De facto agent

The de facto agent assessment is part of IFRS 10 Consolidated financial statements (i.e. assessment of control over an investee for consolidation purposes), the de facto agent is a party engaged to act on behalf of another party (the principal). A principal may delegate some of its decision authority over the investee to the agent, but the agent does not control the investee when it exercises such powers on behalf of the principal (IFRS 10 B58).

The decision-making rights of the agent should be treated as being held by the principal directly in assessing control. Power resides with the principal rather than the agent (IFRS 10 B59).

As a result the principal may have to consolidate the investee’s financial statement because the decision making rights of the agent are of a de facto agent who should not consolidate the investee’s financial statements into its consolidated financial statements.

The overall relationship between the decision-maker and other parties involved with the investee must be assessed to determine whether the decision-maker acts as an agent. The standard sets out a number of specific factors to consider; several are determinative, but the majority are judgemental and need to be considered together in assessing the overall relationship.

A party is a de facto agent when the investor has, or those that direct the activities of the investor have, the ability to direct that party to act on the investor’s behalf. The decisions and judgements to be made are summarised as follows:

. IFRS 10 B65 . . IFRS 10 B69 – B70 . . . . IFRS 10 B62 IFRS 10 B63 . IFRS 10 B64 – B67 . IFRS 10 B68 . . IFRS 10 B71 – B72   See below – Variable returns

IFRS 10 also requires management to consider whether there are other parties who are acting on behalf of an investor by virtue of their relationship with the investor, that is, whether the other parties are acting as de facto agents of the investor. The rights held by de facto agents, and the returns received by such parties, are considered when evaluating whether an investor has control.

IFRS 10 provides examples of parties that might be considered de facto agents of an investor, such as those who are related parties, as defined in IAS 24 Related Party Disclosures, those who maintain a close business relationship with the investor, or those who cannot finance their operations without subordinated support from the investor.

The standard identifies a number of possible de facto agent/principal relationships including:

1. IAS 24 related parties of the principal;
2. parties that received interests in the investee as a contribution or loan from the principal;
3. parties that agreed not to sell, transfer or encumber their interests in the investee without the principal’s approval;
4. parties that cannot finance operations without subordinated financial support from the principal;
5. parties that have largely similar governing body members or key management personnel as the principal; and
6. parties that have close business relationships with the principal.

An agent need not be bound to the principal by a contract. IFRS 10 uses the term ‘de facto agents’ to describe agents who may be acting on behalf of principals even when there is no contractual arrangement in place.  Identification of such relationships is expected to be highly judgemental. Consideration should be given to the nature of relationships between the investor and various parties and how they interact with each other (IFRS 10 B73).

An investor with a de facto agent should consider the de facto agent’s decision-making rights, as well as its indirect exposure to variable returns through the de facto agent when assessing control of the investee (IFRS 10 B74).

Control in IFRS 10

At the heart of IFRS 10 is the requirement that in order for an investor to have control over an investee, the investor must have all three of the following: De facto agent

1. Power over the investee; De facto agent
2. Exposure or rights to variable returns from its involvement with the investee; and De facto agent
3. The ability to use its power over the investee to affect the amount of the investor’s returns. De facto agent

IFRS 10 provides guidance on applying this new control model with a view to addressing some of the more complex areas that led to diversity in the past. This includes: when holding a significant but less than a majority of voting rights can give power (i.e. “de facto power”), when potential voting rights should be considered in the assessment of control, what factors should be considered in assessing control for entities not controlled by voting rights (i.e. special purpose entities or structured entities), when an entity is acting as an agent on behalf of others and how this impacts the assessment of control. De facto agent

Although not an exhaustive list, these are some of the areas that could lead preparers to reach a different conclusion under IFRS 10 than they had previously under IAS 27/SIC-12 as to whether an entity should be consolidated. De facto agent

Variable returns

Key items to address De facto agent

• Concept of variable returns is broad De facto agent
• Determine if returns are variable and how variable they are based on substance of the return and not its legal form (e.g., fixed interest payments on a bond are variable as they won’t be paid in the event of a credit default) De facto agent
• If the reporting entity issues an instrument to another entity and in doing so transfers risk to another entity vs. absorbing risk from the other entity, it generally is not exposed to variability of returns from the other entity. De facto agent

Principal-Agent relationships are not confined to investment funds

IAS 27 and SIC-12 did not contain requirements or guidance to assess whether an investor is a principal or an agent. In contrast, IFRS 10 specifically requires that in order for an investor with decision-making rights to have control, it must act as a principal and not an agent. De facto agent

• The examples in IFRS 10 are geared toward the asset management industry – in particular, determining whether a fund manager is a principal or agent in respect of an investment fund of which it is both a manager and investor. However, a principal-agent relationship may also arise where an investor has a management contract or similar arrangement with an investee and may be making decisions on behalf of other investors, as is often the case in the real estate, construction and mining industries and in outsourcing arrangements. De facto agent
• An investor also needs to pay close attention to whether other parties are acting on the investor’s behalf (i.e. as a de facto agent). If the investor has a de facto agent, it considers the de facto agent’s decision-making rights and its exposure to variable returns as its own when assessing control. De facto agent

De facto agent