Examination of comment letters on the development of IFRS 10 and IFRS 12

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Examination of comment

letters on the development of

IFRS 10 and IFRS 12

Master thesis, MscBA, specialization Accountancy & Controlling

University of Groningen, Faculty of Economics and Business June 2, 2013

Desmond Dwayne Rozenberg Student number: s2413620 Van Suchtelen van den Haarestraat 11-II

1068 GM Amsterdam Tel.: +31 6 10408710 E-mail: D.D.Rozenberg@student.rug.nl Supervisors: dr. W. Kevelam RA Second reviewer: prof. dr. R.L. ter Hoeven RA

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Foreword

As the author of this master thesis at the University of Groningen, I would appreciatively express my gratefulness to the people who supported me during the completion of this study. First I gratefully acknowledge the helpful suggestions and comments of my thesis supervisor, drs. Wilfred Kevelam, who provided me great visions and recommendations regarding the subject of this study. Similarly, strong gratitude goes to Shurley Phillis Marengo and Renee Germaine van Seggern, who fully supported me anytime through this master program. Likewise, I would like to thank family and friends for their encouragement in the past period.

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Abstract

This study sets out to enquire about the influence of comment letter writers in the IASB’s due process regarding issued IFRSs 10 and 12. In order to gain further insight into this process, this study investigates whether the international financial reporting standards are created in the best interest of respondents to the draft standard. This case study examines comment letters sent directly to the IASB over the period December 2008-March 2009, regarding consolidation and disclosure guidance. By using a content analysis, 148 comment letters are examined and positions of respondents regarding eleven questions relating to specific topics gathered. With regard to geographic background of respondents the findings show that European perspectives dominated the responses received by the IASB. However, the continents Asia, Africa and South America were represented in a lesser extent during this exposure period. This is in someway noteworthy as the board is continuously seeking for greater acceptance and legitimacy as international convergence of reporting standards. Furthermore, the data reveals that banking and insurances stakeholders reacted significantly more than public company interests, standard setters and professional accountancy bodies to the draft IFRS. Nevertheless, the findings of this study show that the board has not worked on the interest of just one type of interest group, but to the majority of the general position. Nonetheless, there were no major obvious conflicts between interest groups on certain aspects of the draft IFRS. Therefore, this paper reveals that the due process of IFRS 10 and IFRS 12 is very carefully executed.

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1 Introduction

1.1 Motivation

The International Accounting Standards Board (IASB) has been under pressure to reduce diversity in accounting standards internationally and to develop solid International Financial Reporting Standards (IFRSs). This progress is essential for strong global capital markets as it is likely that IFRS shall be used in all-important capital markets around the world within the next decade (Fülbier et al, 2009). The development of IFRSs by the IASB is performed by a due process, which was designed after investigating and expanding practices of national standard-setters (Richardson and Eberlein, 2011), which now contains various opportunities that are foreseen for the different stakeholders to express their opinion and to influence the standards of the IASB (Orens et al., 2011). Public consultations procurers such as invitations to comment on discussions papers, exposure drafts, roundtable meetings or establish field-tests are elements in the development process of IFRSs. Participation by all stakeholders is of essential importance to gauge potential reactions of interest groups (Orens et al., 2011; Jorissen et al., 2012). However, the interests of these different groups make it incredibly difficult for the IASB to issue the right standards and meet everyone’s demands (Posner, 1974). Nevertheless, Kwok and Sharp (2005) see the participation of stakeholders as a potential to mitigate conflicts between them. Since the IASB (formerly IASC) was founded it frequently struggled to gain acceptance and legitimacy as an organization (Larson, 2002). To gain support for widely acceptance (Larson, 2007) and compliance of the IFRSs, the IASB will consider the various interests. Cortese and Irvine (2010) provide evidence that several parties that lobby the stand-setter have greater influence, while Kenny and Larson (1993) suggested that there is a mix of power held by key stakeholder groups. One common way to attempt to influence a standard is through writing comment letters in response to a specific proposal issued by a standard-setter (Chatham et al., 2010).

As consolidation and disclosure guidance are an essential and controversial topic that are widely laid bare by the financial crisis, G20 and Financial Stability Board it is important for the IASB to understand the views of different stakeholder groups. In April 2008, the IASB responded to these topics by accelerating its consolidation project, which was added to the IASB’s active agenda since April 2002. Although, the IASB started its due process that should create sufficient support for new standards already in June 2003. The primary objective of this project is to design

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a model that shall replace the IAS 27 “Consolidated and Separate Financial Statements” and SIC-12 “Consolidation - Special Purpose Entities”. Inconsistencies between the guidance in those standards caused for diversity in application (IASB, 2011b). Widely confusion was present around the definition of control and a special purpose entity and whether to apply IAS 27 or SIC-12 (IASB, 2011a). The new IFRS 10 ‘Consolidated Financial Statements’ and IFRS 12 ‘Disclosure of Interests in Other Entities’ should improve the control definition and related application guidance that can be applied to all entities. Furthermore, the global financial crisis revealed importance of developing disclosure requirements, since IAS 27 and SIC-12 only encompassed disclosure requirements for subsidiaries. Therefore, the disclosure requirements must be strongly improved and provide useful information regarding the involvement of reporting entities in consolidated and unconsolidated entities.

1.2 Research questions & conditions

In December 2008, the IASB published the exposure draft ED 10 “Consolidated Financial statements” for public comment. By 20 March 2009, a total of 148 comment letters from over 35 countries had been received and released to the public. In this exposure period it also seemed that certain interest groups lobbied the IASB through comment letters to ensure their interests. In the past several years, mostly accounting academics have been paying close attention to the IASB and the production of IFSs (Zeff, 2012). While the development of particular accounting standards can be investigated by using different research methods, including a content analysis (Larson, 2007), the objective of this case study is to investigate the quality of the IASB’s due process with respect to public consolations through the writing of comment letters to the exposure draft 10. If the IASB would not respond to the comments of respondents, the effort and time of lobbying the IASB by providing comment letters on an exposure draft could be a useless and inefficient lobbying method. Moreover, it could affect the IASB’s legitimacy and have a disproportionate impact to the acceptance of IFRSs.

The aim of this study is formulated in the following main question:

What is the quality of the development process of IFRS 10 and IFRS 12, which parties did comment to the proposal and what is the influence of providing comments?

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In order to answer the main question as specific as possible and gathering solid evidence the next research questions are framed:

Research question 1:

How are IFRS 10 and IFRS 12 are developed by the IASB with public consultations? Research question 2:

Which type of comment letter writers have attempted to influence the ED 10? Research question 3:

What are the common arguments against the ED 10? Research question 4:

To what extent does the final published IFRSs reflect the arguments of comment letter writers? While the IASB is facing a vast quantity of standard-setting issues at all levels of financial reporting, standard setters including the IASB frequently call for academic input (Fülbier et al, 2009). As researchers have the opportunity to contribute to the IASB’s standard-setting process (Fülbier et al, 2009), this research is performed in the post-implementation review stage. This paper contributes to the existing accounting lobbying literature by investigating the exposure draft, final issued IFRSs and provided comment letters surrounding the consolidation and disclosure of IFRSs. As the IASB will be confronted with many more due processes in the future, this analysis is relevant for understanding the influence of respondents on the IASB through this type of lobbying. Hereby, the evidence of this paper delivers insight into the effectiveness of providing comment letters and the several interest groups and their geographic background. For science and public it is of great importance to see if their input is being acknowledged by the IASB and to what extent. Furthermore, this study develops a methodology for examining comment letters to standard setters, which also can be applied in future studies. While Georgiou (2004) suggests that comment letters are likely to be a good direct lobby activity to which the standard-setter is subjected, there must be stated that lobby activity is not restricted to the use of comment letters (Georgiou, 2010; Chatham et al., 2010). As the findings of Georgiou (2004) shows that the comment letter method of lobbying the IASB can be most effective, the final changes in the issued IFRSs may also be caused by additional (private) lobby activities (e.g. roundtable meetings). Likewise, stakeholders may participate indirectly in the IASB’s due process through communicating their opinion to, for example, their accounting firm or the European

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Financial Reporting Advisory Group (EFRAG). Additionally, previous studies have made use of several different methodologies regarding investigating comment letters. While this paper must be completed within a prescribed time period the established methodology is used in order to preform the main objective of this paper, wherein it is also necessary to meet the requirements of the University of Groningen for scientific research.

1.3 Structure

The remainder of this paper is structured as followed. This paper begins with a theoretical framing of this research in the next chapter, wherein the theories for regulation shall be elaborated and a literature review around the subject of this study will be performed. In chapter three the IASB structure and its due process with respect to IFRS 10 and IFRS 12 will be discussed. Furthermore, this chapter describes the previous and new standards and the changes that were made after the exposure draft in the final standard. The methodology of this study is set out in chapter four of this paper. In chapter five the results of the examination will be analysed and showed. The conclusion and discussion that are resulting from this examination are set out in chapter 6.

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2 Theories for regulation and

previous literature

The different parties that are involved through their interests in the development of International Financial Reporting Standards can be clarified by various theories. Likewise, these theories could explain the considerations and decisions of the IASB according to the standard-setting process. In this chapter the Public Interest theory, Interest Group theory, Institutional theory and Legitimacy theory will be applied. Additionally, previous literature in case of this study will be considered in paragraph 2.2.

2.1 Theories for regulation

The setting of accounting standards is an act of regulation, which invariably involves value judgments about the objectives and other high-level principles of financial reporting (Fülbier et al, 2009). Hereby, standard setting is making choices among the views of individuals and groups with conflicting interests (Kwok and Sharp, 2005). While Posner (1974) suggests that the IASB is created to maximize the public interests, the standard-setter can be seen as an important representative of the public. This suggestion arose from the Public Interest theory, which suggests that regulation is a response to public demand for correction of market failures (Posner, 1974). However, this objective is not always achieved by mismanagement (Posner, 1974), as the regulator has problems with its implementation (Scott, 2012). The Public Interest theory indicated that standards would be implemented when the benefits exceed the costs. Hereby, the development of IFRS 10 and IFRS 12 can be seen as a balance between the social and economic benefits and costs of regulation. However, it is very difficult to determine the right amount of regulation (Scott, 2012) and impossible to satisfy all stakeholders of the regulation (Scott, 2012; Posner, 1974). As it is impossible to meet the demands of everyone, Becker (1983) describes the theory whereby parties form groups in order of competing in favour or against a regulation, the Interest Group theory. Interest groups will have different motivations or objectives concerning reporting standards (Kwok and Sharp, 2005). IFRS 12 can act as an example for this, as the users of financial reporting information usually request for more disclosure information while the preparers may resist mentioning cost, time and other reasons. The role of the standard-setter is to resolve conflicts amongst interest groups by building consensus (Georgiou, 2002). Accounting

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standard-setting bodies like the IASB follow a due process where comments are solicited from interest groups before standards are finalized (Kwok and Sharp, 2005). Several parties will operate in different interest groups with the objective to protect their interests. The Interest Group theory sees regulation as a commodity where supply and demand is present. Therefore, participation in the development process of standards is considered important for standard-setters, because it provides them the views of different interest groups (Georgiou, 2002) and these groups could ensure that their interests are taken in account by the IASB (Kwok and Sharp, 2005). This can be done lobbying the IASB through, for example, writing comment letters on exposure drafts or by board representation. The outcome of competing other groups depends on which groups are able to influence or exercise power (Kwok and Sharp, 2005) and which groups are relatively most effective in applying pressure (Scott, 2012). This means that when a group does not have enough power, it will not be able to lobby in favour of their interests effectively. In context to this study several interest groups may lobby in favour or against IFRS 10 and IFRS 12 through comment letters to the proposed standard in the exposure draft. Nevertheless, the interests of different groups make it impossible for the IASB to issue the right standards. Scott (2012) suggests that we do not know how to calculate the best trade-off between the conflicting uses of information. Therefore, the interest group theory is a better predictor for new IFRSs, because this theory recognizes the existence of conflicting constituencies (Scott, 2012). The Public Interest theory would describe an ideal image of how regulation should work and does not count the power of governments that can be used by stakeholders and political participants. More broadly, the interaction between respondents and the IASB is consistent with an institutional theory explanation of organization change and adaptation to environment pressures (DiMaggio & Powell, 1983; Kenny and Larson, 1993). Scott (1987) defines the Institutional theory as a theory, which predicts that an organization will be responsive to its environment and will change itself to adapt to changes in its environment. Hereby, organisations seek to legitimize themselves by seeking environmental input and taking actions to enhance their own visibility in the environment (Larson, 2002). The motivation for lobbying the standard-setter may also be explained by the Institutional theory, as an organization will strive for legitimatization by becoming or remaining acceptable to its social environment (Chatham et al., 2010). Actively participating in the IASB due process through comment letters responding on draft IFRSs, may be viewed as a way to increase the legitimacy of the IASB (Larson, 2002). As seen from the Institutional theory, the IASB is an organisation that asks input about its international financial reporting standards from its stakeholders. Furthermore, this theory predicts that a standard-setter

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will monitor and address the needs of its stakeholders and it will adapt accordingly to meet those needs (Kenny and Larson, 1993). By lobbying the standard-setter in the form of responding to exposure drafts, it can be an effective way for stakeholders to make their wishes known and influence the development process of reporting standards (Kenny and Larson, 1993). As it appears above legitimacy is a major and crucial concept within the Institutional theory. The Institutional and legitimacy theory are often applied in research related to the IASB and the IFRSs (Kenny and Larson, 1993; Larson, 2002; Durocher, et al., 2007; Chua and Taylor, 2008; Richardson and Eberlein, 2011; Larson and Herz, 2013). Suchman (1995) defines legitimacy as followed: Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions. On behalf of the legitimacy of the IASB can be specified that there are some stakeholders, and that the legitimacy of the IASB is their incentive for acceptance and compliance of the IFRSs. An institution as the IASB is continuously seeking for greater acceptance and legitimacy as international convergence of reporting standards, is becoming more of a reality (Larson, 2007). Public participation in the due process of the IASB is a key component of achieving greater legitimacy (Richardson and Eberlein, 2011; Larson and Herz, 2013). Hereby, Larson and Herz (2013) suggest that diverse geographical substantial participation in development of IFRSs might reduce regional over-influence, improve consistent application of IFRS and promote the legitimacy of the IASB. This is consistent with Suchman (1995), Larson (2002), Larson (2007) and Jorissen et al. (2012) who indicated that participation of all stakeholders seemed as an essential component for a private-sector standard setter with no elected or other governmental authority. The writing of comment letters on exposure drafts may increase the legitimacy of the IASB, but can also ensure higher quality IFRSs. Nevertheless, the lack of participation may hinder the legitimacy of the IASB. Therefrom can be assumed that the provided comment letters to the draft IFRS 10 “Consolidated Financial Statements” are a part of the IASB’s legitimacy. In case of this study the institutional and legitimacy theory will be used to examine the effectiveness of the IASB’s due process with respect to the issued exposure draft. Wallace (1990) and Kenny and Larson (1993) indicated that the IASB is obligated to obey to its constituents to be a legitimate organization. Finally, Durocher and Fortin (2011, p. 29) argue that for accounting standard-setters, ‘a lack of constituents’ involvement may hinder the appropriate identification and evaluation of all important alternatives and viewpoints, and thus jeopardize the quality of standard-setting outputs’.

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2.2 Previous literature

Although numbers of previous studies examine the lobbying of national accounting standard-setters (Georgiou, 2002, 2004, 2005; Georgiou and Roberts, 2004; Elbannan and McKinley, 2006), a growing amount of academic literature examines participation during the development of international financial reporting standards under the IASC or IASB (Kenny and Larson, 1993; Kwok, 1999; Larson and Brown, 2001; Cooper and Robson, 2006; Johnston and Jones, 2006; Jorissen, et al., 2006; Durocher et al., 2007; Larson, 2002, 2007, 2008; Fülbier et al, 2009; Cortese and Irvine, 2010; Georgiou, 2010; Hansen, 2011; Katselas et al., 2011; Larson and Herz, 2011; Orens et al., 2011; Jorissen et al., 2012; Zeff, 2012; Larson and Herz, 2013). Sutton (1984) defines lobbying as an action taken by interested parties to influence a rule-making body. Hereby, the short-term objectives of lobbyists are to influence the content of a proposed standard, while often their long-term objectives are to influence the standard-setting process itself (Sutton, 1984). Zimmerman et al. (2008) indicate that ‘the underling idea of participation and deliberation is the constituents are more likely to accept the resulting norms when they were involved in their formation’. Moreover, the IASB has to deal with more diverse stakeholders than national accounting standard-setters in order to develop international reporting standards (Tokar, 2005). Therefore, it is important to understand how international accounting standard bodies make decisions (Barth, 2000), and thus a further sustained study on the IASB would be worthy (Cooper and Robson, 2006).

As been indicated by the theories for regulation in paragraph 2.1, the participation of different interest groups in the development of standards is considered to be important for the success and acceptance of these standards. Hereby, the attraction to participate in the standard-setting process and the expectation of participating adequate, are motivations of interest groups to participate in the process of developing standards (Durocher and Fortin, 2011). Georgiou (2002) provides evidence that shows that lobbying behaviour depends on the size of companies and their history of lobbying a standard-setter. A study of Sutton (1984), suggested that large companies are more likely to lobby accounting standard-setting bodies than small companies. Larger companies would have more economic incentives to participate because they are wealthier than the smaller firms. Hereby, Sutton (1984) indicates that these firms have the expectation that total benefits are generally larger than the expenditures of participating in the standard-setting process. Kenny and Larson (1993) studied the role of lobbying in an international standards setting process regarding the IAS 31. Hereby, the received comment letters by the IASC

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regarding the exposure draft of the standard were analysed in form of a content analysis. The findings of this examination reveal that a large group of professional organizations and associations responded to the exposure draft. Nevertheless, Kenny and Larson (1993) finds that there is a mix of powers by several key stakeholder interest groups. Almost equally to those before, an examination by Georgiou (2005) on the frequency of lobbying the UK’s Accounting Standards Board (ASB) by interest groups revealed that these are likely to be large firms. Likewise, a study of Cortese and Irvine (2010) that examines the role of powerful entities and coalitions in the development of IFRS 6 by the IASB shows consistent findings. They found that powerful industry entities influence the international standard-setter in order to ensure their own interests. Several others studies that have examined the lobby activities surrounding one or more IASC and IASB exposure drafts, reveal that certain common interest groups such as IASB member bodies, accounting standard setting bodies, other accounting organizations, public accounting firms, banks and corporations seek to influence the international standard-setter (Larson and Brown, 2001; Larson, 2002, 2007, 2008; Chatham et al., 2010; Katselas, Birt and Kang, 2011). Nevertheless, companies may also communicate their views to their external auditors, with the expectation that those shall represent their position sufficiently (Georgiou, 2002). A study of Orens et al., (2011) which examined the opinions of Belgian and UK firms on the use of different lobbying methods, reveals similarities relating to the reliance of firms on their auditors. Furthermore, a recent study of Jorissen et al. (2012) analysed comment letters that were sent directly to the IASB to investigate the nature and drivers to participate in the IASB’s due process during the period of 2002 up to 2006. The findings of this study reveal that preparers, auditors and standard setter react significantly more to a proposal when it has a major effect on the accounting numbers of a firm. In case of proposed disclosure requirements, comment letters are significantly more provided by users, stock exchanges and their supervisory authorities. Nonetheless, Larson and Herz (2011) shows that academics generate about 2.6% of the responses to the IASB in the standard-setting process and indicate that it is substantially higher compared to previous studies that were related to the IASC.

In addition to this all, the geographic background on respondents is considered important in case of global convergence of international accounting standards. The level of participation through the writing of comment letters by various stakeholder interest groups in different countries may be a result of the institutional and cultural differences among countries (Larson and Herz, 2013). Studies of Jorissen et al. (2006, 2012), Larson (2007) and Larson and Herz (2013) are the only ones that clearly consider certain elements of the geographic diversity of comment letters in the

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standard-setting process. The findings of all those four studies show that EU respondents provide relatively 60%, 52%, 57% and 54% of all responses and thus more than 50% in these cases. Within the EU, respondents from the U.K. provide most response in the studies of Jorissen et al. (2006), Larson (2007) and Larson and Herz (2013). Furthermore, Larson (2007) and Larson and Herz (2013) show that regions like Africa, Asia and North America provide a larger number of responses than South America. Nevertheless, Jorissen et al. (2012) suggests that European constituents may also participate indirectly in the IASB’s due process by writing comment letters to the EFRAG. Hereby, the respondents frequently use the exact same comment letter to influence the EFRAG and thereby also the IASB.

While Georgiou (2002) suggests that the choice of various parties to participate in the development process of accounting standards is not simply a meaning of costs and benefits, studies show that some interest groups will only lobby the standard-setter if the benefits from lobbying exceed the costs (Johnston and Jones, 2006) and these costs are significantly associated with the incentives to lobby (Durocher et al., 2007; Chatman et al., 2010). Conversely, other findings of Georgiou (2002) reveal costs of lobbying are strongly important regarding the choice not to participate in the standard-setting process and the belief that others will represent their opinion. Furthermore, the expectation of economic consequences is suggested to be an important intensive of lobbying a proposed standard (Elbannan and McKinly, 2006; Durocher et al., 2007; Chatham et al., 2010). As this paper is focused on specific standards, IFRS 10 and IFRS 12, the common arguments in this case may be highly technically detailed and thus little literature will exist. Nevertheless, Larson (2008) performed a case study that is related to a previous SIC-12 interpretation, which now is replaced by the IFRS 10 and IFRS 12. In paragraph 3.3 SIC-12 is discussed briefly. With respect to the study of Larson (2008), 29 comment letters were analysed in order to gain insight into whether political pressures influence the development of the proposed interpretation. Many arguments against DI-12 were related to each other and often technical in nature. The findings of his study show that around 75% of all respondents supported the DI-12. The remaining 25% of respondents opposed the DI-12 because of the more flexible rules in their home countries regarding the consolidation of Special Purpose Entities. Orens et al. (2010) also suggest that the country’s accounting standard background may influence the decision to participate in an accounting standard-setting process. Consistent with these findings, a multi-period analysis by Larson and Herz (2013) regarding IASB comment letter participation, suggests that country’s national accounting standards that differ from international financial reporting standards are a possible reason for writing comment letters to the IASB. Conversely, respondents

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with similar national accounting standards to IFRS may even not bother writing comment letters to the IASB.

With respect to the extent of acknowledging the responses of comment letter writers, Kenny and Larson (1993) suggests that the standard-setters are looking for acceptance of its interest groups and will issue the final standard in line with the interests of the respondents. In this study Kenny and Larson (1993) indicates that the IASC has modified several elements of the exposure draft in accordance with the provided comments, as the IASC is seeking for legitimatization and survival, the institutional theory. Chatman et al. (2010) suggests that the international accounting standard-setter responded to provided comments by interest groups that opposed the exposure draft, by modifying the final standards to meet the respondent comments partially. A comparison between the draft interpretation and final issued interpretation in the study of Larson (2008) form above shows that overall wording changes were made to clarify the rules, improve the understandability of the interpretation and to increase consistency both internally and with existing international accounting standards. Furthermore, Hansen (2011) has investigated comment letters received by the IASB related to five exposure drafts with a total of 69 questions in a period between November 2002 and January 2004. In order to produce evidence on how the IASB generates accountings standards in case of different interest of parties, this study reveals that successful lobbying is associated with high quality of information provided in comment letters. Therefore, ‘successful lobbying is determined by the ability of the lobbyists to transfer information to the regulator’ (Hansen, 2011). Likewise, lobbying is suggested to be positively associated with size of equity markets in the respondents’ geographic backgrounds and the level of financial contribution. Based on these findings can be stated that the success of lobbying is associated with the financial opportunity of respondents. Consistent with Chatman et al. (2010), the findings of Hansen (2011) shows that the IASB made some changes to the final standard that are substantial enough to satisfy least 75% of the opposing respondents. ‘While private lobbying and, most likely, pre-exposure draft lobbying appear to dominate the decision to issue an IFRS, comment letters have significant impact on the form of the final standard’ (Hansen, 2011).

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3 The IASB and the development of

IFRSs

In this following chapter the IASB’s structure (3.1), its due process and the EU endorsement process (3.2) will be described. Consequently, the new consolidation and disclosure circumstances under the IFRS 10 and IFRS 12 are covered in 3.3. Likewise, the previous standard IAS 27 and interpretation SIC-12 will be reviewed. The changes that are made after the exposure draft in the final standard will also be outlined in 3.3.

3.1 The IASB Structure

The International Accounting Standards Board (IASB) and formerly IASC (created 1973) foremost objective is developing high quality international financial reporting standards, that provide a faithful presentation of a company’s performance and financial position in its financial statement (IFRS foundation, 2013). The renewing of the IASC to the IASB caused for a focus change from harmonization to convergence or global standard setting in 2001 (Doupnik & Perera, 2007). This resulted in a new environment of international financial reporting, whereby the effective operation of the capital markets and the confidence of all financial statements users in the integrity and transparency are essential (IFRS foundation, 2013). Thereby, the IASB now creates international financial reporting standards (IFRSs), which previously were called international accounting standards (IASs). The development process of IFRSs involves different parties that are shown in figure 1 on the next page.

The IASB and the IFRS Foundation are the base of this structure and are supported by the IFRS Advisory Council and the IFRS Interpretations Committee. From July 2012, the IASB comprises 16 Board members, who are appointed for a five-year term, which is renewable for an additional three years1_{. Professional competence and practical experience are the prime qualifications for the}

members of the IASB, which come from different continents of the world to maintain overall geographical balance.

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1_{The chair and vice-chairs may serve second terms of five years.}

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IFRS Foundation

appoint inform oversee, appoint and finance informs

IFRS Interpretations Committee IASB

create develops interpretations

IFRS

IFRS Advisory Council

Monitoring Board

appoints, monitors report to

The IFRS Foundation is an independent, not-for-profit private sector organization. The 22 trustees of the foundation that safeguard the independence of the IASB, are responsible for the financing of the organization and are accountable to a monitoring board (Deloitte, 2013a). Hoogervorst (2013) IASB chairman stated that the IFRS Foundation places extreme importance on its due process procedures an works continually to enhance this process.

Likewise, the IFRS Foundation promotes and facilitates IFRSs adoption with a principles-based approach. The IFRS encourages professional judgement and tends limit guidance for applying general principles by following this approach (Doupnik & Perera, 2007).

Figure 1. The structure of the IASB

! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

The IFRS Advisory Council advices the IASB on agenda work items and inform the Board of the views of individuals and organisations on the standard-setting process. The IFRS Interpretations Committee delivers interpretations for the applications of IFRSs, provides guidance on financial reporting issues that are not explicitly addressed in the standard and performs other tasks requested by the IASB. Finally, the Monitoring Board is stated at the top of the IASB structure and has the primary objective to create formal interaction capital markets authorities and the IFRS Foundation (Fleckner, 2008; Deloitte, 2012).

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The board is composed of: the European Commission, the Japanese Financial Services Agency, the US Securities and Exchange Commission, the Emerging Markets Committee of IOSCO, the Technical Committee of IOSCO and the Basel Committee of Banking Supervision (Deloitte, 2012).

3.2 The IFRS due process and endorsement

The IASB develops IFRSs through an international consultation process, also known as the “due process”, which involves different parties as shown in figure 1 in chapter 3.1. This process should contribute to the creation of sufficient support with respect to developing standards and mitigate the chance of a failure a new IFRS (Scott, 2012). The process of developing IFRSs is divided into several stages (IFRS Foundation & IASB, 2013a): (1) setting the agenda, (2) planning the project (3) developing and publishing the discussion paper, (4) developing and publishing the exposure draft, (5) developing and publishing the standard and (6) post-implementation reviews. Mainly the first stage involves the evaluation of potential financial reporting items by gathering evidence of a perceived deficiency and the possibility of improving the quality of a standard or increasing convergence (Deloitte, 2013b; IFRS Foundation & IASB, 2013a). Additionally, in this stage of the due process the staff will service the IASB in identifying and reviewing items that might be considered for the agenda. Potential issues may also arise from scientific studies, bodies associated with accounting standard-setting and other interested parties that have comments (Deloitte, 2013b). In April 2001 the IASB added the project of IFRS 10 “Consolidated Financial Statements” and IFRS 12 “Disclosure of Interests in Other Entities” to the active agenda (Deloitte, 2013c). This project was started in response to different interpretations by various reasons when applying IAS 27 “Consolidated and Separate Financial Statements” and SIC!12 “Consolidation—Special Purpose Entities” (IASB, 2011a). As the project is added to the active agenda, the IASB establishes a working group2_{at the second stage. This working group (also}

known as advisory group) is formed to launch a project plan and to advice the IASB and its staff on the project (Deloitte, 2012). At the third step of the due process the IASB undertook several additional activities such as a staff draft that was discussed at a public roundtable in September 2008 (Deloitte, 2013c). The IASB also considered suggestions from the IRFS Advisory Council3

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2_{IFRS Foundation & IASB (2013a): working groups offer the IASB access to supplementary practical experience,}

expertise and are generally established for major projects.

3 _{Deloitte (2013b): the IFRS Advisory Council advices the IASB on agenda work items and inform the board of the}

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and conduct field tests with respect to IFRS 12 requirements, which already were present in US GAAP. In those meetings delegates from the banking sector and the standard-setter reviewed existing structuring instruments and relationships to test the proposals. Nevertheless, the staff also conducted auditors and banks to review the application and drafting of early drafts of ED 10 and IFRS and obtain their concerns IASB. (2011b). Additionally, the project team undertook more formal activities, whereby they had face-to-face consultations with insurance companies, hedge fund managers, banks, audit firms and representative organisations from all over the world. This was done to receive examples based on actual conditions and relationships to evaluate the requirements that were proposed IASB. (2011b).

The development and publication of a draft IFRS is a mandatory step in the due process (IFRS foundation, 2013). The exposure draft 10 (ED 10 Consolidated Financial statements) is issued before finalizing and publishing IFRS 10 and IFRS 12. The publishing of the ED requires a supermajority of the IASB members, whereby 10 out 16 members votes in favour. In December 2008 the ED 10 was issued for public consultation with a comment period of three months, comment deadline 20 March 2009 (Deloitte, 2013b, 2013c). In total the IASB received 148 comments letters on the ED 10 (IFRS Foundation & IASB, 2013b). With this information the project group attempted to identify items that may have needed more focus throughout the deliberations of the process development and assessed and considered several notions to consider the need for republishing the draft IFRS. Once the IASB had finalised the issues arising from the ED 10, the IASB’s technical staff prepared to draft the final IFRS before the IASB ballots the standard (IFRS Foundation & IASB, 2013a; Deloitte, 2013b). An international financial reporting standard was approved by the IASB when at least ten from the 16 members voted in favour of publication (Deloitte, 2012). Additionally, the IASB published a standard project summer and a feedback statement. Regularly, two years after the standard is effective, the IASB must conduct a post-implementation review for every new standard (Deloitte, 2013b). This review intends to identify issues with respect to the implementation and consider unexpected costs that have arisen. At last the IASB provides a post-implementation review summary of all found issues for each new IFRS.

Additionally, to the due process of the IASB the European Union (EU) accounting regulations require that each IFRS needs to be endorsed by the European Commission (EC). For this procedure the EU established an endorsement process, wherein several bodies are involved in the assessment of the IFRSs. Besides the endorsement of the issued IFRSs of the IASB, the EC

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is able to add or eliminate words and phrases, known as a carve-out. Fleckner (2008) indicates that the endorsement process of the European union is the biggest treat to the independency of the IASB. Therefore the IASB is needed to please its biggest interest group in order to continue having an important role in international accounting as it seeks for legitimacy.

On May 12, 2011 the IASB issued IFRS 10 and IFRS 12. Subsequently, the European Financial Reporting Advisory Group (EFRAG)4_{set the first step in the EU endorsement process and}

launched consultations with interest groups. Based on these consultations the EFRAG advised the EC whether IFRS 10 and IFRS 12 complied with the endorsement criteria: understandability, relevance, reliability and comparability (EC, 2013a). On February 2nd_{, 2012 and March 30}th_{, 2012}

the EFRAG gave the draft and final endorsement advice on IFRS 10 and IFRS 12. However, the EFRAG indicated that they did not support the mandatory effective date of 1 January 2013, because field-tests had determined that some financial institutions would need more time regarding the implementation of the IFRSs (EFRAG, 2013a). To ensure that the opinion of the EFRAG was objective and well balanced, the Standards Advice Review Group (SARG)5_assessed

the EFRAG advice. Based on the opinion of the SARG and advice of the EFRAG the commission developed a draft endorsement proposal. On June 1st, 2012 the Accounting Regulatory Committee (ARC)6_{voted on the proposal in favour of the adoption of the IFRSs.}

Similar to the EFRAG the ARC did not support the effective date. Fleckner (2008) indicated that the EU endorsement process threatened the IASB’s independency. Hereby, the EU did not achieve the objective to harmonize standards (Doupnik & Perera, 2007). On December 11, 2012 the EC endorsed IFRS 10 and IFRS 12 and followed the advice of the ARC. The effective of the standards in Europe is set at 1 January 2014. Therefore, the first financial statement in EU based on IFRS 10 and IFRS 12 will be published in 2015. In this scenario companies outside of the EU already will apply the standards in 2013 and confront with short-term consequences.

In the United States of America (USA) non-domestic listed companies on the US exchanges are required to reconcile IFRS financial statements to US GAAP. Nevertheless, the Financial Accounting and Reporting Standards (FASB) have joined the consolidation project in order to convergence with the IFRSs in October 2009. Both boards have committed to work towards !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

4_{EC (2013a): EFRAG is an accounting technical committee, which provides support, expertise and opinion to the}

EC according the adopting of IFRSs.

5_{Deloitte (2013d):}_{SARG is a group of independent experts and high-level representatives from National Standard}

Setters whose experience and competence in accounting are widely recognized.

6_{Deloitte (2013d): ARC is composed of representatives from member states and provides an opinion on the}

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developing common standards with respect to consolidation. Nevertheless, the adoption of the IASB’s regulation by the European Commission and a convergence agreement with the FASB increased the importance of the IASB as a private standard-setter (Jorissen et al., 2006).

3.3 The International Financial Reporting Standards

The IASB introduced IFRS 10 “Consolidated Financial Statements” and IFRS 12 “Disclosure of Interest in other Entities” because various deficiencies of the previous standards. With IFRS 10 the IASB replaces IAS 27 “Consolidated and Separate Financial Statements and SIC-12 “Consolidation-Special Purpose Entities”. The previous standards will be considered briefly, before the IFRS 10 and IFRS 12 will be deliberated. In order to deliberate IFRS 10 and IFRS 12, the difference between the proposed standards in the exposure draft 10 and the final issued IFRSs will be intertwined in this paragraph. Hereby, the main changes will be distinguished. On basis of the outlined changes the comments of respondents on the draft IFRS will be take in account so as to investigate the quality of the IASB’s due process with respect to public consultation through comment letters in chapter five.

In January 1990 the IASC issued the first IAS 27, which had many revisions in the years that followed. The objective of this standard was to enhance the relevance, reliability and comparability of the information the reporting entity provides in its separate and consolidated

financial statements (IFRS Foundation & IASB, 2011a). Under IAS 27 an investor controlled an investee when the investor acquired more than half of the voting rights of the entity (Deloitte, 2013e). However, the investor also had control over an investee by power through several agreements with other investors or the investee and the power to appoint or remove the majority of the members of the board of director. Nonetheless, IAS 27 had no explicit guidelines for the consolidation of Structured Entities (SE) (formerly: Special Purpose Entities). The IASB created the Standing Interpretations Committee (SIC) in 1997 to address accounting issues and develop the interpretations of IASs. In November 1998 the Standing Interpretations Committee (SIC) issued SIC-12 that provided consolidation guidance related to SE (Deloitte, 2013e). While IAS 27 was focused on the power of an investor to govern financial and operating policies of an investee, SIC-12 was focusing more on exposure to a majority of risks and rewards (IASB, 2011a). A reporting entity should consolidate a SE if the substance of the relationship between a reporting entity and SE indicates that the SE is controlled by the reporting entity (Deloitte, 2013e). Nevertheless, the standards provided limited guidance on how to assess the effect of

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protective rights, contained limited disclosure requirements and gave no disclosure requirements for unconsolidated entities. Those two standards made it often difficult to determine which stand must be applied to different entities. The IASB indicated that inconsistent application IAS 27 and SIC-12 led to divergence in financial reporting (IASB, 2011a). Additionally, the global financial crisis underlined the lack of transparency with respect to risk that remains from off balance entities.

With IFRS 10 there is no separate guidance and thus no separate consolidation model for structured entities. IFRS 10 combines the previous IAS 27 and SIC-12 into one single consolidation model that is based on control that applies to all entities. Hereby, IFRS 10 should now eliminate uncertainty about applying the standard to different entities. Nevertheless, the exposure draft contained separate guidance with respect to assessing control of a structured entity. This is noteworthy since the IASB initiated the consolidation project with the objective to establish a single IFRS that replaces IAS 27 and nonetheless SIC-12 that addressed consolidation of structured entities. The exposure draft proposed that the reporting entity should consolidate an entity when it has the power to direct the activities of that other entity to generate returns for the reporting entity (IFRS Foundation & IASB, 2013b).

However, the control definition was clarified after the exposure draft and the IASB defines it as followed: an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (IFRS Foundation & IASB, 2011a). With the new control definition the three elements for assessing control are clarified and specified in the guidance. Nevertheless, an investor only controls an investee if the investor holds all three following elements (IFRS Foundation & IASB, 2011a):

• power over the investee;

• exposure, or rights, to variable returns from its involvement with the investee; and

• the ability to use its power over the investee to affect the amount of the investor's returns.

In order of assessing control, the reporting entity first will identity the investees, their relevant activities and how the decisions about relevant activities are made. The element “power” means that an investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, i.e. the activities that significantly affect the investee’s returns (IFRS Foundation & IASB, 2011a). Power thus results from from rights, and

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for the purpose of assessing power only substantive rights and rights that are not protective need to be considered. Rights are substantive if they are exercisable when decisions about relevant activities of an investee need to be made. In order to assess power, voting rights and rights other than voting rights are relevant.

An investor has power with majority of the voting rights, if the relevant activities are directed by the vote of the investor or a majority of the members of the governing body that directs the relevant activities that are appointed by a vote of the investor (IFRS Foundation & IASB, 2011a). Nevertheless, the investor may be deterred of having power over an investee if voting rights do not provide the current ability to direct the relevant activities, or another party has existing rights to direct the relevant activities of the investee and this party is not the agent of the investor. IFRS 10 B38 indicates that an investor can have power with less than a majority of the voting rights through:

• contractual arrangements with other vote holders; • rights from other contractual arrangements;

• potential voting rights that are exercisable in case of making decisions about significant activities of the investee; and

• voting rights that are sufficient to unilaterally direct the relevant activities of the investee or hold a combination of these above.

Contractual arrangements or rights from other contractual arrangements in combination with voting rights can give the investor the current ability to direct the relevant activities of an investee. In case of all voting rights, potential voting rights only must be considered if they are substantive. Substantive potential voting rights are rights to obtain voting rights and give an investor the current ability to direct the relevant activities, such as convertible instruments or options including forward contracts. If those elements do not conclude that the investor has power, additional facts and circumstances shall be considered. Hereby, the investor considers the voting patterns of other shareholders at previous shareholders’ meetings, for example to determine whether they vote in the same way as the reporting entity. Within the assessment of power the investor also shall consider the purpose and design of an investee when the investor does not controls the investee by voting rights. Most entities that previously were in the scope of SIC-12 may be covered by those paragraphs of the standard’s guidance. Nevertheless, this does not mean that other investees may not fall in the scope of these paragraphs.

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IFRS 10 B51-B54 requires that the investor shall consider:

• the involvement and decisions made at the investee’s inception as part of its design and evaluate whether the transaction terms and features of the involvement provide the investor with rights that are sufficient to give it power;

• contractual arrangements such as call rights, put rights and liquidation rights established at the investee’s inception;

• circumstances in which the relevant activities occur only when particular circumstances arise or events occur; and

• the investor’s commitment to ensure the investee’s continuation of activities.

Likewise, the investor shall consider evidence of practical ability to direct the relevant activities unilaterally. Hereby, IFRS 10 B18 requires that the investor considers circumstances such as appointing or approving the investee’s key management personnel with the ability to direct the relevant activities or when the majority of the members of the investee’s governing body are related parties of the investor itself. Having a more than passive interest in an investee, may specify that related rights of the investor gave it the power or provide evidence of existing power over an investee. The indications of a special relationship with an investee can arise for example by the investee’s dependence on the investors operations, such as funding a significant part of the operations or the investor’s guarantees for a significant part of the investee’s obligations. Hereby, the IASB also considered reputational risk alone is not sufficient to indicate power over an investee. A large exposure variability of returns from the involvement with an investee may be the indicator that the investor may have power. However, the extent of the exposure itself is not determinative for having power over an investee.

In order to assess whether an investor controls an investee, the investor is required to consider its exposure or rights to variability in returns from the involvement with the investee. IFRS 10 B56 indicates that variable returns are returns that are not fixed and have the potential to vary as a result of the performance of an investee. Variable returns can only be positive, only negative or solely positive and negative.

The application guidance of IFRS 10 gives examples of returns, such as:

• dividends or other economic benefits, such as interest from debt securities and changes in the value of the investor’s investment in the investee;

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• fees and exposure to loss from providing credit or liquidity support;

• tax benefits and access to future liquidity than an investor has from its involvement with an investee; and

• returns that are not available to other interest holders, such as the ability to use the investee’s assets in combination with the its own to achieve economies of scale, cast savings or gaining access to proprietary knowledge.

With the link between power and exposure or rights to variable returns from the involvement with an investee, an investor also needs to have the ability to use its power to affect its returns form the involvement with the investee. Hereby, an investor shall determine whether it is a principal or an agent. With IFRS 10 the IASB defines the principal and the agent. An agent is a party primarily engaged to act on behalf and for the benefit of another party or parties and therefore does not control an investee when it exercises its decision-making authority (IFRS Foundation & IASB, 2011a). Thus, a principal uses its power to generate benefits for itself, while the agent uses the delegated power for benefits of others. Therefore, an agent is not a decision maker, even though it may hold and exercises the decision-making power. This is simply because other parties can benefit form the decisions that the agent makes.

Unless a single party holds substantive rights to remove (removal rights) the decision maker and can remove the decision maker without cause, the decision maker will consider the overall relationship between itself and other parties, and all the following factors to determine whether it is an agent:

• the scope of its decision-making authority over the investee;

• the rights held by other parties, including substantive removal rights not held by a single party;

• the remuneration to which it is entitled in accordance with the remuneration agreement(s); and

• the exposure to variability of returns from other interests that it holds in the investee.

To determine the scope of decision-making authority over the investee, the investor considers the purpose and design of the investee. This because if the decision maker was significantly involved in the design of the investee, it may indicate that it had the opportunity and incentive to obtain rights obtain power over the investee and having the ability to direct the relevant activities.

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Substantive rights or other rights held by a single party, which may affect the decision maker’s ability without cause, to direct the relevant activities of an investee, are sufficient to conclude that the decision maker is an agent. However, if parties need to act together to remove the decision maker, this factor itself is not sufficient to determine that the decision maker is an agent. Additionally, the greater the number of parties required to act together to remove a decision maker and the greater the magnitude of variability associated with the decision maker’s other economic interests, less weight will be placed on this factor. Remuneration shall be considered in this case and needs to meet the criteria of being in proportion to the service that is provided and which has an arrangement on an arm’s length condition. The decision maker according to IFRS 10 is likely to be a principal, if it does not meet the criteria and the greater magnitude of variability of remuneration and other interests. While discussing the principal and agent, there can be determined that the IASB has developed this element compared with the exposure draft. By IFRS 10 the board introduced the concept of delegated power clearly in the guidance. Hereby, the board included application guidance to consider whether a decision-maker is acting as an agent or a principal, and it included four clear examples regarding agency relationships. Furthermore, the guidance around removal rights and remuneration has been clarified. The board now clearly included that removal rights must be substantive and thus indicated that those rights must be exercisable when decisions about relevant activities need to be made. The draft IFRS did not entirely cover this aspect.

Moreover, several other changes have been made to issue the IFRS 10 as it is. As earlier indicated, the control definition has been changed after the exposure draft was issued for public consultation. The new definition clearly contains three elements for assessing control, which the reporting entity all need to have for taking control over an investee. In the draft IFRS the definition only seemed to be focusing on the power to direct the activities of an investee to generate returns for it own. Power refers in comparison with the exposure draft now, to having the current ability to direct the relevant activities of an investee. The draft IFRS indicated that a reporting entity had power over an investee if it could determine the strategic operating and financing policies. In case of assessing power under IFRS 10 the investor shall consider if it has rights to direct relevant activities, whereby application guidance is included. Additionally, the standard now contains twelve examples to illustrate the application guidance. The guidance regarding returns is clearly illustrated by examples of returns in IFRS 10. However, the standard is now clearly classified in voting rights with or without majority and rights other than voting rights. With respect to power with less than a majority of the voting rights the final issued

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standard contains specific examples that could give the investor power over an investee. Potential voting rights are a variant of these rights. In comparison with the exposure draft, the final issued IFRS 10 contains a clearer guidance and examples to illustrate this. Nevertheless, IFRS 10 indicates that these rights need to be substantive. Control as basis for consolidation of IFRS 10 does not contain separate guidance for consolidation of structured or other entities. As it was remarkable that the exposure draft contained a subsection for structured entities, in the final issued standard the paragraphs are removed. Therefore the IASB now is accomplishing its goal with a control model that applies to all entities.

Overall the new consolidation model provides additional application guidance. The much wider guidance will lead to more appropriate consolidation processes (IASB, 2011 a). The new consolidation model of IFRS 10 may affect the current consolidations of reporting entities. Hereby, consolidation of new investees or deconsolidation of investees could enlarge and reduce the consolidation scope. According the changes between the exposure draft and the final IFRS 10 the main changes are recapitulated in table one.

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Table 1. Overview of difference between the draft and final IFRS 10

Exposure draft IFRS 10

Control as basis for consolidation

The exposure draft seems to be focusing on the power to direct the activities of an investee to generate returns for it own.

Three elements for control

IFRS 10 clarified hat power is about having the current ability to direct relevant activities. More guidance in order to assess returns from the involvement in an investee and overall more application guidance including for power. For the assessment is clearly stated that the investor also shall consider rights other than voting rights, thus all its rights.

Power without a majority of voting rights

The guidance of the draft IFRS 10 indicated that a reporting entity could have power with less than majority of the voting rights.

Consider several provided examples

The guidance regarding power without a majority of voting rights is classified more clearly and includes specific kind of rights and arrangements and illustrates those by practical examples.

Options and convertible instruments

The investor should consider options and convertible instruments when assessing control.

Potential voting rights

In comparison with the exposure draft the board refers in the final IFRS 10 to forward contracts and retained options and convertible instruments. Moreover, the standard states that those rights must be substantive. Hereby, there is a clearer guidance and two application examples are added to the standard.

Agency relationships

Exposure draft had no specified guidance regarding whether an entity is a principal or agent.

IFRS 10 contains clear guidance for agency relationships

Term delegated power is introduced. By the fact that agent may have power over an investee, but may not generate benefits for itself, the agent has no control. There is a clearer guidance around the factors such as removal rights and remuneration to determine whether the entity is an agent or principal. The standard also provides examples regarding agency relationships.

Structured entities

Separate guidance for structured entities was realized in the exposure draft.

Control model applies to all entities.

Specific guidance for structured entities is removed and the control model covers all types of entities.

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As earlier indicated in this paragraph, the previous IAS 27 and SIC-12 contained limited disclosure requirements for consolidated entities and no disclosure requirements for unconsolidated entities. With IFRS 12 the IASB responded to the G20 and Financial Stability Board request about risk associated with structured entities and other ‘off balance sheet’ entities (IASB, 2011a). The financial crisis revealed a lack of transparency about the risk to which reporting entities may be exposed. Therefore, the disclosure requirement needed to be improved by the IASB as part of this project (IFRS Foundation & IASB, 2013b). The IASB issued IFRS 12 to require disclosure that helps the users of the financial statements to evaluate (IFRS Foundation & IASB, 2011b):

• the nature of, and risks associated with, an entity’s interests in other entities; and

• the effects of those interests on the entity’s financial position, financial performance and cash flows.

To meet this objective IFRS 12 requires that an entity shall disclose the significant judgements and assumptions it has made in determining the nature of its interest in another entity or arrangement and information about its interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities (IFRS Foundation & IASB, 2011b). For the investigation in this paper only the disclosure requirements for consolidated subsidiaries and unconsolidated structured entities shall be covered.

With respect to disclosure about the interest in subsidiaries an entity shall disclose information that enables users of consolidated financial statements to understand the composition of the group and the interest that non-controlling interests have in the group’s activities and cash flows. Furthermore, the entity is required to provide disclosures for the users to evaluate the nature and extent of significant restrictions on the ability to access or use assets and settle liabilities of the group; the nature of, and changes in the risks associated with its interests in consolidated structured entities; the consequences of changes in its ownerships interests in a subsidiary; and the consequences of losing control of a subsidiary during the reporting period (IFRS Foundation & IASB, 2011b). In the general and application guidance IFRS 12 requires an entity to disclose general and summarized financial information. In order to meet the disclosure requirement of IFRS 12 an entity also shall provide information about its involvement with unconsolidated structured entities. IFRS 12.24 requires an entity to provide information that helps users of financial statements to understand the nature and extent of its interest in unconsolidated structured entities, and evaluate the nature of and changes in the risks associated with its interests in unconsolidated structured entities. As earlier indicated, the separate guidance and definition of

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a structured entity was removed from the consolidation standard. The final issued IFRS 12 includes and defines a structured entity as an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements (IFRS Foundation & IASB, 2011b). Hereby, the application guidance includes that securitization vehicles, asset-backed financings and some investment funds are examples of structured entities. To meet the disclosure objective the standard requires extensive qualitative and quantitative disclosures about the nature of an entity’s interests and the nature of its risks. Hereby, IFRS 12 includes the information that an entity shall disclose the tabular format, unless another is found more appropriate (IFRS Foundation & IASB, 2011b). Nevertheless, an entity may disclose additional information about nature of risks that is necessary to meet the disclosure objective. In the application guidance IFRS 12 contains examples in this regard.

However, like IFRS 10, the final issued IFRS 12 contains a number of changes. With IFRS 12 the IASB removed the disclosure requirements from the consolidation standard. Likewise IFRS 12 defines structured entities in the application guidance, which previously was included in IFRS 10. Additionally, the disclosure requirements of IFRS 12 indicate to which entities the guidance applies. The exposure draft did not include this. Hereby, the standard clearly specifies to what it is related. With respect to the interest that non-controlling interest have in a group’s activities the IASB removed and added disclosure information, which an entity shall provide in its financial statement. The IASB did the same with the interests in unconsolidated structured entities. Overall the standard clarified and intensified the disclosure objectives, whereby the requirements give the entities the flexibility to disclosure more information to meet the objective of IFRS 12. In table two the main changes are summarized in outline.

Overall, the transition to IFRS 10 and IFRS 12 could be a very extensive process for many entities. IFRS 12 may be the most challenging change for reporting entities. Reporting entities shall reassess all their existing relationships and gather evidence. The implementation and annual reassessment may be costly and a time-consuming process for preparers (IASB, 2011a). Hereby, reporting entities will be forced to adjust their reporting systems to meet the new disclosure requirements.

Examination of comment letters on the development of IFRS 10 and IFRS 12