IFRS 10 Special control approach

IFRS 10 Special control approach

– determines which entities are consolidated in a parent’s financial statements and therefore affects a group’s reported results, cash flows and financial position – and the activities that are ‘on’ and ‘off’ the group’s balance sheet. Under IFRS, this control assessment is accounted for in accordance with IFRS 10 ‘Consolidated financial statements’.

Some of the challenges of applying the IFRS 10 Special control approach include:

  • identifying the investee’s returns, which in turn involves identifying its assets and liabilities. This may appear straightforward but complications arise when the legal ownership of assets diverges from the accounting depiction (for example, in financial asset transfers that ‘fail’ de-recognition, and in finance leases). In general, the assessment of the investee’s assets and returns should be consistent with the accounting depiction in accordance with IFRS
  • it may not always be clear whether contracts and other arrangements between an investor and an investee
    • create rights or exposure to a variable return from the investee’s performance for the investor; or
    • transfer risk or variability from the investor to the investee IFRS 10 Special control approach
  • the relevant activities of an SPE may not be obvious, especially when its activities have been narrowly specified in its purpose and design IFRS 10 Special control approach
  • the rights to direct those activities might also be difficult to identify, because for example, they arise only in particular circumstances or from contracts that are outside the legal boundary of the SPE (but closely related to its activities).

IFRS 10 Special control approach sets out requirements for how to apply the control principle in less straight forward circumstances, which are detailed below:  IFRS 10 Special control approach

  • when voting rights or similar rights give an investor power, including situations where the investor holds less than a majority of voting rights and in circumstances involving potential voting rights
  • when an investee is designed so that voting rights are not the dominant factor in deciding who controls the investee, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements IFRS 10 Special control approach
  • involving agency relationships IFRS 10 Special control approach
  • when the investor has control only over specified assets of an investee
  • franchises. IFRS 10 Special control approach

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Best Read – IFRS 10 Silos and deemed separate entities

IFRS 10 Silos and deemed separate entities

generally require the control assessment to be made at the level of each investee entity. However, in some circumstances the assessment is made for a portion of an entity (a deemed separate entity). This is the case if, and only if, all the assets, liabilities and equity of that part of the investee entity are ring-fenced from the overall investee (often described as a ‘silo’) [IFRS 10 B76 – B79]. IFRS 10 Silos and deemed separate entities

Silos most often exist within special purpose vehicles in the financial services and real estate sectors (for example, ‘multi-seller conduits’ and captive insurance entities). However, the conditions for a silo to be deemed a separate entity for IFRS 10 purposes are strict. The example below illustrates the silo concept: IFRS 10 Silos and deemed separate entities

Example Bank – SPV – 2 Corporate clients

The case

Bank A establishes and administers a special purpose vehicle that enables two corporate clients – Companies A and B – to sell trade receivables in exchange for cash and rights to deferred consideration. The vehicle issues loan notes to outside investors to fund the purchases. Each company remains responsible for managing collection of its own transferred receivables. Bank A provides credit enhancements in exchange for a fee. The terms of the loan notes and contractual document establish how cash collected from each pool of receivables is allocated to meet payments of the loan notes. Cash collected in excess of the specified allocation is paid to the originators.

What does this mean?

A portion of an entity is treated as a silo if, and only if, the following conditions are met:

  • specified assets of the investee (and related credit enhancements) are the only source of payment for specified liabilities
  • parties other than those with the specified liability do not have rights or obligations related to the specified assets or to residual cash flows from those assets
  • in substance, none of the returns from the specified assets can be used by the remaining investee and none of the liabilities of the deemed separate entity are payable from the assets of the remaining investee.

However, in a real life case, further analysis will be required to determine whether the allocation provisions create a situation in which each pool of assets is substantially viewed as the only source of payment for specified liabilities.

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What are Consolidated Financial Statements in IFRS 10

What are Consolidated Financial Statements in IFRS 10 and the relations with IFRS 11 IFRS 12 IAS 27 IAS 28 and disclosures for consolidation and investments.

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IAS 27 Separate Financial Statements, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 28 Investments in Associates and Joint Ventures and IFRS 12 Disclosures of Interest in Other Entities are all relating to or are otherwise intertwined with IFRS Types of Investments in (Consolidated) Financial Statements.

To better understand these 5 IFRS Standards and their interactions, co-relations, and maybe contradictions, here are all the important things summarised.

What are Consolidated Financial Statements in IFRS 10 What are Consolidated Financial Statements in IFRS 10 What are Consolidated Financial Statements in IFRS Read more

Overview IFRS 10 Consolidated Financial Statements

Overview IFRS 10 Consolidated Financial StatementsShort – To establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities Overview IFRS 10 Consolidated Financial Statements

Longer – IFRS 10 replaces the part of IAS 27 Consolidated and Separate Financial Statements that addresses accounting for subsidiaries on consolidation. What remains in IAS 27 after the implementation of IFRS 10 is the accounting treatment for subsidiaries, jointly controlled entities and associates in their separate financial statements.Contingent consideration Contingent consideration Contingent consideration Contingent consideration Contingent consideration

The aim of IFRS 10 is to establish a single control model that is applied to all entities including special purpose entities. The changes require those dealing with the implementation of IFRS 10 to exercise Read more

Consolidated financial statements

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. The detailed ‘mechanics’ of the consolidation process vary from one group to another, depending on the group’s structure, history and financial reporting systems. IFRS 10 and much of the literature on consolidation are based on a traditional approach to consolidation under which the financial statements (or, more commonly in practice, group ‘reporting packs’) of group entities are aggregated and then adjusted on each reporting date.

Completely understand 1 consolidated and 2 separate financial statements

Completely understand 1 consolidated and 2 separate financial statements is a summary of the requirements of IFRS 10 Consolidated financial statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint ventures and IAS 27 Separate financial statements.

Major topics discussed are:

  • The single control model in IFRS 10 that applies to all entities (including ‘structured entities’ or ‘variable interest entities’ as they are referred to in US GAAP). The changes introduced by IFRS 10 require continuous management to exercise significant judgement to determine which entities are controlled, and therefore are required to be consolidated by a parent. IFRS 10 may periodically change which entities are within a group
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Changes in interest resulting in a loss of control

Changes in interest resulting in a loss of control – The loss of control of a subsidiary that is a business, other than in a non-reciprocal transfer to owners, results in the recognition of a gain or loss on the sale of the interest sold and on the revaluation of any retained non-controlling investment. A loss of control is an economic event, similar to that of gaining control, and therefore is a remeasurement event. Changes in interest resulting in a loss of control

In accordance with IFRS 10 B37, events resulting in deconsolidation of a subsidiary that is a business include the following:Changes in interest resulting in a loss of control

  • A parent sells all or part of its ownership interest in its subsidiary, thereby losing its
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Changes in ownership no loss of control

Changes in ownership no loss of control – Changes in a parent’s ownership interest that do not result in a change in control of the subsidiary that is a business are accounted for as equity transactions (through other comprehensive income). Thus, if the parent maintains control, it will recognize no gain or loss in profit or loss upon selling shares of a subsidiary. Similarly, the parent will not record any additional acquisition adjustments to reflect its subsequent purchases of additional shares in a subsidiary if there is no change in control.

Instead, the carrying amount of non-controlling interests (NCI) will be adjusted to reflect the change in the NCI’s ownership interest in the subsidiary. Any difference between the … Read more

Accounting by investment entities

Accounting by investment entities is about the accounting requirements in IFRS 10 for investment entities that are limited to an exception from consolidation of investments in certain subsidiaries. The exception also impacts the separate financial statements of an investment entity (if these are prepared). The table summarises the key requirements: Accounting by investment entities

Requirement

Details

Accounting for subsidiaries held as investments

  • subsidiaries held as investments are measured at fair value through profit or loss in accordance with IFRS 9 instead of being consolidated [IFRS 10 31]. This accounting is mandatory not optional. Voluntary consolidated financial statements that state compliance with IFRS are not permitted
  • IFRS 3 does not apply to the obtaining of control over an exempt
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Assessment of investment entities

The assessment of investment entities is documenting whether an entity meets the definition, all facts and circumstances should be considered, including the entity’s purpose and design [IFRS 10 B85A]. It will often be straightforward to determine whether an entity is an investment entity. However, in view of the fundamental importance this assessment has on affected entities’ financial statements, IFRS 10 provides extensive application guidance.

More detail on each element of the definition is provided below:

1 Investment services condition

One of the essential activities of an investment entity is that it obtains funds from investors in order to provide those investors with investment management services. This is a feature that distinguishes investment entities and other entities, although … Read more