Section 1591, Subsidiaries

Transcription

1 Financial Reporting Alert ASPE MAY 2015 Section 1591, Subsidiaries In September 2014, the Accounting Standards Board (AcSB) issued Section 1591, Subsidiaries, set out in Part II (Accounting Standards for Private Enterprises) of the CPA Canada Handbook Accounting. Section 1591 replaces Section 1590, Subsidiaries and Accounting Guideline 15 (AcG-15), Consolidation of Variable Interest Entities. This CPA Canada Financial Reporting Alert highlights some possible implications of how these new requirements may affect your business or your practice and will discuss effects beyond accounting. Why does Section 1591 matter to me? The new guidance in Section 1591 changes how an enterprise determines control of an entity, where control is obtained through means other than equity interests (i.e., control may exist through contractual arrangements). As a result, enterprises that choose to prepare consolidated financial statements may identify entities that will need to be consolidated as they now qualify as subsidiaries and some other entities that were consolidated previously may no longer qualify as subsidiaries and therefore should be excluded from consolidation. There are no changes where control is obtained through equity interests or where the enterprise chooses to account for its subsidiaries using the equity method or the cost method. 1

2 Who applies Section 1591? Private enterprises that apply Part II of the CPA Canada Handbook Accounting. Not-for-profit organizations applying Part III of the Handbook should continue to apply Section 4450, Reporting Controlled and Related Entities by Not-For-Profit Organizations and refer to Section 1591 for other factors to be considered when determining whether or not an organization controls a profit-oriented enterprise. The new guidance in Section 1591 has no impact on not-for-profit organizations. When is Section 1591 effective? For annual financial statements relating to fiscal years beginning on or after January 1, Earlier application is permitted. What are the key changes when transitioning from Section 1590 to Section 1591? Scope Section 1591 retains the scope exceptions from Section 1590 and also includes the following scope exceptions from AcG-15: an employer s accounting for an employee benefit plan accounting for a qualifying special-purpose entity as set out in Appendix B in Section 3856, Financial Instruments Section 1591 includes a new scope exception regarding accounting for contractual arrangements between enterprises under common control. New Guidance on Control Control obtained through rights other than equity interests (paragraphs ). Section 1591 includes new guidance on assessing control when equity interests are not the dominant factor, such as when equity interests do not provide the holder with the continuing power to determine the strategic operating, investing and financing policies of an enterprise. In those circumstances, control may exist through contractual arrangements that confer on the enterprise the right and ability to obtain future benefits of and be exposed to the risk from the other enterprise. Contractual arrangements come in various forms, such as supply arrangements, management contracts, lease agreements, licence agreements, royalty contracts, other sales contracts and finance arrangements. In evaluating whether contractual rights are sufficient to give an enterprise control over another enterprise, Section 1591 identifies circumstances an enterprise could consider when assessing control while still allowing for the use of professional judgment; for example, the degree of involvement in and decisions made at inception in determining the purpose and design of the other enterprise. 2 Section 1591, Subsidiaries May 2015

3 New Guidance on Control Protective rights (paragraph ). Section 1591 includes new guidance on rights designed to protect the interest of the enterprise holding those rights. The guidance helps to distinguish rights that provide control from those that protect an enterprise s interest in another enterprise but do not confer control. Examples of protective rights are included in Section 1591, such as rights that allow the enterprise to participate in determining financial and operating decisions regarding business transactions between the other enterprise and others that have a financial interest in the other enterprise but do not confer on the holder the right to make decisions without the co-operation of others. Are there new disclosure and presentation requirements? The requirement in AcG-15 for a reporting enterprise to disclose significant restrictions on access to the assets of subsidiaries has been carried forward into Section 1591 for application by enterprises preparing consolidated financial statements. What are the transitional requirements? Retrospective application is required in accordance with Section 1506, Accounting Changes, except as permitted by the transition provisions. The transition provisions provide relief to an enterprise that prepares consolidated financial statements for the first time or prepared consolidated financial statements previously under Section When an enterprise is consolidating a subsidiary that was not consolidated previously, the transition provisions include the option to measure the assets, liabilities and noncontrolling interests in previously unconsolidated subsidiaries using either: the acquisition method in accordance with Section 1582, Business Combinations the carrying amounts of the assets and liabilities of the previously unconsolidated enterprise, based on the information available In addition, an enterprise is permitted to measure any item of property, plant and equipment at fair value as at the beginning of the comparative period. If an enterprise lacks the information to prepare financial statements of the subsidiary in accordance with the standards in Part II of the Handbook, the enterprise measures the assets, liabilities and non-controlling interests of the previously unconsolidated enterprise by applying the acquisition method in accordance with Section 1582, without recognizing any goodwill or intangible assets, as at the beginning of the comparative period. May 2015 Section 1591, Subsidiaries 3

4 When an enterprise is no longer consolidating a subsidiary that was previously consolidated, the enterprise determines its interest in the previously consolidated entity as at the beginning of the fiscal year immediately preceding the date at which Section 1591 is applied for the first time. If the interest in the other enterprise was obtained after the beginning of the immediately preceding period and before Section 1591 was applied for the first time, the date the interest was obtained is used. At this date, the enterprise measures that interest as the aggregate of the carrying amounts of the assets, liabilities and non-controlling interests that the enterprise had previously consolidated, including any goodwill arising from acquisition, and uses this balance as the deemed cost. In addition, the enterprise: a. tests the net investment for impairment in accordance with Section 3051, Investments, at the beginning of the immediately preceding fiscal year b. accounts for other rights and obligations in accordance with the applicable Section(s), such as a lease (see Section 3065, Leases) or a financial liability (see Section 3856, Financial Instruments) Are there any consequential amendments? Section 1500, First-time Adoption allows an enterprise that is preparing financial statements under Part II for the first time to apply the transition provisions in Section 1591 if it chooses to consolidate its subsidiaries. Section 1601, Consolidated Financial Statements paragraphs (guidance on how to consolidate a subsidiary) have been moved into Section 1601 so that all guidance on how to consolidate is contained in one Section. What are the audit implications? The changes to Section 1591 may require that the auditor and management discuss: If management intends to apply the requirements within Section 1591 earlier than their effective date. The accounting policy choice selected in regard to the manner in which the entity will account for its subsidiaries. If consolidated financial statements are prepared, the identification and review of contractual arrangements with other enterprises. Contractual arrangements such as supply arrangements, management contracts, lease agreements, licence agreements, royalty contracts, other sales contracts and finance arrangements should be reviewed and the enterprise consider all facts and circumstances when determining if it controls the other enterprise. The need to obtain new information, for example, when an enterprise applies an accounting policy to consolidate its subsidiaries, and concludes that it has subsidiaries that were not consolidated previously. Management will need to provide financial information for the subsidiary sufficient to appropriately consolidate the subsidiary in accordance with Section 1601, Consolidated Financial Statements. 4 Section 1591, Subsidiaries May 2015

5 Some audit implications might include having the auditor: Consider the requirements in Canadian Auditing Standards (CAS) 300, Planning an Audit of Financial Statements and their implication on the audit plan to determine if the procedures planned are appropriate. For example, for enterprises that prepare consolidated financial statements, the auditor may review management s assessment of whether it has control over other enterprises and the identification of their subsidiaries. The enterprise may identify new subsidiaries that would need to be consolidated and some other enterprises that were consolidated previously may no longer qualify as subsidiaries. If consolidated financial statements are prepared, consider the requirements in CAS 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment. Update the documentation of the auditor s understanding of the entity so that it appropriately reflects the current state; for example, the entity s group structure including the identification of its subsidiaries and significant contractual arrangements with other enterprises. Consider whether or not management s identification and review of contractual arrangements with other enterprises has resulted in the identification of a new component. Consider the requirements in CAS 600, Audits of Group Financial Statements (Including the Work of Component Auditors). It may be useful to read CPA Canada s FAQ for Auditors: Are You Sure You Don t Have to Apply CAS 600? Consider the reporting requirements related to retrospective application. The auditor may need to perform additional procedures and have additional responsibilities with respect to comparative information as described in CAS 710, Comparative Information Corresponding Figures and Comparative Financial Statements. What resources are available to help me? CPA Canada Practitioner s Pulse webinar (June 2015) AcSB Webinar Consolidations, Joint Arrangements and Investments: Project News for Private Enterprises FYI Article Consolidations: No More AcG-15 Headaches for Private Enterprises! May 2015 Section 1591, Subsidiaries 5

6 Comments on this Financial Reporting Alert, or suggestions for future Financial Reporting Alerts should be sent to: Taryn Abate, CPA, CA, CPA (IL) Principal Research, Guidance and Support Chartered Professional Accountants of Canada 277 Wellington Street West Toronto, Ontario M5V 3H2 DISCLAIMER This paper was prepared by the Chartered Professional Accountants of Canada (CPA Canada) as non-authoritative guidance. It has not been approved by the Canadian Accounting Standards Board (AcSB). CPA Canada and the authors do not accept any responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on this material. COPYRIGHT Copyright 2015 Chartered Professional Accountants of Canada All rights reserved. This publication is protected by copyright and written permission is required to reproduce, store in a retrieval system or transmit in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise). For information regarding permission, please contact permissions@cpacanada.ca 6 Section 1591, Subsidiaries May 2015