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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High level overview IFRS 3 Business Combinations

HIGH LEVEL OVERVIEW IFRS 3 BUSINESS COMBINATIONS

A summary on one page and more detail for reference

IFRS 3

(Source https://www.bdo.global/en-gb/services/audit-assurance/ifrs/ifrs-at-a-glance)

ScopeHigh level overview IFRS 3 Business Combinations

IFRS 3 does not apply to:

  • The accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.
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    No alternative use enforceable payment right

    No alternative use enforceable payment right for work to date is the last phase in the satisfaction of performance obligations in IFRS 15 Revenue recognition. This is part of a primary and fundamental subject in the recognition of revenue. There are two ways of recognising revenue, revenue recognition over time and revenue recognition at a point in time. Revenue recognition over time is often referred to as the ‘Percentage of completion‘ method under the (superseded) IAS 11 Construction contracts.

    Revenue recognition at a point in time

    The general principle is the revenue is recognised at a point in time (and as such it is the most common type of sales transaction at least in volume, just … Read more

    IFRS 3 Identify a business

    IFRS 3 Identify a business – An entity shall determine whether a transaction or other event is a business combination by applying the definition in IFRS 3, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the reporting entity shall account for the transaction or other event as an asset acquisition. See also the accounting treatment acquisition of a business or asset(s) 

    Guidance on identifying a business combination and the definition of a business are as follows:

    The definition of a business: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.

    Identifying a business combination [IFRS 3 B5 – B6] IFRS 3 Identify a business

    IFRS 3 defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses. An acquirer might obtain control of an acquiree in a variety IFRS 3 Identify a businessof ways, for example:

    1. by transferring cash, cash equivalents or other assets (including net assets that constitute a business);
    2. by incurring liabilities; IFRS 3 Identify a business
    3. by issuing equity interests; IFRS 3 Identify a business
    4. by providing more than one type of consideration; or
    5. without transferring consideration, including by contract alone.

    A business combination may be structured in a variety of ways for legal, taxation or other reasons, which include but are not limited to:

    1. one or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged into the acquirer;
    2. one combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners;
    3. all of the combining entities transfer their net assets, or the owners of those entities transfer their equity interests, to a newly formed entity (sometimes referred to as a roll-up or put-together transaction); or
    4. a group of former owners of one of the combining entities obtains control of the combined entity.

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    Business combination

    A business combination is: a transaction or event in which acquirer obtains control over a business e.g. acquisition of shares or net assets, legal mergers,