Control = Consolidation

The subject of consolidation has historically been a hot topic for Not-For-Profit entities because:

• Entities did not want to account for and disclose investment funds/other entities in group financial statements for fund raising purposes; and
• Entities did not want to consolidate entities that were not aligned with their main objectives.

In our brave new world, PBE Standards require that if you control an entity, you must consolidate it.

Under PBE IPSAS 6 Consolidated and Separate Financial Statements, control is the power to govern the financial and operating policies of another entity so as to benefit from its activities, and control has two elements:

“Control” by one entity over another exists only when parts (a) and (b) below are both satisfied:

1. The first entity has the power to govern the financial and operating policies that guide the activities of the second entity, except in the following circumstances where such power is not required:
   1. Where the policies have been irreversibly predetermined by the first entity or its agent; or
   2. Where the determination of the policies is unable to materially impact the level of potential ownership benefits that arise from the activities of the second entity.
2. The first entity has an entitlement to a significant level of current or future ownership benefits, including the reduction of ownership losses, which arise from the activities of the second entity.

There are actually some fairly simple things to keep in mind when determining if control exists:

• It does not matter how the controlled entity has been set up – a trust, a foundation, incorporated society or company;
• The controlling entity does not need to “own” the controlled entity – i.e. own shares;
• It does not matter if the controlled entity is For-Profit or a PBE;
• The objectives of the controlled entity may differ from the controlling organisation’s.

As already mentioned, if you control an entity, you must consolidate it. This may result in a number of practical issues to be addressed:

• You need to be aware of all entities that you have a (financial) interest in;

• Analysis of “control” can take significant judgement if the answer is not “clear-cut”. If you are exercising significant judgement – this should be disclosed;

• You need to have a thorough understanding of the founding documents of the entity in question and how things work from an “operational” perspective;
• Benefits obtained do not necessarily have to be positive;
• When you consolidate you need to ensure that balance dates are the same (or within 3 months) and that uniform accounting policies are used throughout.

For assistance with any consolidation related queries, please contact your local BDO adviser.