International accountant and shipping adviser Moore Stephens says shipping companies and their financiers could be among those affected by the introduction of the new International Financial Reporting Standard for consolidated financial statements.
The new standard, IFRS 10, which deals with consolidated accounts, comes into force in 2014 in the EU, but is already in force outside the EU. It adopts a new approach to the definition of a parent in consolidated accounts by identifying three key elements of control relating to a subsidiary: (1) who has the power to direct the key activities; (2) who gets a variable return as a result of the activities; and (3) is there a connection between the exercise of power and the variable return. Where a party has all three elements, then it is a parent; where at least one element is missing, then it is not.
Michael Simms, a partner with the shipping team at Moore Stephens, said: “In every case, IFRS 10 looks to the substance of the arrangement and not just to its legal form. So there is no simple answer to the three key questions it poses. Each situation needs to be assessed individually.
“Many shipping groups will find the new standard has minimal impact on them. While it redefines what it means to be – or to have – a subsidiary, the majority of situations will be straightforward. Where a parent has a wholly owned subsidiary under the current rules, and no unusual arrangements with other parties, it will still have a wholly owned subsidiary under the new rules.
“The standard makes changes, however, in the case of more complex arrangements. For example, there have been a number of cases in recent years of shipping companies being unable to meet their debt obligations.
“If the vessels operated by such companies are then sold, no accounting issues arise and the bank has simply realised its loss. In some cases, though, the bank does not wish to sell the vessel and it is transferred to a new entity in which the bank retains some form of interest.
“The question is whether, in such cases, that entity is a subsidiary of the bank. The new IFRS10 definition is already raising issues and more are likely to arise with the forthcoming implementation in the EU.”