IFRS 10 Silos and deemed separate entities generally require the control assessment to be made at the level of each investee entity. However, in some circumstances the assessment is made for a portion of an entity (a deemed separate entity). This is the case if, and only if, all the assets, liabilities and equity of that part of the investee entity are ring-fenced from the overall investee (often described as a ‘silo’) [IFRS 10 B76 – B79]. IFRS 10 Silos and deemed separate entities
Silos most often exist within special purpose vehicles in the financial services and real estate sectors (for example, ‘multi-seller conduits’ and captive insurance entities). However, the conditions for a silo to be deemed a separate entity for IFRS 10 purposes are strict. The example below illustrates the silo concept: IFRS 10 Silos and deemed separate entities
Bank A establishes and administers a special purpose vehicle that enables two corporate clients – Companies A and B – to sell trade receivables in exchange for cash and rights to deferred consideration. The vehicle issues loan notes to outside investors to fund the purchases. Each company remains responsible for managing collection of its own transferred receivables. Bank A provides credit enhancements in exchange for a fee. The terms of the loan notes and contractual document establish how cash collected from each pool of receivables is allocated to meet payments of the loan notes. Cash collected in excess of the specified allocation is paid to the originators.
What does this mean?
A portion of an entity is treated as a silo if, and only if, the following conditions are met:
However, in a real life case, further analysis will be required to determine whether the allocation provisions create a situation in which each pool of assets is substantially viewed as the only source of payment for specified liabilities.
Silos and deemed separate entities Silos and deemed separate entities Silos and deemed separate entities
The term ‘entity’ is widely used in IFRS and is usually well-understood. Entities are generally arrangements with separate legal personalities in accordance with law (such as companies, corporations, trusts, partnerships and unincorporated associations). However, entities are not defined and questions sometimes arise as to whether an arrangement is an ‘entity’. The example below illustrates one such situation:
The law in Country X provides a mechanism for two or more investors to own undivided shares in the same property. Two entities – Investor A and Investor B – acquire undivided shares in a plot of land of 60% and 40% and establish a co-ownership agreement setting out their intention to develop and operate a retail park on the site. The co-ownership agreement establishes the decision-making rights of each Investor, their respective obligations and the basis for allocation of profits from the venture.
What does this mean?
Based on these limited facts, judgement is required to decide whether the property, combined with the co-ownership agreement, is an ‘entity’. One view is that an entity is any circumscribed area of economic activity for which discrete financial information exists. Under this definition the arrangement described would be an entity. However, this definition is not authoritative.
If an entity exists, Investors A and B should apply IFRS 10 to assess which (if either) has control. If, for example, A has control it would consolidate the investee and recognise a 40% non-controlling interest. Alternatively, A and B might conclude they have joint control and that IFRS 11 applies. The contractual arrangements for this transaction have to be analysed to ascertain whether it is control by one party (60% voting right) or joint venture (contractual arrangements on decisions in relevant activities of the property).
If the arrangement is not an entity:
See also: The IFRS Foundation
IFRS 10 Silos and deemed separate entities
IFRS 10 Silos and deemed separate entities IFRS 10 Silos and deemed separate entities IFRS 10 Silos and deemed separate entities