As a result of the Financial Stability Forum recommendations, last December IASB published Exposure Draft 10, Consolidated Financial Statements, which proposes a cohesive control-based model that would be applicable to all types of entities (including structured financing and investment vehicles, such as SPEs). The proposed standard would replace IAS 27, Consolidated and Separate Financial Statements, (which focuses on control), and SIC-12, Consolidation--Special Purpose Entities, (which focuses more on risks and rewards), and eliminate perceived inconsistencies. ED 10 proposes a revised definition of control, including additional application guidance and enhanced disclosures about consolidated and unconsolidated entities. It would require a greater level of judgment to be applied and result in changes in the composition of the consolidated group. Comments letters to IASB request making this project a joint project with FASB, with the goal of identical outcomes and aligning the timetables of the consolidation and derecognition projects. Then, in March, IASB published ED (ED/2009/3), Derecognition: Proposed amendments to IAS 39, Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures, which proposes to replace the existing guidance on derecognition of financial assets and financial liabilities and the related disclosures. The proposed approach to derecognition is based on a single concept, "control, "as opposed to the complex current requirements in IAS 39 that combine elements of several derecognition concepts (risks and rewards, control and continuing involvement). Proposed amendments may bring significant conceptual change for derecognition of financial assets by removing analysis of risks and rewards, and could lead to significant changes in accounting for repurchase agreements and securities lending transactions. In a comment letter to this ED, Canada's First National Financial LP reported its total assets as of March 31, 2009 are approximately CAD$1 billion and liabilities CAD$850 million, in accordance with Canadian GAAP Estimated proforma balance sheets, prepared in accordance with the ED, would report an increase in assets to more than CAD$35 billion (to 4 billion under the current IAS 39), which suggests a debt-to-equity ratio of approximately 235:1. Similarly, the income statements would report over-inflation of revenue and expense and that, according to the chief financial officer, is not indicative of the nature of the company's operations and business plan. As the U.S. contemplates IFRS, careful planning and consideration of the complexities and differences between consolidation and derecognition of liabilities is critical to avoid unwelcome surprises or higher debt due to consolidation of some long forgotten liability.
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