Need to Know: IFRS 10 - Consolidated Financial ... - BDO Canada

12 IFRS 10 Consolidated Financial Statements7. Control7.1. The single control model7.1.1. DefinitionIFRS 10 Consolidated Financial Statements introduces a single control model for all entities. An investor controls aninvestee when:‘…the investor is exposed, or has rights, to variable returns from its involvement with the investee andhas the ability to affect those returns through its power over the investee.’Under the new guidance control is the sole basis for consolidation. The structure of the investee is not relevant.Consequently, the requirements of IFRS 10 apply to all investor/investee relationships, including what are nowtermed ‘structured entities’. These are broadly equivalent to Special Purpose Entities (SPEs) that previously fell withinthe scope of SIC-12 Consolidation—Special Purpose Entities.7.1.2. Assessment of controlIFRS 10.7 notes that an investor controls an investee if it has all of the following:––Power over the investee (whether or not that power is used in practice)––Exposure, or rights, to variable returns from its involvement with the investee––The ability to use its power to affect the amount of the investor’s returns.Control= + +Exposure toPowervariable returnsLinkage betweenpower andreturnsFigure 2: Assessment of controlAlthough this assessment appears similar to the approach previously required by IAS 27(2008) Consolidated andSeparate Financial Statements and SIC-12, there are key differences. In particular, because an investor must satisfy allthree of the criteria set out above, under IFRS 10 even if an investor has substantial exposure to variable returns ofanother entity, this is not sufficient by itself to conclude that control exists. This is in contrast to, for example, theanalysis carried out under SIC-12 where exposure to a majority of the benefits of an SPE gave rise to an assumptionthat control existed. However, in contrast with SIC-12, but consistent with IAS 27(2008), it is not necessary foran investor to be exposed to a majority of the benefits (or returns) of an investee in order for that investee to beaccounted for as a subsidiary.All facts and circumstances are required to be considered when an investor assesses whether it controls anotherentity. The following factors may assist in the determination (IFRS 10.B3):––The purpose and design of the investee––What the relevant activities are and how decisions about those activities are made––Whether the rights of the investor give it the current ability to direct the relevant activities––Whether the investor is exposed, or has rights, to variable returns from its involvement with the investee––Whether the investor has the ability to use its power over the investee to affect the amount of the investor’sreturns.