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

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36 IFRS 10 Consolidated Financial Statements7.5.2. De facto agentsAn investor is required to combine its rights and the rights of a de facto agent when it assesses whether it controls aninvestee. A de facto agent is described as a party that is acting on the investor’s behalf.IFRS 10 acknowledges that this determination of a de facto agent is judgemental and that the relationship betweenthe investor and the parties and also how the parties interact with each other and the investor is required to be takeninto consideration (IFRS 10.B73).Such a relationship does not necessarily need a contractual arrangement. A party is a de facto agent when theinvestor has the ability to direct that party to act on the investor’s behalf (IFRS 10.B74).IFRS 10.B75 provides a list of examples of parties that might act as de facto agents:––The investor’s related parties––A party that received its interest in the investee as a contribution or loan from the investor––A party that has agreed not to sell, transfer or encumber its interests in the investee without the investor’s priorapproval (except for situations in which the investor and the other party have the right of prior approval and therights are based on mutually agreed terms by willing independent parties)––A party that cannot finance its operations without subordinated financial support from the investor––An investee for which the majority of the members of its governing body or for which its key managementpersonnel are the same as those of the investor––A party that has a close business relationship with the investor, such as the relationship between a professionalservice provider and one of its significant clients.This guidance is not intended to imply that the parties listed above always act for the investor. When assessingwhether a party acts as de facto agent judgement, including careful consideration of the nature of the relationshipand the way that the parties interact with each other, will be required.
IFRS 10 Consolidated Financial Statements377.6. Specific topics7.6.1. SilosIFRS 10 contains guidance which requires an investor to consolidate a portion of an investee (a silo) if the investoris deemed to have control over that portion. This guidance was not included in IAS 27(2008) but was nonethelessapplied in practice. As a result, specified assets and liabilities held by a legal entity may be consolidated as a ‘deemedseparate entity’.The new guidance for silos is likely to affect the finance, real estate and insurance industry (e.g. captive insuranceentities or ‘multi-seller conduits’). A common example is where a bank sets up a wholly owned subsidiary, throughwhich a large number of securitisation transactions are processed. For each securitisation, the assets and liabilitiesare entirely ring fenced from the assets and liabilities of all of the other securitisations.In order for a silo to exist, all of the following conditions have to be met (IFRS 10.B77):––The liabilities of a silo can only be settled with its specified assets––Only parties with the specified liability or liabilities have rights (or obligations) related to the assets or to theresidual cash flows from those assets––In substance, none of the returns from the silo can be used by the remaining investee(s)––None of the liabilities of the silo can be paid using assets outside the boundary of the silo.An investor in a silo that meets the criteria set out above is required to assess whether it controls the silo basedon the same control criteria that apply to other entities. This means that an investor will have to identify if it hasexposure or rights to variable returns from its involvement in the silo and the ability to use its power over the silo toaffect its returns (IFRS 10.B78).An investor only consolidates the silo – not the remainder of the investee. The other party (or parties) that haveinterest(s) in the investee exclude the siloed portion from the entity when assessing control and, if required, will onlyconsolidate the remaining part of the investee (or one or more other silos) (IFRS 10.B79).7.6.2. Structured entitiesStructured entities are defined in IFRS 12. The term ‘structured entity’ replaces the term ‘special purpose entity’ inSIC-12. A structured entity is defined in IFRS 12 Appendix A as:‘An entity that has been designed so that voting or similar rights are not the dominant factor in deciding whocontrols the entity, such as when any voting rights relate to administrative tasks only and the relevant activitiesare directed by means of contractual arrangements.’A structured entity often has some or all of the following features or attributes:––Restricted activities––A narrow and well-defined objective, such as:––To effect a tax-efficient lease––To carry out research and development activities––To provide a source of capital or funding to an entity––To provide investment opportunities for investors by passing on risks and rewards associated with the assets ofthe structured entity to investors.––Insufficient equity to permit the structured entity to finance its activities without subordinated financial support––Financing in the form of multiple contractually linked instruments to investors that create concentrations of creditor other risks (tranches) (IFRS 12.B22).
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Need to Know: IFRS 10 - Consolidated Financial ... - BDO Canada

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