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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Control over structured entities

Control over structured entitiesControl over structured entities – Although IFRS 10 has no separate guidance on Special Purpose Entities (SPEs), it does have guidance on assessing control over entities for which voting rights do not have a significant effect on returns.

Despite the lack of a definition, entities typically considered to be SPEs in practice normally have some of the characteristics noted in the following table:

Control over structured entities Control over structured entities Control over structured entities

Control over structured entities

Typical features of SPEs

The most widespread use of SPEs is in the financial services industry, in connection with securitisation and other asset-backed financing arrangements. Other common uses include:

  • financial engineering and tax optimisation schemes
  • ring-fencing or sharing the risk of
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What are Consolidated Financial Statements about?

What are Consolidated Financial Statements aboutWhat are Consolidated Financial Statements about – Consolidated Financial Statements are the financial statements of a group of entities in which the assets, liabilities, equity, income, expenses and cash flows of the parent entity and its subsidiary entities are presented as those of a single economic entity.

IFRS 10 applies both to traditional entities and to special purpose (or structured) entities and replaced the corresponding requirements of both IAS 27  Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities.

In mainstream financial reporting IFRS 10 has not affected the scope of consolidation involving control through ownership of a majority of the voting power in an investee. However, more complex and borderline control assessments have been purposely … Read more

Control of an investee

Control of an investee exists when an investor controls an investee as it's exposed, or has rights, to variable returns from its involvement with the investee