Question

1. Under U.S. GAAP, a two-tiered consolidation model is applied, one focused on voting rights and the second based on a party's exposure to risks and rewards associated with the entity's activities (the VIE model). Upon what is the IFRS framework based?
2. U.S. GAAP requires a two-step process to evaluate goodwill for potential impairment (as discussed in Chapter 1). What is required by IFRS with respect to goodwill impairment?
3. Under U.S. GAAP, noncontrolling interests are measured at fair value. What is required by IFRS?

Answer 1

1. Under U.S. GAAP, a two-tiered consolidation model is applied, one focused on voting rights and the second based on a party's exposure to risks and rewards associated with the entity's activities (the VIE model). Upon what is the IFRS framework based?

ans: Under IFRS 10  focuses on the concept of control in determining whether a parent-subsidiary relationship exists.

An investor controls an investee when it has all of the following:

1. Power, through rights that give it the current ability, to direct the activities that significantly affect (the relevant activities that affect) the investee’s returns

2. Exposure, or rights, to variable returns from its involvement with the investee (returns must vary and can be positive, negative, or both)

3. The ability to use its power over the investee to affect the amount of the investor’s returns

In assessing control of an entity, an investor should consider the entity’s purpose and design to identify the relevant activities, how decisions about the relevant activities are made, who has the current ability to direct those activities, and who is exposed or has rights to the returns from those activities. Only substantive rights can provide power.

for example : When an entity is controlled by voting rights, control is presumed to exist when a parent owns, directly or indirectly, more than 50 percent of an entity’s voting power. Control also exists when a parent owns half or less of the voting power but has legal or contractual rights to control either the majority of the entity’s voting power or the board of directors. Control may exist even in cases where an entity owns little or none of a structured equity. The application of the control concept requires, in each case, judgment in the context of all relevant factors

2. U.S. GAAP requires a two-step process to evaluate goodwill for potential impairment (as discussed in Chapter 1). What is required by IFRS with respect to goodwill impairment?

ans : under IFRS An investor should assess whether objective indicators of impairment exist based on the “loss event” criteria in IAS 28. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is considered objective evidence of impairment.

If there are objective indicators that the investment may be impaired, the investment is tested for impairment in accordance with IAS 36. Impairments of equity method investments can be reversed in accordance with IAS 36.

3. Under U.S. GAAP, noncontrolling interests are measured at fair value. What is required by IFRS?

ans : non-controlling interests under IFRS 3

The acquirer measures any non-controlling interest either:

1. at fair value as determined by the directors of the acquiring companyor
2. at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets

The differential effect of the two methods is that (i) recognises the whole of the goodwill attributable to an acquired subsidiary, whereas (ii) only recognises the parent’s share of the goodwill.

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