Control Over Structured Entities – FAQ | IFRS

Control over structured entities

Although IFRS 10 has no separate guidance on Special Purpose Entities (SPEs), it does have guidance on assessing control over entities for which voting rights do not have a significant effect on returns.

Despite the lack of a definition, entities typically considered to be SPEs in practice normally have some of the characteristics noted in the following table:

Typical features of SPEs

The most widespread use of SPEs is in the financial services industry, in connection with securitisation and other asset-backed financing arrangements. Other common uses include:

  • financial engineering and tax optimisation schemes
  • ring-fencing or sharing the risk of higher risk assets or activities
  • holding or investing in assets, especially property, in a tax efficient manner
  • regulatory compliance reasons, such as to achieve exposure to assets or activities in which direct participation is not permitted

Typically, an SPE has at least some of the following governance characteristics:

  • mechanism to ensure SPE undertakes only a narrow and well-defined range of activities, including a limited life
  • mechanism to ensure that ordinary shares (if any) do not confer ownership benefits, for example:
    • majority of profits paid out in interest or fees
    • shares owned by a charitable trust
    • thinly capitalised
  • use of a type of corporate vehicle other than a basic limited company
  • professional directors provided by an administration company
  • domiciled in offshore tax haven or financial center.

The practical implications of IFRS’s 10’s control definition on SPE’s are as follows:

  • SPE control assessments are in the scope of IFRS 10’s single model
  • IFRS 10 includes guidance on investees for which voting rights cannot significantly affect the returns and contractual rights determine the direction of the relevant activities
  • SIC-12 was applied in different ways by different entities and some approaches was longer sufficient, for example, assessments based only on:
    • quantitative analysis of risks and rewards
    • qualitative consideration of whether an SPE’s activities are conducted on behalf of the investor and is on ‘autopilot’.

Although IFRS 10 has no separate guidance on SPEs, it does have guidance on assessing control over entities for which voting rights do not have a significant effect on returns.

This type of entity is described (in IFRS 12) as a ‘structured entity’. It is common practice, to assume that most (but not all) SPEs previously within the scope of SIC-12 are structured entities under IFRS 12’s definitions.

Control over structured entities

Control over structured entities

Control over structured entities

IFRS 10’s guidance on assessing control over these types of entity is summarised in the table below:

Considerations

Guidance

Consider investor’s involvement in ‘purpose and design’ of investee

  • consideration should include involvement and decisions made at investee’s inception
  • such involvement may indicate that the investor had opportunity to obtain rights sufficient for power
  • involvement alone is insufficient to confer power.

Consider contractual arrangements between investor and investee

  • example of such contractual arrangements include:
    • call and put rights
    • liquidation rights
  • contractual arrangements involving activities closely related to investee are considered part of the investee’s overall activities (even if outside its legal boundary).

Relevant activities may include activities that arise only in particular circumstances

  • investee’s activities may be predetermined unless a particular event occurs, at which point one or more investors has decision-making rights (for example, rights to manage receivables only if they default)
  • in some circumstances ‘contingent’ activities can be the investee’s only relevant activities and the investor with the related decision-making rights may have control.

Consider implicit and explicit commitments to support investee

  • such commitments may increase an investor’s exposure to variable returns
  • this increases the incentive to obtain power without conferring power in itself.

In overview, then, applying IFRS 10 to structured entities and SPEs requires a detailed and specific assessment of the investee’s relevant activities and the investor’s rights to make decisions about them. Control over structured entities

Link with financial asset derecognition rules (IFRS 9)

SPEs are often used in connection with securitisations and other transactions involving a transfer of financial assets. The financial reporting impact of these transactions depends on the derecognition requirements in IFRS 9 Financial Instruments as well as the consolidation conclusion under IFRS 10.

If the asset transfer ‘fails’ de-recognition because the transferor retains substantially all the risks and rewards of the transferred assets, the accounting effect is often very similar to consolidation of the SPE. Control over structured entities

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