IFRS 10 Structured vs non-structured entities

IFRS 10 Structured vs non-structured entities is a distinction in use under IFRS 10 Consolidated Financial Statements. Consolidation under IFRS 10 is based on what can be referred to as a ‘power-to-direct’ model. Although there is no distinction between different types of entities in determining whether one entity controls another, there is a ‘gating’ question in the analysis that distinguishes between entities for which: IFRS 10 Structured vs non-structured entities

  • voting rights are the dominant factor in assessing whether the investor has power over the investee – i.e. the investee is controlled by voting instruments; and
  • voting rights are not the dominant factor in assessing whether the investor has power over the investee – i.e. the investee is controlled by means of other rights. [IFRS 10 B6]

Therefore, for practical purposes, entities for which voting rights are relevant (typically referred to as ‘non-structured entities’) are considered separately from those for which voting rights are not relevant (typically referred to as ‘structured entities’). IFRS 10 Structured vs non-structured entities

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, IFRS 10 Definitions and IFRS 10 B2] IFRS 10 Structured vs non-structured entities

If the investee is controlled by equity instruments, with associated and proportionate voting rights, then the assessment of power focuses on which investor, if any, has sufficient voting rights to direct the investee’s relevant activities; this is in the absence of any additional arrangements that alter the decision making. In the most straightforward cases, the investor holding the majority of the voting rights has power over (and controls) the investee. [IFRS 10 11, IFRS 10 B6]

An investor considers both substantive rights that it holds and substantive rights held by others. To be ‘substantive’, rights need to be exercisable when decisions about the relevant activities are required to be made, and the holder needs to have a practical ability to exercise those rights. [IFRS 10 B22, IFRS 10 B24]

Protective rights are related to fundamental changes in the activities of an investee, or are rights that apply only in exceptional circumstances. As such, they cannot give the holder power or prevent other parties from having power and therefore control over an investee. [IFRS 10 14, IFRS 10 B26–B28]

In assessing control, an investor considers its potential voting rights – e.g. a call option over shares of the investee – as well as potential voting rights held by other parties, to determine whether it has power. Potential voting rights are considered only if they are substantive (see above). [IFRS 10 B47]

Even without potential voting rights or other contractual rights, if the investor holds significantly more voting rights than any other vote holder or organised group of vote holders, then this may be sufficient evidence of power (de facto power). In other situations, the size of the investor’s holding of voting rights relative to the size and dispersion of the holdings of other vote holders may provide sufficient evidence that the investor does not have power – e.g. if there is a concentration of other voting interests among a small group of vote holders. [IFRS 10 B38, IFRS 10 B43-B45] IFRS 10 Structured vs non-structured entities

The factors discussed below in respect of structured entities apply equally to non‑structured entities. However, in practice, they are more likely to be relevant to structured entities. IFRS 10 Structured vs non-structured entities

Structured entities

‘Structured entities’ are entities designed such that voting or similar rights are not the dominant factor in assessing control. [IFRS 12 Definitions]

The controlling party

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 B2] IFRS 10 Structured vs non-structured entities

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] IFRS 10 Structured vs non-structured entities

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. IFRS 10 Structured vs non-structured entities

There are no exceptions from the requirement to identify a controlling party. IFRS 10 Structured vs non-structured entities

Silo

Control is usually assessed over a legal entity, but can also be assessed over only specified assets and liabilities of the entity (a ‘silo’) if the following criteria are met:

  • the specified assets of the investee are the only source of payment for specified liabilities of, or specified other interests in, an investee; and
  • parties other than those with the specified liability have no rights or obligations in respect of the assets related to that liability (specified assets) or to residual cash flows from those assets. [IFRS 10 B76 – B78]

See also: The IFRS Foundation

IFRS 10 Structured vs non-structured entities

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