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

Scope High 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.
  • Acquisition of an asset or group of assets that is not a business.
  • A combination of entities or businesses under common control.

Definition

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, reverse acquisitions).

Definition of a “Business”

A business is:

  • Integrated set of activities and assets
  • Capable of being conducted and managed to provide return
  • Returns include dividends and cost savings.

High level overview IFRS 3 Business Combinations High level overview Read more

Whether the investor currently directs the activities

Whether the investor currently directs the activities Whether the investor currently directs the activities – In assessing control, an investor considers both substantive rights that it holds and substantive rights held by others. To be ‘substantive’, rights need to be exercisable when decisions about the relevant activities are required to be made, and the holder needs to have a practical ability to exercise those rights. Whether the investor currently directs the activities

Power is assessed with reference to the investee’s relevant activities, which are the activities that most significantly affect the returns of the investee. As part of its analysis, the investor considers the purpose and design of the investee, how decisions about the activities of the investee are made, and who has the current ability … Read more

The relevant activities of an investee

The relevant activities of an investee – Don’t get fooled, relevant activities for financial reporting and consolidation purposes does not mean that the activities of an investee are the same as the activities of other entities (parent entity and subsidiary entities) consolidated into that one group. No…….. it is about whether the activities significantly affect the investee’s returns. In other words can the parent entity earn from the relevant activities.

Let that be clear!!

IFRS 10 introduces the concept of ‘relevant activities’. This is a critical part of the model. This concept clarifies which aspects of an investee’s activities must be under the direction of an investor for that investor to have control for consolidation purposes. The relevant activities of an investee

Examples of activities that, … Read more

Ability to use power to affect the returns

“The ability to use power to affect the returns” means that an investor controls an investee not only if (s)he has power and exposure to its returns but also the ability to use its power to affect these returns. If not, an investor which has decision-making rights with regard to an investee but which cannot influence the investee’s returns will be considered an “agent” – and not the “principal” that is in control of the investee. [IFRS 10 17 Link between power and returns]

Summarised: Ability to use power to affect the returns

  • the definition reflects the fact that IFRS 10 applies to special purpose or structured entities as well as more conventional entities
  • in more complex control
Read more

Agency relationships in consolidation

Agency relationships in consolidation – An investor with decision making rights has to determine whether it is a principal or an agent. An ‘agent’ is defined as ‘a party primarily engaged to act on behalf and for the benefit of another party or parties (the principal(s)) and therefore does not control the investee when it exercises its decision making authority’.

Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf of the principal. An investor that is an agent does not control an investee when it exercises decision making rights delegated to it. Agency relationships in consolidation

Principal versus Agent Agency relationships in consolidation

To determine whether a decision maker is an agent, it … Read more

What are Consolidated Financial Statements about?

What are Consolidated Financial Statements about What 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

Purpose and design of the investee

Purpose and design of the investee – When assessing control of an investee, an investor shall consider the purpose and design of the investee in order to identify the relevant activities, how decisions about the relevant activities are made, who has the current ability to direct those activities and who receives returns from those activities.

Proportionate voting rights

When an investee’s purpose and design are considered, it may be clear that an investee is controlled by means of equity instruments that give the holder proportionate voting rights, such as ordinary shares in the investee. In this case, in the absence of any additional arrangements that alter decision-making, the assessment of control focuses on which party, if any, is able … Read more

The investors exposure or right to variable returns

The investors exposure or right to variable returns – For an investor to have control over an investee it must have exposure, or rights, to variable returns from the investee.

IFRS 10 provides the following examples of variable returns:

  • dividends, The investors exposure or right to variable returns
  • other distributions of economic benefits (for example, interest from debt securities),
  • changes in value of an investment, The investors exposure or right to variable returns
  • remuneration for servicing an investee’s assets or liabilities, The investors exposure or right to variable returns
  • fees and exposure to loss from providing credit or liquidity support, The investors exposure or right to variable returns
  • residual interests in the investee’s assets and liabilities on liquidation, The
Read more

Control over structured entities

Control over structured entities Control 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
Read more