Appendix G — Comparison of U.S. GAAP and IFRS Accounting Standards

Scope exceptions

A reporting entity may be exempt from analyzing a legal entity for consolidation as a result of a general scope exception that applies to legal entities that are (1) employee benefit plans, (2) governmental entities, or (3) money market funds (in certain cases).

Investment companies do not consolidate investees that are not investment companies (but note that there are some differences between the U.S. GAAP and IFRS definitions of an investment company).

In addition, there are certain VIE scope exceptions.

Paragraph 4A of IFRS 10 provides a general scope exception for postemployment benefit plans or other long-term employee benefit plans.

Investment companies present consolidated financial statements.

As discussed below, since IFRS 10 does not have a separate VIE model, VIE scope exceptions are inapplicable.

A parent is exempt from consolidation under paragraph 4 of IFRS 10 if (1) the parent is nonlisted, (2) it is itself a wholly owned subsidiary or a partially owned subsidiary and none of its other owners have objected to the parent’s not presenting consolidated financial statements, and (3) its ultimate or intermediate parent prepares consolidated financial statements under IFRS Accounting Standards that are publicly available.

Determining when to consolidate a legal entity

There are two primary models for determining when consolidation is appropriate — the VIE and the voting interest entity models. If a reporting entity has an interest in a VIE, it must apply the VIE consolidation model, which is based on power and economics. If a reporting entity has an interest in an entity that is not a VIE, it must apply the voting control-based consolidation model (i.e., the voting interest entity model).

IFRS 10 contains a single, control-based model for determining whether consolidation of an investee is appropriate. However, IFRS 10 provides additional guidance that is applicable when the relevant activities of an investee are directed through voting rights and when voting rights do not have a significant effect on returns.

Definition of control — general principle

Under the voting interest entity model, a controlling financial interest is defined as “ownership of a majority voting interest” in another entity. ASC 810-10 further indicates that the power to control another entity may exist in other contracts or agreements outside of a majority voting interest.

The VIE model in ASC 810-10 states that a reporting entity has a controlling financial interest if it has both of the following characteristics: (1) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.

Paragraph 7 of IFRS 10 explains that an investor controls an investee if it has all of the following elements: (1) power over the investee; (2) exposure, or rights, to variable returns from its involvement with the investee; and (3) the ability to use its power over the investee to affect the investor’s returns. An investor must consider all facts and circumstances, including the purpose and design of the investee (for identification of relevant activities), how decisions about relevant activities are made, and who receives returns from those activities when assessing whether it controls the investee.

This principle is similar to the U.S. GAAP control analysis under the VIE model.

However, several differences exist, including the analysis of potential voting rights, de facto power, and the effects of agency relationships.

Control analysis — shared power

If a reporting entity determines that power is shared among multiple unrelated parties involved with a VIE, no party consolidates the VIE.

Under the VIE model in ASC 810-10, power is considered shared if (1) two or more unrelated parties together have the power to direct the VIE’s most significant activities and (2) decisions about those activities require the consent of each of the parties sharing power.

Paragraph 9 of IFRS 10 indicates that when two or more investors collectively control an investee (i.e., they must act together to direct the relevant activities of an entity), no investor individually controls the investee.

If power is shared (i.e., joint control), IFRS 11 applies.

Control analysis — potential voting rights

Under U.S. GAAP, a reporting entity that applies the voting interest entity model is generally not required to consider the effect of potential voting rights (e.g., warrants, share call options, or other instruments convertible into voting shares) when determining whether a controlling financial interest exists.

For example, under the voting interest entity model in ASC 810-10, a reporting entity is not required to consider the additional voting shares it would receive in an investee upon exercise of a stock purchase warrant when determining whether it holds a majority ownership interest in the investee. However, potential voting rights associated with unexercised options and unsettled forwards may be an indicator of control. See Section D.1.4 for additional discussion.

The VIE model in ASC 810-10 also does not specifically address the impact of potential voting rights on the determination of which party has the power to direct the most significant activities of an entity. However, the reporting entity must carefully consider the effect of these rights (see Section 7.2.9).

Paragraphs B47–B50 of IFRS 10 require potential voting rights, such as those resulting from convertible instruments or options, to be considered in the assessment of control; IFRS 10 does not limit potential voting rights to those that are currently exercisable or convertible. (All relevant facts and circumstances need to be considered in the assessment of whether control exists as a result of potential voting rights.)

Potential voting rights must be “substantive” to be considered. Paragraphs B22–B25 of IFRS 10 provide guidance on determining whether rights are substantive. A reporting entity with less than a majority of the voting shares would be required to consolidate the investee if it also has potential voting rights that, alone or in combination with its voting shares, give the reporting entity the current ability to direct the investee’s relevant activities.

For example, assume that Entity A and Entity B hold 60 percent and 40 percent, respectively, of the outstanding voting shares of Entity C. Entity B has an option to purchase half of A’s voting rights. The option is in the money (i.e., it would be favorable for B to currently exercise the option) and there are no barriers that prevent B from exercising its option. If the combination of the voting shares and the option give B the current ability to direct C’s relevant activities, B should consolidate C.

Control analysis — de facto power

This concept does not exist under U.S. GAAP.

An investor with less than a majority of voting rights that has not entered into additional contractual arrangements may still have power over the legal entity if its voting rights give it “the practical ability to direct the relevant activities unilaterally” (see paragraph B41 of IFRS 10). This circumstance may arise when the investor’s holdings of voting rights are significantly greater relative to the size and dispersion of holdings of the other investors. Paragraphs B42–B46 of IFRS 10 provide detailed guidance on determining whether de facto power exists.

For example, assume that Entity A acquires 46 percent of the voting rights of Entity C, and the remaining 54 percent of the voting rights are dispersed among thousands of shareholders (no other shareholder holds more than 1 percent). Upon acquiring its interest in C, A determined that, on the basis of its specific relevant facts and circumstances (including the size of its ownership relative to that of others), its 46 percent interest would be sufficient to give it a dominant voting interest that meets the power criterion regardless of whether it considers any other evidence of power.

Control analysis — related parties and agency relationships

There are no prescriptive related-party rules under the voting interest entity model related to determining whether a reporting entity should consolidate a legal entity.

However, the VIE model includes provisions that require related parties and de facto agents to be considered throughout the consolidation analysis. Interests held by related parties (regardless of whether the reporting entity can cause the related party to vote on its behalf) may result in the consolidation of the VIE by one of the related parties involved with the VIE, even if none of the parties individually have a controlling financial interest over the VIE. If a reporting entity concludes that it does not meet the primary-beneficiary criteria but that the related-party group (including de facto agents) meets the criteria as a group, the reporting entity may be required to determine which party is most closely associated with the VIE and therefore must consolidate the VIE. This determination requires the application of judgment and an evaluation of all relevant facts and circumstances, including the factors listed in ASC 810-10-25-44. Section 7.4.2.1 discusses situations in which a reporting entity is required to perform the related-party tiebreaker test (i.e., the analysis of which party is most closely associated with a VIE), and Section 7.4.2.4 discusses how to perform that test.

IFRS 10 includes a similar list of related parties and de facto agents to those included in ASC 810 under U.S. GAAP. However, IFRS 10 does not assume that the related parties will act in concert. Instead, paragraph B73 of IFRS 10 states, “When assessing control, an investor shall consider the nature of its relationship with other parties and whether those other parties are acting on the investor’s behalf (ie they are ‘de facto agents’). The determination of whether other parties are acting as de facto agents requires judgement, considering not only the nature of the relationship but also how those parties interact with each other and the investor.”

The practical impact is that an entity may be less likely to be consolidated by a reporting entity under IFRS 10 because the power and economics of the related party are only attributed to the reporting entity if the related party is acting as its de facto agent. Further, unlike U.S. GAAP, IFRS 10 does not require performance of the related-party tiebreaker test.

Presentation requirements for certain consolidated entities

Under the VIE model, the primary beneficiary of a VIE is required to separately present on the face of the balance sheet (1) assets of the consolidated VIE that can only be used to settle obligations of the VIE and (2) liabilities of the consolidated VIE for which creditors do not have recourse to the general credit of the primary beneficiary.

Presentation requirements for special-purpose entities are not specifically addressed.

Accounting policies

Upon consolidation, the accounting policies of a parent and its subsidiaries should be conformed in the parent’s consolidated financial statements unless differences between the policies can be justified.

Upon consolidation, paragraph 19 of IFRS 10 requires the accounting policies of a parent and its subsidiaries to be conformed with respect to “using uniform accounting policies for like transactions and other events in similar circumstances.”

Different reporting dates

Consolidation is not prohibited if a parent and subsidiary have different reporting periods. When a difference in reporting periods is three months or less, it is usually acceptable for a parent to consolidate a subsidiary on the basis of the subsidiary’s financial statements; however, the difference is not to exceed three months.

Paragraphs B92 and B93 of IFRS 10 explain that when consolidating a subsidiary, a parent is required to align the subsidiary’s reporting date with its own (if the subsidiary has a different reporting period) unless doing so is impractical. If it is impractical for the subsidiary and parent to have the same reporting period, the difference between the periods can be no greater than three months, and adjustments should be made for significant transactions.

Private-company alternatives

There is an accounting alternative to the VIE model for private companies under common control if certain criteria are met. See Section 3.5.

The concept does not exist under IFRS Accounting Standards.

Specific limited partnership (or similar entity) guidance

A limited partnership would be considered a VIE unless a simple majority or lower threshold of the “unrelated” limited partners have substantive kick-out rights (including liquidation rights) or participating rights. For entities other than limited partnerships, a two-step process must be used to evaluate whether the equity holders (as a group) have power.

The concept does not exist under IFRS Accounting Standards.

Silos

The concept of a “silo” appears only in the VIE subsections of ASC 810-10. The FASB established this concept in response to concerns that reporting entities could avoid consolidation by combining separate pools of assets or activities into a single legal entity while effectively segregating the right to govern the activities, the right to receive the benefits, and the obligation to absorb the losses of each separate pool of assets or activities, effectively creating a VIE within a VIE. Such scenarios will generally only result from either (1) specific regulatory constructs or (2) deliberate legal structuring (see Section 6.2.3). Accordingly, silos typically exist in very limited circumstances. If a silo exists within a VIE, a reporting entity with a variable interest in the silo should determine whether consolidating it separately from the legal entity as a whole is appropriate.

The concept does not exist under IFRS Accounting Standards.

Decision maker/service provider

The evaluation of whether fees paid to a decision maker or service provider are a variable interest focuses on whether all of the following are met:

• The fees are commensurate with the level of service provided.
• The fees are negotiated at arm’s length (i.e., they are at market).
• The decision maker or service provider does not have any other interests (direct interests, indirect interests through its related parties, or certain interests held by its related parties under common control) in the legal entity that absorb more than an insignificant amount of the potential VIE’s variability.

If it is determined that a decision maker’s fee arrangement is not a variable interest, the decision maker would be acting as a fiduciary for the legal entity. This determination could affect whether the legal entity is a VIE (see Section 5.3.1.1.3.1) and whether the decision maker is required to consolidate the VIE.

The concept does not exist under IFRS Accounting Standards.