IFRS 10
Consolidated Financial Statements
In April 2001 the International Accounting Standards Board (Board) adopted IAS 27
Consolidated Financial Statements and Accounting for Investments in Subsidiaries, which had
originally been issued by the International Accounting Standards Committee in April
1989. IAS 27 replaced most of IAS 3 Consolidated Financial Statements (issued in June 1976).
In December 2003, the Board amended and renamed IAS 27 with a new title—Consolidated
and Separate Financial Statements. The amended IAS 27 also incorporated the guidance
contained in two related Interpretations (SIC-12 Consolidation-Special Purpose Entities and
SIC-33 Consolidation and Equity Method—Potential Voting Rights and Allocation of Ownership
Interests).
In May 2011 the Board issued IFRS 10 Consolidated Financial Statements to supersede IAS 27.
IFRS 12 Disclosure of Interests in Other Entities, also issued in May 2011, replaced the
disclosure requirements in IAS 27. IFRS 10 incorporates the guidance contained in two
related Interpretations (SIC-12 Consolidation-Special Purpose Entities and SIC-33 Consolidation).
In June 2012 IFRS 10 was amended by Consolidated Financial Statements, Joint Arrangements
and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10,
IFRS 11 and IFRS 12). These amendments clarified the transition guidance in IFRS 10.
Furthermore, these amendments provided additional transition relief in IFRS 10, limiting
the requirement to present adjusted comparative information to only the annual period
immediately preceding the first annual period for which IFRS 10 is applied.
In October 2012 IFRS 10 was amended by Investment Entities (Amendments to IFRS 10,
IFRS 12 and IAS 27), which defined an investment entity and introduced an exception to
consolidating particular subsidiaries for investment entities. It also introduced the
requirement that an investment entity measures those subsidiaries at fair value through
profit or loss in accordance with IFRS 9 Financial Instruments in its consolidated and
separate financial statements. In addition, the amendments introduced new disclosure
requirements for investment entities in IFRS 12 and IAS 27.
In September 2014 IFRS 10 was amended by Sale or Contribution of Assets between an Investor
and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28), which addressed the
conflicting accounting requirements for the sale or contribution of assets to a joint
venture or associate. In December 2015 the mandatory effective date of this amendment
was indefinitely deferred by Effective Date of Amendments to IFRS 10 and IAS 28.
In December 2014 IFRS 10 was amended by Investment Entities: Applying the Consolidation
Exception (Amendments to IFRS 10, IFRS 12 and IAS 28). These amendments clarified
which subsidiaries of an investment entity should be consolidated instead of being
measured at fair value through profit or loss. The amendments also clarified that the
exemption from presenting consolidated financial statements continues to apply to
subsidiaries of an investment entity that are themselves parent entities. This is so even if
that subsidiary is measured at fair value through profit or loss by the higher level
investment entity parent.
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Other Standards have made minor consequential amendments to IFRS 10, including
Annual Improvements to IFRS Standards 2014–2016 Cycle (issued December 2016) and
Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018).
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CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 10
CONSOLIDATED FINANCIAL STATEMENTS
OBJECTIVE 1
Meeting the objective 2
SCOPE 4
CONTROL 5
Power 10
Returns 15
Link between power and returns 17
ACCOUNTING REQUIREMENTS 19
Non-controlling interests 22
Loss of control 25
DETERMINING WHETHER AN ENTITY IS AN INVESTMENT ENTITY 27
INVESTMENT ENTITIES: EXCEPTION TO CONSOLIDATION 31
APPENDICES
A Dened terms
B Application guidance
C Effective date and transition
D Amendments to other IFRSs
APPROVAL BY THE BOARD OF IFRS 10 ISSUED IN MAY 2011
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 10:
Consolidated Financial Statements, Joint Arrangements and Disclosure of
Interests in other Entities: Transition Guidance (Amendments to IFRS 10,
IFRS 11 and IFRS 12) issued in June 2012
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) issued in
October 2012
Sale or Contribution of Assets between an Investor and its Associate or
Joint Venture (Amendments to IFRS 10 and IAS 28) issued in September
2014
Investment Entities: Applying the Consolidation Exception (Amendments to
IFRS 10, IFRS 12 and IAS 28) issued in December 2014
Effective Date of Amendments to IFRS 10 and IAS 28 issued in
December 2015
FOR THE ACCOMPANYING GUIDANCE LISTED BELOW, SEE PART B OF THIS EDITION
ILLUSTRATIVE EXAMPLES
AMENDMENTS TO THE GUIDANCE ON OTHER IFRSS
FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION
continued...
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International Financial Reporting Standard 10 Consolidated Financial Statements (IFRS 10)
is set out in paragraphs 1–33 and Appendices A–D. All the paragraphs have equal
authority. Paragraphs in bold type state the main principles. Terms defined
in Appendix A are in italics the first time they appear in the Standard. Definitions of
other terms are given in the Glossary for International Financial Reporting Standards.
IFRS 10 should be read in the context of its objective and the Basis for Conclusions,
the Preface to IFRS Standards and the Conceptual Framework for Financial
Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a
basis for selecting and applying accounting policies in the absence of explicit guidance.
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International Financial Reporting Standard 10
Consolidated Financial Statements
Objective
The objective of this IFRS is to establish principles for the presentation and
preparation of consolidated financial statements when an entity controls one
or more other entities.
Meeting the objective
To meet the objective in paragraph 1, this IFRS:
(a)
requires an entity (the parent) that controls one or more other entities
(subsidiaries) to present consolidated financial statements;
(b)
defines the principle of control, and establishes control as the basis for
consolidation;
(c)
sets out how to apply the principle of control to identify whether an
investor controls an investee and therefore must consolidate the
investee;
(d) sets out the accounting requirements for the preparation of
consolidated financial statements; and
(e) defines an investment entity and sets out an exception to consolidating
particular subsidiaries of an investment entity.
This IFRS does not deal with the accounting requirements for business
combinations and their effect on consolidation, including goodwill arising on
a business combination (see IFRS 3 Business Combinations).
Scope
An entity that is a parent shall present consolidated financial statements. This
IFRS applies to all entities, except as follows:
(a) a parent need not present consolidated financial statements if it meets
all the following conditions:
(i) it is a wholly-owned subsidiary or is a partially-owned
subsidiary of another entity and all its other owners, including
those not otherwise entitled to vote, have been informed about,
and do not object to, the parent not presenting consolidated
financial statements;
(ii) its debt or equity instruments are not traded in a public market
(a domestic or foreign stock exchange or an over-the-counter
market, including local and regional markets);
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(iii) it did not file, nor is it in the process of filing, its financial
statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments
in a public market; and
(iv) its ultimate or any intermediate parent produces financial
statements that are available for public use and comply with
IFRSs, in which subsidiaries are consolidated or are measured at
fair value through profit or loss in accordance with this IFRS.
(b) [deleted]
(c) [deleted]
This IFRS does not apply to post-employment benefit plans or other long-term
employee benefit plans to which IAS 19 Employee Benefits applies.
A parent that is an investment entity shall not present consolidated financial
statements if it is required, in accordance with paragraph 31 of this IFRS, to
measure all of its subsidiaries at fair value through profit or loss.
Control
An investor, regardless of the nature of its involvement with an entity (the
investee), shall determine whether it is a parent by assessing whether it
controls the investee.
An investor controls an investee when it is exposed, or 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.
Thus, an investor controls an investee if and only if the investor has all the
following:
(a) power over the investee (see paragraphs 10–14);
(b) exposure, or rights, to variable returns from its involvement with
the investee (see paragraphs 15 and 16); and
(c) the ability to use its power over the investee to affect the amount of
the investor’s returns (see paragraphs 17 and 18).
An investor shall consider all facts and circumstances when assessing whether
it controls an investee. The investor shall reassess whether it controls an
investee if facts and circumstances indicate that there are changes to one or
more of the three elements of control listed in paragraph 7 (see paragraphs
B80–B85).
Two or more investors collectively control an investee when they must act
together to direct the relevant activities. In such cases, because no investor
can direct the activities without the co-operation of the others, no investor
individually controls the investee. Each investor would account for its interest
in the investee in accordance with the relevant IFRSs, such as IFRS 11 Joint
Arrangements, IAS 28 Investments in Associates and Joint Ventures or IFRS 9 Financial
Instruments.
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Power
An investor has power over an investee when the investor has existing rights
that give it the current ability to direct the relevant activities, ie the activities
that significantly affect the investee’s returns.
Power arises from rights. Sometimes assessing power is straightforward, such
as when power over an investee is obtained directly and solely from the voting
rights granted by equity instruments such as shares, and can be assessed by
considering the voting rights from those shareholdings. In other cases, the
assessment will be more complex and require more than one factor to be
considered, for example when power results from one or more contractual
arrangements.
An investor with the current ability to direct the relevant activities has power
even if its rights to direct have yet to be exercised. Evidence that the investor
has been directing relevant activities can help determine whether the investor
has power, but such evidence is not, in itself, conclusive in determining
whether the investor has power over an investee.
If two or more investors each have existing rights that give them the
unilateral ability to direct different relevant activities, the investor that has
the current ability to direct the activities that most significantly affect the
returns of the investee has power over the investee.
An investor can have power over an investee even if other entities have
existing rights that give them the current ability to participate in the direction
of the relevant activities, for example when another entity has significant
influence. However, an investor that holds only protective rights does not have
power over an investee (see paragraphs B26–B28), and consequently does not
control the investee.
Returns
An investor is exposed, or has rights, to variable returns from its involvement
with the investee when the investor’s returns from its involvement have the
potential to vary as a result of the investee’s performance. The investor’s
returns can be only positive, only negative or both positive and negative.
Although only one investor can control an investee, more than one party can
share in the returns of an investee. For example, holders of non-controlling
interests can share in the profits or distributions of an investee.
Link between power and returns
An investor controls an investee if the investor not only has power over the
investee and exposure or rights to variable returns from its involvement with
the investee, but also has the ability to use its power to affect the investor’s
returns from its involvement with the investee.
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Thus, an investor with decision-making rights shall determine whether it is a
principal or an agent. An investor that is an agent in accordance with
paragraphs B58–B72 does not control an investee when it exercises decision-
making rights delegated to it.
Accounting requirements
A parent shall prepare consolidated financial statements using uniform
accounting policies for like transactions and other events in similar
circumstances.
Consolidation of an investee shall begin from the date the investor obtains
control of the investee and cease when the investor loses control of the
investee.
Paragraphs B86–B93 set out guidance for the preparation of consolidated
financial statements.
Non-controlling interests
A parent shall present non-controlling interests in the consolidated statement
of financial position within equity, separately from the equity of the owners of
the parent.
Changes in a parent’s ownership interest in a subsidiary that do not result in
the parent losing control of the subsidiary are equity transactions (ie
transactions with owners in their capacity as owners).
Paragraphs B94–B96 set out guidance for the accounting for non-controlling
interests in consolidated financial statements.
Loss of control
If a parent loses control of a subsidiary, the parent:
(a) derecognises the assets and liabilities of the former subsidiary from the
consolidated statement of financial position.
(b) recognises any investment retained in the former subsidiary and
subsequently accounts for it and for any amounts owed by or to the
former subsidiary in accordance with relevant IFRSs. That retained
interest is remeasured, as described in paragraphs B98(b)(iii) and B99A.
The remeasured value at the date that control is lost shall be regarded
as the fair value on initial recognition of a financial asset in accordance
with IFRS 9 or the cost on initial recognition of an investment in an
associate or joint venture, if applicable.
(c) recognises the gain or loss associated with the loss of control
attributable to the former controlling interest, as specified in
paragraphs B98–B99A.
Paragraphs B97–B99A set out guidance for the accounting for the loss of
control of a subsidiary.
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Determining whether an entity is an investment entity
A parent shall determine whether it is an investment entity. An investment
entity is an entity that:
(a) obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management services;
(b) commits to its investor(s) that its business purpose is to invest funds
solely for returns from capital appreciation, investment income, or
both; and
(c) measures and evaluates the performance of substantially all of its
investments on a fair value basis.
Paragraphs B85A–B85M provide related application guidance.
In assessing whether it meets the definition described in paragraph 27, an
entity shall consider whether it has the following typical characteristics of an
investment entity:
(a)
it has more than one investment (see paragraphs B85O–B85P);
(b)
it has more than one investor (see paragraphs B85Q–B85S);
(c)
it has investors that are not related parties of the entity
(see paragraphs B85T–B85U); and
(d) it has ownership interests in the form of equity or similar interests
(see paragraphs B85V–B85W).
The absence of any of these typical characteristics does not necessarily
disqualify an entity from being classified as an investment entity. An
investment entity that does not have all of these typical characteristics
provides additional disclosure required by paragraph 9A of IFRS 12 Disclosure of
Interests in Other Entities.
If facts and circumstances indicate that there are changes to one or more of
the three elements that make up the definition of an investment entity, as
described in paragraph 27, or the typical characteristics of an investment
entity, as described in paragraph 28, a parent shall reassess whether it is an
investment entity.
A parent that either ceases to be an investment entity or becomes an
investment entity shall account for the change in its status prospectively from
the date at which the change in status occurred (see paragraphs B100–B101).
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Investment entities: exception to consolidation
Except as described in paragraph 32, an investment entity shall not
consolidate its subsidiaries or apply IFRS 3 when it obtains control of
another entity. Instead, an investment entity shall measure an investment
in a subsidiary at fair value through profit or loss in accordance
with IFRS 9.
1
Notwithstanding the requirement in paragraph 31, if an investment entity has
a subsidiary that is not itself an investment entity and whose main purpose
and activities are providing services that relate to the investment entity’s
investment activities (see paragraphs B85C–B85E), it shall consolidate that
subsidiary in accordance with paragraphs 19–26 of this IFRS and apply the
requirements of IFRS 3 to the acquisition of any such subsidiary.
A parent of an investment entity shall consolidate all entities that it controls,
including those controlled through an investment entity subsidiary, unless
the parent itself is an investment entity.
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1 Paragraph C7 of IFRS 10 Consolidated Financial Statements states “If an entity applies this IFRS but
does not yet apply IFRS 9, any reference in this IFRS to IFRS 9 shall be read as a reference to
IAS 39 Financial Instruments: Recognition and Measurement.”
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Appendix A
Dened terms
This appendix is an integral part of the IFRS.
consolidated financial
statements
The financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of
the parent and its subsidiaries are presented as those of a
single economic entity.
control of an investee
An investor controls an investee when the investor is exposed,
or 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.
decision maker
An entity with decision-making rights that is either a principal
or an agent for other parties.
group
A parent and its subsidiaries.
investment entity
An entity that:
(a) obtains funds from one or more investors for the
purpose of providing those investor(s) with investment
management services;
(b) commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both; and
(c) measures and evaluates the performance of
substantially all of its investments on a fair value basis.
non-controlling
interest
Equity in a subsidiary not attributable, directly or indirectly, to
a parent.
parent
An entity that controls one or more entities.
power
Existing rights that give the current ability to direct
the relevant activities.
protective rights
Rights designed to protect the interest of the party holding
those rights without giving that party power over the entity to
which those rights relate.
relevant activities
For the purpose of this IFRS, relevant activities are activities of
the investee that significantly affect the investee’s returns.
removal rights
Rights to deprive the decision maker of its decision-
making authority.
subsidiary
An entity that is controlled by another entity.
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The following terms are defined in IFRS 11, IFRS 12 Disclosure of Interests in Other
Entities, IAS 28 (as amended in 2011) or IAS 24 Related Party Disclosures and are used in this
IFRS with the meanings specified in those IFRSs:
• associate
• interest in another entity
• joint venture
• key management personnel
• related party
•
significant influence.
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Appendix B
Application guidance
This appendix is an integral part of the IFRS. It describes the application of paragraphs 1–33 and has
the same authority as the other parts of the IFRS.
The examples in this appendix portray hypothetical situations. Although some
aspects of the examples may be present in actual fact patterns, all facts and
circumstances of a particular fact pattern would need to be evaluated when
applying IFRS 10.
Assessing control
To determine whether it controls an investee an investor shall assess whether
it has all the following:
(a)
power over the investee;
(b)
exposure, or rights, to variable returns from its involvement with the
investee; and
(c)
the ability to use its power over the investee to affect the amount of
the investor’s returns.
Consideration of the following factors may assist in making that
determination:
(a) the purpose and design of the investee (see paragraphs B5–B8);
(b) what the relevant activities are and how decisions about those
activities are made (see paragraphs B11–B13);
(c) whether the rights of the investor give it the current ability to direct
the relevant activities (see paragraphs B14–B54);
(d) whether the investor is exposed, or has rights, to variable returns from
its involvement with the investee (see paragraphs B55–B57); and
(e) whether the investor has the ability to use its power over the investee
to affect the amount of the investor’s returns (see paragraphs
B58–B72).
When assessing control of an investee, an investor shall consider the nature of
its relationship with other parties (see paragraphs B73–B75).
Purpose and design of an 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.
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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 to
exercise voting rights sufficient to determine the investee’s operating and
financing policies (see paragraphs B34–B50). In the most straightforward case,
the investor that holds a majority of those voting rights, in the absence of any
other factors, controls the investee.
To determine whether an investor controls an investee in more complex cases,
it may be necessary to consider some or all of the other factors in
paragraph B3.
An investee may be 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. In such cases, an investor’s consideration of the
purpose and design of the investee shall also include consideration of the risks
to which the investee was designed to be exposed, the risks it was designed to
pass on to the parties involved with the investee and whether the investor is
exposed to some or all of those risks. Consideration of the risks includes not
only the downside risk, but also the potential for upside.
Power
To have power over an investee, an investor must have existing rights that
give it the current ability to direct the relevant activities. For the purpose of
assessing power, only substantive rights and rights that are not protective
shall be considered (see paragraphs B22–B28).
The determination about whether an investor has power depends on the
relevant activities, the way decisions about the relevant activities are made
and the rights the investor and other parties have in relation to the investee.
Relevant activities and direction of relevant activities
For many investees, a range of operating and financing activities significantly
affect their returns. Examples of activities that, depending on the
circumstances, can be relevant activities include, but are not limited to:
(a) selling and purchasing of goods or services;
(b) managing financial assets during their life (including upon default);
(c) selecting, acquiring or disposing of assets;
(d) researching and developing new products or processes; and
(e)
determining a funding structure or obtaining funding.
Examples of decisions about relevant activities include but are not limited to:
(a)
establishing operating and capital decisions of the investee, including
budgets; and
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(b) appointing and remunerating an investee’s key management personnel
or service providers and terminating their services or employment.
In some situations, activities both before and after a particular set of
circumstances arises or event occurs may be relevant activities. When two or
more investors have the current ability to direct relevant activities and those
activities occur at different times, the investors shall determine which
investor is able to direct the activities that most significantly affect those
returns consistently with the treatment of concurrent decision-making rights
(see paragraph 13). The investors shall reconsider this assessment over time if
relevant facts or circumstances change.
Application examples
Example 1
Two investors form an investee to develop and market a medical product.
One investor is responsible for developing and obtaining regulatory approval
of the medical product—that responsibility includes having the unilateral
ability to make all decisions relating to the development of the product and
to obtaining regulatory approval. Once the regulator has approved the
product, the other investor will manufacture and market it—this investor
has the unilateral ability to make all decisions about the manufacture and
marketing of the product. If all the activities—developing and obtaining
regulatory approval as well as manufacturing and marketing of the medical
product—are relevant activities, each investor needs to determine whether it
is able to direct the activities that most significantly affect the investee’s
returns. Accordingly, each investor needs to consider whether developing
and obtaining regulatory approval or the manufacturing and marketing of
the medical product is the activity that most significantly affects the
investee’s returns and whether it is able to direct that activity. In
determining which investor has power, the investors would consider:
(a)
the purpose and design of the investee;
(b)
the factors that determine the profit margin, revenue and value of
the investee as well as the value of the medical product;
(c) the effect on the investee’s returns resulting from each investor’s
decision-making authority with respect to the factors in (b); and
(d) the investors’ exposure to variability of returns.
In this particular example, the investors would also consider:
(e) the uncertainty of, and effort required in, obtaining regulatory
approval (considering the investor’s record of successfully developing
and obtaining regulatory approval of medical products); and
(f) which investor controls the medical product once the development
phase is successful.
continued...
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...continued
Application examples
Example 2
An investment vehicle (the investee) is created and financed with a debt
instrument held by an investor (the debt investor) and equity instruments
held by a number of other investors. The equity tranche is designed to
absorb the first losses and to receive any residual return from the investee.
One of the equity investors who holds 30 per cent of the equity is also the
asset manager. The investee uses its proceeds to purchase a portfolio of
financial assets, exposing the investee to the credit risk associated with the
possible default of principal and interest payments of the assets. The
transaction is marketed to the debt investor as an investment with minimal
exposure to the credit risk associated with the possible default of the assets
in the portfolio because of the nature of these assets and because the equity
tranche is designed to absorb the first losses of the investee. The returns of
the investee are significantly affected by the management of the investee’s
asset portfolio, which includes decisions about the selection, acquisition and
disposal of the assets within portfolio guidelines and the management upon
default of any portfolio assets. All those activities are managed by the asset
manager until defaults reach a specified proportion of the portfolio value
(ie when the value of the portfolio is such that the equity tranche of the
investee has been consumed). From that time, a third-party trustee manages
the assets according to the instructions of the debt investor. Managing the
investee’s asset portfolio is the relevant activity of the investee. The asset
manager has the ability to direct the relevant activities until defaulted assets
reach the specified proportion of the portfolio value; the debt investor has
the ability to direct the relevant activities when the value of defaulted assets
surpasses that specified proportion of the portfolio value. The asset manager
and the debt investor each need to determine whether they are able to direct
the activities that most significantly affect the investee’s returns, including
considering the purpose and design of the investee as well as each party’s
exposure to variability of returns.
Rights that give an investor power over an investee
Power arises from rights. To have power over an investee, an investor must
have existing rights that give the investor the current ability to direct the
relevant activities. The rights that may give an investor power can differ
between investees.
Examples of rights that, either individually or in combination, can give an
investor power include but are not limited to:
(a) rights in the form of voting rights (or potential voting rights) of an
investee (see paragraphs B34–B50);
(b)
rights to appoint, reassign or remove members of an investee’s key
management personnel who have the ability to direct the relevant
activities;
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(c) rights to appoint or remove another entity that directs the relevant
activities;
(d) rights to direct the investee to enter into, or veto any changes to,
transactions for the benefit of the investor; and
(e) other rights (such as decision-making rights specified in a management
contract) that give the holder the ability to direct the relevant
activities.
Generally, when an investee has a range of operating and financing activities
that significantly affect the investee’s returns and when substantive
decision-making with respect to these activities is required continuously, it
will be voting or similar rights that give an investor power, either individually
or in combination with other arrangements.
When voting rights cannot have a significant effect on an investee’s returns,
such as when voting rights relate to administrative tasks only and contractual
arrangements determine the direction of the relevant activities, the investor
needs to assess those contractual arrangements in order to determine whether
it has rights sufficient to give it power over the investee. To determine
whether an investor has rights sufficient to give it power, the investor shall
consider the purpose and design of the investee (see paragraphs B5–B8) and
the requirements in paragraphs B51–B54 together with paragraphs B18–B20.
In some circumstances it may be difficult to determine whether an investor’s
rights are sufficient to give it power over an investee. In such cases, to enable
the assessment of power to be made, the investor shall consider evidence of
whether it has the practical ability to direct the relevant activities unilaterally.
Consideration is given, but is not limited, to the following, which, when
considered together with its rights and the indicators in paragraphs B19 and
B20, may provide evidence that the investor’s rights are sufficient to give it
power over the investee:
(a) The investor can, without having the contractual right to do so,
appoint or approve the investee’s key management personnel who
have the ability to direct the relevant activities.
(b) The investor can, without having the contractual right to do so, direct
the investee to enter into, or can veto any changes to, significant
transactions for the benefit of the investor.
(c) The investor can dominate either the nominations process for electing
members of the investee’s governing body or the obtaining of proxies
from other holders of voting rights.
(d) The investee’s key management personnel are related parties of the
investor (for example, the chief executive officer of the investee and
the chief executive officer of the investor are the same person).
(e)
The majority of the members of the investee’s governing body are
related parties of the investor.
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Sometimes there will be indications that the investor has a special
relationship with the investee, which suggests that the investor has more than
a passive interest in the investee. The existence of any individual indicator, or
a particular combination of indicators, does not necessarily mean that the
power criterion is met. However, having more than a passive interest in the
investee may indicate that the investor has other related rights sufficient to
give it power or provide evidence of existing power over an investee. For
example, the following suggests that the investor has more than a passive
interest in the investee and, in combination with other rights, may indicate
power:
(a) The investee’s key management personnel who have the ability to
direct the relevant activities are current or previous employees of the
investor.
(b)
The investee’s operations are dependent on the investor, such as in the
following situations:
(i)
The investee depends on the investor to fund a significant
portion of its operations.
(ii)
The investor guarantees a significant portion of the investee’s
obligations.
(iii) The investee depends on the investor for critical services,
technology, supplies or raw materials.
(iv) The investor controls assets such as licences or trademarks that
are critical to the investee’s operations.
(v) The investee depends on the investor for key management
personnel, such as when the investor’s personnel have
specialised knowledge of the investee’s operations.
(c) A significant portion of the investee’s activities either involve or are
conducted on behalf of the investor.
(d) The investor’s exposure, or rights, to returns from its involvement
with the investee is disproportionately greater than its voting or other
similar rights. For example, there may be a situation in which an
investor is entitled, or exposed, to more than half of the returns of the
investee but holds less than half of the voting rights of the investee.
The greater an investor’s exposure, or rights, to variability of returns from its
involvement with an investee, the greater is the incentive for the investor to
obtain rights sufficient to give it power. Therefore, having a large exposure to
variability of returns is an indicator that the investor may have power.
However, the extent of the investor’s exposure does not, in itself, determine
whether an investor has power over the investee.
When the factors set out in paragraph B18 and the indicators set out in
paragraphs B19 and B20 are considered together with an investor’s rights,
greater weight shall be given to the evidence of power described in
paragraph B18.
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Substantive rights
An investor, in assessing whether it has power, considers only substantive
rights relating to an investee (held by the investor and others). For a right to
be substantive, the holder must have the practical ability to exercise that
right.
Determining whether rights are substantive requires judgement, taking into
account all facts and circumstances. Factors to consider in making that
determination include but are not limited to:
(a) Whether there are any barriers (economic or otherwise) that prevent
the holder (or holders) from exercising the rights. Examples of such
barriers include but are not limited to:
(i)
financial penalties and incentives that would prevent (or deter)
the holder from exercising its rights.
(ii)
an exercise or conversion price that creates a financial barrier
that would prevent (or deter) the holder from exercising its
rights.
(iii)
terms and conditions that make it unlikely that the rights
would be exercised, for example, conditions that narrowly limit
the timing of their exercise.
(iv) the absence of an explicit, reasonable mechanism in the
founding documents of an investee or in applicable laws or
regulations that would allow the holder to exercise its rights.
(v) the inability of the holder of the rights to obtain the
information necessary to exercise its rights.
(vi) operational barriers or incentives that would prevent (or deter)
the holder from exercising its rights (eg the absence of other
managers willing or able to provide specialised services or
provide the services and take on other interests held by the
incumbent manager).
(vii) legal or regulatory requirements that prevent the holder from
exercising its rights (eg where a foreign investor is prohibited
from exercising its rights).
(b) When the exercise of rights requires the agreement of more than one
party, or when the rights are held by more than one party, whether a
mechanism is in place that provides those parties with the practical
ability to exercise their rights collectively if they choose to do so. The
lack of such a mechanism is an indicator that the rights may not be
substantive. The more parties that are required to agree to exercise the
rights, the less likely it is that those rights are substantive. However, a
board of directors whose members are independent of the decision
maker may serve as a mechanism for numerous investors to act
collectively in exercising their rights. Therefore, removal rights
exercisable by an independent board of directors are more likely to be
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substantive than if the same rights were exercisable individually by a
large number of investors.
(c) Whether the party or parties that hold the rights would benefit from
the exercise of those rights. For example, the holder of potential voting
rights in an investee (see paragraphs B47–B50) shall consider the
exercise or conversion price of the instrument. The terms and
conditions of potential voting rights are more likely to be substantive
when the instrument is in the money or the investor would benefit for
other reasons (eg by realising synergies between the investor and the
investee) from the exercise or conversion of the instrument.
To be substantive, rights also need to be exercisable when decisions about the
direction of the relevant activities need to be made. Usually, to be substantive,
the rights need to be currently exercisable. However, sometimes rights can be
substantive, even though the rights are not currently exercisable.
Application examples
Example 3
The investee has annual shareholder meetings at which decisions to direct
the relevant activities are made. The next scheduled shareholders’ meeting
is in eight months. However, shareholders that individually or collectively
hold at least 5 per cent of the voting rights can call a special meeting to
change the existing policies over the relevant activities, but a requirement to
give notice to the other shareholders means that such a meeting cannot be
held for at least 30 days. Policies over the relevant activities can be changed
only at special or scheduled shareholders’ meetings. This includes the
approval of material sales of assets as well as the making or disposing of
significant investments.
The above fact pattern applies to examples 3A–3D described below. Each
example is considered in isolation.
Example 3A
An investor holds a majority of the voting rights in the investee. The
investor’s voting rights are substantive because the investor is able to make
decisions about the direction of the relevant activities when they need to be
made. The fact that it takes 30 days before the investor can exercise its
voting rights does not stop the investor from having the current ability to
direct the relevant activities from the moment the investor acquires the
shareholding.
continued...
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...continued
Application examples
Example 3B
An investor is party to a forward contract to acquire the majority of shares
in the investee. The forward contract’s settlement date is in 25 days. The
existing shareholders are unable to change the existing policies over
the relevant activities because a special meeting cannot be held for at least
30 days, at which point the forward contract will have been settled. Thus,
the investor has rights that are essentially equivalent to the majority
shareholder in example 3A above (ie the investor holding the forward
contract can make decisions about the direction of the relevant activities
when they need to be made). The investor’s forward contract is a substantive
right that gives the investor the current ability to direct the relevant
activities even before the forward contract is settled.
Example 3C
An investor holds a substantive option to acquire the majority of shares in
the investee that is exercisable in 25 days and is deeply in the money. The
same conclusion would be reached as in example 3B.
Example 3D
An investor is party to a forward contract to acquire the majority of shares
in the investee, with no other related rights over the investee. The forward
contract’s settlement date is in six months. In contrast to the examples
above, the investor does not have the current ability to direct the relevant
activities. The existing shareholders have the current ability to direct the
relevant activities because they can change the existing policies over the
relevant activities before the forward contract is settled.
Substantive rights exercisable by other parties can prevent an investor from
controlling the investee to which those rights relate. Such substantive rights
do not require the holders to have the ability to initiate decisions. As long as
the rights are not merely protective (see paragraphs B26–B28), substantive
rights held by other parties may prevent the investor from controlling the
investee even if the rights give the holders only the current ability to approve
or block decisions that relate to the relevant activities.
Protective rights
In evaluating whether rights give an investor power over an investee, the
investor shall assess whether its rights, and rights held by others, are
protective rights. Protective rights relate to fundamental changes to the
activities of an investee or apply in exceptional circumstances. However, not
all rights that apply in exceptional circumstances or are contingent on events
are protective (see paragraphs B13 and B53).
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Because protective rights are designed to protect the interests of their holder
without giving that party power over the investee to which those rights relate,
an investor that holds only protective rights cannot have power or prevent
another party from having power over an investee (see paragraph 14).
Examples of protective rights include but are not limited to:
(a) a lender’s right to restrict a borrower from undertaking activities that
could significantly change the credit risk of the borrower to the
detriment of the lender.
(b) the right of a party holding a non-controlling interest in an investee to
approve capital expenditure greater than that required in the ordinary
course of business, or to approve the issue of equity or debt
instruments.
(c)
the right of a lender to seize the assets of a borrower if the borrower
fails to meet specified loan repayment conditions.
Franchises
A franchise agreement for which the investee is the franchisee often gives the
franchisor rights that are designed to protect the franchise brand. Franchise
agreements typically give franchisors some decision-making rights with
respect to the operations of the franchisee.
Generally, franchisors’ rights do not restrict the ability of parties other than
the franchisor to make decisions that have a significant effect on the
franchisee’s returns. Nor do the rights of the franchisor in franchise
agreements necessarily give the franchisor the current ability to direct the
activities that significantly affect the franchisee’s returns.
It is necessary to distinguish between having the current ability to make
decisions that significantly affect the franchisee’s returns and having the
ability to make decisions that protect the franchise brand. The franchisor does
not have power over the franchisee if other parties have existing rights that
give them the current ability to direct the relevant activities of the franchisee.
By entering into the franchise agreement the franchisee has made a unilateral
decision to operate its business in accordance with the terms of the franchise
agreement, but for its own account.
Control over such fundamental decisions as the legal form of the franchisee
and its funding structure may be determined by parties other than the
franchisor and may significantly affect the returns of the franchisee. The
lower the level of financial support provided by the franchisor and the lower
the franchisor’s exposure to variability of returns from the franchisee the
more likely it is that the franchisor has only protective rights.
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Voting rights
Often an investor has the current ability, through voting or similar rights, to
direct the relevant activities. An investor considers the requirements in this
section (paragraphs B35–B50) if the relevant activities of an investee are
directed through voting rights.
Power with a majority of the voting rights
An investor that holds more than half of the voting rights of an investee has
power in the following situations, unless paragraph B36 or paragraph B37
applies:
(a)
the relevant activities are directed by a vote of the holder of the
majority of the voting rights, or
(b)
a majority of the members of the governing body that directs the
relevant activities are appointed by a vote of the holder of the majority
of the voting rights.
Majority of the voting rights but no power
For an investor that holds more than half of the voting rights of an investee,
to have power over an investee, the investor’s voting rights must be
substantive, in accordance with paragraphs B22–B25, and must provide the
investor with the current ability to direct the relevant activities, which often
will be through determining operating and financing policies. If another
entity has existing rights that provide that entity with the right to direct the
relevant activities and that entity is not an agent of the investor, the investor
does not have power over the investee.
An investor does not have power over an investee, even though the investor
holds the majority of the voting rights in the investee, when those voting
rights are not substantive. For example, an investor that has more than half of
the voting rights in an investee cannot have power if the relevant activities are
subject to direction by a government, court, administrator, receiver, liquidator
or regulator.
Power without a majority of the voting rights
An investor can have power even if it holds less than a majority of the voting
rights of an investee. An investor can have power with less than a majority of
the voting rights of an investee, for example, through:
(a) a contractual arrangement between the investor and other vote
holders (see paragraph B39);
(b) rights arising from other contractual arrangements (see
paragraph B40);
(c)
the investor’s voting rights (see paragraphs B41–B45);
(d)
potential voting rights (see paragraphs B47–B50); or
(e)
a combination of (a)–(d).
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Contractual arrangement with other vote holders
A contractual arrangement between an investor and other vote holders can
give the investor the right to exercise voting rights sufficient to give the
investor power, even if the investor does not have voting rights sufficient to
give it power without the contractual arrangement. However, a contractual
arrangement might ensure that the investor can direct enough other vote
holders on how to vote to enable the investor to make decisions about the
relevant activities.
Rights from other contractual arrangements
Other decision-making rights, in combination with voting rights, can give an
investor the current ability to direct the relevant activities. For example, the
rights specified in a contractual arrangement in combination with voting
rights may be sufficient to give an investor the current ability to direct the
manufacturing processes of an investee or to direct other operating or
financing activities of an investee that significantly affect the investee’s
returns. However, in the absence of any other rights, economic dependence of
an investee on the investor (such as relations of a supplier with its main
customer) does not lead to the investor having power over the investee.
The investor’s voting rights
An investor with less than a majority of the voting rights has rights that are
sufficient to give it power when the investor has the practical ability to direct
the relevant activities unilaterally.
When assessing whether an investor’s voting rights are sufficient to give it
power, an investor considers all facts and circumstances, including:
(a) the size of the investor’s holding of voting rights relative to the size
and dispersion of holdings of the other vote holders, noting that:
(i) the more voting rights an investor holds, the more likely the
investor is to have existing rights that give it the current ability
to direct the relevant activities;
(ii) the more voting rights an investor holds relative to other vote
holders, the more likely the investor is to have existing rights
that give it the current ability to direct the relevant activities;
(iii) the more parties that would need to act together to outvote the
investor, the more likely the investor is to have existing rights
that give it the current ability to direct the relevant activities;
(b) potential voting rights held by the investor, other vote holders or other
parties (see paragraphs B47–B50);
(c)
rights arising from other contractual arrangements (see
paragraph B40); and
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(d) any additional facts and circumstances that indicate the investor has,
or does not have, the current ability to direct the relevant activities at
the time that decisions need to be made, including voting patterns at
previous shareholders’ meetings.
When the direction of relevant activities is determined by majority vote and
an investor holds significantly more voting rights than any other vote holder
or organised group of vote holders, and the other shareholdings are widely
dispersed, it may be clear, after considering the factors listed in
paragraph B42(a)–(c) alone, that the investor has power over the investee.
Application examples
Example 4
An investor acquires 48 per cent of the voting rights of an investee. The
remaining voting rights are held by thousands of shareholders, none
individually holding more than 1 per cent of the voting rights. None of the
shareholders has any arrangements to consult any of the others or make
collective decisions. When assessing the proportion of voting rights to
acquire, on the basis of the relative size of the other shareholdings, the
investor determined that a 48 per cent interest would be sufficient to give it
control. In this case, on the basis of the absolute size of its holding and the
relative size of the other shareholdings, the investor concludes that it has a
sufficiently dominant voting interest to meet the power criterion without
the need to consider any other evidence of power.
Example 5
Investor A holds 40 per cent of the voting rights of an investee and twelve
other investors each hold 5 per cent of the voting rights of the investee. A
shareholder agreement grants investor A the right to appoint, remove and
set the remuneration of management responsible for directing the relevant
activities. To change the agreement, a two-thirds majority vote of the
shareholders is required. In this case, investor A concludes that the absolute
size of the investor’s holding and the relative size of the other shareholdings
alone are not conclusive in determining whether the investor has rights
sufficient to give it power. However, investor A determines that its
contractual right to appoint, remove and set the remuneration of
management is sufficient to conclude that it has power over the investee.
The fact that investor A might not have exercised this right or the likelihood
of investor A exercising its right to select, appoint or remove management
shall not be considered when assessing whether investor A has power.
In other situations, it may be clear after considering the factors listed
in paragraph B42(a)–(c) alone that an investor does not have power.
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Application example
Example 6
Investor A holds 45 per cent of the voting rights of an investee. Two other
investors each hold 26 per cent of the voting rights of the investee. The
remaining voting rights are held by three other shareholders, each holding
1 per cent. There are no other arrangements that affect decision-making. In
this case, the size of investor A’s voting interest and its size relative to the
other shareholdings are sufficient to conclude that investor A does not have
power. Only two other investors would need to co-operate to be able to
prevent investor A from directing the relevant activities of the investee.
However, the factors listed in paragraph B42(a)–(c) alone may not be
conclusive. If an investor, having considered those factors, is unclear whether
it has power, it shall consider additional facts and circumstances, such as
whether other shareholders are passive in nature as demonstrated by voting
patterns at previous shareholders’ meetings. This includes the assessment of
the factors set out in paragraph B18 and the indicators in paragraphs B19 and
B20. The fewer voting rights the investor holds, and the fewer parties that
would need to act together to outvote the investor, the more reliance would
be placed on the additional facts and circumstances to assess whether the
investor’s rights are sufficient to give it power. When the facts and
circumstances in paragraphs B18–B20 are considered together with the
investor’s rights, greater weight shall be given to the evidence of power in
paragraph B18 than to the indicators of power in paragraphs B19 and B20.
Application examples
Example 7
An investor holds 45 per cent of the voting rights of an investee. Eleven
other shareholders each hold 5 per cent of the voting rights of the investee.
None of the shareholders has contractual arrangements to consult any of the
others or make collective decisions. In this case, the absolute size of the
investor’s holding and the relative size of the other shareholdings alone are
not conclusive in determining whether the investor has rights sufficient to
give it power over the investee. Additional facts and circumstances that may
provide evidence that the investor has, or does not have, power shall be
considered.
continued...
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...continued
Application examples
Example 8
An investor holds 35 per cent of the voting rights of an investee. Three other
shareholders each hold 5 per cent of the voting rights of the investee. The
remaining voting rights are held by numerous other shareholders, none
individually holding more than 1 per cent of the voting rights. None of the
shareholders has arrangements to consult any of the others or make
collective decisions. Decisions about the relevant activities of the investee
require the approval of a majority of votes cast at relevant shareholders’
meetings—75 per cent of the voting rights of the investee have been cast at
recent relevant shareholders’ meetings. In this case, the active participation
of the other shareholders at recent shareholders’ meetings indicates that the
investor would not have the practical ability to direct the relevant activities
unilaterally, regardless of whether the investor has directed the relevant
activities because a sufficient number of other shareholders voted in the
same way as the investor.
If it is not clear, having considered the factors listed in paragraph B42(a)–(d),
that the investor has power, the investor does not control the investee.
Potential voting rights
When assessing control, an investor considers its potential voting rights as
well as potential voting rights held by other parties, to determine whether it
has power. Potential voting rights are rights to obtain voting rights of an
investee, such as those arising from convertible instruments or options,
including forward contracts. Those potential voting rights are considered only
if the rights are substantive (see paragraphs B22–B25).
When considering potential voting rights, an investor shall consider the
purpose and design of the instrument, as well as the purpose and design of
any other involvement the investor has with the investee. This includes an
assessment of the various terms and conditions of the instrument as well as
the investor’s apparent expectations, motives and reasons for agreeing to
those terms and conditions.
If the investor also has voting or other decision-making rights relating to the
investee’s activities, the investor assesses whether those rights, in
combination with potential voting rights, give the investor power.
Substantive potential voting rights alone, or in combination with other rights,
can give an investor the current ability to direct the relevant activities. For
example, this is likely to be the case when an investor holds 40 per cent of the
voting rights of an investee and, in accordance with paragraph B23, holds
substantive rights arising from options to acquire a further 20 per cent of the
voting rights.
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Application examples
Example 9
Investor A holds 70 per cent of the voting rights of an investee. Investor B
has 30 per cent of the voting rights of the investee as well as an option to
acquire half of investor A’s voting rights. The option is exercisable for the
next two years at a fixed price that is deeply out of the money (and is
expected to remain so for that two-year period). Investor A has been
exercising its votes and is actively directing the relevant activities of the
investee. In such a case, investor A is likely to meet the power criterion
because it appears to have the current ability to direct the relevant activities.
Although investor B has currently exercisable options to purchase additional
voting rights (that, if exercised, would give it a majority of the voting rights
in the investee), the terms and conditions associated with those options are
such that the options are not considered substantive.
Example 10
Investor A and two other investors each hold a third of the voting rights of
an investee. The investee’s business activity is closely related to investor A.
In addition to its equity instruments, investor A also holds debt instruments
that are convertible into ordinary shares of the investee at any time for a
fixed price that is out of the money (but not deeply out of the money). If the
debt were converted, investor A would hold 60 per cent of the voting rights
of the investee. Investor A would benefit from realising synergies if the debt
instruments were converted into ordinary shares. Investor A has power over
the investee because it holds voting rights of the investee together with
substantive potential voting rights that give it the current ability to direct
the relevant activities.
Power when voting or similar rights do not have a signicant effect
on the investee’s returns
In assessing the purpose and design of an investee (see paragraphs B5–B8), an
investor shall consider the involvement and decisions made at the investee’s
inception as part of its design and evaluate whether the transaction terms and
features of the involvement provide the investor with rights that are sufficient
to give it power. Being involved in the design of an investee alone is not
sufficient to give an investor control. However, involvement in the design may
indicate that the investor had the opportunity to obtain rights that are
sufficient to give it power over the investee.
In addition, an investor shall consider contractual arrangements such as call
rights, put rights and liquidation rights established at the investee’s inception.
When these contractual arrangements involve activities that are closely
related to the investee, then these activities are, in substance, an integral part
of the investee’s overall activities, even though they may occur outside the
legal boundaries of the investee. Therefore, explicit or implicit
decision-making rights embedded in contractual arrangements that are
closely related to the investee need to be considered as relevant activities
when determining power over the investee.
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For some investees, relevant activities occur only when particular
circumstances arise or events occur. The investee may be designed so that the
direction of its activities and its returns are predetermined unless and until
those particular circumstances arise or events occur. In this case, only the
decisions about the investee’s activities when those circumstances or events
occur can significantly affect its returns and thus be relevant activities. The
circumstances or events need not have occurred for an investor with the
ability to make those decisions to have power. The fact that the right to make
decisions is contingent on circumstances arising or an event occurring does
not, in itself, make those rights protective.
Application examples
Example 11
An investee’s only business activity, as specified in its founding documents,
is to purchase receivables and service them on a day-to-day basis for its
investors. The servicing on a day-to-day basis includes the collection and
passing on of principal and interest payments as they fall due. Upon default
of a receivable the investee automatically puts the receivable to an investor
as agreed separately in a put agreement between the investor and the
investee. The only relevant activity is managing the receivables upon default
because it is the only activity that can significantly affect the investee’s
returns. Managing the receivables before default is not a relevant activity
because it does not require substantive decisions to be made that could
significantly affect the investee’s returns—the activities before default are
predetermined and amount only to collecting cash flows as they fall due and
passing them on to investors. Therefore, only the investor’s right to manage
the assets upon default should be considered when assessing the overall
activities of the investee that significantly affect the investee’s returns.
In this example, the design of the investee ensures that the investor has
decision-making authority over the activities that significantly affect the
returns at the only time that such decision-making authority is required.
The terms of the put agreement are integral to the overall transaction and
the establishment of the investee. Therefore, the terms of the put agreement
together with the founding documents of the investee lead to the conclusion
that the investor has power over the investee even though the investor takes
ownership of the receivables only upon default and manages the defaulted
receivables outside the legal boundaries of the investee.
Example 12
The only assets of an investee are receivables. When the purpose and design
of the investee are considered, it is determined that the only relevant
activity is managing the receivables upon default. The party that has the
ability to manage the defaulting receivables has power over the investee,
irrespective of whether any of the borrowers have defaulted.
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An investor may have an explicit or implicit commitment to ensure that an
investee continues to operate as designed. Such a commitment may increase
the investor’s exposure to variability of returns and thus increase the
incentive for the investor to obtain rights sufficient to give it power. Therefore
a commitment to ensure that an investee operates as designed may be an
indicator that the investor has power, but does not, by itself, give an investor
power, nor does it prevent another party from having power.
Exposure, or rights, to variable returns from an investee
When assessing whether an investor has control of an investee, the investor
determines whether it is exposed, or has rights, to variable returns from its
involvement with the investee.
Variable returns are returns that are not fixed and have the potential to vary
as a result of the performance of an investee. Variable returns can be only
positive, only negative or both positive and negative (see paragraph 15). An
investor assesses whether returns from an investee are variable and how
variable those returns are on the basis of the substance of the arrangement
and regardless of the legal form of the returns. For example, an investor can
hold a bond with fixed interest payments. The fixed interest payments are
variable returns for the purpose of this IFRS because they are subject to
default risk and they expose the investor to the credit risk of the issuer of the
bond. The amount of variability (ie how variable those returns are) depends on
the credit risk of the bond. Similarly, fixed performance fees for managing an
investee’s assets are variable returns because they expose the investor to the
performance risk of the investee. The amount of variability depends on the
investee’s ability to generate sufficient income to pay the fee.
Examples of returns include:
(a) dividends, other distributions of economic benefits from an investee
(eg interest from debt securities issued by the investee) and changes in
the value of the investor’s investment in that investee.
(b) remuneration for servicing an investee’s assets or liabilities, fees and
exposure to loss from providing credit or liquidity support, residual
interests in the investee’s assets and liabilities on liquidation of that
investee, tax benefits, and access to future liquidity that an investor
has from its involvement with an investee.
(c) returns that are not available to other interest holders. For example,
an investor might use its assets in combination with the assets of the
investee, such as combining operating functions to achieve economies
of scale, cost savings, sourcing scarce products, gaining access to
proprietary knowledge or limiting some operations or assets, to
enhance the value of the investor’s other assets.
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Link between power and returns
Delegated power
When an investor with decision-making rights (a decision maker) assesses
whether it controls an investee, it shall determine whether it is a principal or
an agent. An investor shall also determine whether another entity with
decision-making rights is acting as an agent for the investor. An agent is 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 (see paragraphs 17 and 18). Thus,
sometimes a principal’s power may be held and exercisable by an agent, but
on behalf of the principal. A decision maker is not an agent simply because
other parties can benefit from the decisions that it makes.
An investor may delegate its decision-making authority to an agent on some
specific issues or on all relevant activities. When assessing whether it controls
an investee, the investor shall treat the decision-making rights delegated to its
agent as held by the investor directly. In situations where there is more than
one principal, each of the principals shall assess whether it has power over the
investee by considering the requirements in paragraphs B5–B54. Paragraphs
B60–B72 provide guidance on determining whether a decision maker is an
agent or a principal.
A decision maker shall consider the overall relationship between itself, the
investee being managed and other parties involved with the investee, in
particular all the factors below, in determining whether it is an agent:
(a) the scope of its decision-making authority over the investee
(paragraphs B62 and B63).
(b) the rights held by other parties (paragraphs B64–B67).
(c) the remuneration to which it is entitled in accordance with the
remuneration agreement(s) (paragraphs B68–B70).
(d) the decision maker’s exposure to variability of returns from other
interests that it holds in the investee (paragraphs B71 and B72).
Different weightings shall be applied to each of the factors on the basis of
particular facts and circumstances.
Determining whether a decision maker is an agent requires an evaluation of
all the factors listed in paragraph B60 unless a single party holds substantive
rights to remove the decision maker (removal rights) and can remove the
decision maker without cause (see paragraph B65).
The scope of the decision-making authority
The scope of a decision maker’s decision-making authority is evaluated by
considering:
(a)
the activities that are permitted according to the decision-making
agreement(s) and specified by law, and
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(b) the discretion that the decision maker has when making decisions
about those activities.
A decision maker shall consider the purpose and design of the investee, the
risks to which the investee was designed to be exposed, the risks it was
designed to pass on to the parties involved and the level of involvement the
decision maker had in the design of an investee. For example, if a decision
maker is significantly involved in the design of the investee (including in
determining the scope of decision-making authority), that involvement may
indicate that the decision maker had the opportunity and incentive to obtain
rights that result in the decision maker having the ability to direct the
relevant activities.
Rights held by other parties
Substantive rights held by other parties may affect the decision maker’s
ability to direct the relevant activities of an investee. Substantive removal or
other rights may indicate that the decision maker is an agent.
When a single party holds substantive removal rights and can remove the
decision maker without cause, this, in isolation, is sufficient to conclude that
the decision maker is an agent. If more than one party holds such rights (and
no individual party can remove the decision maker without the agreement of
other parties) those rights are not, in isolation, conclusive in determining that
a decision maker acts primarily on behalf and for the benefit of others. In
addition, the greater the number of parties required to act together to exercise
rights to remove a decision maker and the greater the magnitude of, and
variability associated with, the decision maker’s other economic interests
(ie remuneration and other interests), the less the weighting that shall be
placed on this factor.
Substantive rights held by other parties that restrict a decision maker’s
discretion shall be considered in a similar manner to removal rights when
evaluating whether the decision maker is an agent. For example, a decision
maker that is required to obtain approval from a small number of other
parties for its actions is generally an agent. (See paragraphs B22–B25 for
additional guidance on rights and whether they are substantive.)
Consideration of the rights held by other parties shall include an assessment
of any rights exercisable by an investee’s board of directors (or other
governing body) and their effect on the decision-making authority (see
paragraph B23(b)).
Remuneration
The greater the magnitude of, and variability associated with, the decision
maker’s remuneration relative to the returns expected from the activities of
the investee, the more likely the decision maker is a principal.
In determining whether it is a principal or an agent the decision maker shall
also consider whether the following conditions exist:
(a)
The remuneration of the decision maker is commensurate with the
services provided.
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(b) The remuneration agreement includes only terms, conditions or
amounts that are customarily present in arrangements for similar
services and level of skills negotiated on an arm’s length basis.
A decision maker cannot be an agent unless the conditions set out in
paragraph B69(a) and (b) are present. However, meeting those conditions in
isolation is not sufficient to conclude that a decision maker is an agent.
Exposure to variability of returns from other interests
A decision maker that holds other interests in an investee (eg investments in
the investee or provides guarantees with respect to the performance of the
investee), shall consider its exposure to variability of returns from those
interests in assessing whether it is an agent. Holding other interests in an
investee indicates that the decision maker may be a principal.
In evaluating its exposure to variability of returns from other interests in the
investee a decision maker shall consider the following:
(a)
the greater the magnitude of, and variability associated with, its
economic interests, considering its remuneration and other interests in
aggregate, the more likely the decision maker is a principal.
(b)
whether its exposure to variability of returns is different from that of
the other investors and, if so, whether this might influence its actions.
For example, this might be the case when a decision maker holds
subordinated interests in, or provides other forms of credit
enhancement to, an investee.
The decision maker shall evaluate its exposure relative to the total variability
of returns of the investee. This evaluation is made primarily on the basis of
returns expected from the activities of the investee but shall not ignore the
decision maker’s maximum exposure to variability of returns of the investee
through other interests that the decision maker holds.
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Application examples
Example 13
A decision maker (fund manager) establishes, markets and manages a
publicly traded, regulated fund according to narrowly defined parameters
set out in the investment mandate as required by its local laws and
regulations. The fund was marketed to investors as an investment in a
diversified portfolio of equity securities of publicly traded entities. Within
the defined parameters, the fund manager has discretion about the assets in
which to invest. The fund manager has made a 10 per cent pro rata
investment in the fund and receives a market-based fee for its services equal
to 1 per cent of the net asset value of the fund. The fees are commensurate
with the services provided. The fund manager does not have any obligation
to fund losses beyond its 10 per cent investment. The fund is not required to
establish, and has not established, an independent board of directors. The
investors do not hold any substantive rights that would affect the decision-
making authority of the fund manager, but can redeem their interests
within particular limits set by the fund.
Although operating within the parameters set out in the investment
mandate and in accordance with the regulatory requirements, the fund
manager has decision-making rights that give it the current ability to direct
the relevant activities of the fund—the investors do not hold substantive
rights that could affect the fund manager’s decision-making authority. The
fund manager receives a market-based fee for its services that is
commensurate with the services provided and has also made a pro rata
investment in the fund. The remuneration and its investment expose the
fund manager to variability of returns from the activities of the fund
without creating exposure that is of such significance that it indicates that
the fund manager is a principal.
In this example, consideration of the fund manager’s exposure to variability
of returns from the fund together with its decision-making authority within
restricted parameters indicates that the fund manager is an agent. Thus, the
fund manager concludes that it does not control the fund.
Example 14
A decision maker establishes, markets and manages a fund that provides
investment opportunities to a number of investors. The decision
maker (fund manager) must make decisions in the best interests of all
investors and in accordance with the fund’s governing agreements.
Nonetheless, the fund manager has wide decision-making discretion. The
fund manager receives a market-based fee for its services equal to 1 per cent
of assets under management and 20 per cent of all the fund’s profits if a
specified profit level is achieved. The fees are commensurate with the
services provided.
continued...
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...continued
Application examples
Although it must make decisions in the best interests of all investors, the
fund manager has extensive decision-making authority to direct the relevant
activities of the fund. The fund manager is paid fixed and performance-
related fees that are commensurate with the services provided. In addition,
the remuneration aligns the interests of the fund manager with those of the
other investors to increase the value of the fund, without creating exposure
to variability of returns from the activities of the fund that is of such
significance that the remuneration, when considered in isolation, indicates
that the fund manager is a principal.
The above fact pattern and analysis applies to examples 14A–14C described
below. Each example is considered in isolation.
Example 14A
The fund manager also has a 2 per cent investment in the fund that aligns
its interests with those of the other investors. The fund manager does not
have any obligation to fund losses beyond its 2 per cent investment. The
investors can remove the fund manager by a simple majority vote, but only
for breach of contract.
The fund manager’s 2 per cent investment increases its exposure to
variability of returns from the activities of the fund without creating
exposure that is of such significance that it indicates that the fund manager
is a principal. The other investors’ rights to remove the fund manager are
considered to be protective rights because they are exercisable only for
breach of contract. In this example, although the fund manager has
extensive decision-making authority and is exposed to variability of returns
from its interest and remuneration, the fund manager’s exposure indicates
that the fund manager is an agent. Thus, the fund manager concludes that it
does not control the fund.
Example 14B
The fund manager has a more substantial pro rata investment in the fund,
but does not have any obligation to fund losses beyond that investment. The
investors can remove the fund manager by a simple majority vote, but only
for breach of contract.
continued...
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...continued
Application examples
In this example, the other investors’ rights to remove the fund manager are
considered to be protective rights because they are exercisable only for
breach of contract. Although the fund manager is paid fixed and
performance-related fees that are commensurate with the services provided,
the combination of the fund manager’s investment together with its
remuneration could create exposure to variability of returns from the
activities of the fund that is of such significance that it indicates that the
fund manager is a principal. The greater the magnitude of, and variability
associated with, the fund manager’s economic interests (considering its
remuneration and other interests in aggregate), the more emphasis the fund
manager would place on those economic interests in the analysis, and the
more likely the fund manager is a principal.
For example, having considered its remuneration and the other factors, the
fund manager might consider a 20 per cent investment to be sufficient to
conclude that it controls the fund. However, in different circumstances (ie if
the remuneration or other factors are different), control may arise when the
level of investment is different.
Example 14C
The fund manager has a 20 per cent pro rata investment in the fund, but
does not have any obligation to fund losses beyond its 20 per cent
investment. The fund has a board of directors, all of whose members are
independent of the fund manager and are appointed by the other investors.
The board appoints the fund manager annually. If the board decided not to
renew the fund manager’s contract, the services performed by the fund
manager could be performed by other managers in the industry.
Although the fund manager is paid fixed and performance-related fees that
are commensurate with the services provided, the combination of the fund
manager’s 20 per cent investment together with its remuneration creates
exposure to variability of returns from the activities of the fund that is of
such significance that it indicates that the fund manager is a principal.
However, the investors have substantive rights to remove the fund manager
—the board of directors provides a mechanism to ensure that the investors
can remove the fund manager if they decide to do so.
In this example, the fund manager places greater emphasis on the
substantive removal rights in the analysis. Thus, although the fund manager
has extensive decision-making authority and is exposed to variability of
returns of the fund from its remuneration and investment, the substantive
rights held by the other investors indicate that the fund manager is an
agent. Thus, the fund manager concludes that it does not control the fund.
continued...
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...continued
Application examples
Example 15
An investee is created to purchase a portfolio of fixed rate asset-backed
securities, funded by fixed rate debt instruments and equity instruments.
The equity instruments are designed to provide first loss protection to the
debt investors and receive any residual returns of the investee. The
transaction was marketed to potential debt investors as an investment in a
portfolio of asset-backed securities with exposure to the credit risk
associated with the possible default of the issuers of the asset-backed
securities in the portfolio and to the interest rate risk associated with the
management of the portfolio. On formation, the equity instruments
represent 10 per cent of the value of the assets purchased. A decision
maker (the asset manager) manages the active asset portfolio by making
investment decisions within the parameters set out in the investee’s
prospectus. For those services, the asset manager receives a market-based
fixed fee (ie 1 per cent of assets under management) and performance-
related fees (ie 10 per cent of profits) if the investee’s profits exceed a
specified level. The fees are commensurate with the services provided. The
asset manager holds 35 per cent of the equity in the investee. The remaining
65 per cent of the equity, and all the debt instruments, are held by a large
number of widely dispersed unrelated third party investors. The asset
manager can be removed, without cause, by a simple majority decision of
the other investors.
The asset manager is paid fixed and performance-related fees that are
commensurate with the services provided. The remuneration aligns the
interests of the fund manager with those of the other investors to increase
the value of the fund. The asset manager has exposure to variability of
returns from the activities of the fund because it holds 35 per cent of the
equity and from its remuneration.
Although operating within the parameters set out in the investee’s
prospectus, the asset manager has the current ability to make investment
decisions that significantly affect the investee’s returns—the removal rights
held by the other investors receive little weighting in the analysis because
those rights are held by a large number of widely dispersed investors. In this
example, the asset manager places greater emphasis on its exposure to
variability of returns of the fund from its equity interest, which is
subordinate to the debt instruments. Holding 35 per cent of the equity
creates subordinated exposure to losses and rights to returns of the investee,
which are of such significance that it indicates that the asset manager is a
principal. Thus, the asset manager concludes that it controls the investee.
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...continued
Application examples
Example 16
A decision maker (the sponsor) sponsors a multi-seller conduit, which issues
short-term debt instruments to unrelated third party investors. The
transaction was marketed to potential investors as an investment in a
portfolio of highly rated medium-term assets with minimal exposure to the
credit risk associated with the possible default by the issuers of the assets in
the portfolio. Various transferors sell high quality medium-term asset
portfolios to the conduit. Each transferor services the portfolio of assets that
it sells to the conduit and manages receivables on default for a market-based
servicing fee. Each transferor also provides first loss protection against credit
losses from its asset portfolio through over-collateralisation of the assets
transferred to the conduit. The sponsor establishes the terms of the conduit
and manages the operations of the conduit for a market-based fee. The fee is
commensurate with the services provided. The sponsor approves the sellers
permitted to sell to the conduit, approves the assets to be purchased by the
conduit and makes decisions about the funding of the conduit. The sponsor
must act in the best interests of all investors.
The sponsor is entitled to any residual return of the conduit and also
provides credit enhancement and liquidity facilities to the conduit. The
credit enhancement provided by the sponsor absorbs losses of up to
5 per cent of all of the conduit’s assets, after losses are absorbed by the
transferors. The liquidity facilities are not advanced against defaulted assets.
The investors do not hold substantive rights that could affect the decision-
making authority of the sponsor.
Even though the sponsor is paid a market-based fee for its services that is
commensurate with the services provided, the sponsor has exposure to
variability of returns from the activities of the conduit because of its rights
to any residual returns of the conduit and the provision of credit
enhancement and liquidity facilities (ie the conduit is exposed to liquidity
risk by using short-term debt instruments to fund medium-term assets).
Even though each of the transferors has decision-making rights that affect
the value of the assets of the conduit, the sponsor has extensive decision-
making authority that gives it the current ability to direct the activities that
most significantly affect the conduit’s returns (ie the sponsor established the
terms of the conduit, has the right to make decisions about the assets
(approving the assets purchased and the transferors of those assets) and the
funding of the conduit (for which new investment must be found on a
regular basis)). The right to residual returns of the conduit and the provision
of credit enhancement and liquidity facilities expose the sponsor to
variability of returns from the activities of the conduit that is different from
that of the other investors. Accordingly, that exposure indicates that the
sponsor is a principal and thus the sponsor concludes that it controls the
conduit. The sponsor’s obligation to act in the best interest of all investors
does not prevent the sponsor from being a principal.
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Relationship with other parties
When assessing control, an investor shall consider the nature of its
relationship with other parties and whether those other parties are acting on
the investor’s behalf (ie they are ‘de facto agents’). The determination of
whether other parties are acting as de facto agents requires judgement,
considering not only the nature of the relationship but also how those parties
interact with each other and the investor.
Such a relationship need not involve a contractual arrangement. A party is a
de facto agent when the investor has, or those that direct the activities of the
investor have, the ability to direct that party to act on the investor’s behalf. In
these circumstances, the investor shall consider its de facto agent’s
decision-making rights and its indirect exposure, or rights, to variable returns
through the de facto agent together with its own when assessing control of an
investee.
The following are examples of such other parties that, by the nature of their
relationship, might act as de facto agents for the investor:
(a)
the investor’s related parties.
(b)
a party that received its interest in the investee as a contribution or
loan from the investor.
(c) a party that has agreed not to sell, transfer or encumber its interests in
the investee without the investor’s prior approval (except for situations
in which the investor and the other party have the right of prior
approval and the rights are based on mutually agreed terms by willing
independent parties).
(d) a party that cannot finance its operations without subordinated
financial support from the investor.
(e) an investee for which the majority of the members of its governing
body or for which its key management personnel are the same as those
of the investor.
(f) a party that has a close business relationship with the investor, such as
the relationship between a professional service provider and one of its
significant clients.
Control of specied assets
An investor shall consider whether it treats a portion of an investee as a
deemed separate entity and, if so, whether it controls the deemed separate
entity.
An investor shall treat a portion of an investee as a deemed separate entity if
and only if the following condition is satisfied:
Specified assets of the investee (and related credit enhancements, if
any) are the only source of payment for specified liabilities of, or
specified other interests in, the investee. Parties other than those with
the specified liability do not have rights or obligations related to the
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specified assets or to residual cash flows from those assets. In
substance, none of the returns from the specified assets can be used by
the remaining investee and none of the liabilities of the deemed
separate entity are payable from the assets of the remaining investee.
Thus, in substance, all the assets, liabilities and equity of that deemed
separate entity are ring-fenced from the overall investee. Such a
deemed separate entity is often called a ‘silo’.
When the condition in paragraph B77 is satisfied, an investor shall identify
the activities that significantly affect the returns of the deemed separate
entity and how those activities are directed in order to assess whether it has
power over that portion of the investee. When assessing control of the deemed
separate entity, the investor shall also consider whether it has exposure or
rights to variable returns from its involvement with that deemed separate
entity and the ability to use its power over that portion of the investee to
affect the amount of the investor’s returns.
If the investor controls the deemed separate entity, the investor shall
consolidate that portion of the investee. In that case, other parties exclude
that portion of the investee when assessing control of, and in consolidating,
the investee.
Continuous assessment
An investor shall reassess whether it controls an investee if facts and
circumstances indicate that there are changes to one or more of the three
elements of control listed in paragraph 7.
If there is a change in how power over an investee can be exercised, that
change must be reflected in how an investor assesses its power over an
investee. For example, changes to decision-making rights can mean that the
relevant activities are no longer directed through voting rights, but instead
other agreements, such as contracts, give another party or parties the current
ability to direct the relevant activities.
An event can cause an investor to gain or lose power over an investee without
the investor being involved in that event. For example, an investor can gain
power over an investee because decision-making rights held by another party
or parties that previously prevented the investor from controlling an investee
have lapsed.
An investor also considers changes affecting its exposure, or rights, to variable
returns from its involvement with an investee. For example, an investor that
has power over an investee can lose control of an investee if the investor
ceases to be entitled to receive returns or to be exposed to obligations, because
the investor would fail to satisfy paragraph 7(b) (eg if a contract to receive
performance-related fees is terminated).
An investor shall consider whether its assessment that it acts as an agent or a
principal has changed. Changes in the overall relationship between the
investor and other parties can mean that an investor no longer acts as an
agent, even though it has previously acted as an agent, and vice versa. For
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example, if changes to the rights of the investor, or of other parties, occur, the
investor shall reconsider its status as a principal or an agent.
An investor’s initial assessment of control or its status as a principal or an
agent would not change simply because of a change in market conditions (eg a
change in the investee’s returns driven by market conditions), unless the
change in market conditions changes one or more of the three elements of
control listed in paragraph 7 or changes the overall relationship between a
principal and an agent.
Determining whether an entity is an investment entity
An entity shall consider all facts and circumstances when assessing whether it
is an investment entity, including its purpose and design. An entity that
possesses the three elements of the definition of an investment entity set out
in paragraph 27 is an investment entity. Paragraphs B85B–B85M describe the
elements of the definition in more detail.
Business purpose
The definition of an investment entity requires that the purpose of the entity
is to invest solely for capital appreciation, investment income (such as
dividends, interest or rental income), or both. Documents that indicate what
the entity’s investment objectives are, such as the entity’s offering
memorandum, publications distributed by the entity and other corporate or
partnership documents, will typically provide evidence of an investment
entity’s business purpose. Further evidence may include the manner in which
the entity presents itself to other parties (such as potential investors or
potential investees); for example, an entity may present its business as
providing medium-term investment for capital appreciation. In contrast, an
entity that presents itself as an investor whose objective is to jointly develop,
produce or market products with its investees has a business purpose that is
inconsistent with the business purpose of an investment entity, because the
entity will earn returns from the development, production or marketing
activity as well as from its investments (see paragraph B85I).
An investment entity may provide investment-related services (eg investment
advisory services, investment management, investment support and
administrative services), either directly or through a subsidiary, to third
parties as well as to its investors, even if those activities are substantial to the
entity, subject to the entity continuing to meet the definition of an investment
entity.
An investment entity may also participate in the following investment-related
activities, either directly or through a subsidiary, if these activities are
undertaken to maximise the investment return (capital appreciation or
investment income) from its investees and do not represent a separate
substantial business activity or a separate substantial source of income to the
investment entity:
(a)
providing management services and strategic advice to an investee; and
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(b) providing financial support to an investee, such as a loan, capital
commitment or guarantee.
If an investment entity has a subsidiary that is not itself an investment entity
and whose main purpose and activities are providing investment-related
services or activities that relate to the investment entity’s investment
activities, such as those described in paragraphs B85C–B85D, to the entity or
other parties, it shall consolidate that subsidiary in accordance
with paragraph 32. If the subsidiary that provides the investment-related
services or activities is itself an investment entity, the investment entity
parent shall measure that subsidiary at fair value through profit or loss in
accordance with paragraph 31.
Exit strategies
An entity’s investment plans also provide evidence of its business purpose.
One feature that differentiates an investment entity from other entities is that
an investment entity does not plan to hold its investments indefinitely; it
holds them for a limited period. Because equity investments and non-financial
asset investments have the potential to be held indefinitely, an investment
entity shall have an exit strategy documenting how the entity plans to realise
capital appreciation from substantially all of its equity investments and
non-financial asset investments. An investment entity shall also have an exit
strategy for any debt instruments that have the potential to be held
indefinitely, for example perpetual debt investments. The entity need not
document specific exit strategies for each individual investment but shall
identify different potential strategies for different types or portfolios of
investments, including a substantive time frame for exiting the investments.
Exit mechanisms that are only put in place for default events, such as a
breach of contract or non-performance, are not considered exit strategies for
the purpose of this assessment.
Exit strategies can vary by type of investment. For investments in private
equity securities, examples of exit strategies include an initial public offering,
a private placement, a trade sale of a business, distributions (to investors) of
ownership interests in investees and sales of assets (including the sale of an
investee’s assets followed by a liquidation of the investee). For equity
investments that are traded in a public market, examples of exit strategies
include selling the investment in a private placement or in a public market.
For real estate investments, an example of an exit strategy includes the sale of
the real estate through specialised property dealers or the open market.
An investment entity may have an investment in another investment entity
that is formed in connection with the entity for legal, regulatory, tax or
similar business reasons. In this case, the investment entity investor need not
have an exit strategy for that investment, provided that the investment entity
investee has appropriate exit strategies for its investments.
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Earnings from investments
An entity is not investing solely for capital appreciation, investment income,
or both, if the entity or another member of the group containing the entity
(ie the group that is controlled by the investment entity’s ultimate parent)
obtains, or has the objective of obtaining, other benefits from the entity’s
investments that are not available to other parties that are not related to the
investee. Such benefits include:
(a) the acquisition, use, exchange or exploitation of the processes, assets
or technology of an investee. This would include the entity or another
group member having disproportionate, or exclusive, rights to acquire
assets, technology, products or services of any investee; for example, by
holding an option to purchase an asset from an investee if the asset’s
development is deemed successful;
(b)
joint arrangements (as defined in IFRS 11) or other agreements
between the entity or another group member and an investee to
develop, produce, market or provide products or services;
(c)
financial guarantees or assets provided by an investee to serve as
collateral for borrowing arrangements of the entity or another group
member (however, an investment entity would still be able to use an
investment in an investee as collateral for any of its borrowings);
(d) an option held by a related party of the entity to purchase, from that
entity or another group member, an ownership interest in an investee
of the entity;
(e) except as described in paragraph B85J, transactions between the entity
or another group member and an investee that:
(i) are on terms that are unavailable to entities that are not related
parties of either the entity, another group member or the
investee;
(ii) are not at fair value; or
(iii) represent a substantial portion of the investee’s or the entity’s
business activity, including business activities of other group
entities.
An investment entity may have a strategy to invest in more than one investee
in the same industry, market or geographical area in order to benefit from
synergies that increase the capital appreciation and investment income from
those investees. Notwithstanding paragraph B85I(e), an entity is not
disqualified from being classified as an investment entity merely because such
investees trade with each other.
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Fair value measurement
An essential element of the definition of an investment entity is that it
measures and evaluates the performance of substantially all of its investments
on a fair value basis, because using fair value results in more relevant
information than, for example, consolidating its subsidiaries or using the
equity method for its interests in associates or joint ventures. In order to
demonstrate that it meets this element of the definition, an investment entity:
(a) provides investors with fair value information and measures
substantially all of its investments at fair value in its financial
statements whenever fair value is required or permitted in accordance
with IFRSs; and
(b)
reports fair value information internally to the entity’s key
management personnel (as defined in IAS 24), who use fair value as the
primary measurement attribute to evaluate the performance of
substantially all of its investments and to make investment decisions.
In order to meet the requirement in B85K(a), an investment entity would:
(a)
elect to account for any investment property using the fair value
model in IAS 40 Investment Property;
(b)
elect the exemption from applying the equity method in IAS 28 for its
investments in associates and joint ventures; and
(c) measure its financial assets at fair value using the requirements in
IFRS 9.
An investment entity may have some non-investment assets, such as a head
office property and related equipment, and may also have financial liabilities.
The fair value measurement element of the definition of an investment entity
in paragraph 27(c) applies to an investment entity’s investments. Accordingly,
an investment entity need not measure its non-investment assets or its
liabilities at fair value.
Typical characteristics of an investment entity
In determining whether it meets the definition of an investment entity, an
entity shall consider whether it displays the typical characteristics of one (see
paragraph 28). The absence of one or more of these typical characteristics does
not necessarily disqualify an entity from being classified as an investment
entity but indicates that additional judgement is required in determining
whether the entity is an investment entity.
More than one investment
An investment entity typically holds several investments to diversify its risk
and maximise its returns. An entity may hold a portfolio of investments
directly or indirectly, for example by holding a single investment in another
investment entity that itself holds several investments.
B85K
B85L
B85M
B85N
B85O
IFRS 10
© IFRS Foundation A597
There may be times when the entity holds a single investment. However,
holding a single investment does not necessarily prevent an entity from
meeting the definition of an investment entity. For example, an investment
entity may hold only a single investment when the entity:
(a) is in its start-up period and has not yet identified suitable investments
and, therefore, has not yet executed its investment plan to acquire
several investments;
(b) has not yet made other investments to replace those it has disposed of;
(c) is established to pool investors’ funds to invest in a single investment
when that investment is unobtainable by individual investors (eg when
the required minimum investment is too high for an individual
investor); or
(d)
is in the process of liquidation.
More than one investor
Typically, an investment entity would have several investors who pool their
funds to gain access to investment management services and investment
opportunities that they might not have had access to individually. Having
several investors would make it less likely that the entity, or other members
of the group containing the entity, would obtain benefits other than capital
appreciation or investment income (see paragraph B85I).
Alternatively, an investment entity may be formed by, or for, a single investor
that represents or supports the interests of a wider group of investors (eg a
pension fund, government investment fund or family trust).
There may also be times when the entity temporarily has a single investor. For
example, an investment entity may have only a single investor when the
entity:
(a) is within its initial offering period, which has not expired and the
entity is actively identifying suitable investors;
(b) has not yet identified suitable investors to replace ownership interests
that have been redeemed; or
(c) is in the process of liquidation.
Unrelated investors
Typically, an investment entity has several investors that are not related
parties (as defined in IAS 24) of the entity or other members of the group
containing the entity. Having unrelated investors would make it less likely
that the entity, or other members of the group containing the entity, would
obtain benefits other than capital appreciation or investment income (see
paragraph B85I).
B85P
B85Q
B85R
B85S
B85T
IFRS 10
A598 © IFRS Foundation
However, an entity may still qualify as an investment entity even though its
investors are related to the entity. For example, an investment entity may set
up a separate ‘parallel’ fund for a group of its employees (such as key
management personnel) or other related party investor(s), which mirrors the
investments of the entity’s main investment fund. This ‘parallel’ fund may
qualify as an investment entity even though all of its investors are related
parties.
Ownership interests
An investment entity is typically, but is not required to be, a separate legal
entity. Ownership interests in an investment entity are typically in the form of
equity or similar interests (eg partnership interests), to which proportionate
shares of the net assets of the investment entity are attributed. However,
having different classes of investors, some of which have rights only to a
specific investment or groups of investments or which have different
proportionate shares of the net assets, does not preclude an entity from being
an investment entity.
In addition, an entity that has significant ownership interests in the form of
debt that, in accordance with other applicable IFRSs, does not meet the
definition of equity, may still qualify as an investment entity, provided that
the debt holders are exposed to variable returns from changes in the fair value
of the entity’s net assets.
Accounting requirements
Consolidation procedures
Consolidated financial statements:
(a) combine like items of assets, liabilities, equity, income, expenses and
cash flows of the parent with those of its subsidiaries.
(b) offset (eliminate) the carrying amount of the parent’s investment in
each subsidiary and the parent’s portion of equity of each subsidiary
(IFRS 3 explains how to account for any related goodwill).
(c) eliminate in full intragroup assets and liabilities, equity, income,
expenses and cash flows relating to transactions between entities of
the group (profits or losses resulting from intragroup transactions that
are recognised in assets, such as inventory and fixed assets, are
eliminated in full). Intragroup losses may indicate an impairment that
requires recognition in the consolidated financial statements. IAS 12
Income Taxes applies to temporary differences that arise from the
elimination of profits and losses resulting from intragroup
transactions.
B85U
B85V
B85W
B86
IFRS 10
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Uniform accounting policies
If a member of the group uses accounting policies other than those adopted in
the consolidated financial statements for like transactions and events in
similar circumstances, appropriate adjustments are made to that group
member’s financial statements in preparing the consolidated financial
statements to ensure conformity with the group’s accounting policies.
Measurement
An entity includes the income and expenses of a subsidiary in the consolidated
financial statements from the date it gains control until the date when the
entity ceases to control the subsidiary. Income and expenses of the subsidiary
are based on the amounts of the assets and liabilities recognised in the
consolidated financial statements at the acquisition date. For example,
depreciation expense recognised in the consolidated statement of
comprehensive income after the acquisition date is based on the fair values of
the related depreciable assets recognised in the consolidated financial
statements at the acquisition date.
Potential voting rights
When potential voting rights, or other derivatives containing potential voting
rights, exist, the proportion of profit or loss and changes in equity allocated to
the parent and non-controlling interests in preparing consolidated financial
statements is determined solely on the basis of existing ownership interests
and does not reflect the possible exercise or conversion of potential voting
rights and other derivatives, unless paragraph B90 applies.
In some circumstances an entity has, in substance, an existing ownership
interest as a result of a transaction that currently gives the entity access to the
returns associated with an ownership interest. In such circumstances, the
proportion allocated to the parent and non-controlling interests in preparing
consolidated financial statements is determined by taking into account the
eventual exercise of those potential voting rights and other derivatives that
currently give the entity access to the returns.
IFRS 9 does not apply to interests in subsidiaries that are consolidated. When
instruments containing potential voting rights in substance currently give
access to the returns associated with an ownership interest in a subsidiary, the
instruments are not subject to the requirements of IFRS 9. In all other cases,
instruments containing potential voting rights in a subsidiary are accounted
for in accordance with IFRS 9.
Reporting date
The financial statements of the parent and its subsidiaries used in the
preparation of the consolidated financial statements shall have the same
reporting date. When the end of the reporting period of the parent is different
from that of a subsidiary, the subsidiary prepares, for consolidation purposes,
additional financial information as of the same date as the financial
B87
B88
B89
B90
B91
B92
IFRS 10
A600 © IFRS Foundation
statements of the parent to enable the parent to consolidate the financial
information of the subsidiary, unless it is impracticable to do so.
If it is impracticable to do so, the parent shall consolidate the financial
information of the subsidiary using the most recent financial statements of
the subsidiary adjusted for the effects of significant transactions or events that
occur between the date of those financial statements and the date of the
consolidated financial statements. In any case, the difference between the date
of the subsidiary’s financial statements and that of the consolidated financial
statements shall be no more than three months, and the length of the
reporting periods and any difference between the dates of the financial
statements shall be the same from period to period.
Non-controlling interests
An entity shall attribute the profit or loss and each component of other
comprehensive income to the owners of the parent and to the non-controlling
interests. The entity shall also attribute total comprehensive income to the
owners of the parent and to the non-controlling interests even if this results in
the non-controlling interests having a deficit balance.
If a subsidiary has outstanding cumulative preference shares that are
classified as equity and are held by non-controlling interests, the entity shall
compute its share of profit or loss after adjusting for the dividends on such
shares, whether or not such dividends have been declared.
Changes in the proportion held by non-controlling interests
When the proportion of the equity held by non-controlling interests changes,
an entity shall adjust the carrying amounts of the controlling and
non-controlling interests to reflect the changes in their relative interests in
the subsidiary. The entity shall recognise directly in equity any difference
between the amount by which the non-controlling interests are adjusted and
the fair value of the consideration paid or received, and attribute it to the
owners of the parent.
Loss of control
A parent might lose control of a subsidiary in two or more arrangements
(transactions). However, sometimes circumstances indicate that the multiple
arrangements should be accounted for as a single transaction. In determining
whether to account for the arrangements as a single transaction, a parent
shall consider all the terms and conditions of the arrangements and their
economic effects. One or more of the following indicate that the parent should
account for the multiple arrangements as a single transaction:
(a) They are entered into at the same time or in contemplation of each
other.
(b)
They form a single transaction designed to achieve an overall
commercial effect.
B93
B94
B95
B96
B97
IFRS 10
© IFRS Foundation A601
(c) The occurrence of one arrangement is dependent on the occurrence of
at least one other arrangement.
(d) One arrangement considered on its own is not economically justified,
but it is economically justified when considered together with other
arrangements. An example is when a disposal of shares is priced below
market and is compensated for by a subsequent disposal priced above
market.
If a parent loses control of a subsidiary, it shall:
(a) derecognise:
(i)
the assets (including any goodwill) and liabilities of the
subsidiary at their carrying amounts at the date when control is
lost; and
(ii)
the carrying amount of any non-controlling interests in the
former subsidiary at the date when control is lost (including
any components of other comprehensive income attributable to
them).
(b)
recognise:
(i)
the fair value of the consideration received, if any, from the
transaction, event or circumstances that resulted in the loss of
control;
(ii) if the transaction, event or circumstances that resulted in the
loss of control involves a distribution of shares of the subsidiary
to owners in their capacity as owners, that distribution; and
(iii) any investment retained in the former subsidiary at its fair
value at the date when control is lost.
(c) reclassify to profit or loss, or transfer directly to retained earnings if
required by other IFRSs, the amounts recognised in other
comprehensive income in relation to the subsidiary on the basis
described in paragraph B99.
(d) recognise any resulting difference as a gain or loss in profit or loss
attributable to the parent.
If a parent loses control of a subsidiary, the parent shall account for all
amounts previously recognised in other comprehensive income in relation to
that subsidiary on the same basis as would be required if the parent had
directly disposed of the related assets or liabilities. Therefore, if a gain or loss
previously recognised in other comprehensive income would be reclassified to
profit or loss on the disposal of the related assets or liabilities, the parent shall
reclassify the gain or loss from equity to profit or loss (as a reclassification
adjustment) when it loses control of the subsidiary. If a revaluation surplus
previously recognised in other comprehensive income would be transferred
directly to retained earnings on the disposal of the asset, the parent shall
transfer the revaluation surplus directly to retained earnings when it loses
control of the subsidiary.
B98
B99
IFRS 10
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If a parent loses control of a subsidiary that does not contain a business, as
defined in IFRS 3, as a result of a transaction involving an associate or a joint
venture that is accounted for using the equity method, the parent determines
the gain or loss in accordance with paragraphs B98–B99. The gain or loss
resulting from the transaction (including the amounts previously recognised
in other comprehensive income that would be reclassified to profit or loss in
accordance with paragraph B99) is recognised in the parent’s profit or loss
only to the extent of the unrelated investors’ interests in that associate or
joint venture. The remaining part of the gain is eliminated against the
carrying amount of the investment in that associate or joint venture. In
addition, if the parent retains an investment in the former subsidiary and the
former subsidiary is now an associate or a joint venture that is accounted for
using the equity method, the parent recognises the part of the gain or loss
resulting from the remeasurement at fair value of the investment retained in
that former subsidiary in its profit or loss only to the extent of the unrelated
investors’ interests in the new associate or joint venture. The remaining part
of that gain is eliminated against the carrying amount of the investment
retained in the former subsidiary. If the parent retains an investment in the
former subsidiary that is now accounted for in accordance with IFRS 9, the
part of the gain or loss resulting from the remeasurement at fair value of the
investment retained in the former subsidiary is recognised in full in the
parent’s profit or loss.
B99A
IFRS 10
© IFRS Foundation A603
Application examples
Example 17
A parent has a 100 per cent interest in a subsidiary that does not contain a business.
The parent sells 70 per cent of its interest in the subsidiary to an associate in which it
has a 20 per cent interest. As a consequence of this transaction the parent loses control
of the subsidiary. The carrying amount of the net assets of the subsidiary is CU100 and
the carrying amount of the interest sold is CU70 (CU70 = CU100 × 70%). The fair value
of the consideration received is CU210, which is also the fair value of the interest sold.
The investment retained in the former subsidiary is an associate accounted for using
the equity method and its fair value is CU90. The gain determined in accordance with
paragraphs B98–B99, before the elimination required by paragraph B99A, is CU200
(CU200 = CU210 + CU90 – CU100). This gain comprises two parts:
(a) the gain (CU140) resulting from the sale of the 70 per cent interest in the
subsidiary to the associate. This gain is the difference between the fair value of
the consideration received (CU210) and the carrying amount of the interest sold
(CU70). According to paragraph B99A, the parent recognises in its profit or loss
the amount of the gain attributable to the unrelated investors’ interests in the
existing associate. This is 80 per cent of this gain, that is CU112 (CU112 = CU140
× 80%). The remaining 20 per cent of the gain (CU28 = CU140 × 20%) is
eliminated against the carrying amount of the investment in the existing
associate.
(b)
the gain (CU60) resulting from the remeasurement at fair value of the
investment directly retained in the former subsidiary. This gain is the difference
between the fair value of the investment retained in the former subsidiary
(CU90) and 30 per cent of the carrying amount of the net assets of the subsidiary
(CU30 = CU100 × 30%). According to paragraph B99A, the parent recognises in
its profit or loss the amount of the gain attributable to the unrelated investors’
interests in the new associate. This is 56 per cent (70% × 80%) of the gain, that is
CU34 (CU34 = CU60 × 56%). The remaining 44 per cent of the gain CU26 (CU26 =
CU60 × 44%) is eliminated against the carrying amount of the investment
retained in the former subsidiary.
Accounting for a change in investment entity status
When an entity ceases to be an investment entity, it shall apply IFRS 3 to any
subsidiary that was previously measured at fair value through profit or loss in
accordance with paragraph 31. The date of the change of status shall be the
deemed acquisition date. The fair value of the subsidiary at the deemed
acquisition date shall represent the transferred deemed consideration when
measuring any goodwill or gain from a bargain purchase that arises from the
deemed acquisition. All subsidiaries shall be consolidated in accordance with
paragraphs 19–24 of this IFRS from the date of change of status.
When an entity becomes an investment entity, it shall cease to consolidate its
subsidiaries at the date of the change in status, except for any subsidiary that
shall continue to be consolidated in accordance with paragraph 32. The
investment entity shall apply the requirements of paragraphs 25 and 26 to
B100
B101
IFRS 10
A604 © IFRS Foundation
those subsidiaries that it ceases to consolidate as though the investment entity
had lost control of those subsidiaries at that date.
IFRS 10
© IFRS Foundation A605
Appendix C
Effective date and transition
This appendix is an integral part of the IFRS and has the same authority as the other parts of the
IFRS.
Effective date
An entity shall apply this IFRS for annual periods beginning on or after
1 January 2013. Earlier application is permitted. If an entity applies this IFRS
earlier, it shall disclose that fact and apply IFRS 11, IFRS 12, IAS 27 Separate
Financial Statements and IAS 28 (as amended in 2011) at the same time.
Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in
Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12),
issued in June 2012, amended paragraphs C2–C6 and added paragraphs
C2A–C2B, C4A–C4C, C5A and C6A–C6B. An entity shall apply those
amendments for annual periods beginning on or after 1 January 2013. If an
entity applies IFRS 10 for an earlier period, it shall apply those amendments
for that earlier period.
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), issued in
October 2012, amended paragraphs 2, 4, C2A, C6A and Appendix A and
added paragraphs 27–33, B85A–B85W, B100–B101 and C3A–C3F. An entity
shall apply those amendments for annual periods beginning on or after
1 January 2014. Early application is permitted. If an entity applies those
amendments earlier, it shall disclose that fact and apply all amendments
included in Investment Entities at the same time.
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
(Amendments to IFRS 10 and IAS 28), issued in September 2014, amended
paragraphs 25–26 and added paragraph B99A. An entity shall apply those
amendments prospectively to transactions occurring in annual periods
beginning on or after a date to be determined by the IASB. Earlier application
is permitted. If an entity applies those amendments earlier, it shall disclose
that fact.
Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10,
IFRS 12 and IAS 28), issued in December 2014, amended paragraphs 4, 32,
B85C, B85E and C2A and added paragraphs 4A–4B. An entity shall apply those
amendments for annual periods beginning on or after 1 January 2016. Earlier
application is permitted. If an entity applies those amendments for an earlier
period it shall disclose that fact.
Transition
An entity shall apply this IFRS retrospectively, in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors, except as specified
in paragraphs C2A–C6.
C1
C1A
C1B
C1C
C1D
C2
IFRS 10
A606 © IFRS Foundation
Notwithstanding the requirements of paragraph 28 of IAS 8, when this IFRS is
first applied, and, if later, when the Investment Entities and Investment Entities:
Applying the Consolidation Exception amendments to this IFRS are first applied, an
entity need only present the quantitative information required
by paragraph 28(f) of IAS 8 for the annual period immediately preceding the
date of initial application of this IFRS (the ‘immediately preceding period’). An
entity may also present this information for the current period or for earlier
comparative periods, but is not required to do so.
For the purposes of this IFRS, the date of initial application is the beginning of
the annual reporting period for which this IFRS is applied for the first time.
At the date of initial application, an entity is not required to make
adjustments to the previous accounting for its involvement with either:
(a)
entities that would be consolidated at that date in accordance with
IAS 27 Consolidated and Separate Financial Statements and SIC-12
Consolidation—Special Purpose Entities and are still consolidated in
accordance with this IFRS; or
(b)
entities that would not be consolidated at that date in accordance with
IAS 27 and SIC-12 and are not consolidated in accordance with this
IFRS.
At the date of initial application, an entity shall assess whether it is an
investment entity on the basis of the facts and circumstances that exist at that
date. If, at the date of initial application, an entity concludes that it is an
investment entity, it shall apply the requirements of paragraphs C3B–C3F
instead of paragraphs C5–C5A.
Except for any subsidiary that is consolidated in accordance
with paragraph 32 (to which paragraphs C3 and C6 or paragraphs C4–C4C,
whichever is relevant, apply), an investment entity shall measure its
investment in each subsidiary at fair value through profit or loss as if the
requirements of this IFRS had always been effective. The investment entity
shall retrospectively adjust both the annual period that immediately precedes
the date of initial application and equity at the beginning of the immediately
preceding period for any difference between:
(a) the previous carrying amount of the subsidiary; and
(b) the fair value of the investment entity’s investment in the subsidiary.
The cumulative amount of any fair value adjustments previously recognised in
other comprehensive income shall be transferred to retained earnings at the
beginning of the annual period immediately preceding the date of initial
application.
Before the date that IFRS 13 Fair Value Measurement is adopted, an investment
entity shall use the fair value amounts that were previously reported to
investors or to management, if those amounts represent the amount for
which the investment could have been exchanged between knowledgeable,
willing parties in an arm’s length transaction at the date of the valuation.
C2A
C2B
C3
C3A
C3B
C3C
IFRS 10
© IFRS Foundation A607
If measuring an investment in a subsidiary in accordance with paragraphs
C3B–C3C is impracticable (as defined in IAS 8), an investment entity shall
apply the requirements of this IFRS at the beginning of the earliest period for
which application of paragraphs C3B–C3C is practicable, which may be the
current period. The investor shall retrospectively adjust the annual period
that immediately precedes the date of initial application, unless the beginning
of the earliest period for which application of this paragraph is practicable is
the current period. If this is the case, the adjustment to equity shall be
recognised at the beginning of the current period.
If an investment entity has disposed of, or has lost control of, an investment
in a subsidiary before the date of initial application of this IFRS, the
investment entity is not required to make adjustments to the previous
accounting for that subsidiary.
If an entity applies the Investment Entities amendments for a period later than
when it applies IFRS 10 for the first time, references to ‘the date of initial
application’ in paragraphs C3A–C3E shall be read as ‘the beginning of the
annual reporting period for which the amendments in Investment Entities
(Amendments to IFRS 10, IFRS 12 and IAS 27), issued in October 2012, are
applied for the first time.’
If, at the date of initial application, an investor concludes that it shall
consolidate an investee that was not consolidated in accordance with IAS 27
and SIC-12, the investor shall:
(a) if the investee is a business (as defined in IFRS 3 Business Combinations),
measure the assets, liabilities and non-controlling interests in that
previously unconsolidated investee as if that investee had been
consolidated (and thus had applied acquisition accounting in
accordance with IFRS 3) from the date when the investor obtained
control of that investee on the basis of the requirements of this IFRS.
The investor shall adjust retrospectively the annual period
immediately preceding the date of initial application. When the date
that control was obtained is earlier than the beginning of the
immediately preceding period, the investor shall recognise, as an
adjustment to equity at the beginning of the immediately preceding
period, any difference between:
(i) the amount of assets, liabilities and non-controlling interests
recognised; and
(ii) the previous carrying amount of the investor’s involvement
with the investee.
(b) if the investee is not a business (as defined in IFRS 3), measure the
assets, liabilities and non-controlling interests in that previously
unconsolidated investee as if that investee had been consolidated
(applying the acquisition method as described in IFRS 3 but without
recognising any goodwill for the investee) from the date when the
investor obtained control of that investee on the basis of the
requirements of this IFRS. The investor shall adjust retrospectively the
C3D
C3E
C3F
C4
IFRS 10
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annual period immediately preceding the date of initial application.
When the date that control was obtained is earlier than the beginning
of the immediately preceding period, the investor shall recognise, as an
adjustment to equity at the beginning of the immediately preceding
period, any difference between:
(i) the amount of assets, liabilities and non-controlling interests
recognised; and
(ii) the previous carrying amount of the investor’s involvement
with the investee.
If measuring an investee’s assets, liabilities and non-controlling interests in
accordance with paragraph C4(a) or (b) is impracticable (as defined in IAS 8),
an investor shall:
(a)
if the investee is a business, apply the requirements of IFRS 3 as of the
deemed acquisition date. The deemed acquisition date shall be the
beginning of the earliest period for which application of
paragraph C4(a) is practicable, which may be the current period.
(b)
if the investee is not a business, apply the acquisition method as
described in IFRS 3 but without recognising any goodwill for the
investee as of the deemed acquisition date. The deemed acquisition
date shall be the beginning of the earliest period for which the
application of paragraph C4(b) is practicable, which may be the current
period.
The investor shall adjust retrospectively the annual period immediately
preceding the date of initial application, unless the beginning of the earliest
period for which application of this paragraph is practicable is the current
period. When the deemed acquisition date is earlier than the beginning of the
immediately preceding period, the investor shall recognise, as an adjustment
to equity at the beginning of the immediately preceding period, any difference
between:
(c) the amount of assets, liabilities and non-controlling interests
recognised; and
(d) the previous carrying amount of the investor’s involvement with the
investee.
If the earliest period for which application of this paragraph is practicable is
the current period, the adjustment to equity shall be recognised at the
beginning of the current period.
When an investor applies paragraphs C4–C4A and the date that control was
obtained in accordance with this IFRS is later than the effective date of IFRS 3
as revised in 2008 (IFRS 3 (2008)), the reference to IFRS 3 in paragraphs C4 and
C4A shall be to IFRS 3 (2008). If control was obtained before the effective date
of IFRS 3 (2008), an investor shall apply either IFRS 3 (2008) or IFRS 3 (issued in
2004).
C4A
C4B
IFRS 10
© IFRS Foundation A609
When an investor applies paragraphs C4–C4A and the date that control was
obtained in accordance with this IFRS is later than the effective date of IAS 27
as revised in 2008 (IAS 27 (2008)), an investor shall apply the requirements of
this IFRS for all periods that the investee is retrospectively consolidated in
accordance with paragraphs C4–C4A. If control was obtained before the
effective date of IAS 27 (2008), an investor shall apply either:
(a) the requirements of this IFRS for all periods that the investee is
retrospectively consolidated in accordance with paragraphs C4–C4A; or
(b) the requirements of the version of IAS 27 issued in 2003 (IAS 27 (2003))
for those periods prior to the effective date of IAS 27 (2008) and
thereafter the requirements of this IFRS for subsequent periods.
If, at the date of initial application, an investor concludes that it will no longer
consolidate an investee that was consolidated in accordance with IAS 27 and
SIC-12, the investor shall measure its interest in the investee at the amount at
which it would have been measured if the requirements of this IFRS had been
effective when the investor became involved with (but did not obtain control
in accordance with this IFRS), or lost control of, the investee. The investor
shall adjust retrospectively the annual period immediately preceding the date
of initial application. When the date that the investor became involved with
(but did not obtain control in accordance with this IFRS), or lost control of, the
investee is earlier than the beginning of the immediately preceding period, the
investor shall recognise, as an adjustment to equity at the beginning of the
immediately preceding period, any difference between:
(a) the previous carrying amount of the assets, liabilities and
non-controlling interests; and
(b) the recognised amount of the investor’s interest in the investee.
If measuring the interest in the investee in accordance with paragraph C5 is
impracticable (as defined in IAS 8), an investor shall apply the requirements of
this IFRS at the beginning of the earliest period for which application of
paragraph C5 is practicable, which may be the current period. The investor
shall adjust retrospectively the annual period immediately preceding the date
of initial application, unless the beginning of the earliest period for which
application of this paragraph is practicable is the current period. When the
date that the investor became involved with (but did not obtain control in
accordance with this IFRS), or lost control of, the investee is earlier than the
beginning of the immediately preceding period, the investor shall recognise,
as an adjustment to equity at the beginning of the immediately preceding
period, any difference between:
(a) the previous carrying amount of the assets, liabilities and
non-controlling interests; and
(b)
the recognised amount of the investor’s interest in the investee.
If the earliest period for which application of this paragraph is practicable is
the current period, the adjustment to equity shall be recognised at the
beginning of the current period.
C4C
C5
C5A
IFRS 10
A610 © IFRS Foundation
Paragraphs 23, 25, B94 and B96–B99 were amendments to IAS 27 made in
2008 that were carried forward into IFRS 10. Except when an entity applies
paragraph C3, or is required to apply paragraphs C4–C5A, the entity shall
apply the requirements in those paragraphs as follows:
(a) An entity shall not restate any profit or loss attribution for reporting
periods before it applied the amendment in paragraph B94 for the first
time.
(b) The requirements in paragraphs 23 and B96 for accounting for changes
in ownership interests in a subsidiary after control is obtained do not
apply to changes that occurred before an entity applied these
amendments for the first time.
(c)
An entity shall not restate the carrying amount of an investment in a
former subsidiary if control was lost before it applied the amendments
in paragraphs 25 and B97–B99 for the first time. In addition, an entity
shall not recalculate any gain or loss on the loss of control of a
subsidiary that occurred before the amendments in paragraphs 25 and
B97–B99 were applied for the first time.
References to the ‘immediately preceding period’
Notwithstanding the references to the annual period immediately preceding
the date of initial application (the ‘immediately preceding period’) in
paragraphs C3B–C5A, an entity may also present adjusted comparative
information for any earlier periods presented, but is not required to do so. If
an entity does present adjusted comparative information for any earlier
periods, all references to the ‘immediately preceding period’ in paragraphs
C3B–C5A shall be read as the ‘earliest adjusted comparative period presented’.
If an entity presents unadjusted comparative information for any earlier
periods, it shall clearly identify the information that has not been adjusted,
state that it has been prepared on a different basis, and explain that basis.
References to IFRS 9
If an entity applies this IFRS but does not yet apply IFRS 9, any reference in
this IFRS to IFRS 9 shall be read as a reference to IAS 39 Financial Instruments:
Recognition and Measurement.
Withdrawal of other IFRSs
This IFRS supersedes the requirements relating to consolidated financial
statements in IAS 27 (as amended in 2008).
This IFRS also supersedes SIC-12 Consolidation—Special Purpose Entities.
C6
C6A
C6B
C7
C8
C9
IFRS 10
© IFRS Foundation A611
Appendix D
Amendments to other IFRSs
This appendix sets out the amendments to other IFRSs that are a consequence of the Board issuing this
IFRS. An entity shall apply the amendments for annual periods beginning on or after 1 January 2013.
If an entity applies this IFRS for an earlier period, it shall apply these amendments for that earlier
period. Amended paragraphs are shown with new text underlined and deleted text struck through.
* * * * *
The amendments contained in this appendix when this IFRS was issued in 2011 have been
incorporated into the relevant IFRSs published in this volume.
IFRS 10
A612 © IFRS Foundation
Approval by the Board of IFRS 10 issued in May 2011
International Financial Reporting Standard 10 Consolidated Financial Statements was
approved for issue by the fifteen members of the International Accounting Standards
Board.
Sir David Tweedie Chairman
Stephen Cooper
Philippe Danjou
Jan Engström
Patrick Finnegan
Amaro Luiz de Oliveira Gomes
Prabhakar Kalavacherla
Elke König
Patricia McConnell
Warren J McGregor
Paul Pacter
Darrel Scott
John T Smith
Tatsumi Yamada
Wei-Guo Zhang
IFRS 10
© IFRS Foundation A613
Approval by the Board of Consolidated Financial Statements,
Joint Arrangements and Disclosure of Interests in Other Entities:
Transition Guidance (Amendments to IFRS 10, IFRS 11 and
IFRS 12) issued in June 2012
Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities:
Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) was approved for issue
by the fourteen members of the International Accounting Standards Board.
Hans Hoogervorst Chairman
Ian Mackintosh Vice-Chairman
Stephen Cooper
Philippe Danjou
Jan Engström
Patrick Finnegan
Amaro Luiz de Oliveira Gomes
Prabhakar Kalavacherla
Patricia McConnell
Takatsugu Ochi
Paul Pacter
Darrel Scott
John T Smith
Wei-Guo Zhang
IFRS 10
A614 © IFRS Foundation
Approval by the Board of Investment Entities (Amendments to
IFRS 10, IFRS 12 and IAS 27) issued in October 2012
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) was approved for issue by
the fifteen members of the International Accounting Standards Board.
Hans Hoogervorst Chairman
Ian Mackintosh Vice-Chairman
Stephen Cooper
Philippe Danjou
Martin Edelmann
Jan Engström
Patrick Finnegan
Amaro Luiz de Oliveira Gomes
Prabhakar Kalavacherla
Patricia McConnell
Takatsugu Ochi
Paul Pacter
Darrel Scott
Chungwoo Suh
Zhang Wei-Guo
IFRS 10
© IFRS Foundation A615
Approval by the Board of Sale or Contribution of Assets between
an Investor and its Associate or Joint Venture (Amendments to
IFRS 10 and IAS 28) issued in September 2014
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture was approved
for issue by eleven of the fourteen members of the International Accounting Standards
Board. Mr Kabureck, Ms Lloyd and Mr Ochi dissented
2
from the issue of the amendments
to IFRS 10 and IAS 28. Their dissenting opinions are set out after the Basis for
Conclusions.
Hans Hoogervorst Chairman
Ian Mackintosh Vice-Chairman
Stephen Cooper
Philippe Danjou
Martin Edelmann
Patrick Finnegan
Amaro Luiz de Oliveira Gomes
Gary Kabureck
Suzanne Lloyd
Takatsugu Ochi
Darrel Scott
Chungwoo Suh
Mary Tokar
Wei-Guo Zhang
2 Ms Patricia McConnell (former IASB member) intended to dissent from the issue of the
amendments to IFRS 10 and IAS 28 for the same reasons as Ms Lloyd and Mr Ochi. Her dissenting
opinion is not included in these amendments, because her term as an IASB member expired on
30 June 2014.
IFRS 10
A616 © IFRS Foundation
Approval by the Board of Investment Entities: Applying the
Consolidation Exception (Amendments to IFRS 10, IFRS 12 and
IAS 28) issued in December 2014
Investment Entities: Applying the Consolidation Exception was approved for issue by the
fourteen members of the International Accounting Standards Board.
Hans Hoogervorst Chairman
Ian Mackintosh Vice-Chairman
Stephen Cooper
Philippe Danjou
Amaro Luiz De Oliveira Gomes
Martin Edelmann
Patrick Finnegan
Gary Kabureck
Suzanne Lloyd
Takatsugu Ochi
Darrel Scott
Chungwoo Suh
Mary Tokar
Wei-Guo Zhang
IFRS 10
© IFRS Foundation A617
Approval by the Board of Effective Date of Amendments to
IFRS 10 and IAS 28 issued in December 2015
Effective Date of Amendments to IFRS 10 and IAS 28 was approved for publication by the
fourteen members of the International Accounting Standards Board.
Hans Hoogervorst Chairman
Ian Mackintosh Vice-Chairman
Stephen Cooper
Philippe Danjou
Martin Edelmann
Patrick Finnegan
Amaro Gomes
Gary Kabureck
Suzanne Lloyd
Takatsugu Ochi
Darrel Scott
Chungwoo Suh
Mary Tokar
Wei-Guo Zhang
IFRS 10
A618 © IFRS Foundation
