the level of remuneration does not create an exposure to variable returns that is of such
significance that, in isolation, it indicates that the fund manager is a principal. IFRS 10 does
not include any examples of remuneration arrangements where the remuneration is of
such significance that, in isolation, it does indicate that the fund manager is a principal.
Additionally, IFRS 10 does not provide any examples of remuneration arrangements that
are not market-based although this would always need to be assessed.
In our experience, in most asset management scenarios involving retail investors,
management will be able to conclude that the remuneration is commensurate with
services provided and only includes market terms. This is because otherwise, retail
investors would take their business elsewhere.
As discussed at 6.4 above, a decision-maker cannot be an agent unless conditions (a) and
(b) are met. However, meeting both criteria is not conclusive. The decision-maker must
evaluate whether the magnitude and exposure to variable returns received through the
remuneration, together with other factors, indicates that it is an agent or a principal.
6.4.2
Evaluating remuneration in other industries
IFRS 10 does not include any examples of principal-agency evaluations in the
construction, real estate and extractive industries. In our view, in these industries, it is
more common for the decision-maker to possess unique traits (see 6.3.1.A above). That
might make it more difficult to assess whether the remuneration is commensurate with
the skills provided, and includes only market terms.
Consolidated financial statements 425
6.5
Exposure to variability of returns from other interests
When an investor has exposure to variable returns from its involvement with an
investee (e.g. an investment in that investee, or provides a guarantee), and has been
delegated decision-making authority by other parties, the investor considers that
exposure to variable returns when assessing whether it has control over that investee.
[IFRS 10.B71]. This is illustrated in Example 6.25 below as well as in the examples provided
by IFRS 10 reproduced at 6.6 below.
Example 6.25: Illustration of exposure to variability of returns through other
interests
A parent of a fund manager has a 20% direct interest in a fund. The other 80% of the fund is held by third
party investors, who have delegated their rights with respect to the fund to the fund manager. When evaluating
whether the parent controls the fund, it assesses whether the fund manager (which the parent controls) would
use the power that has been delegated to it by the third parties holding the 80% interest, to benefit the parent,
since the parent has a 20% direct interest in the fund and could benefit from that power.
Parent
of fund
manager
Third
party
investors
Delegated
power
Fund
Direct
manager
20%
Direct
Power
80%
Fund
As discussed at 5 above, being an ‘investor’ and having an ‘interest’ in an investee is not
limited to holding equity or debt instruments. A variety of exposures to variable returns
can represent an ‘interest’ and any potential controlling party is referred to as an ‘investor.’
IFRS 10 states that if a decision-maker has interests in an investee, just by virtue of holding
those other interests, the decision-maker may be a principal. [IFRS 10.B71]. In the Basis for
Conclusions accompanying IFRS 10, the IASB notes that a decision-maker might use its
decision-making authority primarily to affect its exposure to variable returns from that
interest. That is, the decision-maker would have power for its own benefit. [IFRS 10.BC132]. The
IASB also notes in its Basis for Conclusions that it would be inappropriate to conclude that
426 Chapter
6
every decision-maker that is obliged, by law or contract (i.e. having any fiduciary
responsibility) to act in the best interests of other parties is always an agent. This is because
it would assume that a decision-maker that is legally or contractually obliged to act in the best
interests of other parties will always do so, even if that decision-maker receives the vast
majority of the returns that are influenced by its decision-making. [IFRS 10.BC130]. Accordingly,
IFRS 10 requires an entity to evaluate the magnitude and variability of its other interests
when determining if it is a principal or an agent, notwithstanding its fiduciary responsibility.
In evaluating its exposure to variability of returns from other interests in the investee a
decision-maker considers 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 evaluates 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 does not ignore the decision maker’s maximum
exposure to variability of returns of the investee through other interests that the
decision-maker holds. [IFRS 10.B72].
As indicated at (a) above, in evaluating its exposure to variability of returns from other
interests, the investor considers its remuneration and other interests in aggregate. So,
even if the initial assessment about remuneration is that the decision-maker is an agent
(see 6.4 above), the remuneration needs to be considered in the assessment of exposure
to variability of returns.
Since the magnitude and variability of exposure to returns are considered together with the
other factors, there is no bright line as to what level of other direct interests, on their own,
would cause a decision-maker to be a principal or an agent. That is, the scope of authority,
removal rights, and remuneration also need to be considered. The examples in IFRS 10
(see 6.6 below) also do not specify the magnitude and variability of the remuneration.
6.5.1
Evaluating returns received via an indirect investment in another
entity
In Example 6.25 above, the exposure of the investor (the parent of the fund manager)
to variable returns was through a direct investment in the fund. However, what if the
exposure to variable returns arises from an investor’s indirect involvement with an
investee, e.g. via a joint venture or an associate?
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. IFRS 10 discusses ‘returns’ as a broad term, and the examples in paragraph B57
of the standard (see 5 above) suggest the exposure to var
iable returns encompasses both
direct and indirect involvement with the investee.
Consolidated financial statements 427
The Basis for Conclusions accompanying IFRS 10 further clarifies that the IASB
intended the term ‘returns’ as a broad term, stating that ‘The Board confirmed its
intention to have a broad definition of “returns” that would include synergistic returns
as well as more direct returns, for example, dividends or changes in the value of an
investment. In practice, an investor can benefit from controlling an investee in a variety
of ways. The Board concluded that to narrow the definition of returns would artificially
restrict those ways of benefiting.’ [IFRS 10.BC63].
Therefore, in our view, when an investor evaluates the exposure to variable returns
from its involvement with another entity, the returns received indirectly via another
entity that is not under the control of that investor, are included in that assessment. This
is regardless of the structure of the indirect involvement – that is, whether it is held
through a joint venture, an associate, or neither influence nor joint control exists such
that it is just an investment.
In the case of an indirect interest there are essentially two different ways of assessing
the returns – the dividend flow and/or the change in fair value of the intermediate
investment. While the dividend flow is not in the control of the investor, it still receives
the returns via the change in value of its intermediate investment, and therefore these
returns cannot be ignored.
Example 6.26: Illustration of exposure to variability of returns through indirect
interests
Company A has a wholly-owned subsidiary, GP, which is the General Partner and fund manager of a Fund.
A has a 50% interest in the shares of Company B and, as a result of the contractual arrangement with the
other investors in B, has joint control of B. GP has a 1% interest in the Fund, with the remaining 99% of the
Fund owned by B.
Company A
Company B
50%
100%
99%
GP
Fund
1%
It has been assessed and concluded that GP, in its capacity as the fund manager, has power over the Fund.
Therefore, by extension, A has power over the Fund. At the same time, GP also concluded that it is acting on
behalf and for the benefit of another party or parties, i.e. as an agent for the investors, and therefore does not
control the Fund.
B also evaluated its involvement with the Fund and determined it has no power over the Fund, and therefore
does not control it.
A has joint control of B. It does not have control over B and therefore does not control how the returns from
the Fund are ultimately distributed to the investors in B.
While A does not control how the returns from the Fund are ultimately distributed, its indirect entitlement to
the returns of the Fund is considered with its direct investment through the GP when evaluating whether there
is sufficient exposure to variable returns, when combined with power, to conclude that control exists.
428 Chapter
6
6.6
Application examples in IFRS 10
IFRS 10 provides a number of application examples in relation to the determination of
whether a decision-maker is a principal or an agent. These are reflected in
Examples 6.27 to 6.33 below.
As with all of the examples included in the Application Guidance, the examples portray
hypothetical situations. Although some aspects of the examples may be present in actual
fact patterns, all relevant facts and circumstances of a particular fact pattern would need
to be evaluated when applying IFRS 10. [IFRS 10.B1]. When reaching a conclusion on a
particular fact pattern, each of the factors discussed above is weighted according to the
facts and circumstances of each case, which will require judgement. [IFRS 10.B60].
Example 6.27: Determining whether a decision-maker is a principal or agent (1)
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% pro rata investment in the fund and receives a market-based fee for its services equal to 1% 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% 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.
Analysis
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. [IFRS 10.B72 Example 13].
Example 6.28: Determining whether a decision-maker is a principal or agent (2)
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 and there are no other rights held by others that affect this discretion. The fund
manager receives a market-based fee for its services equal to 1% of assets under management and 20% of all
the fund’s profits if a specified profit level is achieved. The fees are commensurate with the services provided.
The fund manager does not hold a direct interest in the fund.
Analysis
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. Therefore, the fund manager is an agent. [IFRS 10.B72 Example 14].
See Examples 6.29 to 6.31 below for an evaluation of other factors based on the same
fact pattern and initial analysis.
Consolidated financial statements 429
Example 6.29: Determining whether a decision-maker is a principal or agent (3)
Assume the fact pattern and initial analysis in Example 6.28 above.
However, in this example the fund manager also has a 2% 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% investment.
The investors can remove the fund manager by a simple majority vote, but only for breach of contract.
Analysis
The fund manager’s 2% 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. [IFRS 10.B72 Example 14A].
Example 6.30: Determining whether a decision-maker is a principal or agent (4)
Assume the fact pattern and initial analysis in Example 6.28 above.
However, in this example, the fund manager has a more substantial pro rata investment in the fund (than the
2% in Example 6.29 above), 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.
Analysis
In this scenario, 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
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 85
