In my previous post, I was telling you about the importance of accounting and the consequences derived from changes in the regulation, providing as an example the IASB’s (European regulator) proposal related to changes in the way leases are recorded.
Once again trying to raise awareness on the economic consequences of accounting regulation, and, in particular, of the International Financial Reporting Standards (IFRS), I will put forward some other examples that will affect (or affecting already) substantially financial statements of quoted companies in Spain.
IASB is quite an active regulator and modifies and issues new standards quite often. In fact, only 5 months ago, that is, on the 1st January 2013, 4 new standards related to consolidation came into force (together with some others I will not go into now). And, one of the main changes introduced by these new consolidation standards was the elimination of the consolidation method known as Proportionate Consolidation. This method was used for the consolidation of joint ventures.
Consolidated financial statements are those corresponding to a group of companies that are under control of a parent or holding company. Groups can be formed by the parent company, the subsidiaries (controlled by the parent), associates (the parent owns between 20 and 50% of the shares so there is no control) and joint ventures (jointly owned and managed by the group and some other shareholders outside the group).
Until December 2012, Joint Ventures were mostly consolidated using Proportionate Consolidation. However, from now on, joint ventures can only be consolidated by means of the Equity Method. This represents a relevant change in the consolidated balance sheet and consolidated income statement. Under Proportionate Consolidation, the joint venture was integrated into the consolidated financial statements, adding to each of the owners, the corresponding percentage owned. That is, if A (which is the parent company of a group) and B (a company outside the group) own each other 50% of C and C is managed jointly by A and B, C would be integrated in A (we do not worry about B here) adding to the assets, liabilities, revenues and expenses of A, 50% of those of C.
Now, with the change just introduced by the new IFRS standards, C will not be integrated this way anymore and, following the equity method, A will just account for its part on the net income (profit or loss) of C but will not integrate (add) sales, expenses, assets or debt. This means a relevant change in the recognition of joint venture stakes in consolidated financial statements. One of the main consequences derived from this is that, in the consolidated balance sheet, total debt will not reflect the real debt of all companies included in the group.
So, we see how these new standards (already in force) together with the leases proposal (which may come in the future), generates relevant economic consequences for business analysis on companies performance. And there are more examples to be explained but that will have to be discussed in a later post….