New IASB standards may change financial positions of fund managers
Friday, 13 May 2011 — Banks, private equity funds, asset managers and real estate investment funds will be most affected by the two new standards released overnight by the International Accounting Standards Board (IASB). The standards introduce a control model to determine which companies will be included in a set of consolidated financial statements and new disclosure requirements.
Consolidated Financial Statements (IFRS 10) and Disclosure of Involvement with Other Entities (IFRS 12) broaden the situation when a company has control of another, and increases the transparency when a company is involved with another company but doesn't control it. It will likely result in more fund managers and responsible entities consolidating more of their funds under management.
According to Lynda Tomkins, Ernst & Young's National IFRS leader, one of the reasons that the IASB made this change was in response to the financial crisis: "Many companies were criticised for not consolidating entities that they seemed to control, or for funding a distressed company where previously it had never disclosed a relationship or obligation".
"The new standards may increase the number of entities consolidated into parent company balance sheets. This will ultimately increase transparency of financial reporting. However it is not a rules-based standard and a lot of judgment will need to be exercised to determine if an entity is controlled by another. For example, many fund managers will need to reassess whether they are acting as agents for the other investors or principles. Other entities will need to assess anew whether options give control or de facto control exists."
'De facto control' describes a situation today where an investor may own less than a majority voting but can direct the financial and operating decision-making through other means.
"The revised standards represent a fundamental shift that will require companies to consider other shareholders interests, rights and past voting patterns to determine whether they could direct an entity's activities. If they determine that they can direct these activities, even without majority voting rights, they will need to consolidate. An increasing number of investors may find they need to consolidate their investments when they only hold 30 or 40% of the voting rights in other companies." Ms Tomkins says.
While the standards do not come into effect until 1 January 2013 all companies operating under IFRS should assess as soon as possible how they will be affected, consider early adoption and begin planning for adoption of these standards.
"Companies will need to factor in the time required to gather data, make judgments and change business processes and controls," says Ms Tomkins.
"In the upcoming reporting season, companies will need to disclose the impact on their current financial statements; therefore they can't afford to 'leave it until later'. They should also consider the impact of the new standards on planned transactions and beginning developing a transition plan today."
While the financial services sector is primarily impacted by these standards, other Australian companies will need to come to grip with the changes and determine if they are affected. This is just one change of many - representing the biggest change in financial reporting since Australia adopted international accounting standards in 2006.
"The consolidation standard is just one of five major IFRS change projects coming in the next 12 months. Each has its own complexity and industry impacts, will be implemented in a short timeframe, and will have a fundamental impact on business operations. It's big, it's complex and it's coming our way."
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