At a recent virtual event, ACCA members in Mauritius discussed implementation challenges around IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, and IFRS 12, Disclosure of Interests in Other Entities, as well as offering suggestions for improvement.
IFRS 10 introduced a control basis for consolidation for all entities, and detailed guidance was provided for the implementation of the new framework. IFRS 10 was further amended in 2014 to introduce an exception to consolidating particular subsidiaries of an investment entity.
The introduction of the elements of control forced preparers and reviewers of financial statements to undertake more research and analysis of existing arrangements. The key challenges involved:
- principal and agent relationships
- identification of relevant activities
- control without majority of the voting rights
- power over an investee
The challenges here arose mostly in sourcing the relevant information from existing contractual and non-contractual arrangements.
In addition, the investment entity exception to consolidation posed a few issues where the design of certain corporate structures was not intended to avoid consolidation.
Financial information should be concise and to the point, with infographics rather than pages of narrative and boilerplate technical language
Some lenders still require consolidated financial statements, even if a borrower entity meets all the criteria of an investment entity. It is considered that qualitative information is lost when reporting investment in subsidiaries at fair value.
In other instances, measuring at fair value a subsidiary which is itself an investment entity results in loss of information for users of financial statements. Consolidation of the assets and liabilities of such subsidiaries would have been preferred.
IFRS 11 requires the use of the equity method of accounting for interests in joint ventures, thereby eliminating the proportionate consolidation method.
The classification of joint arrangements between joint operation and joint venture presents some challenges, especially when the arrangements are not fully documented in writing and actual practice differs from contractual arrangement.
The application of judgments after considering facts and circumstances does lead to varied conclusions. Practical challenges arise when decisions about the relevant activities require the unanimous consent of the parties that control the arrangement collectively.
IFRS 12 applies to entities that have an interest in subsidiaries, joint arrangements, associates or unconsolidated structured entities. The disclosure requirements are extensive, and significant efforts are required to accumulate the necessary information.
The main challenges here arise on unconsolidated structured entities as well as foreign non-IFRS investees, where the information collection processes may hinder the availability and quality of information required to comply with the requirements of IFRS 12.
Occasionally preparers of financial statements will use the undue cost or effort principle to disclose the strict minimum information. Confidentiality of information is also considered in determining the extent of disclosures.
Suggestions for change
Preparers and reviewers of financial statements made use of the implementation guidance on the standards, supplemented by consultations with IFRS specialists for more complex matters arising.
While there are no implementation issues regarding IFRS 10, 11 and 12 in Mauritius in particular, attendees made the following general suggestions:
- Similar to US GAAP’s ASC 946, investment companies should be permitted to prepare consolidated financial statements as an accounting policy choice, where SPEs, set up for tax and regulatory reasons, are allowed to be consolidated and the underlying value-driving investees are fair valued.
- Any subsequent interpretations issued by the International Accounting Standards Board (IASB) should be codified within the main IFRS Standards, as this is the sole authoritative source of guidance.
- Guides similar to IASB’s education guide for IFRS 13, Fair Value Measurement, should be published for IFRS 10, 11 and 12 (and indeed other IFRS Standards) to provide illustrative guidance for preparers of financial statements.
- In an era where all financial information is converted into XBRL format for filing purposes, and where financial information needs to be easily readable in multiple formats (including smartphones), the IASB should consider reviewing the presentation of financial statements. Financial information should be concise and to the point, with infographics rather than pages of narrative and boilerplate technical language. While extensive disclosures provide useful context in understanding the numbers reported in financial statements, the layout should be amended to suit the needs of users. Amendments made to the audit report a few years back that brought the audit opinion up front and relegated the narratives and standard technical analysis to the latter part of the report could provide a helpful template.
- The IASB should consider the concept of practical expedients in instances where the undue effort and cost considerations under strict conditions are allowed. Standards, interpretations or IASB staff papers can offer guidelines in those areas where judgments are required, to promote consistency in the adoption and implementation of IFRS.
The views expressed in this article are those of event participants and the author, and do not reflect the opinions or views of their employers or ACCA.