The use of special structures by reporting entities, particularly banks, to manage securitisations and other more complex financial arrangements was highlighted by the FSF and the G20 as a matter of concern. Some commentators have questioned whether the current requirements lead to the right things being brought onto the balance sheet. They have been concerned that financial statements do not convey the extent to which reporting entities are exposed to risks from those types of structures.

The proposals address those concerns by presenting a new, principle-based, definition of control of an entity that would apply to a wide range of situations and be more difficult to evade by special structuring. The proposals also include enhanced disclosure requirements that would enable an investor to assess the extent to which a reporting entity has been involved in setting up special structures and the risks to which these special structures expose the entity. The proposals would apply not only to the banking sector but to any entity that uses legal entities to manage its activities.

Commenting on the proposals, Sir David Tweedie, Chairman of the IASB, said:

The proposals involve tightening the requirements for consolidation and expanding disclosures to give an overall view of companies’ involvement with off balance sheet entities. They therefore go a long way to addressing concerns investors have expressed about how entities are accounting for some complex entity structures and uncertainties about the risks the entities face as a result of being involved with such structures.

We have moved quickly to deal with these issues and consulted widely through working groups and in public round tables. However, the continued input of both users and investors is crucial to ensure that our proposals will help improve transparency and increase investor confidence in financial statements.

The IASB invites comment on the proposals, set out in an exposure draft, ED 10 Consolidated Financial Statements, by 20 March 2009 . The exposure draft is available on the ‘Open for Comment’ section on www.iasb.org from today.

Printed copies of ED 10 (ISBN for the set 978-1-905590-86-5) will be available shortly, at £12 plus shipping, from the IASC Foundation Publications Department. Those wishing to subscribe to eIFRSs should visit the online shop or contact: