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FROM: SEP-OCT 2008 ISSUE | BY STEPHEN SPECTOR
In my May-June column, I discussed the International Accounting Standards Board’s (IASB) revised version of IFRS 3, Business Combinations, and the amended version of IAS 27, Consolidated and Separate Financial Statements. The column noted that Canadian GAAP would likely be amended and GAAP for publicly accountable enterprises moved to IFRS.
But in late April – just as the May-June issue of CGA Magazine went to press – the Accounting Standards Board (AcSB) released an exposure draft that resulted in a new section in the Handbook. Section 1602, Non-Controlling Interests, provides guidance on accounting for any non-controlling interests subsequent to a business combination. Section 1602 (based on the amended IAS 27) is to be implemented concurrently with section 1582, Business Combinations (the same as IFRS 3, but not SFAS 141R).
The exposure draft proposes replacing section 1600, Consolidated Financial Statements, with a new section 1601 (same name). Section 1601 would carry forward the requirements for preparing consolidated financial statements after acquisition and some aspects of consolidation at the date of a business combination. However, given the introduction of section 1602, current material relating to non-controlling interests would not be included in section 1601. Likewise, most of the material related to the preparation of consolidated financial statements at the date of a business combination would be replaced by guidance in section 1582.
Section 1602 will duplicate IAS 27 guidance applicable to non-controlling interests, other than the disclosure requirements. These provisions are consistent with the treatment of a non-controlling interest at the date of an acquisition in section 1582. However, the AcSB decided against incorporating all of IAS 27 into Canadian GAAP because it did not intend to change any of the following aspects of Canadian GAAP that differ from IFRS (at least not until 2011):
- Section 1590, Subsidiaries, uses a definition of control that differs from that in IAS 27; adopting the latter might result in changing the entities that are required to be consolidated.
- Accounting Guideline AcG-15, Consolidation of Variable Interest Entities, is not the same as IFRS Interpretation SIC-12, Consolidation — Special Purpose Entities.
- Guidance relating to investment companies that is comparable to Accounting Guideline AcG-18, Investment Companies, is not found in IAS 27.
The key features of section 1602 are:
- Non-controlling interests in subsidiaries will be presented within equity on the consolidated balance sheet, separate from the parent shareholders’ equity, rather than as liabilities or as items between liabilities and equity.
- The non-controlling interest in income is not to be deducted in arriving at consolidated net income. Rather, consolidated net income will be allocated to the controlling interest and the non-controlling interest according to their percentage ownership.
- Losses are to be attributed to the non-controlling interest even if they exceed its carrying amount.
- Any acquisitions or dispositions of non-controlling interests that do not result in a change in control will be accounted for as equity transactions.
- In the event that control of a subsidiary is lost, the gain or loss to be recognized will be the difference between the fair value of the consideration received plus the fair value of any shares retained and the carrying amount of the subsidiary’s net assets net of the carrying amount of the non-controlling interest (i.e. debit balances net of credit balances).
The IASB’s standards will be effective for fiscal periods beginning on or after July 1, 2009, and the U.S. standards will be effective for fiscal periods beginning on or after December 15, 2008. Given that the new sections will mean a significant change in Canadian GAAP, sections 1582, 1601, and 1602 are not mandatory until fiscal years beginning on or after January 1, 2011. The AcSB will permit earlier adoption, but the three sections must be implemented concurrently.
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