Toward global standards on consolidation and recognition.

• Author: Heffes, Ellen M.
• Position: Financial reporting

This International Financial Reporting Standards section discusses another area where significant differences between United States generally accepted accounting principles and IFRS exist: global standards on consolidation and recognition.

As highlighted by the recent global financial crisis, assessing whether a financial asset or liability may be derecognized can be extremely difficult when dealing with complex structures. Thus, the complexity continues for multinationals that monitor both IFRS and U.S. GAAP.

Here, Eva K. Jermakowicz, Ph.D., CPA, professor of Accounting and head of the Department of Accounting and Business Law at Tennessee State University; and Homiyar Wykes, Group Financial controller for Stolt-Nielsen S.A, detail some differences.

--IFRS Section co-developers Cheryl de Mesa Graziano, CPA, vice president-Operations, Financial Executives Research Foundation, and Ellen Heffes, editor-in-chief, Financial Executive.

Responding to the recent recommendations of the Financial Stability Forum and conclusions of the Group of Twenty (G-20) Finance Ministers and Central Bank Governors leaders, the International Accounting Standards Board accelerated its projects on consolidation, derecognition and required disclosure for off-balance sheet activities. Since the derecognition of financial instruments often involves the use of special purpose entities, the projects on consolidation and derecognition are closely related.

Off-balance sheet treatment in financial reports can result from the standards for consolidation accounting (e.g. special purpose entities) or derecognition (e.g., removing assets from the balance sheet through securitizations). When dealing with complex structures such as special purpose vehicles used for the securitization of financial assets, assessing derecognition of such financial assets and liabilities becomes increasingly difficult.

Inconsistencies Add to Complexity

For companies that have to monitor both IFRS and U.S. GAAP, there are significant differences between the two sets of standards on consolidation and derecognition. Disclosure requirements relating to off-balance sheet activities also exist. Both IFRS and U.S. GAAP require the consolidation of entities by the reporting entity, which controls--directly or indirectly--the majority of voting rights.

But, IFRS and U.S. GAAP have different approaches to consolidation in certain situations when there are no voting rights, when potential voting rights exist...