above all, the new standard requires a broader understanding of circumstances in assessing control. Previously disregarded facts could become relevant and could even tilt the balance of the overall analysis under the new standard. Even if the consolidation conclusion does not change, the related disclosure standard has its own challenges and may require additional data collection on your relationships with other entities – whether or not consolidated.

How does this affect you?

• You might have less than half of the voting rights over an investee, but hold options over shares or loans that are convertible to shares of the investee. Instead of simply considering whether these potential voting rights are currently exercisable, the test is now whether they are ‘substantive’. This is a more holistic and judgmental analysis, involving a wide consideration of factors such as the purpose and design of these rights, and the incentives and barriers to exercise.
  
  
• You might be the dominant shareholder of an investee, but do not currently consolidate because you do not have the majority of voting rights.  Regardless of whether you applied the old standard on the basis of legal or de facto control, you are now required to go through a two-step analysis to determine whether you have de facto power over the investee. This can be a challenging and highly judgmental analysis.
  
  
• You might have a close business relationship with a supplier or customer that goes beyond what would be considered a usual supplier-customer relationship. While economic dependence by itself is not generally a basis for consolidation, you need to take a broader look at relationships and the returns – e.g. tax benefits, fees, ability to use assets to achieve economies of scale, synergies – from those relationships.  
  
  
• You might have involvement with an investee that has been designed so that voting or similar rights are not the dominant factor in deciding control (a structured entity). If the risks and rewards analysis for special purpose entities under the old standard was challenging enough, you now need to perform a different analysis of your relationship – an analysis of power over the limited activities of the investee. The analysis is no longer focused on whether you have the majority of risks and rewards. Do you have an interest in an investee that you consider to operate on complete auto-pilot, and that you were therefore not expecting to consolidate?  
  
  
• You might act as an agent on behalf of other parties. Depending on the level of your economic interest in the investee and the ease with which you can be removed as agent, you may have control over the investee and would therefore need to consolidate.
  
  
• If you have extensive interests in subsidiaries and frequent changes in shareholdings, or involvement with structured entities (even if not consolidated), then more extensive information needs to be disclosed. Much of the information required under the new standard may not be readily available under your current processes and systems, with the requirements for unconsolidated structured entities likely to be particularly challenging.

Please contact us if you would like to discuss how the new standard on consolidation will affect your organization. Determining the appropriate accounting is the first step to determining the wider impacts on your organization. Our team understands that implementing a new standard is more than an accounting exercise – it will have significant impacts on your entire organization, including P&L volatility, tax implications, systems and processes and the potential need to recalculate internal management information, KPIs and forecasts.

AAS@kpmg.ca
www.kpmg.ca/accountingadvisory