ifrs-10_2026

Contents

INTERNATIONAL FINANCIAL REPORTING STANDARD 10

CONSOLIDATED FINANCIAL STATEMENTS

OBJECTIVE

Meeting the objective

SCOPE

CONTROL

Power

Returns

Link between power and returns

ACCOUNTING REQUIREMENTS

Non-controlling interests

Loss of control

DETERMINING WHETHER AN ENTITY IS AN INVESTMENT ENTITY

INVESTMENT ENTITIES: EXCEPTION TO CONSOLIDATION

APPENDICES

A Defined 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

BASIS FOR CONCLUSIONS

APPENDICES TO THE BASIS FOR CONCLUSIONS

Previous Board approvals and dissenting opinions

Amendments to the Basis for Conclusions on other IFRSs

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

. IFRS 10 should be read in the context of its

objective

and the

Basis for Conclusions

, the

Preface to IFRS Accounting Standards

and the

Conceptual Framework for Financial Reporting

IAS 8

Basis of Preparation of Financial Statements

provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

[

Refer:

IAS 8 paragraphs 10–12

]

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.

[

Refer:

Basis for Conclusions paragraph BC29

Basis for Conclusions paragraph BC7

and

IFRS 12

for disclosure requirements for interests in subsidiaries]

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

;

[

Refer:

paragraph 4

]

(b)

defines the principle of

control

, and establishes control as the basis for consolidation;

[

Refer:

paragraphs 5–18

]

(c)

sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee;

[

Refer:

paragraphs B1–B85

]

(d)

sets out the accounting requirements for the preparation of consolidated financial statements

[

Refer:

paragraphs 19–26

and

B86–B99

]

; and

(e)

defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity.

[

Refer:

paragraphs 27–33

B85A–B85W

and

B100–B101

]

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

[IFRIC®

Update

, January 2010, Agenda Decision, ‘

IAS 27

Consolidated and Separate Financial Statements

—Combined financial statements and redefining the reporting entity’

The IFRIC received a request for guidance on whether a reporting entity may, in accordance with IFRSs, present financial statements that include a selection of entities that are under common control, rather than being restricted to a parent/subsidiary relationship as defined by IAS 27.

The IFRIC noted that the ability to include entities within a set of IFRS financial statements depends on the interpretation of ‘reporting entity’ in the context of common control. The IFRIC noted that in December 2007 the Board added a project to its research agenda to examine the definition of common control and the methods of accounting for business combinations under common control in the acquirer’s consolidated and separate financial statements. The IFRIC also noted that describing the reporting entity is the objective of Phase D of the Board’s

Conceptual Framework

project.

The IFRIC also received a request for guidance on whether a reporting entity may, in accordance with IFRSs, be redefined to exclude from comparative periods entities/businesses that have been carved out of a group. The IFRIC noted that the Board’s common control project referred to above will also consider the accounting for demergers, such as the spin‑off of a subsidiary or business. Therefore, the IFRIC decided not to add these issues to its agenda.]

An entity that is a

parent

shall present

consolidated financial statements

. This IFRS applies to all entities, except as follows:

[

Refer:

Basis for Conclusions paragraphs BCZ12–BCZ18

]

(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;

[

Refer:

Basis for Conclusions paragraphs BCZ16 and BCZ17

]

(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);

[

Refer:

Basis for Conclusions paragraph BCZ18

]

(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;

[

Refer:

Basis for Conclusions paragraph BCZ18

]

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.

[

Refer:

Basis for Conclusions paragraphs BC28A–BC28F

]

(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.

[

Link to

Basis for Conclusions paragraphs BCZ19–BCZ21

for the reasons why the IASB did not provide further exemptions from consolidation]

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.

[

Refer:

Basis for Conclusions paragraphs BC29–BC39

]

[IFRIC®

Update

, May 2014, Agenda Decision, ‘

IFRS 3

Business Combinations

—identification of the acquirer in accordance with IFRS 3 and the parent in accordance with

IFRS 10

Consolidated Financial Statements in a stapling arrangement

’

The Interpretations Committee received a request to clarify the interaction of the requirements in IFRS 3 (as revised in 2008) for identifying an acquirer with the requirements in IFRS 10 for deciding whether control exists. More specifically, the submitter is seeking clarification of whether an acquirer identified for the purpose of IFRS 3 (as revised in 2008) is a parent for the purpose of IFRS 10 in circumstances in which a business combination is achieved by contract alone, such as a stapling arrangement, with no combining entity obtaining control of the other combining entities.

IFRS 3 (as revised in 2008) defines a business combination as “a transaction or other event in which an acquirer obtains control of one or more businesses”. In addition, IFRS 3 (as revised in 2008) refers to IFRS 10 for the meaning of the term ‘control’. IFRS 10 states that 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. Hence, the Interpretations Committee observed that an investment is not needed in order for an entity to control another entity.

The definition of a business combination in IFRS 3 (as revised in 2008) includes transactions in which an acquirer obtains control of one or more businesses. It also includes transactions that are sometimes referred to as ‘true mergers’ or ‘mergers of equals’. In other words, it includes transactions in which none of the combining entities obtains control of the other combining entities. The Interpretations Committee discussed a stapling arrangement and noted that if the stapling arrangement combines separate entities and businesses by the unification of ownership and voting interests in the combining entities, then such a transaction is a business combination as defined by IFRS 3 (as revised in 2008).

Notwithstanding the fact that IFRS 3 (as revised in 2008) includes business combinations in which none of the combining entities obtains control of the other combining entities, the Interpretations Committee noted that paragraph 6 of IFRS 3 (as revised in 2008) requires that one of the combining entities in a business combination must be identified as the acquirer. Paragraphs B14–B18 of IFRS 3 (as revised in 2008) provide additional guidance for identifying the acquirer if the guidance in IFRS 10 does not clearly indicate which combining entity is the acquirer.

The Interpretations Committee also noted that paragraph B15(a) of IFRS 3 (as revised in 2008) provides guidance on identifying the acquirer by assessing the relative voting rights in the combined entity after the combination—this guidance explains that the acquirer is usually the combining entity whose owners, as a group, receive the largest portion of the voting rights in the combined entity. This guidance is consistent with the Interpretations Committee’s observation that the definition of a business combination includes transactions in which none of the combining entities or businesses are identified as having control of the other combining entities. The Interpretations Committee thought that this guidance would be relevant to identifying which of the combining entities is the acquirer in the stapling transaction considered.

The Interpretations Committee noted that the IASB stated in the IASB Update for September 2004 that the intended interaction between IFRS 3 (issued in 2004) and IAS 27

Consolidated and Separate Financial Statements

is that an entity that is identified as the ‘acquirer’ of another entity in accordance with IFRS 3 (issued in 2004) is a ‘parent’ for the purposes of IAS 27. The Interpretations Committee noted that the meaning of the term ‘acquirer’ has not changed since 2004 and that the term ‘control’ is used consistently between IFRS 3 (as revised in 2008) and IFRS 10. It also noted that the notion in IFRS 3 (as revised in 2008) that a business combination could occur even if none of the combining entities obtains control of the other combining entities has not changed from IFRS 3 (issued in 2004). Accordingly, the Interpretations Committee observed that the IASB’s statement on the interaction between IFRS 3 (issued in 2004) and IAS 27 remains valid in respect of the interaction between IFRS 3 (as revised in 2008) and IFRS 10. Consequently, the Interpretations Committee observed that the combining entity in the stapling arrangement that is identified as the acquirer for the purpose of IFRS 3 (as revised in 2008) should prepare consolidated financial statements of the combined entity in accordance with IFRS 10.

The Interpretations Committee noted that there is little diversity in practice for the accounting for business combinations achieved by contract alone. It further noted that it does not expect diversity to emerge in the future on the basis of the analysis on the requirements and guidance in IFRS 3 (as revised in 2008) and IFRS 10.

Accordingly, the Interpretations Committee decided not to add this issue to its agenda.]

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.

[

Refer:

Basis for Conclusions paragraphs BC40–BC153

]

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

);

[

Refer:

paragraphs B9–B54

(including

examples 1–12

) and

Basis for Conclusions paragraphs BC42–BC59

]

(b)

exposure, or rights, to variable returns from its involvement with the investee (see

paragraphs 15 and 16

)

[

Refer:

paragraphs B55–B57

and

Basis for Conclusions paragraphs BC60–BC67

]

; 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

[

Refer:

paragraph B58

and

Basis for Conclusions paragraph BC68

]

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

[

Refer:

Basis for Conclusions paragraphs BC149–BC153

]

[IFRIC®

Update

, September 2013, Agenda Decision, ‘

IFRS 10

Consolidated Financial Statements

—Effect of protective rights on an assessment of control’

The Interpretations Committee received a request to clarify the guidance in IFRS 10. The query relates to protective rights and the effect of those rights on the power over the investee. More specifically, the submitter asked whether the assessment of control should be reassessed when facts and circumstances change in such a way that rights, previously determined to be protective, change (for example upon the breach of a covenant in a borrowing arrangement that causes the borrower to be in default) or whether, instead, such rights are never included in the reassessment of control upon a change in facts and circumstances.

The Interpretations Committee observed that paragraph 8 of IFRS 10 requires an investor to 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. The Interpretations Committee also observed that a breach of a covenant that results in rights becoming exercisable constitutes such a change. It noted that the Standard does not include an exemption for any rights from this need for reassessment. The Interpretations Committee also discussed the IASB's redeliberations of this topic during the development of IFRS 10 and concluded that the IASB's intention was that rights initially determined to be protective should be included in a reassessment of control whenever facts and circumstances indicate that there are changes to one or more of the three elements of control. Accordingly, the Interpretations Committee noted that the conclusion about which party controlled the investee would need to be reassessed after the breach occurred. It also noted that the reassessment may or may not result in a change to the outcome of the assessment of control, depending on the individual facts and circumstances.

The Interpretations Committee also concluded that it did not expect significant diversity in practice to develop following the implementation of the Standard. Consequently, the Interpretations Committee decided not to add this issue to its agenda.]

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

IFRS 9

Financial Instruments

[

Refer:

Basis for Conclusions paragraphs BC81–BC92

]

Power

[

Refer:

paragraphs 7(a)

and

B9–B54

Basis for Conclusions paragraphs BC42–BC59

and

BC93–BC124

]

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.

[

Refer:

paragraphs B11–B13

Basis for Conclusions paragraphs BC56–BC59

]

[IFRIC®

Update

, May 2015, Agenda Decision, ‘

IFRS 10

Consolidated Financial Statements

—Single-asset, single lessee lease vehicles’

The Interpretations Committee received two requests for clarification about the interaction of IFRS 10 and IAS 17

Leases

. In both examples, a structured entity (SE) is created to lease a single asset to a single lessee.

In one submission the lease is an operating lease; in the other it is a finance lease. In the case of the operating lease, the question was whether the lessee should consolidate the SE. In the case of the finance lease, the question was whether the lender should consolidate the SE. In both examples, the consolidation decision would be based on an assessment of whether the entity controls the SE. In particular, the submitters asked whether the lessee’s use of the leased asset is a relevant activity of the SE when assessing power over the SE.

The Interpretations Committee noted that an entity has power over an investee when it has rights that give it the current ability to direct the relevant activities of the entity, ie the activities that significantly affect the investee’s returns. On entering into a lease, regardless of whether it is a finance lease or an operating lease, the SE (the lessor) would have two rights—a right to receive lease payments and a right to the residual value of the leased asset at the end of the lease. Consequently, the activities that would affect the SE’s returns would relate to managing the returns derived from these rights; for example, managing the credit risk associated with the lease payments and any other guaranteed payments or managing the leased asset at the end of the lease term (for example, managing its sale or re-leasing). How the decision-making relating to these activities would significantly affect the SE’s returns would depend on the particular facts and circumstances.

The Interpretations Committee was of the view that the lessee’s right to use the leased asset for a period of time would not, in isolation, typically give the lessee decision-making rights over these relevant activities of the SE and hence would not typically be a relevant activity of the SE.

However, it noted that this conclusion does not mean that a lessee can never control the lessor. For example, a parent that controls another entity for other reasons can lease an asset from that entity.

It also noted that, in assessing control, an entity would consider all of the rights that it has in relation to the investee to determine whether it has power over the investee. This would include rights in contractual arrangements other than the lease contract, such as contractual arrangements for loans made to the lessor, as well as rights included within the lease contract, including those that go beyond simply providing the lessee with the right to use the asset.

As a result of its discussions, the Interpretations Committee concluded that the principles and guidance within IFRS 10 would enable a determination of control to be made in a specific scenario based on the relevant facts and circumstances of that scenario. The Interpretations Committee also noted that it is not its practice to give case-by-case advice on individual fact patterns.

Consequently, the Interpretations Committee thought that neither an Interpretation of nor an amendment to a Standard is required and decided not to add these issues to its agenda.]

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.

[

Refer:

paragraphs B14–B54

Basis for Conclusions paragraphs BC93–BC124

]

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.

[

Refer:

paragraphs B47–B50

Basis for Conclusions paragraphs BC112–BC124

]

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.

[

Refer:

Basis for Conclusions paragraphs BC69 and BC70

]

Returns

[

Refer:

paragraphs 7(b)

and

B55–B57

Basis for Conclusions paragraphs BC60–BC67

]

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.

[

Refer:

Basis for Conclusions paragraph BC64

]

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

[

Refer:

paragraphs 7(c)

and

B58–B75

Basis for Conclusions paragraphs BC68

and

BC125–BC146

]

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.

[

Refer:

Basis for Conclusions paragraph BC68

]

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.

[

Refer:

Basis for Conclusions paragraphs BC125–BC146

]

Accounting requirements

[

Refer:

paragraphs B86–B99

Basis for Conclusions paragraphs BC154–BCZ190

]

parent

shall prepare

consolidated financial statements

using uniform accounting policies for like transactions and other events in similar circumstances.

[

Refer:

paragraph B87

]

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.

[

Refer:

paragraph B88

]

Paragraphs B86–B93

set out guidance for the preparation of

consolidated financial statements

[

Refer:

Basis for Conclusions paragraph BC154

]

Non-controlling interests

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.

[

Refer:

Basis for Conclusions paragraphs BCZ155–BCZ159

]

[IFRIC®

Update

, November 2013, Agenda Decision, ‘

IFRS 10

Consolidated Financial Statements

—Classification of puttable instruments that are non-controlling interests’

The Interpretations Committee discussed a request for guidance on the classification, in the consolidated financial statements of a group, of puttable instruments that are issued by a subsidiary but that are not held, directly or indirectly, by the parent. The submitter asked about puttable instruments classified as equity instruments in the financial statements of the subsidiary in accordance with paragraphs 16A–16B of IAS 32

Financial Instruments: Presentation

(‘puttable instruments’) that are not held, directly or indirectly, by the parent. The question asked was whether these instruments should be classified as equity or liability in the parent’s consolidated financial statements.

The submitter claims that paragraph 22 of IFRS 10

Consolidated Financial Statements

is not consistent with paragraph AG29A of IAS 32, because:

IFRS 10 defines non-controlling interests (NCI) as equity in a subsidiary not attributable, directly or indirectly, to a parent;

according to paragraph 22 of IFRS 10 a parent shall present non-controlling interests (NCI) in the consolidated statement of financial position within equity; but

according to paragraph AG29A of IAS 32, instruments classified as equity instruments in accordance with paragraphs 16A–16D of IAS 32 in the separate or individual financial statements of the subsidiary that are NCI are classified as liabilities in the consolidated financial statements of the group.

The Interpretations Committee noted that paragraphs 16A–16D of IAS 32 state that puttable instruments and instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation meet the definition of a financial liability. These instruments are classified as equity in the financial statements of the subsidiary as an exception to the definition of a financial liability if all relevant requirements are met. Paragraph AG29A clarifies that this exception applies only to the financial statements of the subsidiary and does not extend to the parent’s consolidated financial statements. Consequently, these financial instruments should be classified as financial liabilities in the parent’s consolidated financial statements.

The Interpretations Committee therefore concluded that in the light of the existing guidance in IAS 32, neither an interpretation nor an amendment to a Standard was necessary and consequently decided not to add this issue to its agenda.]

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).

[

Refer:

paragraph B96

Basis for Conclusions paragraphs BCZ168–BCZ179

]

Paragraphs B94–B96

set out guidance for the accounting for

non-controlling interests

consolidated financial statements

[

Refer:

Basis for Conclusions paragraphs BCZ155–BCZ179

]

[IFRIC®

Update

, July 2009, Agenda Decision, ‘

IAS 27

Consolidated and Separate Financial Statements

—Transaction costs for non-controlling interest’

The IFRIC received a request to clarify the guidance in IAS 27 (as amended in 2008) for accounting for transaction costs incurred in the acquisition or disposal of non-controlling interest (NCI) that does not result in the loss of control of an entity.

The IFRIC noted that the amended IAS 27 requires transactions with NCI to be treated as equity transactions. Paragraphs 106(d)(iii) and 109 of IAS 1

Presentation of Financial Statements

[now

paragraphs 107(c)(iii)

and

112

IFRS 18

Presentation and Disclosure in Financial Statements

] state that changes in equity resulting from transactions with owners in their capacity as owners (such as equity contributions, reacquisitions of the entity’s own equity instruments and dividends) and transaction costs directly related to such transactions are not part of the income and expense generated by the entity’s activities during that period.

Accordingly, the IFRIC concluded that relevant guidance exists in IFRSs applicable to such transactions. Because it did not expect significant divergence in practice given the existing guidance, the IFRIC decided not to add the issue to its agenda.]

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.

[

Refer:

Basis for Conclusions paragraphs BC190L–BC190O

for deferral of effective date]

(c)

recognises the gain or loss associated with the loss of control attributable to the former controlling interest, as specified in paragraphs B98–B99A.

[IFRIC®

Update

, July 2016, Agenda Decision, ‘

IFRS 11

Joint Arrangements

and

IFRS 10

Consolidated Financial Statements

—Accounting for loss of control transactions’

The Interpretations Committee discussed whether an entity should remeasure its retained interest in the assets and liabilities of a joint operation when the entity loses control of a business, or an asset or group of assets that is not a business. In the transaction discussed, the entity either retains joint control of a joint operation or is a party to a joint operation (with rights to assets and obligations for liabilities) after the transaction.

The Interpretations Committee noted that paragraphs B34–B35 of IFRS 11

Joint Arrangements

specify that an entity recognises gains or losses on the sale or contribution of assets to a joint operation only to the extent of the other parties’ interests in the joint operation. The requirements in these paragraphs could be viewed as conflicting with the requirements in IFRS 10

Consolidated Financial Statements

, which specify that an entity remeasures any retained interest when it loses control of a subsidiary.

The Interpretations Committee observed that the Board issued amendments to IFRS 10 and IAS 28

Investments in Associates and Joint Ventures

in September 2014 to address the accounting for the sale or contribution of assets to an associate or a joint venture. Those amendments address a similar conflict that exists between the requirements in IFRS 10 and IAS 28. The Board decided to defer the effective date of the amendments to IFRS 10 and IAS 28 and further consider a number of related issues at a later date. The Interpretations Committee observed that the Post-implementation Review of IFRS 10 and IFRS 11 would provide the Board with an opportunity to consider loss of control transactions and a sale or contribution of assets to an associate or a joint venture.

Because of the similarity between the transaction discussed by the Interpretations Committee and a sale or contribution of assets to an associate or a joint venture, the Interpretations Committee concluded that the accounting for the two transactions should be considered concurrently by the Board. Consequently, the Interpretations Committee decided not to add this issue to its agenda but, instead, to recommend that the Board consider the issue at the same time the Board further considers the accounting for the sale or contribution of assets to an associate or a joint venture.]

Paragraphs B97–B99A

set out guidance for the accounting for the loss of

control

of a subsidiary.

[

Refer:

Basis for Conclusions paragraphs BCZ180–BC190J

]

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;

[

Refer:

Basis for Conclusions paragraph BC237

]

(b)

commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both

[

Refer:

paragraphs B85B–B85J

and

Basis for Conclusions paragraphs BC238–BC248

]

; and

(c)

measures and evaluates the performance of substantially all of its investments on a fair value basis.

[

Refer:

paragraphs B85K–B85M

and

Basis for Conclusions paragraphs BC249–BC252

]

Paragraphs B85A–B85M

provide related application guidance.

[

Refer:

Basis for Conclusions paragraphs BC228–BC254

Illustrative Examples paragraphs IE4

IE8

IE11

and

IE14

]

[IFRIC®

Update

, March 2017, Agenda Decision, ‘IFRS 10

Consolidated Financial Statements

—Investment entities and subsidiaries’

The Committee received a request regarding the investment entity requirements in IFRS 10, including how an entity applies the requirements in paragraphs 27 and 28 of IFRS 10, and how an investment entity assesses whether it consolidates a subsidiary applying paragraph 32 of IFRS 10 in specified circumstances. The Committee discussed the following questions:

does an entity qualify as an investment entity if it possesses all three elements described in paragraph 27 of IFRS 10, but does not have one or more of the typical characteristics of an investment entity listed in paragraph 28 of IFRS 10? (Question a)

does an entity provide investment management services to investors (as specified in paragraph 27(a) of IFRS 10) if it outsources the performance of these services to a third party? (Question b)

to what extent can an investment entity provide investment-related services, itself or through a subsidiary, to third parties? (Question c)

does a subsidiary provide services that relate to its parent investment entity’s investment activities (as specified in paragraph 32 of IFRS 10) by holding an investment portfolio as beneficial owner? (Question d)

Question a

Paragraph 27 of IFRS 10 lists the three elements an entity must possess to qualify as an investment entity. Paragraph B85A of IFRS 10 emphasises the importance of considering all facts and circumstances when assessing whether an entity is an investment entity, and notes that an entity that possesses the three elements of the definition of an investment entity in paragraph 27 is an investment entity. Paragraphs B85B-B85M then describe the elements of the definition in more detail.

Paragraph 28 of IFRS 10 lists typical characteristics that an entity considers in assessing whether it possesses all three elements in paragraph 27, and says that the absence of any of these characteristics does not necessarily disqualify an entity from being an investment entity. Paragraph B85N of IFRS 10 clarifies that the absence of one or more of the typical characteristics of an investment entity listed in paragraph 28 of IFRS 10 indicates that additional judgement is required in determining whether the entity is an investment entity.

Accordingly, the Committee concluded that an entity that possesses all three elements of the definition of an investment entity in paragraph 27 of IFRS 10 is an investment entity. This is the case even if that entity does not have one or more of the typical characteristics of an investment entity listed in paragraph 28 of IFRS 10.

Question b

Paragraph 27(a) of IFRS 10 requires an investment entity to provide investors with investment management services. IFRS 10 does not specify how the investment entity must provide these services, and does not preclude it from outsourcing the performance of these services to a third party.

Accordingly, the Committee concluded that an investment entity responsible for providing investment management services to its investors can engage another party to perform some or all of these services on its behalf (ie it can outsource the performance of some or all of these services).

Question c

Paragraph 27(b) of IFRS 10 requires that the business purpose of an investment entity is to invest solely for capital appreciation, investment income, or both. Paragraph B85C of IFRS 10 says that an investment entity may provide investment-related 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.

Accordingly, the Committee concluded that an investment entity may provide investment-related services to third parties, either directly or through a subsidiary, as long as those services are ancillary to its core investing activities and thus do not change the business purpose of the investment entity.

The Committee observed that an investment entity assesses whether the investment management services provided by a subsidiary, including those provided to third parties, relate to the investment entity’s investment activities. If so, the investment entity includes these services when assessing whether the investment entity itself possesses the element of the investment entity definition in paragraph 27(b) of IFRS 10.

The Committee also noted that, applying paragraph 32 of IFRS 10, an investment entity consolidates any non-investment entity subsidiaries whose main purpose and activities are providing services that relate to the investment entity’s investment activities.

Question d

The Committee observed that it had previously discussed a question similar to Question d. At its meeting in March 2014, the Committee issued an agenda decision noting its conclusion that a subsidiary does not provide investment-related services or activities if the subsidiary holds investments for tax optimisation purposes and there is no activity within the subsidiary.

Similarly, the Committee concluded that an investment entity does not consider the holding of investments by a subsidiary as beneficial owner (and recognised in the subsidiary’s financial statements) to be a service that relates to the parent investment entity’s investment activities (as specified in paragraph 32 of IFRS 10).

For all four questions (ie Questions a–d), the Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine the appropriate accounting in each of the specified circumstances. Consequently, the Committee decided not to add this matter to its standard-setting agenda.]

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

);

[

Refer:

Basis for Conclusions paragraphs BC257 and BC258

]

(b)

it has more than one investor (see

paragraphs B85Q–B85S

);

[

Refer:

Basis for Conclusions paragraphs BC259 and BC260

]

(c)

it has investors that are not related parties of the entity (see

paragraphs B85T–B85U

)

[

Refer:

Basis for Conclusions paragraphs BC261 and BC262

]

; and

(d)

it has ownership interests in the form of equity or similar interests (see

paragraphs B85V–B85W

[

Refer:

Basis for Conclusions paragraphs BC263–BC267

]

The absence of any of these typical characteristics does not necessarily disqualify an entity from being classified as an investment entity

[

Refer:

Basis for Conclusions paragraph BC255

]

. 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

[

Refer:

IFRS 12 Basis for Conclusions paragraph BC61E

]

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

[

Refer:

Basis for Conclusions paragraphs BC255–BC267

]

, 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.

[

Refer:

Basis for Conclusions paragraph BC269

]

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

[

Refer:

Basis for Conclusions paragraphs BC270–BC271

]

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

[

Refer:

Basis for Conclusions paragraphs BC215–BC227

]

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.

E9,

E10

[

Refer:

Basis for Conclusions paragraphs BC240–BC240I

]

[IFRIC®

Update

, March 2014, Agenda Decision, ‘

IFRS 10

Consolidated Financial Statements: Investment Entities Amendments

—the definition of investment-related services or activities’

The Interpretations Committee received a request to clarify the definition of ‘investment-related services or activities’ as it relates to subsidiaries that act as intermediate holding companies ('intermediate subsidiaries') and are established for ‘tax optimisation’ purposes.

An investment entity is permitted to provide investment-related services or activities, either directly or through a subsidiary. If an investment entity provides investment-related services or activities through a subsidiary, the investment entity shall consolidate that subsidiary.

Some investment entities establish wholly-owned intermediate subsidiaries in some jurisdictions, which own all or part of the portfolio of investments in the group structure. The sole purpose of the intermediate subsidiaries is to minimise the tax paid by investors in the ‘parent’ investment entity. There is no activity within the subsidiaries and the tax advantage comes about because of returns being channelled through the jurisdiction of the intermediate subsidiary. The submitter asked whether the ‘tax optimisation’ described should be considered investment-related services or activities.

The Interpretations Committee noted that, according to paragraph BC272 of IFRS 10, the IASB thinks that fair value measurement of all of an investment entity’s subsidiaries would provide the most useful information, except for subsidiaries providing investment-related services or activities. In addition, the Interpretations Committee noted that the IASB had considered requiring an investment entity to consolidate investment entity subsidiaries that are formed for tax purposes, but had decided against this.

The Interpretations Committee noted that one of the characteristics of ‘tax optimisation’ subsidiaries described in the submission is “that there is no activity within the subsidiary”. Accordingly, the Interpretations Committee considers that the parent should not consolidate such subsidiaries, because they do not provide investment-related services or activities, and do not meet the requirements to be consolidated in accordance with paragraph 32 of IFRS 10. The parent should therefore account for such an intermediate subsidiary at fair value.

On the basis of the analysis above, the Interpretations Committee considered that in the light of the existing IFRS requirements, neither an interpretation nor an amendment to a Standard was necessary and consequently decided not to add the issue to its agenda.]

E10

[IFRIC®

Update,

March 2017, Agenda Decision, ‘IFRS 10

Consolidated Financial Statements

—Investment entities and subsidiaries’

does an entity provide investment management services to investors (as specified in paragraph 27(a) of IFRS 10) if it outsources the performance of these services to a third party? (Question b)

to what extent can an investment entity provide investment-related services, itself or through a subsidiary, to third parties? (Question c)

Question a

…[see the education footnote to para 27 of IFRS 10]

Question b

...[see the education footnote to para 27 of IFRS 10]

Question c

…[see the education footnote to para 27 of IFRS 10]

Question d

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.

[

Refer:

Basis for Conclusions paragraphs BC272–BC283

]

Appendices

Appendix A

Defined 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.

[

Refer:

paragraphs B86–B99

Basis for Conclusions paragraphs BC154–BCZ190

]

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.

E11

[

Refer:

paragraphs 5–18

and

B2–B85

Basis for Conclusions paragraphs BC29–BC153

]

E11

[IFRIC®

Update

, January 2007, Agenda Decision, ‘

IAS 39

Financial Instruments: Recognition and Measurement

and

IAS 27

Consolidated and Separate Financial Statements

—Financial Instruments puttable at an amount other than Fair Value’

The IFRIC received a submission regarding the classification in the financial statements of the holders of financial instruments puttable at the option of the holders at an amount other than fair value (the puttable instruments). The submission noted that the issuer’s contractual obligation to deliver cash requires the issuer to recognise financial liabilities in its financial statements in accordance with IAS 32 Financial Instruments: Presentation. The issues are:

...

whether an entity that has control over an entity that has no equity instruments in issue is required to present consolidated financial statements in accordance with IAS 27 Consolidated and Separate Financial Statements as well as to recognise goodwill in accordance with IFRS 3 Business Combinations.

Regarding the first issue, ...

Regarding the second issue, the IFRIC noted that the control of a subsidiary, and the resulting requirement for a parent to present consolidated financial statements in accordance with IAS 27 [These requirements are now in IFRS 10] (including the requirement to recognise goodwill in accordance with IFRS 3) does not necessarily depend on the parent’s owning equity instruments of the subsidiary. The IFRIC, therefore, decided not to take the second issue onto the agenda.]

decision maker

An entity with decision-making rights that is either a principal or an agent for other parties.

[

Refer:

paragraphs 18

and

B58–B75

Basis for Conclusions paragraphs BC125–BC146

]

group

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.

[

Refer:

paragraphs 27–30

and

B85A–B85M

Basis for Conclusions paragraphs BC236–BC254

]

non-controlling interest

Equity in a

subsidiary

not attributable, directly or indirectly, to a

parent

An entity that

controls

one or more entities.

power

Existing rights that give the current ability to direct the

relevant activities

[

Refer:

paragraphs 10–14

and

B9–B54

Basis for Conclusions paragraphs BC42–BC59

and

BC93–BC124

]

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.

[

Refer:

paragraphs 14

and

B26–B33

examples 14A and 14B

Basis for Conclusions paragraph BC70

]

relevant activities

For the purpose of this IFRS, relevant activities are activities of the investee that significantly affect the investee’s returns.

[

Refer:

paragraphs 10

and

B11–B13

Basis for Conclusions paragraphs BC56–BC59

]

removal rights

Rights to deprive the decision maker of its

decision-making

authority.

[

Refer:

paragraph B65

Basis for Conclusions paragraphs BC134–BC140

]

subsidiary

An entity that is

controlled

by another entity.

The following terms are defined in

IFRS 11

IFRS 12

Disclosure of Interests in Other Entities

IAS 28 (as amended in 2011)

IAS 24

Related Party Disclosures

and are used in this IFRS with the meanings specified in those IFRSs:

associate

[

Refer:

IAS 28 paragraph 3

]

interest in another entity

[

Refer:

IFRS 12 Appendix A

]

joint venture

[

Refer:

IAS 28 paragraph 3

]

key management personnel

[

Refer:

IAS 24 paragraph 9

]

related party

[

Refer:

IAS 24 paragraph 9

]

significant influence

[

Refer:

IAS 28 paragraph 3

]

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

[

Refer:

Basis for Conclusions paragraphs BC71–BC146

]

To determine whether it controls an investee an investor shall assess whether it has all the following:

(a)

power over the investee;

[

Refer:

paragraphs 7(a)

10–14

B9–B54

(including

examples 1–12

) and

Basis for Conclusions paragraphs BC42–BC59

]

(b)

exposure, or rights, to variable returns from its involvement with the investee; and

[

Refer:

paragraphs 7(b)

15, 16

and

B55–B57

and

Basis for Conclusions paragraphs BC60–BC67

]

(c)

the ability to use its power over the investee to affect the amount of the investor’s returns

[

Refer:

paragraphs 7(c)

17, 18

and

B58

and

Basis for Conclusions paragraph BC68

]

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

[

Refer:

Basis for Conclusions paragraphs BC143–BC146

]

Purpose and design of an investee

[

Refer:

paragraph B3(a)

Basis for Conclusions paragraphs BC76–BC80

]

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.

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

[

Refer:

paragraphs 10–14

Basis for Conclusions paragraphs BC42–BC59

]

To have

power

over an investee, an investor must have existing rights that give it the current ability to direct the

relevant activities

[

Refer:

Basis for Conclusions paragraphs BC42–BC55

]

For the purpose of assessing power, only substantive rights and rights that are not protective shall be considered (see

paragraphs B22–B28

B10

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

[

Refer:

Basis for Conclusions paragraphs BC56–BC59

]

B11

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.

B12

Examples of decisions about

relevant activities

include but are not limited to:

(a)

establishing operating and capital decisions of the investee, including budgets; and

(b)

appointing and remunerating an investee’s

key management personnel

or service providers and terminating their services or employment.

B13

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.

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 activitie

s 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

[

Refer:

paragraph 11

Basis for Conclusions paragraphs BC93–BC124

]

B14

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.

B15

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

[

Refer:

paragraphs B6

and

B34–B46

and

Basis for Conclusions paragraphs BC96–BC111

]

(or potential voting rights

[

Refer:

paragraphs B47–B50

and

Basis for Conclusions paragraphs BC112–BC124

]

) 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

;

(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.

B16

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.

B17

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

B18

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,

[

Refer:

paragraphs B45

and

B80–B85

]

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.

B19

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.

B20

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.

B21

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

Substantive rights

[

Refer:

Basis for Conclusions paragraphs BC97

BC106

BC107

and

BC125–BC142

]

B22

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.

B23

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 substantive than if the same rights were exercisable individually by a large number of investors.

[

Refer:

paragraph B67

]

(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.

B24

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.

[

Refer:

Basis for Conclusions paragraph BC53

]

Application examples

Example 3

The investee has annual shareholder meetings at which decisions to direct the

relevant activitie

s 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.

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 activitie

s. 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.

B25

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

[

Refer:

paragraph 14

Basis for Conclusions paragraph BC70

]

B26

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

E12

[IFRIC®

Update

, September 2013, Agenda Decision, ‘IFRS 10

Consolidated Financial Statements

—Effect of protective rights on an assessment of control’

B27

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

B28

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

B29

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.

B30

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.

B31

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.

B32

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.

B33

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

Voting rights

[

Refer:

paragraph 11

Basis for Conclusions paragraphs BC96–BC124

]

B34

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

[

Refer:

Basis for Conclusions paragraph BC97

]

B35

An investor that holds more than half of the voting rights of an investee has

power

in the following situations, unless

paragraph B36

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

B36

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.

B37

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

[

Refer:

Basis for Conclusions paragraphs BC98–BC111

]

B38

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).

Contractual arrangement with other vote holders

[

Refer:

paragraph B38(a)

]

B39

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

[

Refer:

paragraph B38(b)

]

B40

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.

[

Refer:

paragraph B42(c)

]

The investor’s voting rights

[

Refer:

paragraph B38(c)

Basis for Conclusions paragraphs BC97–BC111

]

B41

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.

B42

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

(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.

B43

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

[

Refer:

paragraph B38

and

Basis for Conclusions paragraphs BC98–BC111

]

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

[

Refer:

paragraphs B39 and B40

]

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.

B44

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

Application example

Example 6

[

Refer:

paragraph B42

]

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.

B45

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

[

Refer:

paragraphs B42

and

B18–B20

]

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.

Example 8

[

Refer:

paragraphs B42

and

B18–B20

]

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.

B46

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

[

Refer:

paragraph B23(c)

Basis for Conclusions paragraphs BC112–BC124

]

B47

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

B48

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.

B49

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

B50

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.

Application examples

Example 9

[

Refer:

paragraphs B47–B50

]

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

[

Refer:

paragraphs B47–B50

]

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 significant effect on the investee’s returns

[

Refer:

paragraph B17

]

B51

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.

B52

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.

B53

For some investees, relevant activities occur only when particular circumstances arise or events occur. The investee may be designed

[

Refer:

paragraphs B8

B54

and

B63

and

example 2

]

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.

[

Refer:

Basis for Conclusions paragraph BC64

]

Application examples

Example 11

[

Refer:

paragraphs B51–B53

]

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

[

Refer:

paragraphs B51–B53

]

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.

B54

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

[

Refer:

paragraphs 7(b)

15, 16

and

B3(d)

Basis for Conclusions paragraphs BC60–BC67

]

B55

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.

B56

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.

B57

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.

Link between power and returns

[

Refer:

paragraphs 7(c)

B2(c)

and

B3(e)

Basis for Conclusions paragraphs BC68

]

Delegated power

[

Refer:

paragraph 18

and

Appendix B examples 13

14A

and

14C

Basis for Conclusions paragraphs BC125–BC142

]

B58

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.

B59

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.

B60

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.

B61

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

[

Refer:

paragraph B60(a)

Basis for Conclusions paragraph BC138

]

B62

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

(b)

the discretion that the decision maker has when making decisions about those activities.

B63

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

[

Refer:

paragraphs B8

B53 and B54

and

example 2

]

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

[

Refer:

paragraph B60(b)

]

B64

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.

[

Refer:

paragraphs 18

B36

B58–B61

B65

B66

and

B69–B75

and

examples 13

14A

and

14C

]

B65

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.

[

Refer:

Basis for Conclusions paragraph BC134

]

B66

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

[

Refer:

paragraphs 18

B36

B58–B61

B64

and

B69–B75

and

examples 13

14A

and

14C

]

. 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.)

B67

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

[

Refer:

paragraph B60(c)

]

B68

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.

B69

In determining whether it is a principal or an agent

[

Refer:

paragraphs 18

B36

B58–B61

B64–B66

B70–B75

B84, B85

and

examples 13

14A

and

14C

]

the

decision maker

shall also consider whether the following conditions exist:

(a)

The remuneration of the decision maker is commensurate with the services provided.

(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.

B70

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

[

Refer:

paragraph B60(d)

Basis for Conclusions paragraphs BC141 and BC142

]

B71

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.

B72

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.

Application examples

Example 13

[

Refer:

paragraphs B62–B72

]

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

[

Refer:

paragraphs B62–B72

]

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.

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

[

Refer:

paragraphs B62–B72

]

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

[

Refer:

paragraphs B62–B72

]

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.

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

[

Refer:

paragraphs B62–B72

]

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.

Example 15

[

Refer:

paragraphs B62–B72

]

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.

Example 16

[

Refer:

paragraphs B62–B72

]

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.

Relationship with other parties

[

Refer:

paragraph B4

Basis for Conclusions paragraphs BC139, BC140

and

BC143–BC146

]

B73

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.

B74

Such a relationship need not involve a contractual arrangement. A party is a de facto agent when the investor has the ability to direct that party to act on the investor’s behalf. A party might also be a de facto agent when those that direct the activities of the investor have the ability to direct that party to act on the investor’s behalf. 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

[

Refer:

Basis for Conclusions paragraphs BC146A–BC146C

]

B75

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.

[

Refer:

Basis for Conclusions paragraphs BC146

]

Control of specified assets

[

Refer:

Basis for Conclusions paragraphs BC147 and BC148

]

B76

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.

B77

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 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’.

B78

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.

B79

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

[

Refer:

paragraph 8

Basis for Conclusions paragraphs BC124

and

BC149–BC153

]

B80

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

B81

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.

B82

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.

B83

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).

B84

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 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.

B85

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.

[

Refer:

Basis for Conclusions paragraphs BC124

and

BC152

]

Determining whether an entity is an investment entity

B85A

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

[

Refer:

paragraph 27(b)

and

Basis for Conclusions paragraphs BC238—BC248

]

B85B

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

B85C

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.

B85D

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

(b)

providing financial support to an investee, such as a loan, capital commitment or guarantee.

B85E

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

[

Refer:

Basis for Conclusions paragraphs BC240–BC240I

]

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.

[

Refer:

Basis for Conclusions paragraph BC272

]

Exit strategies

[

Refer:

Basis for Conclusions paragraphs BC244–BC248

Illustrative Examples paragraphs IE8

IE11

and

IE14

]

B85F

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.

B85G

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.

B85H

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.

Earnings from investments

[

Refer:

Basis for Conclusions paragraphs BC242 and BC243

]

B85I

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.

B85J

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.

Fair value measurement

[

Refer:

Basis for Conclusions paragraphs BC249–BC252

]

B85K

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.

B85L

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

B85M

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

B85N

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.

[

Refer:

Basis for Conclusions paragraph BC255

]

More than one investment

[

Refer:

Basis for Conclusions paragraphs BC257 and BC258

]

B85O

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.

B85P

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

[

Refer:

Basis for Conclusions paragraphs BC259 and BC260

]

B85Q

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

B85R

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).

B85S

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

[

Refer:

Basis for Conclusions paragraphs BC261 and BC262

]

B85T

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

B85U

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

[

Refer:

Basis for Conclusions paragraphs BC263–BC267

]

B85V

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.

B85W

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

[

Refer:

paragraphs 19–26

Basis for Conclusions paragraphs BC154–BCZ190

]

Consolidation procedures

[

Refer:

paragraph 21

Basis for Conclusions paragraph BC154

]

B86

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.

Uniform accounting policies

[

Refer:

paragraph 19

]

B87

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

B88

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.

[

Refer:

IFRS 3

]

For example, depreciation expense recognised in the consolidated statement of comprehensive income after the acquisition date is based on the fair values

[

Refer:

IFRS 13

]

of the related depreciable assets recognised in the

consolidated financial statements

at the acquisition date.

Potential voting rights

[

Refer:

paragraphs B15(a)

, B23, B38(d),

B42(b)

and

B47–B50

Basis for Conclusions paragraphs BC112–BC124

]

B89

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

[

Refer:

paragraphs 16

22–24

and

B94–B96

]

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.

B90

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.

B91

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

B92

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 statements of the parent to enable the parent to consolidate the financial information of the subsidiary, unless it is impracticable to do so.

B93

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

[

Refer:

paragraphs 16

22–24

B89

B90

and

B98

Basis for Conclusions paragraphs BCZ155–BCZ159

]

B94

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.

B95

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

B96

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

[

Refer:

IFRS 13

]

of the consideration paid or received, and attribute it to the owners of the

parent

E13

[

Refer:

paragraph 23

Basis for Conclusions paragraphs BCZ168–BCZ179

]

E13

[IFRIC®

Update

, January 2013, Agenda Decision, ‘

IAS 27

Consolidated and Separate Financial Statements

and

IFRS 10

Consolidated Financial Statements

—Non-cash acquisition of a non-controlling interest by a controlling shareholder in the consolidated financial statements’

The Interpretations Committee received a request for guidance on the accounting for the purchase of a non-controlling interest (NCI) by the controlling shareholder when the consideration includes non-cash items. More specifically, the submitter asked the Interpretations Committee to clarify whether the difference between the fair value of the consideration given and the carrying amount of such consideration should be recognised in equity or in profit or loss. The submitter asserted that, according to paragraph 31 of IAS 27 (paragraph 31 of IAS 27 has been superseded by paragraph B96 of IFRS 10), the difference described should be recognised in equity, whereas applying IFRIC 17

Distributions of Non-cash Assets to Owners

by analogy the difference should be recognised in profit or loss. The submitter asked the Interpretations Committee to resolve this apparent conflict between IAS 27 (superseded by IFRS 10) and IFRIC 17.

The Interpretations Committee noted that paragraph 31 of IAS 27 (paragraph 31 of IAS 27 has been superseded by paragraph B96 of IFRS 10) deals solely with the difference between the carrying amount of NCI and the fair value of the consideration given; this difference is required to be recognised in equity. This paragraph does not deal with the difference between the fair value of the consideration given and the carrying amount of such consideration. The difference between the fair value of the assets transferred and their carrying amount arises from the derecognition of those assets. IFRSs generally require an entity to recognise, in profit or loss, any gain or loss arising from the derecognition of an asset.

Consequently, the Interpretations Committee concluded that in the light of the existing IFRS requirements, an interpretation or an amendment to Standards was not necessary and consequently decided not to add this issue to its agenda.]

Loss of control

[

Refer:

paragraphs 25 and 26

Basis for Conclusions paragraphs BCZ160–BCZ167

and

BCZ180–BC190J

]

B97

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.

(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.

B98

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

[

Refer:

paragraphs 16

22–24

B89 and B90

B94–B96

]

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

[

Refer:

IFRS 13

]

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.

B99

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.

[

Refer:

paragraph B98(c)

]

B99A

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,

[

Refer:

IAS 28 paragraphs 10–15

]

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.

[

Refer:

Basis for Conclusions paragraphs BC190A–BC190J

and, for deferral of effective date,

paragraphs BC190L–BC190O

]

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.

[

Refer:

Basis for Conclusions paragraphs BC190L–BC190O

for deferral of effective date]

Accounting for a change in investment entity status

B100

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.

[

Refer:

Basis for Conclusions paragraph BC270

]

B101

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 those subsidiaries that it ceases to consolidate as though the investment entity had lost control of those subsidiaries at that date.

[

Refer:

Basis for Conclusions paragraph BC271

]

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.

[

Refer:

Basis for Conclusions paragraphs BC191–BC194

]

C1A

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.

[

Refer:

Basis for Conclusions paragraphs BC196A—BC196C

and

BC199A—BC199D

]

C1B

Investment Entities

(Amendments to IFRS 10,

IFRS 12

and

IAS 27

), issued in October 2012, amended

paragraphs 2

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.

[

Refer:

Basis for Conclusions paragraph BC288

]

C1C

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.

[

Refer:

Basis for Conclusions paragraphs BC190K–BC190O

]

C1D

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.

C1E

Annual Improvements to IFRS Accounting Standards—Volume 11

, issued in July 2024, amended

paragraph B74

. An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2026. Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact.

Transition

[

Refer:

Basis for Conclusions paragraphs BC195–BCZ203

]

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

[

Refer:

Basis for Conclusions paragraphs BC195

BC196

and

BC199

]

C2A

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

[

Refer:

Basis for Conclusions paragraphs BC285(c)

]

, 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’)

[

Refer:

paragraphs C6A

and

C6B

]

. An entity may also present this information for the current period or for earlier comparative periods, but is not required to do so.

[

Refer:

Basis for Conclusions paragraphs BC199D–BC287A

]

C2B

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.

[

Refer:

Basis for Conclusions paragraphs BC199A and BC199B

]

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.

[

Refer:

Basis for Conclusions paragraph BC199B

]

C3A

At the date of initial application,

[

Refer:

paragraph C3F

]

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

C3B

Except for any subsidiary that is consolidated in accordance with

paragraph 32

(to which

paragraphs C3

and

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.

[

Refer:

Basis for Conclusions paragraph BC285

]

C3C

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.

[

Refer:

Basis for Conclusions paragraph BC286

]

C3D

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.

[

Refer:

Basis for Conclusions paragraph BC285

]

C3E

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.

[

Refer:

Basis for Conclusions paragraph BC285

]

C3F

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

)

[

Refer:

IFRS 3 Appendix A (definition of a business)

and

paragraphs B7–B12

]

, 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 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.

C4A

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

E14

an investor shall:

(a)

if the investee is a business

[

Refer:

IFRS 3 Appendix A (definition of a business)

and

paragraphs B7–B12

]

, 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.

[

Refer:

Basis for Conclusions paragraph BC197

]

E14

[IFRIC®

Update

, November 2013, Agenda Decision, ‘IFRS 10

Consolidated Financial Statements

and IFRS 11

Joint Arrangements

—Transition provisions in respect of impairment, foreign exchange and borrowing costs’

The Interpretations Committee received a request to clarify the transition provisions of IFRS 10

Consolidated Financial Statements

and IFRS 11

Joint Arrangements

. The transition provisions of IFRS 10 and IFRS 11 include exemptions from retrospective application in specific circumstances. However, the submitter observes that IFRS 10 and IFRS 11 do not provide specific exemptions from retrospective application in respect of the application of IAS 21

The Effects of Changes in Foreign Exchange Rates

, IAS 23

Borrowing Costs

or IAS 36

Impairment of Assets

. The submitter thinks that retrospective application of these Standards could be problematic when first applying IFRS 10 and IFRS 11.

The Interpretations Committee noted that when IFRS 10 is applied for the first time, it must be applied retrospectively, except for the specific circumstances for which exemptions from retrospective application are given. It also noted that when IFRS 10 is applied retrospectively, there may be consequential accounting requirements arising from other Standards (such as IAS 21, IAS 23 and IAS 36). These requirements must also be applied retrospectively in order to measure the investee’s assets, liabilities and non-controlling interests, as described in paragraph C4 of IFRS 10, or the interest in the investee, as described in paragraph C5 of IFRS 10. The Interpretations Committee observed that if retrospective application of the requirements of IFRS 10 is impracticable because it is impracticable to apply retrospectively the requirements of other Standards, then IFRS 10 (paragraphs C4A and C5A) provides exemption from retrospective application.

The Interpretations Committee noted that although the meaning of the term ‘joint control’ as defined in IFRS 11 is different from its meaning in IAS 31

Interests in Joint Ventures

(2003) because of the new definition of ‘control’ in IFRS 10, nevertheless the outcome of assessing whether control is held ‘jointly’ would in most cases be the same in accordance with IFRS 11 as it was in accordance with IAS 31. As a result, the Interpretations Committee observed that, typically, the changes resulting from the initial application of IFRS 11 would be to change from proportionate consolidation to equity accounting or from equity accounting to recognising a share of assets and a share of liabilities. In those situations, IFRS 11 already provides exemption from retrospective application. The Interpretations Committee concluded that in most cases the initial application of IFRS 11 should not raise issues in respect of the application of other Standards.

On the basis of the analysis above, the Interpretations Committee determined that the existing transition requirements of IFRS 10 and IFRS 11 provide sufficient guidance or exemptions from retrospective application and consequently decided not to add this issue to its agenda.]C4B 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).

[Refer:Basis for Conclusions paragraphs BC196A and BC196B]C4C 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.

[Refer:Basis for Conclusions paragraph BC196C]C5 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.

[Refer:Basis for Conclusions paragraph BC198]C5A If measuring the interest in the investee in accordance with paragraph C5 is impracticable (as defined in IAS 8),E15 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.

[Refer:Basis for Conclusions paragraph BC198]E15[IFRIC®Update

, November 2013, Agenda Decision, ‘IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements

—Transition provisions in respect of impairment, foreign exchange and borrowing costs’

The Interpretations Committee received a request to clarify the transition provisions of IFRS 10 Consolidated Financial Statements and IFRS 11 Joint Arrangements

. The submitter thinks that retrospective application of these Standards could be problematic when first applying IFRS 10 and IFRS 11.

The Interpretations Committee noted that although the meaning of the term ‘joint control’ as defined in IFRS 11 is different from its meaning in IAS 31 Interests in Joint Ventures

On the basis of the analysis above, the Interpretations Committee determined that the existing transition requirements of IFRS 10 and IFRS 11 provide sufficient guidance or exemptions from retrospective application and consequently decided not to add this issue to its agenda.]C6 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.

[Refer:Basis for Conclusions paragraphs BCZ200–BCZ203]

References to the ‘immediately preceding period’[Refer:Basis for Conclusions paragraph BC199C]C6A 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’.

C6B 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 C7 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[Refer:Basis for Conclusions paragraphs BC204 and BC205]C8 This IFRS supersedes the requirements relating to consolidated financial statements in IAS 27 (as amended in 2008).

C9 This IFRS also supersedes SIC‑12 Consolidation—Special Purpose Entities.

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.

Board Approvals 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 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 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 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 3 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 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 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 Footnotes 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.”(back) 2 When it issued IFRS 18 Presentation and Disclosure in Financial Statements in April 2024, the IASB changed the title of IAS 8 to Basis of Preparation of Financial Statements.

(back) 3 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.