International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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primary activities for which the entity was designed, which are the activities that
significantly affect the entity’s returns. Although specific examples are not contained in
IFRS 12, we believe that the examples contained previously in SIC-12 would also apply.
That is, the entity is involved principally in:
• providing a source of long-term capital to an entity or funding to support a
reporting entity’s ongoing major or central operations through issuing notes; or
• providing a supply of goods and services that is consistent with a reporting entity’s
ongoing major or central operations which, without the existence of the structured
entity, would have to be provided by the reporting entity itself.
6.1.1.D Financing
This disclosure requirement is not limited to financing provided by the reporting entity to
the structured entity and would include financing received by the structured entity from
unrelated third parties. It is also not limited to equity financing and would appear to include
all forms of financing that allow the structured entity to conduct its business activities.
Barclays PLC’s financial statements illustrate disclosures of financing of structured entities.
Extract 13.9: Barclays PLC (2017)
Notes to the financial statements [extract]
37 Structured entities [extract]
Other interests in unconsolidated structured entities [extract]
The Group’s interests in structured entities not held for the purposes of short-term trading activities are set out below, summarised by the purpose of the entities and limited to significant categories, based on maximum exposure to loss.
Nature of interest
Multi-seller conduit
programmes
Lending
£m
£m
As at 31 December 2017
[...]
Loans and advances to customers
5,424 11,497
Other assets
468 11
Total on-balance sheet exposures
5,892
11,508
Total off-balance sheet notional amounts
6,270
6,337
Maximum exposure to loss
12,162
17,845
Total assets of the entity
103,057
179,994
[...]
Lending
The portfolio includes lending provided by the Group to unconsolidated structured entities in the normal course of its
lending business to earn income in the form of interest and lending fees and includes loans to structured entities that are generally collateralised by property, equipment or other assets. All loans are subject to the Group’s credit sanctioning
process. Collateral arrangements are specific to the circumstances of each loan with additional guarantees and collateral sought from the sponsor of the structured entity for certain arrangements. During the period the Group incurred an
impairment of £11m (2016: £24m) against such facilities.
Disclosure of interests in other entities 919
6.1.2
Disclosures of sponsored structured entities for which no interest is
held at the reporting date
If an entity has sponsored an unconsolidated structured entity for which it does not
disclose the risk information required by 6.2 below (e.g. because it does not have an
interest in the entity at the reporting date), the entity must disclose:
(a) how it has determined which structured entities it has sponsored;
(b) income from those structured entities during the reporting period, including a
description of the types of income presented; and
(c) the carrying amount (at the time of transfer) of all assets transferred to those
structured entities during the reporting period. [IFRS 12.27].
The rationale for this disclosure requirement is that sponsoring a structured entity
can create risks for a reporting entity, even though the entity may not retain an
interest in the structured entity. The Basis for Conclusions states that ‘if the
structured entity encounters difficulties, it is possible that the sponsor could be
challenged on its advice or actions, or might choose to act to protect its reputation.’
[IFRS 12.BC87].
IFRS 12 does not define ‘sponsored’. However, SIC-12 defined a sponsor as ‘the entity
on whose behalf the SPE was created’. [SIC-12.2]. An illustrative example in IFRS 10 uses
the word ‘sponsors’ in a similar context when it states that ‘a decision maker (the
sponsor) sponsors a multi-seller conduit’. In the IFRS 10 example, the sponsor
establishes the terms of the conduit and manages the operations of the conduit for a
market-based fee. [IFRS 10.B72 Example 16].
Determining whether the reporting entity is the sponsor of a structured entity will be a
matter of individual facts and circumstances and may require judgement to be exercised.
For example, a structured entity may have been created to achieve two possible
objectives that could satisfy both the reporting entity and third party investors in the
structured entity. Factors that may indicate that a reporting entity has sponsored a
structured entity include:
• the reporting entity established and set up the entity; and
• the reporting entity was involved in the creation and design of the structured
entity; or
• the reporting entity is the majority user of the structured entity; or
• the reporting entity’s name appears in the name of the structured entity or on
the products issued by the structured entity.
The information required by (b) and (c) above must be presented in a tabular format
unless some other format is more appropriate and the sponsoring activities must be
classified into relevant categories. [IFRS 12.28].
920 Chapter
13
Many financial institutions define ‘sponsor’ for the purpose of their IFRS 12 disclosures
as illustrated by this disclosure from HSBC Holdings plc’s financial statements.
Extract 13.10: HSBC Holdings plc (2017)
Notes on the Financial Statements [extract]
1.
Basis of preparation and significant accounting policies [extract]
1.2
Summary of significant accounting policies [extract]
(a)
Consolidation and related policies [extract]
HSBC sponsored structured entities
HSBC is considered to sponsor another entity if, in addition to ongoing involvement with the entity, it
had a key role in establishing that entity or in bringing together relevant counterparties so the transaction
that is the purpose of the entity could occur. HSBC is generally not considered a sponsor if the only
involvement with the entity is merely administrative.
The information required by (a) and (b) must be disclosed whether or not any assets were
transferred to the structured entity during the reporting period. There is no time limit set
for these disclosures so, in theory, they could continue indefinitely after the cessation of
any interest in the structured entity. IFRS 12 does not specify whether (c) above refers to
assets transferred to the structured entity by the reporting entity or to the total assets
transferred to the structured entity irrespective of who the transferor may be. However,
the Basis for Conclusions states that the IASB concluded that the asset information
di
sclosed should refer not only to assets transferred by the sponsor but to all assets
transferred to the structured entity during the reporting period. [IFRS 12.BC90].
Income received from structured entities would not be confined to the income derived
from the reporting entity’s ‘interest(s)’ as defined by IFRS 12, but would cover all types
of income received and reported by the entity. The standard states that ‘income from a
structured entity’ includes, but is not limited to:
• recurring and non-recurring fees (structuring fees, management fees, placing agent
fees, etc.);
• interest;
• dividends;
• gains or losses on the remeasurement or derecognition of interests in structured
entities; and
• gains or losses from the transfer of assets or liabilities to the structured entity.
[IFRS 12 Appendix A].
Disclosure of interests in other entities 921
There is no requirement for a quantitative split of the fee income by type although it
may be useful for users of the financial statements.
An illustrative example of the disclosures required by (a) to (c) above is shown below.
Example 13.7: Illustrative example of disclosures for sponsored structured
entities where no interest exists at the reporting date
The Group considers itself the sponsor of a number of structured entities. The Group designed and established
these entities. In some cases, it also transferred assets to them, in others it markets products associated with
the entities in its own name and/or provides guarantees regarding the performance of the entities.
For some structured entities, the Group has no interest at the reporting date. However, it has sold assets to
those entities during the reporting period in such a way that it has no continuing involvement in those assets
and has earned fees for selling those assets and for other transactions carried out for the entities. The table
below presents the Group’s income recognised during the reporting period and the fair value of any assets
transferred to those structured entities during the reporting period as follows:
Income from unconsolidated structured entities in which no interest is
held at 31 December 2019
Income Income
2019 2018
€’000 €’000
Commissions and fees
69
50
Interest income
48
47
Gains and losses on sale of assets
66
–
183 97
Split by:
Mortgage-backed securitisations
75
41
CDO’s and CLO’s
50
20
Asset-backed commercial paper 25
30
Property, credit-related and other investing
33
6
183 97
Carrying amounts of assets transferred to unconsolidated structured
Transferred
Transferred
entities in reporting period
in year
in year
2019 2018
€’000
€’000
Mortgage-backed securitisations
3,065
–
CDO’s and CLO’s
2,536
–
Asset-backed commercial paper 1,325
3,000
Property, credit-related and other investing
178
–
7,104 3,000
922 Chapter
13
Aviva plc made the following disclosures in respect of investment management fees
earned in respect of its asset management business.
Extract 13.11: Aviva plc (2017)
Notes to the consolidated financial statements [extract]
25 – Interests in structured entities [extract]
(c) Other interests in unconsolidated structured entities [extract]
The Group receives management fees and other fees in respect of its asset management businesses. The Group does not
sponsor any of the funds or investment vehicles from which it receives fees. Management fees received for investments
that the Group manages but does not have a holding in also represent an interest in unconsolidated structured entities. As these investments are not held by the Group, the investment risk is borne by the external investors and therefore the
Group’s maximum exposure to loss relates to future management fees. The table below shows the assets under
management of entities that the Group manages but does not have a holding in and the fees earned from those entities.
2017
Assets Under
Investment
Management
Management fees
£m
£m
Investment funds1
9,411 67
Specialised investment vehicles:
3,877
12
Analysed as:
OEICs
1,177 3
PLPs
2,666 9
SICAVs
34 0
Total 13,288
79
1 Investment funds relate primarily to the Group’s Polish pension funds
6.2
Disclosure of the nature of risks of unconsolidated structured
entities
The IASB decided that, although it agreed with the concept that an entity should
generally be allowed to tailor its disclosures to meet the specific information needs of
its users, disclosure requirements should contain a minimum set of requirements that
should be applied by all entities. In making this decision, the IASB was convinced by
comments from users who pointed out that without any specific disclosure
requirements, comparability would be impaired and an entity might not disclose
information that users find important. [IFRS 12.BC94].
These minimum disclosures are discussed at 6.2.1 and 6.2.2 below.
6.2.1
Disclosures of interests in structured entities and of the maximum
exposure to loss from those interests
An entity must disclose, in a tabular form, unless another format is more appropriate, a
summary of:
(a) the carrying amounts of the assets and liabilities recognised in its financial
statements relating to its interests in unconsolidated structured entities;
(b) the line items in the statement of financial position in which those assets and
liabilities are recognised;
Disclosure of interests in other entities 923
(c) the amount that best represents the entity’s maximum exposure to loss from its
interests in unconsolidated structured entities, including how the maximum
exposure to loss is determined. If an entity cannot quantify its maximum exposure
to loss from its interests in consolidated structured entities it must disclose that fact
and the reasons; and
(d) a comparison of the carrying amounts of the assets and liabilities of the entity that
relate to its interests in unconsolidated structured entities and the entity’s
maximum exposure to loss from those entities. [IFRS 12.29].
Disclosure of an entity’s maximum exposure to loss was considered necessary by the
IASB as it was concerned that, if only information about expected losses was required,
an entity might often identify a positive expected value of returns from its interests in
unconsolidated structured entities
and, as a consequence, would not disclose any loss
exposure. [IFRS 12.BC97].
The IASB also decided to require an entity to disclose a comparison of the carrying
amounts of the assets and liabilities in its statement of financial position and its
maximum exposure to loss. This is because the information will provide users with a
better understanding of the differences between the expected loss exposure and the
expectation of whether it is likely that an entity will bear all or only some of the losses.
The IASB reasoned that this information would help an entity explain why the
maximum exposure to loss is unrepresentative of its actual exposure if that is the case.
[IFRS 12.BC100].
IFRS 12 does not define maximum exposure to loss. The IASB decided not to provide
such a definition of ‘loss’ but to leave it to the entity to identify what constitutes a loss
in the particular context of that reporting entity. The entity should then disclose how it
has determined maximum loss exposure. The IASB acknowledged that an entity might
not always be able to calculate the maximum exposure to loss, such as when a financial
instrument exposes an entity to theoretically unlimited losses. The IASB decided that
when this is the case an entity should disclose the reasons why it is not possible to
calculate the maximum exposure to loss. [IFRS 12.BC98-99].
We believe that ‘maximum exposure to loss’ refers to the maximum loss that an entity
could be required to record in its statement of comprehensive income as a result of its
involvement with a structured entity. Further, this maximum possible loss must be
disclosed regardless of the probability of such losses actually being incurred. IFRS 12 is
silent on whether the maximum exposure is gross or net of collateral or hedging
instruments held that would mitigate any loss. Consistent with the equivalent
disclosures required by IFRS 7, we believe that the maximum exposure to loss should