INTERNATIONAL FINANCIAL REPORTING STANDARD& EXPOSURE DRAFTTABLE OF CONTENT PAGESIntroduction03International Accounting Standard 27.03Control Definition04Control Principal04Requirements and Guidelines Regarding Assessing Control05Options and Convertible instruments06Voting Right Proposal07Structured Entity07Assessment Of control of Structured Entity08Risk and Reward Fall Back test09Proposed Disclosure Requirements10Reputational Risk11Conclusion11Reference12INTRODUCTIONThis paper highlights the use of special purpose entities that have been kept off-balance sheet. Before getting into further details, we must have a very good idea of International Accounting Standard (IAS) 27, which pertains to consolidated and separate financial statements. Let’s discuss the IAS 27 in detail. INTERNATIONAL ACCOUNTING STANDARD (IAS) 27:The objective of IAS 27 is to enhance the relevance, reliability and comparability of the information that a parent entity provides in its separate financial statements and in consolidated financial statements for a group of companies under its control.
IAS 27 elaborates that a parent company will regulate their subsidiary entities to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Decision making and financial analysis will become relatively convenient, if one has consolidated financial information regarding the entity (IFRS, 2007). Consolidated financial statements are the financial statements of a group presented as those of a single economic entity.
The group which regulates is referred to as the parent while the rest ones are its subsidiaries. An entity combines the financial statements of the parent and its subsidiaries line by line by adding together items like assets, equity, income, liabilities and expenses at the end of the reporting period while preparing consolidated financial statements (Lewis, 2004). An entity must disclose the information about the nature, relationship and ethics between the parent entity and its subsidiaries. DEFINITION OF CONTROL: ANS 1) International Accounting Standard (IAS 27) elaborates control as the power to influence the entities to follow financial and operating policies, which are made by the parent company for their subsidiaries in order to regulate them properly.
I think the proposed control definition is not justifying all the entities because the definition apprise to only those firms who have a regulating body, let say the parent entity, on their heads which are responsible to keep a critical eye to make sure that their subsidiaries are in compliance with the financial and operating policies which IAS governs.
Exposure draft (E. D) does not consider the fact when an entity is not being regulated by a control entity like sole proprietors or private companies. CONTROL PRINCIPAL: ANS 2) Yes, the control principal as articulated in the draft IFRS is appropriate because it states that control and power can be achieved in many ways, rather emphasizing only on the financial and operating policies as stated in International Accounting Standard (IAS – 27). Drafts manifest that a reporting entity can have the power to direct or govern the activities to another entity by different means.
They may control by having voting rights, by having options or convertible instruments, contractual agreements or by accumulation of all these. REQUIREMENTS AND GUIDANCE REGARDING ASSESSING CONTROL: ANS 3) I am satisfied with the related arrangements and requirements of assessing control but little bit uncomfortable with the guidelines the International Accounting Standard Board (IASB) have provided for the assessment. Although exposure draft have some thought provoking points in it which are no doubt beneficial, like the point which considers power and return together and consideration of all relevant facts and circumstances when assessing control.
Continuous control assessment is also a positive point to direct the subsidiary entity pertinently to affect the return.