MEMO

Memo

Memo for FASB and IASB Issues on Consolidated Financial Statements

Chase Cheviron,

Chief Financial Officer

XYZ Industries

Subject: Effect of IASB's Latest Standards on XYZ

According to the new consolidation standards, there would be a single definition of control for all entities, and provides guidance on how to apply that definition in particular situations that have been found difficult when applying IAS 27 and SIC-12. As a consequence, the Board expects that entities will be consolidated on a more consistent basis, making the financial statements of groups more comparable and understandable.

A reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity.

Control of another entity requires the power to direct the activities of that other entity. The Board believes that the power to govern the financial and operating policies, as stated in IAS 27, is one means of having power to direct the activities of another entity, but it is not the only means. Power can be achieved in many ways, including by having voting rights, by having options or convertible instruments, by means of contractual arrangements, or a combination of these, or by having an agent with the ability to direct the activities for the benefit of the controlling entity.

Yes, XYZ must have to include ABC Company in its consolidated financial statements. A reporting entity that holds less than half of the voting rights in another entity can control that other entity in some situations. The exposure draft includes application guidance on how to apply the control principle when assessing whether a reporting entity has power to direct the activities of another entity with less than half of the voting rights. In addition to holding 51% of the outstanding common stock of ABC, XYZ has strong influence over the appointment of key management personnel for ABC. Also, the XYZ's CEO currently serves on ABC's Board of Directors. XYZ owns 51% of the outstanding common stock of ABC Company and 43% of the outstanding common stock of RWR Inc.

Additionally, XYZ also has to include RWR in its consolidated financial statements. XYZ is the largest single investor in the common stock of RWR. The next largest shareholder owns 22% of the common stock of RWR, and the third largest shareholder owns 20% of the common stock of RWR. The remaining shares are widely distributed across many shareholders. In ...