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Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council.

Content

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Consolidation and equity method - potential voting rights and allocation of ownership interests

Paragraph 11 of IAS 1 (revised 1997), presentation of financial statements, requires that financial statements should not be described as complying with International Accounting Standards unless they comply with all the requirements of each applicable standard and each applicable interpretation issued by the Standing Interpretations Committee. SIC interpretations are not expected to apply to immaterial items.

Reference: IAS 27, consolidated financial statements and accounting for investments in subsidiaries (reformatted 1994), IAS 28, accounting for investments in associates (revised 2000), IAS 39, financial instruments: recognition and measurement (revised 2000).

Issue

1. An enterprise may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the enterprise voting power or reduce another party's voting power over the financial and operating policies of another enterprise (potential voting rights).

2. The issues are:

(a) when assessing whether an enterprise controls or significantly influences another enterprise according to IAS 27 and IAS 28 respectively,

(i) whether the existence and effect of potential voting rights should be considered, in addition to the factors described in IAS 27.12 and IAS 28.4 and 5; and

(ii) if so, whether any other facts and circumstances related to potential voting rights should be assessed;

(b) whether the proportion allocated to the parent and minority interests in preparing consolidated financial statements under IAS 27, and the proportion allocated to an investor that accounts for its investment in an associate using the equity method under IAS 28, should be determined based on present ownership interests or ownership interests that would be held if the potential voting rights were exercised or converted; and

(c) the appropriate accounting treatment for potential voting rights until they are exercised or expire.

Consensus

3. The existence and effect of potential voting rights that are presently (i.e. currently) exercisable or presently convertible should be considered, in addition to the factors described in IAS 27.12 and IAS 28.4 and 5, when assessing whether an enterprise controls (as defined in IAS 27.6) or significantly influences (as defined in IAS 28.3) another enterprise. All potential voting rights should be considered, including potential voting rights held by other enterprises. Potential voting rights are not presently exercisable or presently convertible when, for example, they cannot be exercised or converted until a future date or upon the occurrence of a future event.

4. All facts and circumstances that affect potential voting rights considered in accordance with paragraph 3 of this interpretation should be examined, except the intention of management and the financial capability to exercise or convert. Other facts that should be considered include the terms of exercise of the potential voting rights and possible linked transactions. (Appendix A provides illustrations of application of this interpretation.)

5. The proportion allocated to the parent and minority interests in preparing consolidated financial statements under IAS 27, and the proportion allocated to an investor that accounts for its investment using the equity method under IAS 28, should be determined based solely on present ownership interests. An enterprise may, in substance, have a present ownership interest when for example, it sells and simultaneously agrees to repurchase, but does not lose control of, access to economic benefits associated with an ownership interest. In this circumstance, the proportion allocated should be determined taking into account the eventual exercise of potential voting rights and other derivatives that, in substance, presently give access to the economic benefits associated with an ownership interest. (Appendix B provides illustrations of application of this interpretation.)

6. When applying the consolidation and the equity method of accounting, instruments containing potential voting rights should be accounted for as part of the investment in a subsidiary and the investment in an associate respectively only when the proportion of ownership interests is allocated by taking into account the eventual exercise of those potential voting rights in accordance with paragraph 5 of this interpretation. In all other circumstances, instruments containing potential voting rights should be accounted for in accordance with IAS 39.

Date of consensus: August 2001.

Effective date: This interpretation becomes effective for annual financial periods beginning on or after 1 January 2002. Changes in accounting policies should be accounted for according to the transition requirements of IAS 8.46.

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