ASPE changes to consolidations and joint … | ASPE changes to consolidations and joint arrangements Consolidations What you need to know Withdrawal of AcG-15 AcG-15, Consolidation

ASPE changes to consolidations and joint arrangements New accounting standards take effect 1 January 2016

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In September, the Accounting Standards Board (AcSB) released changes to the Accounting Standards for Private Enterprises (ASPE). These new standards will affect the financial reporting requirements for private enterprises with respect to consolidations and joint arrangements. Here is a summary of what’s changing — and what it means for you. Consolidations: • The new standards address situations where a

reporting entity may have control over another entity, through means other than voting rights.

Joint arrangements: • New terminology has been introduced. • Certain accounting policy choices in respect

of joint ventures have been eliminated. • Accounting for gains on contributions

has been modified.

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Who is affected? The changes will affect private enterprises with entities that;

• haverelationshipswithotherorganizationsthatresultincontrolthroughmeansotherthanvotingrights.Underthenewstandards,theywouldberequiredtoconsolidate,unlesstheentitychoosestopreparenon-consolidatedfinancialstatements.

• Entitiesthatpreviouslyaccountedfortheirinterestinjointventuresusingtheproportionateconsolidationmethod,astheywillnolongerbeabletousethatasanoption.

Why are these changes occurring? Thechangesarebeingimplementedtoimprovethetransparencyandclarityoffinancialstatements.Thenewstandardsaccountforpolicychoicesforjointarrangementsthatpreviousstandardsdidnotreflect.

ThechangesalsomorecloselyalignASPEwithInternationalFinancialreportingStandards(IFRS),whilerecognizingtheuniqueneedsandcircumstancesofprivateorganizations.

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ThenewstandardsreplacetheexistingSubsidiariessectionintheCPACanadaHandbook–AccountingPartII.

Terminology changes•Theterm“jointventure”hasbeenreplacedwith“jointarrangement”

•Theterm“venturer”hasbeenreplacedwith“investorinajointarrangement”

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Consolidations

What you need to knowWithdrawal of AcG-15AcG-15,ConsolidationofVariableInterestEntities,hasbeenseeninpracticeasproblematic,requiringsignificantefforttounderstandandapply.

TheInternationalAccountingStandardsBoard(IASB)hasissuedIFRS10,ConsolidatedFinancialStatements,whichdealswithconsolidationonasinglecomprehensivebasis.TheAcSBhasconsideredthisandotherconsolidationstandardstodevelopappropriateguidancefortheconsolidationofinterestsinvariableinterestentitiesbyprivateenterprises.Thischangewillnotaffectthoseprivateenterprisesthatusetheaccountingpolicyoptiontoaccountforsubsidiariesonanon-consolidatedbasis.

Withtheissuanceofthenewhandbooksection1591,AcG-15willbewithdrawn.Thenewstandardprovidesguidanceandsupportaroundsituationswheretheuseofjudgmentisnecessarytodeterminewhencontrolisobtainedthroughmeansotherthanequityinterests.ThenewstandardisconsistentwithIFRS10,ConsolidatedFinancialStatements,inthisregardandcontainsminimalchangestotheguidanceoncontrolthroughequityinterests.

Guidance for situations where control is obtained through means other than equity interestsThenewstandardidentifiesthatinsomecircumstancesequityinterestsmaynotbethedominantfactorindeterminingcontrol.Controlthroughstatute,contractualarrangementsorotheritemsmayindividuallyorcollectivelygiveanotherenterprisecontrol.Considerationsinmakingthisassessmentwouldincludehowdecisionsaremadeinrelationtorisksandreturnsandtheextenttowhichtheotherenterprisewasdesignedtobeexposed.

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TheAcSBhasidentifiedcircumstanceswherecontractualarrangementscanconferontherightandabilitytoobtainfutureeconomicbenefitsfromanotherenterpriseandexposuretotherelatedrisksofthatenterprise.Thestandardreinforcestheneedtoconsiderallfactsandcircumstanceswhenapplyingjudgmentindeterminingwhetheranenterpriseisasubsidiary.

What if I prepare non-consolidated financial statements? Whenanenterprisechoosestopreparenon-consolidatedfinancialstatements,theenterprisewillbepermittedtoaccountforsubsidiariescontrolledthroughvotinginterestsand/orpotentialvotinginterestsusingtheequityorcostmethod.Subsidiariescontrolledthroughcontractualarrangementsaloneorincombinationwithequityinterestswouldbeaccountedforaccordingtothenatureofthecontractualarrangementsinaccordancewiththeapplicablesection.

Thenewstandardclarifiesthatwhenenterprisespreparenon-consolidatedfinancialstatements,subsidiariescontrolledthroughcontractualarrangements,orincombinationwithvotinginterests,wouldbeaccountedforaccordingtothenatureofthecontractualarrangementinaccordancewiththeapplicablesection.Forexample,iftheenterprisesarepartiestoaleaseagreement,theguidanceinSection3065,Leases,wouldbeapplicable.Thisclarificationtothestandardreflectshowsucharrangementsarecommonlyaccountedforinpractice.

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Jointarrangements

What you need to knowRestrictions surrounding the application of accounting policy choices Thenewstandardsaddressaccountingforaninterestinajointarrangement(previouslycalledajointventure)whenanentityhas:

• Rightstothearrangement’sassetsandobligationsforitsliabilities;and

• Rightstothearrangement’snetassets

Thecurrentaccountingpolicychoicepermitsthedifferentialreportingoptionfrompre-changeoverstandardsinPartVoftheHandbook.Thiscanresultinaccountingthatisnotfaithfullyrepresentational.

Proportionateconsolidationofaninterestinajointlycontrolledenterprisemayresultinreporting:

• Individualassetsthattheentitydoesnotcontrol;

• Liabilitiesforwhichithasnodirectobligation;and

• Cashflowstowhichtheentitydoesnothavedirectaccess.

TheAcSBbelievesthataninvestorshouldaccountforitsinterestsinajointarrangementbasedonwhatitownsandwhatitowes,asspecifiedinthejointarrangementagreementtoensurethesubstanceoftheinvestor’sinterestinajointarrangementisfaithfullyrepresented.

Forjointlycontrolledoperationsorjointlycontrolledassets,aninvestorwouldrecognizeitsinterestintheindividualassets,obligations,revenuesandexpensesofthejointarrangement.Althoughthisconceptissimilartoproportionateconsolidation,itmayproducedifferentresultsdependingonthedetailsofthejointarrangement.

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Forjointlycontrolledenterprises,theinvestorcanaccountfortheseinvestmentsinasimilarmannertootherinvestmentsinnetassetswithoutcontrol.Thiswillprovideaccountingpolicychoicetoaccountfortheseinvestmentsusingeitherthecostorequitymethod.Alternatively,aninvestorhastheabilitytoundertakeadditionalanalysistoassesswhethertheinvestorhastherightstotheindividualassetsand/orobligationsforspecificliabilitiesofajointlycontrolledenterpriseratherthanthenetassets.Inthesecircumstances,theinvestorcanaccountforitsinterestinthesamemannerasforajointlycontrolledoperationorasset.

Accounting for gains on contributions Underthecurrentstandard,section3055onlypermitsimmediaterecognitionofagainonthecontributiontoajointarrangementwherethecashorthefairvalueofotherassetswasreceived.Theremainingportionofthatgainwouldbedeferredandamortized.TheAcSBhasremovedthisfromthestandardasitwasnotwellunderstood.

Anygainisnowrequiredtobeaccountedforinnetincometotheextentoftheinterestsofothernon-relatedinvestors.Thisnewchangeprovidesthesameapplicationaswhenaninvestorsellsanassettoajointarrangementinthenormalcourseofbusiness.

Section3055inPartIIwillbereplacedby3056sothenatureofanentity’sinterestinajointventureisfaithfullyrepresented.

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Howwecanhelp

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Youshouldmakethemostofthetransitionperiodtoprepareforthecomingchanges.Wecanhelpyou:

•Understandthechangesandtheirimpactonyourbottomline

•Adjustyourprocessesandschedulestoaccommodatethenewrequirements

•Prepareyourlendersandotherstakeholdersfortheimpactthechangeswillhaveonequityandotherfinancialstatementfigures

I’dbedelightedtogettheconversationstartedonhowwecanhelpyouwiththechangestotheaccountingstandards.Pleasecontactmetoday.

Kelly Khalilieh AssociatePartner NationalAccountingandAssurance, PrivateMid-MarketPractice +14169326245 [email protected]

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