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

Read more

Completely understand 1 consolidated and 2 separate financial statements

Completely understand 1 consolidated and 2 separate financial statements is a summary of the requirements of IFRS 10 Consolidated financial statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint ventures and IAS 27 Separate financial statements.

Major topics discussed are:

  • The single control model in IFRS 10 that applies to all entities (including ‘structured entities’ or ‘variable interest entities’ as they are referred to in US GAAP). The changes introduced by IFRS 10 require continuous management to exercise significant judgement to determine which entities are controlled, and therefore are required to be consolidated by a parent. IFRS 10 may periodically change which entities are within a group
Read more

IFRS 12 Disclosure of Interest in Other Entities

IFRS 12 Disclosure of Interest in Other Entities is a consolidated disclosure standard requiring a wide range of disclosures about an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated ‘structured entities’. Disclosures are presented as a series of objectives, with detailed guidance on satisfying those objectives.

IFRS 12

Source: PKF Summaries & Snapshots

Or in more detail……

SCOPE

DEFINITIONS

SIGNIFICANT JUDGEMENTS AND ASSUMPTIONS

Applied by entities that have an interest in: Subsidiaries; joint arrangements, associates; and unconsolidated structured entities.

IFRS 12 does not apply to:

  • Post-employment benefit plans or other long-term employee benefit plans to which IAS 19 Employee Benefits applies,

  • Separate financial statements, where IAS 27 Separate Financial Statements applies

  • An interest held by an entity that

Read more

Directing relevant activities

Having identified an investee’s relevant activities, the next step is to determine how directing relevant activities has been organised. IFRS 10 breaks this down into the following two steps (although in practice these steps are normally combined with the identification of relevant activities): Directing relevant activities

  • understanding the decisions about relevant activities (see below first box) [IFRS 10 B12] Directing relevant activities
  • identifying rights that confer ability to direct those decisions (see below second box) [IFRS 10 B14-B17]. Directing relevant activities

IFRS 10 envisages two types of rights that may confer ability to direct these decisions (ie power): Directing relevant activities

  • voting rights granted by equity instruments for example, ordinary shares Directing relevant activities
  • contractual
Read more

Power in IFRS-perspective

Power in IFRS-perspective is all about the difference between structured entities (also called Special Purpose Vehicles, think of Enron!) and non-structured entities (strange name for normal (legal) entities) and what control through power means in IFRS 10 Consolidation.

Power is defined in IFRS 10 as ‘existing rights that give the current ability to direct the relevant activities’.

Just to look at an important term in IFRS from a different perspective, here are some IFRS / financial reporting topics in which power plays an important role. By reading this you get a quick understanding on all kinds of financial reporting issues.


Power and (Non-) Structured entities

Although there is no distinction between different types of entities in determining whether … Read more

Consolidated subsidiaries joint operations and other entities Investments in joint ventures associates and structured entities

Consolidated subsidiaries joint operations and other entities Investments in joint ventures associates and structured entities – want a quick understanding of all control nuances, read this!  IFRS 12 provides one comprehensive disclosure standard for equity instruments in Subsidiaries, Joint arrangements (Joint operations and Joint ventures), Associates and Structured entities. Hence, management needs to exercise a certain degree of judgement in determining whether a new investee is controlled and therefore consolidated. For instance, disclosure and internal documentation is required for how voting rights are evaluated and whether it is a principal or an agent etc. Consolidated subsidiaries joint operations and other entities Investments in joint ventures associates and structured entities

Classifying these equity instruments requires time, effort and the exercise of … Read more

Identify a controlling party

Identify a controlling party – Like the analysis for non-structured entities, an investor ‘controls’ an investee if the investor is exposed to (has rights to) variable returns from its involvement with the investee, and has the ability to affect those returns through its power over the investee. Control involves power, exposure to variability of returns and a link between the two. [IFRS 10 6 – 7, IFRS 10 Definitions, IFRS 10 B2]

As for non-structured entities, a structured entity is not expected to have more than one controlling party at any given time. If no single investor, or group of investors acting collectively, has control, then no controlling party is identified and the entity is … Read more

IFRS 10 Structured vs non-structured entities

IFRS 10 Structured vs non-structured entities is a distinction in use under IFRS 10 Consolidated Financial Statements. Consolidation under IFRS 10 is based on what can be referred to as a ‘power-to-direct’ model. Although there is no distinction between different types of entities in determining whether one entity controls another, there is a ‘gating’ question in the analysis that distinguishes between entities for which: IFRS 10 Structured vs non-structured entities

  • voting rights are the dominant factor in assessing whether the investor has power over the investee – i.e. the investee is controlled by voting instruments; and
  • voting rights are not the dominant factor in assessing whether the investor has power over the investee – i.e. the investee is
Read more

Disclosures unconsolidated structured entities

Disclosures unconsolidated structured entitiesIFRS 12 defines structured entity as an entity that has been designed so that voting or similar rights are not the dominant factor on deciding who controls the entity. Paragraph B23 of IFRS 12 provides the following examples of structured entities: Disclosures unconsolidated structured entities

  1. Securitisation vehicles. Disclosures unconsolidated structured entities
  2. Asset backed financings. Disclosures unconsolidated structured entities
  3. Some investment funds. Disclosures unconsolidated structured entities

The term ‘unconsolidated structured entities’ refers to all structured entities that are not controlled by the reporting entity.


Disclosures – Generic model

The level of disclosure in respect of unconsolidated structured entities will depend on the facts and circumstances of the entity but is likely to be more complex for Read more