Do you think that the proposed control definition could be applied to all entities within the scope of IAS 27 as well as those within the scope of SIC-12? If not, what are the application difficulties?

Yes. The G100 believes that the control model is the preferable single model basis for consolidation. However, the proposed concepts of control and variable returns are drafted separately and as such are likely to lead to difficulties in application for structured entities.
 

Is the control principle as articulated in the draft IFRS an appropriate basis for consolidation?

The G100 believes that the control principle provides the best basis for the approach to consolidations. However, we are not convinced that the change in the definition and terminology is necessary. The claimed present concerns about the use of the term ‘benefits’ leading to the substitution of the term ‘returns’ appear to be dealing in semantics. The term ‘benefits’ encompasses a much broader range of factors than does ‘returns’ and is more consistent with the consideration of the indicators of control. The concerns mentioned could be adequately addressed by providing explanation and examples of the application of the term benefits in a control context.

As mentioned above, the G100 believes that in a principles-based standard the guidance relating to structured and non-structured entities should be integrated such that the assessment of control should not depend on the type of entity involved.
 

No. The G100 believes that the discussion of the indicators of control should be integrated so that it is clear that all entities are within its scope. In addition to our views about structured and non-structured entities we consider that additional guidance is desirable in respect of:

• the circumstances where an entity holds less than half of the voting rights;
• the way in which options and convertible instruments are assessed;
• how a dominant shareholder position is determined and assessed;
• the application of indicators of control where other shareholdings are dispersed and how an entity is to determine whether other shareholders are not being organized;
• clarifying the difference between having control and having the ability to control another entity;
• clarifying the guidance on de facto control, participative versus protective rights, agency versus principal arrangements and potential voting rights, in order to avoid unintended outcomes such as consolidation of managed funds by the entities that manage them, even though the variable returns belong to the unit holders;
• paragraphs 23-24 refer to a governing body. This term is not defined and in many cases structured entities do not have a governing body;
• paragraph 27 refers to one party having more voting rights than any other party – this situation is not easily determined by a party unless legal ownership is such that they can demand the information;
• paragraph 28 refers to a dominant shareholder, yet this term is not defined and could lead to application difficulties; and
• the focus on relative shareholdings may make differentiation between ‘significant influence’ under IAS 28 and ‘control’ under the ED, more judgmental and less consistent in practice. Some equity-accounted associates might be required to be consolidated under the ED, in the absence of being able to demonstrate that the other shareholders or unit holders could not collectively organize themselves when exercising votes. This could lead to inconsistent application of the control principle, and impact on current equity accounting principles.

The G100 does not support the proposals. Rather, we believe that the impact of holdings of options and convertible instruments should be assessed in the light of the facts and circumstances in each case. Given the emphasis on legal rights the G100 considers that only those instruments that are currently exercisable should be taken into account in assessing whether control exists.
 

While voting rights whether held directly or indirectly as an agent should be considered as an indicator the G100 believes that for this guidance to be operational more clarity and examples are needed. For example it is not unusual for an entity such as a managed investment scheme to appoint an investment advisor (an entity controlled by the responsible entity) who can only be removed in specified circumstances. In these cases, under the proposals in the ED, the investment advisor would be regarded as controlling the managed investment scheme due to restrictions on the ability of unitholders to replace it. The G100 does not believe that this is an appropriate outcome.
 

As indicated above, the G100 considers that the guidance in relation to structured entities should be integrated with that of other entities so that there is common guidance on applying the control concept. In view of the separation of the guidance it is unlikely that the proposals will result in any significant change in current practice from the application of SIC-12.

In addition, the treatment of structured entities is based on the notion that there is a high degree of correlation between having power to direct and the variability of returns. We do not believe that this assumption can be sustained as a basis for determining whether an entity is controlled.
 

No. Refer comments above. If the guidance is not integrated we believe that further illustrative examples dealing with a range of indicators/factors would be useful to preparers in implementing the requirements.
 

Definitely not. There should be no need to establish a ‘fall back’ position if robust principles are developed. Matters relating to risks and rewards would form part of the assessment of the indicators of control in the light of the facts and circumstances of each case.
 

No. The G100 believes that the IASB should establish a set of principles to assess whether disclosures are needed. The increasing level of disclosures in IFRSs is, in our view, a significant factor contributing to the development of other forms of communication to shareholders. These proposals amplify those concerns.

In this case the proposed disclosures are unnecessary and will be particularly onerous and requiring them may be viewed as a form of ‘insurance’ for the standard setter in the event that the consolidations model is not sufficiently robust. In addition, the disclosure of financial exposures would seem to replicate several existing requirements of IFRS 7 ‘Financial Instruments: Disclosures’; IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and the recognition and measurement rules in IAS 39 ‘Financial Instruments: Recognition and Measurement’.
 

The G100 believes that obtaining information about structured entities that are not consolidated is likely to present significant challenges on both practical and legal grounds which have the potential to make it unworkable.
 

No. The G100 believes that issues relating to “reputational risk” should be discussed in the context of indicators of control rather than forming the basis for consolidation.

b). Do you think that the proposed disclosures in paragraph B47 are sufficient? If not, how should they be enhanced?

Yes, subject to comments on Question 10. It is unlikely that there will be practical difficulties in obtaining the information. In addition, further guidance on what is meant by “support” would facilitate implementation and compliance with the proposed requirement. However, the disclosure of when support has been provided is likely to provide more useful information to users.
 

Yes. The G100 believes that because accounting for investments in associates (and joint ventures on joint control) is based on applying consolidation techniques and an aspect of control the implications for accounting for such interests should be considered as part of this project.