A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
Whether an investee is a structured-entity is a key factor in determining the extent of disclosures required under IFRS 12.
- 10(b)(ii) and 14–17 of IFRS 12 require an entity to disclose the nature of and changes in the risks associated with its interests in consolidated structured entities
- 24–31 of IFRS 12, supported by B25–B26, require an entity to disclose information about its interests in unconsolidated structured entities.
To supplement the definition, IFRS 12 B22 indicates that a structured-entity often (i.e. not always) has some or all of the following characteristics:
- restricted activities;
- a narrow and well-defined objective;
- insufficient equity to permit the structured entity to finance its activities without subordinated financial support; and/or
- financing in the form of multiple contractually linked instruments issued to investors that create concentrations of credit or other risks (tranches).
Although these characteristics are helpful in identifying structured entities, they may not be definitive in all cases.
[IFRS 12 B22(b)] represents that examples of entities with a narrow and well-defined objective that may be structured entities include those designed to effect a tax-efficient lease, carry out research and development activities, provide a source of capital or funding to an entity or provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors.
[IFRS 12 B23] represents that other examples of structured entities include securitisation vehicles, asset-backed financings and some investment funds.
In assessing whether an investee is a structured entity, an investor also considers how the power assessment was made under IFRS 10, irrespective of the outcome of that analysis. This is because IFRS 10 requires entities to conduct the power analysis differently depending on whether voting rights are the dominant factor in deciding who controls the investee. Therefore, the analysis of the investee under IFRS 10 is directly relevant to a decision under IFRS 12 about whether the investee is a structured entity.
If the decision was made on the basis of who held a majority of voting rights, or less than a majority but with de facto power over the investee, then the investee is not a structured entity.
If the control analysis required a more in-depth consideration, such as of the purpose and design of the investee, and evidence of the practical ability to direct the relevant activities of the investee, etc, then it is more likely that the investee is a structured entity.
As noted above, a structured entity is an entity that has been designed so that voting or ‘similar’ rights are not the dominant factor in deciding who controls the entity. Therefore, it is important to understand the meaning of ‘similar’ rights.
It appears that an example of rights that are similar to voting rights include rights to appoint or remove members of an investee’s key management personnel who have the ability to direct the relevant activities.
Conversely, it appears that voting or similar rights would not generally include rights that derive from a contract that gives the holder the ability to direct relevant activities. Such a contract might apply directly or indirectly as an override of the usual power that is derived from the voting rights of investors.
This approach focuses on how the investee is governed in order to consider what similar rights are; it does not focus on whether the activities of the investee are those of a conventional operating entity – e.g. a manufacturing company.
The following are examples of entities governed by voting or similar rights – i.e. they are not structured entities.
- A conventional company in which shareholders exercise voting rights, which determines the party that has power over the company.
- A joint arrangement in which the partners exercise voting rights, which determines that the parties have joint control. This is the case even if there are non-participating investors or if the voting rights held by the partners are disproportionate to their share of returns. Joint arrangements are discussed here.
Conversely, the activities of the structured entities noted above (see ‘Characteristics’ above) – e.g. securitisation vehicles, asset-backed financings and structures designed to effect a tax-efficient lease – are typically governed by a contract that specifies the rights and obligations of each party in the structure; they would not be governed by voting or similar rights.
For the purpose of IFRS 12 Disclosure of Interest in Other Entities, income from a structured entity includes, but is not limited to, recurring and non-recurring fees, interest, dividends, gains or losses on the remeasurement or derecognition of interests in structured entities and gains or losses from the transfer of assets and liabilities to the structured entity.