Revision of IPSASs 6-8

Staff

Stephenie Fox

Task Force

The Members of the Task Based Group are Ken Warren, Stefan Berger, Adriana Tiron Tudor and Masud Muzaffar.

Objective(s) of project

The objective of the project is to: 

• Revise IPSAS 6, Consolidated and Separate Financial Statements and relocate guidance relating to consolidated financial statements in a separate standard; 
• Revise IPSAS 7, Investments in Associates; 
• Revise IPSAS 8, Interests in Joint Ventures; and 
• Locate all disclosures relating to interests in other entities in a separate standard.

Scope

This project will consider the revision of IPSASs 6-8 as they relate to the underlying IFRSs.

Background

One of the objectives of the IPSASB is to maintain alignment with IFRSs for its standards that are based on an underlying IFRS. In May 2011, the IASB issued the following standards for which the IPSASB has equivalent standards: 

• IFRS 10, Consolidated Financial Statements; 
• IFRS 11, Joint Arrangements; 
• IFRS 12, Disclosure of Interests in Other Entities; 
• IAS 27 (revised 2011), Separate Financial Statements; and 
• IAS 28 (revised 2011), Investments in Associates and Joint Ventures.

This means that is an appropriate time to revise IPSASs 6-8.

Issues

Issues the project needs to take into consideration include (but are not necessarily limited to): 

• Should the temporary control exemption from consolidation in IPSAS 6 be retained? 
• Should the scope of the project include consideration of whether the term control should continue to be used and whether the revised definition of control is appropriate?
• Should the scope of the project include consideration of whether all controlled entities should be consolidated?
• How should the project address the consolidation of structured entities?

Task Force progress / Board discussions to date

March 2013: The IPSASB provided feedback on issues arising from the development of two Exposure Drafts (EDs):

(a)      ED X, Separate Financial Statements (based on IAS 27 as amended in 2011); and

(b)      ED X, Investments in Associates and Joint Ventures (based on IAS 28 as amended in 2011).

The IPSASB also considered unresolved issues arising from consideration of other EDs within this project at previous meetings. The key issues were (i) possible exemptions from the consolidation requirements in ED X, Consolidated Financial Statements and alternative accounting methods for any such entities; (ii) in the event that consolidation is required, alternative ways of presenting information on certain controlled entities in consolidated financial statements and (iii) possible ways of limiting the structured entity disclosures within ED X, Disclosure of Interests in Other Entities to ensure appropriate disclosures in the public sector context.

In relation to ED X, Separate Financial Statements the IPSASB:

• Noted that the International Accounting Standards Board (IASB) has amended IAS 27 to give effect to an exemption for investment entities from the consolidation requirements in IFRS 10, Consolidated Financial Statements and agreed to reconsider the relevance of the concept of investment entities in the public sector, including the accounting treatment for investment entities;
• Agreed to reinstate the use of the equity method in separate financial statements and to monitor the IASB’s project proposing to reinstate the equity method in IAS 27 (an IASB ED proposing to amend IAS 27 is expected later this year);
• Noted that if the IPSASB decides to exempt certain types of entities from the consolidation requirements in ED X, Consolidated Financial Statements, it would also need to specify the accounting requirements for the separate financial statements of such entities in ED X, Separate Financial Statements; and
• Provided detailed feedback on the contents of the draft ED.

In relation to ED X, Investments in Associates and Joint Ventures the IPSASB:

• Agreed to incorporate the amendments in ED/2012/3 Equity Method: Share of Other Net Asset Changes (Proposed amendments to IAS 28) in ED X, Investments in Associates and Joint Ventures to the extent that they are relevant. If these amendments have not been finalized by the IASB by the time the IPSASB’s ED is issued, the IPSASB agreed that constituents’ views should be sought on any such amendments included in the ED;
• Agreed not to incorporate the amendments in ED/2012/6 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Proposed amendments to IFRS 10 and IAS 28) in ED X, Investments in Associates and Joint Ventures (Amended [Date]) on the grounds that it would be more appropriate to consider the recognition of full or partial gains and losses in the context of drafting standards level requirements for public sector combinations;
• Agreed, in the context of the regular liaison meetings with the IASB, to indicate the IPSASB’s interest in the IASB’s research project on the usefulness of the equity method of accounting and to monitor this project; and
• Provided detailed feedback on the contents of the draft ED.

The IPSASB had an extensive discussion, but has not yet concluded on which, if any controlled entities should be exempt from the consolidation requirements in ED X, Consolidated Financial Statements or the alternative ways of presenting information on such entities in consolidated financial statements.

The IPSASB noted the potential difficulties in operationalizing exemptions and the risk that such exemptions could lead to dissimilar accounting treatment for similar entities. Key issues arising from the discussion were as follows:

• As noted above, the concept of investment entities is to be considered at the next meeting.
• All controlled entities including Government Business Enterprises and entities where control was obtained in circumstances of financial distress form part of the economic entity but some members still consider that the use of the equity method is more appropriate than consolidation for certain entities.
• There was very little support for Option 1 in the agenda papers, being line by line consolidation of all controlled entities together with the presentation of an extra column in which certain controlled entities could be accounted for as investments. Members were generally concerned that the size of certain controlled entities could limit the usefulness of line by line consolidation and that an additional column would clutter the face of the financial statements.
• There was mixed support for Options 2 and 3 in the agenda papers, both of which proposed consolidation of all controlled entities. Under Option 2 certain controlled entities would not be consolidated on a line by line basis – instead consolidated information would be presented in respect of aggregates such as
  total assets or non-current assets. Under Option 3 additional information on certain controlled entities would be presented in the notes. It was noted that there could be practical difficulties in implementing Option 2. Views were mixed as to the usefulness of the additional note disclosure proposed under Option 3.
• There was some support for Option 4, being the use of equity accounting for certain controlled entities. There were mixed views as to the usefulness of additional note disclosure intended to allow users to recast the financial statements as if such entities had been consolidated. Some members saw equity accounting as
  being an acceptable option in the context of moving towards full consolidation over time.
• Some members raised other options for consideration, including combinations of the options in the agenda papers, and the separate presentation of consolidated financial information by function or by statistical sector such as the General Government Sector.

The IPSASB agreed to give these matters further consideration at its next meeting, with an emphasis on the concept of investment entities, full line by line consolidation with additional note disclosure and separate presentation of information on the general government sector. The IPSASB noted that the diversity of current practice and the range of views held by members might appropriately be reflected in an ED that outlines alternative accounting treatments or exemptions and seeks views on those alternative treatments or exemptions.  

The IPSASB has previously expressed concern about the consequences of applying the IASB’s definition of a structured entity to public sector entities, many of which are dependent on a government for ongoing funding. The IPSASB considered two options for limiting application of the structured entity disclosures in the public sector. The first option (set out in the agenda papers) was to limit the disclosures to profit-oriented structured entities. The second option (raised in the meeting) was to limit the definition of structured entities to entities that have been designed so that voting or similar rights, including administrative arrangements or statutory provisions, are not the dominant factor in determining control of the entity. The IPSASB agreed to incorporate the second approach in ED X, Disclosure of Interests in Other Entities 

December 2012: The IPSASB provided feedback on issues arising from the development of three Exposure Drafts (EDs):

(a)        ED X, Consolidated Financial Statements (based on IFRS 10);

(b)        ED X, Joint Arrangements (based on IFRS 11); and

(c)        ED X, Disclosure of Interests in Other Entities (based on IFRS 12).

The IPSASB confirmed a number of issues is respect of ED X, Consolidated Financial Statements but has yet to make a decision regarding whether there should be an exemption from consolidation for temporarily controlled entities.

In relation to ED X, Joint Arrangements the IPSASB confirmed the definitions of joint ventures and joint arrangements. The IPSASB noted that IFRS 11 no longer permits the use of proportionate consolidation and confirmed that joint ventures should be accounted for using the equity method.

In relation to ED X, Disclosure of Interests in Other Entities the IPSASB considered the appropriateness of the concept of structured entities and the disclosures in respect of structured entities.  The IPSASB agreed to consider this matter further, having regard to the risk disclosures currently required by IPSASs.

All five draft EDs comprising this project will be included in the March 2013 agenda papers.

September 2012: The IPSASB considered an analysis of differences between the definitions of control in relevant financial reporting standards and the definitions of control and indicators of control in the Government Finance Statistics Manual. The IPSASB agreed that there were opportunities for aligning the definitions of control and to clarify the nature of differences.

The IPSASB provided feedback on an Exposure Draft based on IFRS 10, Consolidated Financial Statements. A revised draft of this Exposure Draft, together with Exposure Drafts based on IFRS 11, Joint Arrangements and IFRS 12, Disclosure of Interests in Other Entities will be considered at the December 2012 meeting.

June 2012: The Board IPSASB considered a number of issues related to this project. The IPSASB noted the IASB’s project on investment entities and agreed to monitor that project.

The Board decided that IFRS 5 Non-current Assets Held-for-sale and Discontinued Operations should remain outside the scope of the project. However, the Board noted that the temporary control exemptions in existing standards would be re-examined as part of this project.

September 2011: The IPSASB discussed the issue of whether the temporary control exemption from consolidation in IPSAS 6 should be retained.  The IPSASB had differing views as to whether this exemption should be retained and agreed to explore the issue further at a future meeting.

A finalized Project Brief was issued.

The Board agreed that the public sector modifications in IPSASs 6-8, together with other issues identified by the Board would be a useful starting point for identifying possible departures from these IFRSs. The Board noted the work currently being done by the Australian Accounting Standards Board and that other jurisdictions also have similar projects.

June 2011: The IPSASB approved a Project Brief, Revision of IPSASs 6-8. The IPSASB identified the issues above as relevant to this project.