Like the analysis for non-structured entities, an investor ‘controls’ an investee if the investor is exposed to (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. Control involves power, exposure to variability of returns and a link between the two. [IFRS 10 6 – 7, IFRS 10 Definitions, IFRS 10 B2]
As for non-structured entities, a structured entity is not expected to have more than one controlling party at any given time. If no single investor, or group of investors acting collectively, has control, then no controlling party is identified and the entity is not consolidated. [IFRS 10 9]
As for non-structured entities, the assessment of control is performed on a continuous basis and an investor reassesses whether it controls an investee if facts and circumstances indicate that there are changes to one or more of the elements of the control model. [IFRS 10 8, IFRS 10 B80 – B85]
Other than in respect of disclosure, the distinction between structured and non-structured entities is practical rather than being a feature of the control model itself. Therefore, there is no need for an entity to reconsider whether an investee is a structured entity when changes in facts and circumstances occur, although this might change the factors considered in assessing control.
There are no exceptions from the requirement to identify a controlling party.
IFRS 10 introduces a single consolidation model that identifies continuous control as the basis for consolidation for all types of entities including structured entities. It identifies three elements of control, as shown in the reference to IFRS 10 above and the picture. An investor must possess all the three elements to conclude that it has control over an investee.
Other considerations when assessing control include the following:
Purpose and design of investee – (see separate blog)
To have power, the investor must be able to direct the relevant activities, taking into consideration the purpose and design of an investee. The relevant activities for an investee whose operations are directed through voting rights will generally be its operating and financing activities.
In the event that there are several investors who have the ability to direct different relevant activities, the investor having the current ability to direct the activities that most significantly affect the returns of the investee is considered to have power. One such example is illustrated in IFRS 10 ‘application examples’ where an investee is set up by two investors for the purpose of developing and marketing a medical product. One investor is responsible for developing and obtaining regulatory approval of the medical product while the other investor manufactures and markets the approved medical product. Accordingly, each investor needs to consider which activity most signifi cantly aff ects the investee’s returns and whether the investor is able to direct that activity.
Control with less than majority voting rights – (see separate blog)
It is also possible for an investor with less than majority voting rights to have power when the investor can unilaterally direct the relevant activities; this is also known as de facto control. This would imply consideration of relative and potential voting rights (only if they are substantive) and any additional facts and circumstances that may be relevant, like voting patterns at previous shareholders’ meetings.
IFRS 10 B43 contains an example of Investor A, who has acquired 48% of the voting rights of an investee while the remaining voting rights are held by thousands of shareholders, none individually holding more than 1% of the voting rights. In this case, Investor A concludes that he has a sufficiently dominant voting interest to meet the power criterion without the need to consider any other evidence of power.
Agency relationships – (see separate blog)
IFRS 10 provides explicit guidance on an agency relationship where an evaluation of the decision-making rights will determine which party holds the decision-making authority. The investor shall treat the decision-making rights of an investor’s agent as if they were held by the investor directly.
This is would have a potential impact for investment and asset managers when evaluating whether they are agents of the fund’s board of directors. Factors to be considered in such agency relationships would usually include the scope of discretion of decision-making authority, rights held by other parties, linkage of investee’s remuneration agreement to performance and decision-maker’s exposure to variability from interests in the investee.
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