Getting consolidation right

A few weeks back the International Accounting Standards Board (IASB) did something unprecedented: it blocked out time to discuss what consolidated reporting means for investment entities (like certain buyout funds) right down to the nitty gritty detail around “master-feeder” structures. 

What’s more is the board has finally realised that requiring buyout funds to roll up their portfolio companies into one jumbled financial statement – as is demanded by current international standards – makes no sense. 

It was about time, really. One of the biggest gripes private equity CFOs have is how worthless consolidated financial statements are under international accounting standards. Investors can’t decipher consolidated portfolio financial numbers in any meaningful sense and GPs view them as a waste of time and resources. 

IASB’s (prior) lack of understanding on the issue has resulted in the large majority of European buyout firms neglecting international standards in favour of US Generally Accepted Accounting Principles (GAAP), which provide private equity firms an exemption from consolidated reporting. But now that IASB has shown a deeper understanding of the industry, it’s entirely possible that European funds could begin adopting standards that are closer to home.  

So why the change in stance now? The answer is most likely the IASB’s closer involvement with its US counterpart, the Financial Accounting Standards Board (FASB), which oversees GAAP. The two boards have had a number of joint meetings throughout the year but in June they discussed whether the consolidation exemption should go beyond traditional buyout funds and also capture fund of funds and master-feeder structures. 

Mariya Stefanova, of consultancy house PE Accounting Insights, told PE Manager the IASB has tentatively decided that international standards will not require investment entities to consolidate financial statements under any circumstances while FASB decided to require a feeder fund in a master-feeder structure to attach its master fund's financial statement along with its own. It’s a small divergence, but one that speaks volumes about IASB’s progression in understanding buyout markets. 

Private equity CFOs should be delighted to know that a consolidation exemption seems imminent under international standards. But more importantly, they should be happy that standard setters are now discussing the industry in a level of detail not seen before. 

P.S. Be sure to check out our August edition which focuses in greater depth on the move towards ‘convergence’ in worldwide accounting standards, as well as other accounting issues including how to book carry.