At the meeting of IASB liaison standard setters in May, the ASB presented a paper on consolidation policy prepared at the IASB’s behest. The paper reflected many months of discussion and consultation with other standard setters around the world.

The paper argued for the development of an international policy on consolidation based on control. Control requires an entity to have both the ability to direct another’s policies unilaterally and an ability to benefit from that direction. Using control as the criterion for consolidation ensures accountability and aligns consolidation with the definition and recognition of assets. In contrast, using criteria that have regard to legal form, such as ownership of voting rights, can give an arbitrary result. It might in some cases require consolidation where it would not be justified in principle and facilitate the exclusion of entities that should be consolidated.

The ASB argues that a general controlbased approach remains valid in identifying Special Purpose Entities (SPEs) for consolidation. For many SPEs day-to-day direction is irrelevant because the entity’s policies may be predetermined. In such cases, evidence of control is provided by the nature of the benefits expected.

The IASB has now added a project on consolidation policy to its immediate agenda. Among the issues to be addressed further is one on which standard setters remain divided: the question of whether and when a minority holding alone (ie without any further enforceable rights) is sufficient to justify consolidation. Any policy developed will also need to be aligned with requirements in respect of derecognition and securitisation.