CONSOLIDATED FINANCIAL STATEMENT
IFRS: Parent entities prepare consolidated financial statements that include all subsidiaries. An exemption applies to a parent:
- that is itself wholly owned or if the owners of the minority interests have been informed about and do not object to the parent not presenting consolidated financial statements;
- the parent’s securities are not publicly traded nor is it in the process of issuing securities in public securities markets; and
- the immediate or ultimate parent publishes consolidated financial statements that comply with IFRS.
US GAAP: There is no exemption for general purpose financial statements. Consolidated financial statements are presumed to be more meaningful and are required for SEC registrants. Specific rules apply for certain industries.
Consolidation Model and Subsidiaries
The definition of a subsidiary, for the purpose of consolidation, is an important distinction between the two frameworks.
IFRS: Focuses on the concept of control in determining whether a parent/subsidiary relationship exists. Control is the parent’s ability to govern the financial and operating policies of a subsidiary to obtain benefits. Control is presumed to exist when a parent owns, directly or indirectly through subsidiaries, more than one half of an entity’s voting power. Control also exists when a parent owns half or less of the voting power but has legal or contractual rights to control the majority of the entity’s voting power or board of directors. A parent could have control over an entity in circumstances where it holds less than 50% of the voting rights of an entity and no legal or contractual rights by which to control the majority of the entity’s voting power or board of directors (de facto control). Currently exercisable potential voting rights should also be considered to determine whether control exists. Entities acquired (disposed of) are included in (excluded from) consolidation from the date on which control passes.
US GAAP: Uses a bipolar consolidation model. All consolidation decisions are evaluated first under the variable interest entity (VIE) model. If the entity is a VIE, management should follow the US GAAP guidance below, under ‘Special purpose entities’. The second model looks to voting interest. Under this model, control can be direct or indirect and may exist with less than 50% ownership. ‘Effective control’, which is a similar notion to de facto control under IFRS, is very rare if ever employed in practice under US GAAP. Accordingly, there could be situations in which an entity is consolidated under IFRS based on the notion of de facto control. However, it would not be consolidated under US GAAP under the concept of effective control.
Special Purpose Entities
IFRS: Special purpose entities (SPEs) are consolidated where the substance of the relationship indicates that an entity controls the SPE. Control may arise through the predetermination of the activities of the SPE (operating on ‘autopilot’) or otherwise. Indicators of control arise where:
- the SPE conducts its activities on behalf of the entity;
- the entity has the decision-making power to obtain the majority of the benefits of the SPE;
- the entity has other rights to obtain the majority of the benefits of the SPE; or
- the entity has the majority of the residual or ownership risks of the SPE or its assets.
Post-employment benefit plans or other long-term employee benefit plans to which IAS 19, Employee Benefits, applies are excluded from this requirement.
US GAAP: The consolidation of an SPE is required by its primary beneficiary when the SPE meets the definition of a VIE and the primary beneficiary has a variable interest in the entity that will cause it to absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. There are several scope exceptions to this rule (such as pension, post-retirement or post-employment plans). Specific criteria also permit the transfer of financial assets to an SPE that is not consolidated by the transferor. The SPE should be a qualifying SPE (QSPE, as defined),
and the assets should be financial assets (as defined).
Uniform Accounting Policies
IFRS: Consolidated financial statements are prepared using uniform accounting policies for like transactions and events in similar circumstances for all of the entities in a group.
US GAAP: Similar to IFRS, with certain exceptions. Consolidated financial statements are prepared using uniform accounting policies for all of the entities in a group except when a subsidiary has specialized industry accounting principles. Retention of the specialized accounting policy in consolidation is permitted in such cases.
IFRS: The consolidated financial statements of the parent and the subsidiary are usually drawn up at the same reporting date. However, the consolidation of subsidiary accounts can be drawn up at a different reporting date provided the difference between the reporting dates is no more than three months. Adjustments are made for significant transactions that occur in the gap period.
US GAAP: Similar to IFRS, except that adjustments are generally not made for transactions that occur in the gap period (REFERENCES: IFRS: IAS 27, SIC-12, IFRS 5. US GAAP: ARB 51, FAS 94, FAS 144, SAB 51, SAB 84, EITF 96-16, FIN 46).