International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 72
1.3 Consolidation
procedures
...................................................................................
365
1.4 Disclosure
requirements
....................................................................................
366
2 OBJECTIVE AND SCOPE OF IFRS 10 ............................................................ 366
2.1
Objective ............................................................................................................... 366
2.2 Scope
...................................................................................................................... 366
2.2.1
Exemption from preparing consolidated financial
statements by an intermediate parent .............................................. 367
2.2.1.A
Condition (a) – consent of non-controlling
shareholders ...................................................................... 367
2.2.1.B
Condition (b) – securities not traded in a
public market ................................................................... 368
2.2.1.C
Condition (c) – not filing financial statements
for listing securities ......................................................... 368
2.2.1.D
Condition (d) – parent’s IFRS financial
statements are publicly available and include
subsidiaries that are consolidated or measured
at fair value through profit or loss in
accordance with IFRS 10 ............................................... 369
2.2.2
Employee benefit plans and employee share trusts ...................... 370
2.2.3 Investment
entity
exception
..............................................................
371
2.2.4
Entity no longer a parent at the end of the reporting
period ...................................................................................................... 371
2.2.5
Interaction of IFRS 10 and EU law .................................................... 372
2.2.6
Combined and carve-out financial statements ............................... 372
2.2.6.A
Common control .............................................................. 373
358 Chapter
6
2.2.6.B
Purpose and users of combined financial
statements .......................................................................... 373
2.2.6.C
Preparation of combined financial statements .......... 374
2.2.6.D
When combined financial statements are not
general-purpose ............................................................... 375
2.2.6.E
The reporting entity in combined financial
statements and in consolidated financial
statements .......................................................................... 376
3 CONTROL ....................................................................................................... 377
3.1
Assessing control ................................................................................................... 377
3.2 Purpose
and
design
of an investee .................................................................... 379
4 POWER OVER AN INVESTEE ......................................................................... 380
4.1
Relevant activities ................................................................................................ 380
4.1.1
More than one relevant activity ........................................................ 381
4.1.2 No
relevant
activities
..........................................................................
383
4.1.3
Single asset, single lessee vehicles ................................................... 384
4.1.4
Management of assets in the event of default ................................385
4.2
Existing rights ........................................................................................................385
4.2.1
Evaluating whether rights are substantive ...................................... 386
4.2.2
Evaluating whether rights are protective ....................................... 388
4.2.2.A
Veto rights ........................................................................ 389
4.2.2.B Franchises
......................................................................... 389
4.2.2.C Budget
approval rights ................................................... 390
4.2.2.D Independent
directors
....................................................
391
4.2.3
Incentives to obtain power ................................................................. 391
4.3
Voting rights .......................................................................................................... 392
4.3.1
Power with a majority of the voting rights ..................................... 392
4.3.2
A majority of voting rights without power ......................................393
4.3.2.A
Evaluating voting rights during bankruptcy ................393
4.3.3
Power without a majority of voting rights (de facto
control)................................................................................................... 394
4.3.4 Potential
voting rights ......................................................................... 400
4.3.4.A
Exercise price or conversion price ............................. 402
4.3.4.B Financial ability ............................................................... 403
4.3.4.C Exercise
period
...............................................................
403
4.3.5
Contractual arrangement with other vote holders ....................... 404
4.3.6
Additional rights from other contractual arrangements .............. 405
4.4
Contractual arrangements .................................................................................. 405
4.4.1
Structured entities ............................................................................... 406
4.5
Other evidence of power ................................................................................... 408
Consolidated financial statements 359
4.6
Determining whether sponsoring (designing) a structured entity
gives power ........................................................................................................... 409
5 EXPOSURE TO VARIABLE RETURNS ............................................................. 410
5.1
Exposure to variable returns can be an indicator of power .......................... 411
5.2 Returns
that
appear
fixed can be variable ........................................................ 411
5.3
Evaluating whether derivatives provide an exposure to variable
returns ..................................................................................................................... 412
5.3.1
Plain vanilla foreign exchange swaps and interest rate
swaps ....................................................................................................... 413
5.3.2 Total
return swaps ................................................................................ 415
5.4
Exposures to variable returns not directly received from an
investee ................................................................................................................... 415
5.5
Exposure to variable returns in bankruptcy filings ........................................ 415
5.6
Interaction of IFRS 10 with the derecognition requirements in
IFRS 9 ...................................................................................................................... 416
5.7 Reputational
risk
...................................................................................................
416
6 LINK BETWEEN POWER AND RETURNS: PRINCIPAL-AGENCY
SITUATIONS .................................................................................................... 417
6.1
Delegated power: principals and agents .......................................................... 417
6.2 Scope
of
decision-making
................................................................................... 419
6.2.1
Involvement in design ......................................................................... 419
6.2.2
Assessing whether the scope of powers is narrow or broad ...... 420
6.3
Rights held by other parties ............................................................................... 420
6.3.1
Evaluating whether a removal right is substantive ....................... 422
6.3.1.A
Available replacements .................................................. 422
6.3.1.B Exercise
period
...............................................................
423
6.3.2
Liquidation rights and redemption rights ....................................... 423
6.4
Remuneration ....................................................................................................... 423
6.4.1
Evaluating remuneration in the asset management
industry .................................................................................................. 424
6.4.2
Evaluating remuneration in other industries ................................. 424
6.5
Exposure to variability of returns from other interests ............................... 425
6.5.1
Evaluating returns received via an indirect investment in
another entity ....................................................................................... 426
6.6
Application examples in IFRS 10 ...................................................................... 428
6.7 Other
illustrative examples ................................................................................. 431
7 RELATED PARTIES AND DE FACTO AGENTS ............................................... 433
7.1
Customer-supplier relationships ...................................................................... 434
7.2
Non-controlling interests when there is a de facto agent ........................... 434
360 Chapter
6
8 CONTROL OF SPECIFIED ASSETS ................................................................. 435
8.1
Identifying a silo ................................................................................................... 436
8.1.1
Identifying silos in the insurance industry ...................................... 436
8.1.2
Identifying silos in the investment funds industry ......................... 437
8.2
Evaluating control of a silo ................................................................................. 437
8.3 Consolidation
of a silo ........................................................................................ 438
9 CONTINUOUS ASSESSMENT ......................................................................... 438
9.1
Changes in market conditions ........................................................................... 439
9.2
Bankruptcy filings and troubled debt restructurings ..................................... 441
9.3
Control reassessment as a result of action by others ................................... 442
10 INVESTMENT ENTITIES ................................................................................ 443
10.1 Definition of an investment entity ................................................................... 444
10.2 Determining whether an entity is an investment entity .............................. 445
10.2.1
Business purpose ................................................................................. 446
10.2.1.A
Entities that provide investment-related
services.............................................................................. 446
10.2.1.B
Entities that are intermediate holding
companies established for tax optimisation
purposes ............................................................................. 447
10.2.2 Exit strategies ....................................................................................... 448
10.2.3 Earnings
from investments ................................................................ 449
10.2.4 Fair
value
measurement ..................................................................... 450
10.2.5 Holding more than one investment .................................................. 451
10.2.6 Having more than one investor ......................................................... 451
10.2.7 Unrelated
investors ............................................................................. 452
10.2.8 Ownership
interests
............................................................................
452
10.2.9 Investment entity illustrative examples ........................................... 453
10.2.10 Multi-layered
fund structures ............................................................ 455
10.3 Accounting by an investment entity ................................................................ 456
10.3.1
Accounting for a change in investment entity status .................... 458
10.3.1.A
Becoming an investment entity ................................... 458
10.3.1.B
Ceasing to be an investment entity ............................. 459
10.4 Accounting by a parent of an investment entity ........................................... 459
11 FUTURE DEVELOPMENTS ............................................................................ 460
11.1
The revised Conceptual Framework for
Financial Reporting ................... 460
11.2 Post-Implementation
Review of IFRS 10 ........................................................ 461
Consolidated financial statements 361
List of examples
Example 6.1:
Consent for not preparing consolidated financial
statements (1) ........................................................................................ 368
Example 6.2:
Consent for not preparing consolidated financial
statements (2) ........................................................................................ 368
Example 6.3:
Preparation of consolidated financial statements after
combined financial statements .......................................................... 376
Example 6.4:
Identifying relevant activities in life sciences arrangements ....... 381
Example 6.5:
Identifying relevant activities in an investment vehicle .............. 382
Example 6.6:
Identifying relevant activities in a structured entity ..................... 383
Example 6.7:
Rights exercisable when decisions need to be made ................... 386
Example 6.8:
Rights held by franchisor ................................................................... 390
Example 6.9:
Less than a majority of voting rights (1) ............................................ 395
Example 6.10:
Less than a majority of voting rights (2) .......................................... 396
Example 6.11:
Less than a majority of voting rights (3) ........................................... 397
Example 6.12:
Less than a majority of voting rights (4) ........................................... 397
Example 6.13:
Less than a majority of voting rights (5) .......................................... 398
Example 6.14:
Potential voting rights (1) .................................................................... 400
Example 6.15:
Potential voting rights (2) .................................................................... 401
Example 6.16:
Potential voting rights (3) ................................................................... 403
Example 6.17:
Potential voting rights (4) ................................................................... 403
Example 6.18:
Less than a majority of voting rights combined with
additional rights under a contractual arrangement ....................... 405