All Australian companies and other entities that report under Australian Accounting Standards will be adopting the new suite of consolidation standards for their June 2014 reporting (and where applicable for their December 2013 annual and half-year financial reports). The new standards to be adopted include AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, and AASB 12 Disclosure of Interests in Other Entities.
These new standards introduce changes to the way in which companies assess their control relationships and how they determine which entities are subsidiaries and therefore which should be included in their consolidated financial reporting.
Key to the new standards are the concepts of power, returns and a linkage between power and returns. In summary, these concepts are:
Power - the ability to exercise existing rights to direct the relevant activities of an entity.
Returns - an exposure or rights to, a variable return from an involvement with an entity (the investee) as a result of the performance of that entity.
Linkage - For an investor to control an entity, the investor needs power and returns as well as the ability to use the power to affect the returns, in effect the linkage between the power and the returns.
Whilst the concepts are similar to those employed in the standards that were replaced (the old AASB 127 Consolidated and Separate Financial Statements), this is a new standard that needs to be considered with its fresh application guidance and examples. Key situations to watch out for include partially owned entities where management and executive functions are undertaken by an investor or alternatively structured entities where management decision making rights are exercised by an entity that is only partially invested in the structured entity (i.e., mining joint ventures and managed investment schemes). Of course, for many companies (particularly wholly-owned corporate groups) this new standard will not affect their consolidation processes.
For additional information on the impacts of adopting the new standards, please speak with your Hanrick Curran adviser or contact Matthew Green on 07 3218 3900.