AASB 10, 11 and 12 - How Will They Affect You?

The AASB has issued three new standards which will impact the accounting for subsidiaries, joint ventures and associates.
The Australian Accounting Standards Board has issued three new standards AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, and AASB 12 Disclosure of Interests in Other Entities: AASB 10 replaces the existing definition of control in the existing standard AASB 127 Consolidated and Separate Financial Statements Exposure, or rights, to variable returns from its involvement with the investee The ability to use its power over the investee to affect the amount of the investors returns. AASB 10 makes clear that determining control is not just a matter of determining whether an investor holds greater than 50% of voting rights. It may also exist where an investor holds a substantial stake less than 50%, and the remaining voting rights are widely held, or where control exists through a contractual arrangement or through the use of a special-purpose entity. Potential voting rights, such as share options or convertible debt should also be considered. The requirements of AASB 10 are principles-based, and will involve the exercise of judgment. Some entities that were previously accounted for as investments or associates may fall inside the new definition of control, and therefore will need to be consolidated. We would encourage preparers of financial statements to consider this issue early, to discuss with their auditors, and to seek professional advice where necessary.

September 2011

jointly controlled assets are replaced by two new classifications: Joint operations where the parties have the rights to the assets, and obligation to the liabilities, relating to the arrangement Joint ventures where the parties have the rights to the net assets of the arrangement Under AASB 11, joint operators must each recognise their own assets, liabilities, revenue and expenses, including their share of any items held jointly. However, joint venturers must equity account for their investment in the joint venture, meaning that their investment will be a single line-item in the balance sheet, and their share of the joint ventures profit will be a single line-item in the income statement. The option which was available under AASB 131 to use proportional consolidation no longer exists. Determining whether an arrangement is a joint operation or joint venture may be complex in some instances. It will depend on the legal structure of the joint venture entity, the terms of the joint venture agreement, the existence or otherwise of joint and several liability, and the other facts and circumstances of the arrangement. The use of judgment, and the development of a consistent accounting policy will be necessary, The removal of proportionate consolidation for joint ventures is likely to have a significant impact on some industries where the use of joint ventures is widespread, such as mining, oil and gas, and real estate. The treatment of joint

AASB 11 sets out a new framework for the accounting for joint ventures, including removal of the option to use proportionate consolidation AASB 12 updates and combines the disclosure requirements for subsidiaries, joint arrangements, associates, and other similar entities The new standards are effective for annual periods beginning on or after 1 January 2013. Early adoption is available, as long as all standards are adopted simultaneously.

AASB 10 - A New Definition of Control

AASB 10 provides new and expanded guidance on determining whether control exists over an entity, and therefore whether it must be consolidated. Control exists where the following three criteria are met: Power over the investee

AASB 11 A New Model for Joint Arrangements

AASB 11 replaces and substantially alters the existing method of accounting for joint ventures which is currently determined by AASB 131 Interests in Joint Ventures. The existing three categories of jointly controlled entities, jointly controlled operations, and

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National Audit Alert: AASB 10, 11 and 12 - How Will They Affect You?

For Further Information

For further information please contact your local Crowe Horwath representative. Leah Russell Head of Audit and Assurance, Sydney Tel +61 2 9619 1735 leah.russell@crowehorwath.com.au Sean McGurk Head of Audit and Assurance, Perth Tel +61 8 9488 1162 sean.mcgurk@crowehorwath.com.au John Gavens Head of Audit and Assurance, Melbourne Tel +61 3 9258 6823 john.gavens@crowehorwath.com.au Vanessa de Waal Head of Audit and Assurance, Brisbane Tel +61 7 3233 3492 vanessa.dewaal@crowehorwath.com.au

ventures as equity investments rather than proportional consolidation may result in lower reported revenue for businesses in extractive industries, and lower loan-to-value ratios and rental income in the property and construction industries. This may in turn affect loan covenants or other key performance indicators, which may need to be modified or renegotiated.

The basis on which the determination between a jointly controlled operation and a joint venture has been made Where an entity controls less than 100% of the voting rights in a subsidiary, the proportion of voting rights held by the non-controlling interest Summarised financial information about all material subsidiaries that have a non-controlling interest Any restrictions in place that might prevent the parent or any subsidiaries from transferring cash within the group Any loan guarantees, or other contractual arrangements that might restrict dividends or loans from being repaid The nature of, and changes in, the risks associated with the reporting entitys interests in subsidiaries, joint arrangements and associates. Similar to other recent standards, the disclosure requirements cover not just factual information, but also require preparers to disclose qualitative information about key estimates and judgments, and their perception of the risks involved with their activities. As with AASB 10 and AASB 11, judgment will be required in applying the new standard.

AASB 12 A New Set of Disclosure Requirements for Groups

AASB 12 Disclosure of Interests in Other Entities seeks to combine and make consistent the disclosure requirements for investments, subsidiaries, joint ventures and associates. However, in addition to combining existing disclosure requirements, it also includes new disclosures concerning the nature of, and risks associated with, an investors interest in other entities, and the involvement of any non-controlling interest. New disclosure requirements include: Significant judgments and assumptions made in determining whether control, joint control, or significant influence exist

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