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US GAAP vs. IFRS: the basics, March 2010 - Consolidations, joint venture accounting and equity method investees - Ernst & Young - United States

US GAAP vs. IFRS: the basics, March 2010

Consolidations, joint venture accounting and equity method investees

Similarities

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

Under both US GAAP and IFRS, the determination of whether or not entities are consolidated by a reporting enterprise is based on control, although differences exist in the definition of control. Generally, under both GAAPs all entities subject to the control of the reporting enterprise must be consolidated (note that there are limited exceptions in US GAAP in certain specialized industries). Further, uniform accounting policies are used for all of the entities within a consolidated group, with certain exceptions under US GAAP (for example, a subsidiary within a specialized industry may retain the specialized accounting policies in consolidation). Under both GAAPs, 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, formerly APB 18) 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 variable interest entities (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. The concept of “effective control” exists, but is rarely employed in practice.Focus is on the concept of the power to control, with control being the parent’s ability to govern the financial and operating policies of an entity to obtain benefits. Control is presumed to exist if 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)The guidance in ASC 810 requires the primary beneficiary (determined based on the consideration of power and benefits) to consolidate the VIE.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 (for example, 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.
Changes in ownership interest in a subsidiary without loss of controlTransactions that result in decreases in a partner’s ownership interest in a subsidiary in either of the following situations without a loss of control are accounted for as equity transactions in the consolidated entity (that is, no gain or loss is recognized): (1) a subsidiary that is a business or a nonprofit activity, except for either of the following — (a) a sale of in substance real estate and (b) a conveyance of oil and gas mineral rights; (2) a subsidiary that is not a business or a 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, 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 subsidiaryIn certain transactions that result in a loss of control of a subsidiary of a group of assets, any retained non-controlling investment in the former subsidiary of group of assets is re-measured to fair value on the date control is lost. The gain or loss on re-measurement is 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 a nonprofit activity, except for either of the following — (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 a nonprofit activity if the substance of the transaction is not addressed directly by other ASC Topics; (3) the derecognition of a group of assets that is a business or a nonprofit activity, except for either of the following — (a) a sale of in substance real estate and (b) a conveyance of oil and gas mineral rights.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) does not address the derecognition of assets outside the loss of control of a subsidiary.
Equity-method investmentsASC 825-10 Financial Instruments (formerly FAS 159) gives entities the option to account for equity-method investments at fair value. For those equity-method investments for which 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.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 (that is, those presented 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 Investments in Joint Ventures permits either the proportionate consolidation method or the equity method of accounting.

Convergence

In September 2007, the IASB issued Exposure Draft 9 Joint Arrangements that would amend IAS 31 to eliminate proportionate consolidation of jointly controlled entities. The IASB is expected to publish a final standard in the first quarter of 2010.

The FASB aims to publish an Exposure Draft in the second quarter of 2010. Concurrently, the IASB will also seek views on the FASB’s Exposure Draft. Both Boards aim to issue a final standard in the second half of 2010.

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