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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IFRS 11 Joint Arrangements quick overview

IFRS 11 Joint Arrangements quick overview provides the fastest overview on financial reporting by entities that have an interest in arrangements that are bound by a contractual arrangement providing two or more parties joint control.

OBJECTIVE

To establish principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (i.e. joint arrangements)

IFRS 11 Joint Arrangements quick overview

IFRS 11 Joint Arrangements quick overview

IFRS 11 Joint Arrangements quick overview

SCOPE

IFRS 11 applies to all entities that are a party to a joint arrangement

DEFINITIONS

Joint arrangement

Joint control

Joint operationJoint operator

Joint ventureJoint venturer

Party to a joint arrangement

Separate vehicle

JOINT ARRANGEMENT

A joint arrangement is an arrangement

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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

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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    Securitisation in 1 Best Complete Reading

    Securitisation entails pooling the cash flows and selling them to investors via a special purpose vehicle, turning ‘illiquid’ assets into a more ‘liquid’ asset.

    Consolidation Assess control over an investment

    Consolidation Assess control over an investmentIFRS 10 Consolidation Assess control over an investment is the key to consolidate a investee entity or not. Whether a subsidiary or a consolidated structured entity.

    Voting rights in subsidiaries

    In many cases, when decision-making is controlled by voting rights, and those voting rights entitle an entity to returns (e.g., voting shares), it is clear that whoever holds a majority of those voting rights controls the investee. However, in other cases (such as for structured entities, or when there are potential voting rights, or less than a majority of voting rights), it may not be so clear. Consolidation Assess control over an investment

    Contractual relations for consolidated structured entities

    In those instances, further analysis is needed and the factors … Read more

    Control without a majority of voting rights

    Control without a majority of voting rightsControl without a majority of voting rights is a more special case of structuring the investments of investors in companies. IFRS 10 confirms that an investor with the majority of an investee’s voting rights controls an investee in most circumstances. In the absence of other relevant factors the majority vote holder has control if: Control without a majority of voting rights

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    Potential voting rights

    Potential voting rightsPotential voting rights – An investor may hold instruments that (if exercised or converted), give the investor power to direct the relevant activities. These are called ‘potential voting rights’ and may be held through ownership of the following types of instrument:

    • share options and warrants Potential voting rights
    • convertible bonds Potential voting rights
    • convertible preference shares. Potential voting rights

    Potential voting rights can contribute to control of an investee in combination with current voting rights, or even confer control on their own. However, IFRS 10 requires an assessment to determine whether potential voting rights are substantive. IFRS 10 has no bright lines and so judgment will be required.

    IFRS 10’s ‘substantive’ assessment takes into account both:

    • the general guidance
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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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