Financial crisis-inspired standards released

NEW INTERNATIONAL International Financial Reporting Standards released today offer guidance on off-balance sheet activities, joint arrangements and disclosure of interests in other entities.

IFRS 10, 11 and 12 form a significant part of the International Accounting Standards Board’s response to the financial crisis, dealing with when entities should be recognised in the consolidated financial statements of a parent company.

The issue shot to attention when concerns were raised about companies managing their accounts by making insecure assets off-statement, despite the fact that the liability remained with the parent company.

IFRS 10 makes control central to the decision of whether an entity should be on or off balance sheet, as well as offering guidance on determining control where this is difficult to assess.

It means, for example, that a company with less than 50% of an entity’s shares can still be considered to control it if other stakeholders’ interests are dispersed, meaning the company remains the largest single voting interest.

Taking an entity on balance sheet is known as consolidation, and can have a significant impact on a company’s assets, income and expenses.

Banks may be particularly affected by the release, as it deals with special purpose vehicles, used to isolate companies from financial risk.

Joint arrangements, whereby control of entities is shared by two or more companies, are the focus of IFRS 11.

IASB chairman David Tweedie (pictured) said the new standards will assist investors in understanding risks associated with financial institutions’ activities: “These improvements tighten up the reporting requirements for the consolidation of subsidiaries and special purpose vehicles, and require the substance of joint arrangements to be revealed.”

IFRS 12 deals with disclosure of interests in other entities, and sets out the requirements surrounding off balance sheet vehicles such as joint arrangements, associates and special purpose vehicles.

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Fiona Westwood of Smith and Williamson.