5.2 Consolidation

Though both the IASB and the FASB use control as the foundation for their approaches to consolidation, the boards’ standards are not converged. A notable difference is that under IFRS Accounting Standards, entities apply a single, control-based model, while under U.S. GAAP, entities determine consolidation by using a two-model approach (the VIE model or the voting interest entity model). Other key differences between IFRS Accounting Standards and U.S. GAAP, as shown in the table below, exist in (1) the definition of “control” and the identification of the primary beneficiary, (2) potential voting rights, (3) variable interests held by related parties, (4) de facto control, (5) reporting periods, and (6) accounting policies.

Topic	IFRS Accounting Standards (IFRS 10, IFRS 12)	U.S. GAAP (ASC 810-10)
Scope exceptions	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 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.	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.
Consolidation models	There is a single consolidation model that applies to all entities. Therefore, the concept of a VIE does not exist under IFRS 10. Though the VIE concept does not exist, the consolidation model and determination of who has a controlling financial interest in an entity under IFRS 10 are similar to those under ASC 810-10.	There are two models for determining when consolidation is appropriate. If a reporting entity has an interest in a VIE, it must apply the VIE consolidation model, which is based on power and economics, under ASC 810-10. If a reporting entity has an interest in an entity that is not a VIE, it must apply the voting control-based consolidation model (the voting interest entity model) under ASC 810-10.
Definition of “control” and identification of the primary beneficiary	Consolidation is based solely on the concept of control of an investee by an investor. Paragraph 7 of IFRS 10 identifies three elements of such control: “[P]ower over the investee.” “[E]xposure, or rights, to variable returns from its involvement with the investee.” “[T]he ability to use its power over the investee to affect the amount of the investor’s returns.” The investor must possess all three elements to conclude that it controls the investee. The investor must consider all facts and circumstances when assessing whether it controls the investee.	The basis for consolidating an entity depends on whether it is a VIE or a voting interest entity: VIE model — An entity applies a qualitative assessment that is based on power and economics to determine which entity is the primary beneficiary of the legal entity and therefore must consolidate the VIE. The primary beneficiary has both (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. Voting interest entity model — An entity generally considers voting rights. Typically, the conditions for consolidation are that (1) the entity owns a majority voting interest (i.e., more than 50 percent of the voting shares) and (2) the noncontrolling shareholders do not have substantive participating rights. ASC 810-10 further indicates that the power to control another entity may exist in other contracts or agreements outside of the shares.
Specific limited partnership (or similar entity) guidance	The concept does not exist.	A limited partnership would be considered a VIE regardless of whether it otherwise qualifies as a voting interest entity 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.
Control analysis — potential voting rights (e.g., warrants, call options on shares, or other instruments convertible into voting shares)	An entity considers substantive potential voting rights in determining control.	An entity generally does not consider potential voting rights in determining control.
Control analysis — shared power	Under IFRS 10, if 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 because no investor can direct the activities without the cooperation of the other(s). Each investor would account for its interest in the investee in accordance with the relevant IFRS Accounting Standards. If power is shared (i.e., joint control), IFRS 11 applies.	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.
Control analysis — variable interests held by related parties and agency relationships	IFRS 10 includes a list of related parties and de facto agents; however, but it 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 related parties are less likely to be consolidated by a reporting entity under IFRS 10 because the power and economics of the related party are attributed to the reporting entity only 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.	There are no prescriptive related-party rules under the voting interest entity model related to the determination of 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 may result in the consolidation of the VIE by one of the related parties involved with it, even if none of the parties individually has 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) does, the reporting entity may be required to determine which party is most closely associated with the VIE and therefore must consolidate it.
Control analysis — de facto control	An investor with less than a majority of the voting rights may still have power over the investee 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 the holdings of other investors.	The de facto control concept does not exist.
Differences in reporting dates	IFRS 10 requires entities to have the same reporting period unless impracticable to do so. If impracticable to do so, significant intervening transactions must be adjusted for in the consolidated financial statements, and the difference in reporting dates “shall be no more than three months.”	A difference in reporting dates of no more than three months is allowed. Disclosure of the difference and an explanation about why the difference exists are required. An entity must disclose the effect of any material intervening transactions or events during the intervening period on the financial statements of the consolidated entity.
Differences in accounting policies	Upon consolidation, 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.”	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.