IFRS 10 and IFRS 12 are effective for annual periods beginning on or after 1 January 2013.
A single control model may impact what an insurer consolidates from 1 January 2013
In May 2011, the International Accounting Standards Board (the IASB) issued IFRS 10 Consolidated Financial Statements, which becomes effective for annual periods beginning on or after 1 January 2013. IFRS 10 must be applied retrospectively.
IFRS 10 establishes a single control model that applies to all entities, including 'special purpose entities'. SIC-12 Consolidation-Special Purpose Entities has been withdrawn. The portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements has been moved from IAS 27 to IFRS 10; it has not changed.
What remains in IAS 27 is limited to accounting for investments in subsidiaries, joint ventures and associates in separate financial statements. The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled, and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27. Therefore, IFRS 10 may change which entities are included within a group.
New definition of control
An investor consolidates an investee when it controls the investee. The investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. This principle applies to all investees, including structured entities.
An investor must possess all of the following elements to be deemed to control an investee:
- Power over the investee, which is described as having existing rights that give the current ability to direct the activities of the investee that significantly affect the investee's returns (such activities are referred to as the 'relevant activities')
- Exposure, or rights, to variable returns from its involvement with the investee
- Ability to exert power over the investee to affect the amount of the investor's returns
The main change introduced by IFRS 10 compared with the existing consolidation requirements is a greater focus on which investor has power over an investee's activities rather than who has the majority of the voting rights.
Significant judgement may be required to determine whether an investor has control. While the consolidation assessment may not change for many entities, the effect will depend on the specific terms of each structure.