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US GAAP versus IFRS - Consolidation, joint venture accounting and equity method investees - EY - United States

US GAAP versus IFRS

Consolidation, joint venture accounting and equity method investees

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The principal guidance for consolidation of financial statements, including variable interest entities (VIEs), under US GAAP is ASC 810, Consolidation. IAS 27 (as revised), Consolidated and Separate Financial Statements, and SIC-12, Consolidation — Special Purpose Entities, contain the IFRS guidance.

Under both US GAAP and IFRS, the determination of whether entities are consolidated by a reporting entity is based on control, although differences exist in the definition of control. Generally, all entities subject to the control of the reporting entity must be consolidated (although there are limited exceptions in US GAAP in certain industries).

Further, uniform accounting policies are used for all of the entities within a consolidated group, with certain exceptions under US GAAP (e.g., a subsidiary within a specialized industry may retain the specialized accounting policies in consolidation). Under both sets of standards, the consolidated financial statements of the parent and its subsidiaries may be based on different reporting dates as long as the difference is not greater than three months.

However, under IFRS, a subsidiary's financial statements should be as of the same date as the financial statements of the parent unless it is impracticable to do so.

An equity investment that gives an investor significant influence over an investee (referred to as "an associate" in IFRS) is considered an equity method investment under both US GAAP (ASC 323, Investments — Equity Method and Joint Ventures) and IFRS (IAS 28, Investments in Associates) if the investee is not consolidated. Further, the equity method of accounting for such investments, if applicable, generally is consistent under both US GAAP and IFRS.

Significant differences


 US GAAPIFRS
Consolidation modelFocus is on controlling financial interests. All entities are first evaluated as potential VIEs. If a VIE, the applicable guidance in ASC 810 is followed (below). Entities controlled by voting rights are consolidated as subsidiaries, but potential voting rights are not included in this consideration.Focus is on the power to control, with control defined as the parent's ability to govern the financial and operating policies of an entity to obtain benefits. Control is presumed to exist if the parent owns more than 50% of the votes, and potential voting rights must be considered. Notion of "de facto control" must also be considered.
Special purpose entities (SPE) / VIEsThe guidance in ASC 810 requires the primary beneficiary (determined based on the consideration of power and benefits) to consolidate the VIE. For certain specified VIEs, the primary beneficiary is determined quantitatively based on a majority of the exposure to variability.Under SIC-12, SPEs (entities created to accomplish a narrow and well-defined objective) are consolidated when the substance of the relationship indicates that an entity controls the SPE.
Preparation of consolidated financial statements — generalRequired, although certain industry-specific exceptions exist (e.g., investment companies). Generally required, but there is a limited exemption from preparing consolidated financial statements for a parent company that is itself a wholly owned subsidiary, or is a partially owned subsidiary, if certain conditions are met.
Preparation of consolidated financial statements — different reporting dates of parent and subsidiary(ies)The effects of significant events occurring between the reporting dates when different dates are used are disclosed in the financial statements.The effects of significant events occurring between the reporting dates when different dates are used are adjusted for in the financial statements.
Changes in ownership interest in a subsidiary without loss of controlIn either of the following situations, transactions that result in decreases in ownership interest in a subsidiary without a loss of control are accounted for as equity transactions in the consolidated entity (that is, no gain or loss is recognized): (1) subsidiary is a business or nonprofit activity (with two exceptions: (a) a sale of in substance real estate and (b) a conveyance of oil and gas mineral rights); (2) subsidiary is not a business or nonprofit activity, but the substance of the transaction is not addressed directly by other ASC Topics.Consistent with US GAAP, except that this guidance applies to all subsidiaries under IAS 27(R), even those that are not businesses or nonprofit activities, those that involve sales of in substance real estate or conveyance of oil and gas mineral rights. In addition, IAS 27(R) does not address whether that guidance should be applied to transactions involving non-subsidiaries that are businesses or nonprofit activities.
Loss of control of a subsidiaryFor certain transactions that result in a loss of control of a subsidiary or a group of assets, any retained noncontrolling investment in the former subsidiary or group of assets is re-measured to fair value on the date control is lost, with the gain or loss included in income along with any gain or loss on the ownership interest sold.

This accounting is limited to the following transactions: (1) loss of control of a subsidiary that is a business or nonprofit activity or a group of assets that is a business or nonprofit activity (with two exceptions: (a) a sale of in substance real estate, (b) a conveyance of oil and gas mineral rights); (2) loss of control of a subsidiary that is not a business or nonprofit activity if the substance of the transaction is not addressed directly by other ASC Topics.
Consistent with US GAAP, except that this guidance applies to all subsidiaries under IAS 27(R), even those that are not businesses or nonprofit activities or those that involve sales of in substance real estate or conveyance of oil and gas mineral rights. In addition, IAS 27(R) does not address whether that guidance should be applied to transactions involving non-subsidiaries that are businesses or nonprofit activities. IAS 27(R) also does not address the derecognition of assets outside the loss of control of a subsidiary.
Equity method investments Potential voting rights are generally not considered in the determination of significant influence.ASC 825-10, Financial Instruments, gives entities the option to account for equity method investments at fair value. If management does not elect to use the fair value option, the equity method of accounting is required.

Uniform accounting policies between investor and investee are not required. In determining significant influence, potential voting rights are considered if currently exercisable.The fair value option is not available to investors to account for their investments in associates.
IAS 28 generally requires investors (other than venture capital organizations, mutual funds, unit trusts, and similar entities) to use the equity method of accounting for their investments in associates in consolidated financial statements. If separate financial statements are presented (i.e., by a parent or investor), subsidiaries and associates can be accounted for at either cost or fair value.

Uniform accounting policies between investor and investee are required.
Joint venturesGenerally accounted for using the equity method of accounting, with the limited exception of unincorporated entities operating in certain industries, which may follow proportionate consolidation.IAS 31, Interests in Joint Ventures, permits either the proportionate consolidation method or the equity method of accounting.

Convergence

In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements, which replaces IAS 27(R) and SIC-12 and provides a single control model. The FASB chose not to pursue a single consolidation model at this time and instead is making targeted revisions to the consolidation models within US GAAP. Similar to IFRS 10, the FASB proposed amendments to the consideration of kick-out rights and principal versus agent relationships.

However, certain differences between consolidation guidance under IFRS and US GAAP (e.g., effective control, potential voting rights) will continue to exist. IFRS 10 is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted. The FASB's exposure draft was issued on 3 November 2011 and comments were due on 15 February 2012.

In May 2011, the IASB also issued IFRS 11, Joint Arrangements, which replaces IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities — Non-monetary Contributions by Venturers. IFRS 11 eliminates proportionate consolidation of jointly controlled entities and requires jointly controlled entities classified as joint ventures to be accounted for using the equity method.

This change is expected to bring IFRS more in line with US GAAP. Jointly controlled assets and jointly controlled operations under IAS 31 are generally expected to be considered joint operations under IFRS 11 so that the accounting for those arrangements generally will be consistent with IAS 31. That is, those entities will continue to recognize their assets, liabilities, revenues and expenses, and relative shares thereof. IFRS 11 is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted.

Note that this publication does not address the differences between US GAAP and IFRS resulting from IFRS 10 and 11 because of the delayed effective dates.

The FASB is addressing the accounting for equity method investments in the redeliberation of its May 2010 Exposure Draft, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities.

The FASB and the IASB have issued proposals to establish consistent criteria for determining whether an entity is an investment company (the IASB uses the term "investment entity"). While the Boards' proposals would largely converge the definitions of an investment company in US GAAP and IFRS, differences in accounting and reporting would remain.



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