While reading the 3Q'10 conference call transcript of a shipping company, the Q&A session revealed an interesting nugget which goes to show why we need a principles based system like IFRS.
Ship Finance has a 100% subsidiary which it does not consolidate. Instead, it accounts for that as an investment/associate. The company explains this surprising accounting as follows:-
The only reason these are not fully consolidated based on US GAAP, is that when we structured those charters, we structured them in a very, in a way where we mitigated a lot of the risks for ourselves. We structured it with higher charter in the beginning. We have structured it where we offload interest risk, relativity risk within those projects through an interest compensation cost....it’s kind of coming back and biting us because after end run, US GAAP introduced a lot of very rigorous calculation methods to identify who is more closely associated with the asset, and particularly who absorbs more of the downside volatility. And because we are structured in a very low risk way for ourselves, we, who own 100% of the company, can only account for them in investment and associate.
And then from our side, what we do, and this is more from a bookkeeping perspective, we can allocate our equity investment in those subsidiaries either as a combination of equity and call in inter-company loan, or whichever way we like.
When a rule is applied too mechanically without a "Comply or explain" type opt our provisions, such things happen. That is why the "fair presentation override" in IFRS will help avoid these situations.