AASB 10 - Consolidated Financial Statements - August 2011 (Cth)
| Compiled AASB Standard | AASB 10 |
Consolidated Financial Statements
This compiled Standard applies to annual reporting periods beginning on or after 1 January 2016 but before 1 July 2016. Early application is permitted for annual reporting periods beginning on or after 1 January 2014 but before 1 January 2016. It incorporates relevant amendments made up to and including 22 December 2015.
Prepared on 14 February 2016 by the staff of the Australian Accounting Standards Board.
Obtaining Copies of Accounting Standards
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COPYRIGHT
© Commonwealth of Australia 2016
This compiled AASB Standard contains IFRS Foundation copyright material. Reproduction within Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source. Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to The Director of Finance and Administration, Australian Accounting Standards Board, PO Box 204, Collins Street West, Victoria 8007.
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Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only. Further information and requests for authorisation to reproduce for commercial purposes outside Australia should be addressed to the IFRS Foundation at align="center">CONTENTS
COMPILATION DETAILS
COMPARISON WITH IFRS 10
INTRODUCTION TO IFRS 10
(available on the AASB website)
ACCOUNTING STANDARD
AASB 10 CONSOLIDATED FINANCIAL STATEMENTS
Paragraphs
Objective 1
Meeting the objective 2 – 3
Application Aus3.1 – Aus3.6
Scope 4 – 4B
Control 5 – 9
Power 10 – 14
Returns 15 – 16
Link between power and returns 17 – 18
Accounting requirements 19 – 21
Non-controlling interests 22 – 24
Loss of control 25 – 26
Determining whether an entity is an investment entity 27 – 30
Investment entities: exception to consolidation 31 – 33
Appendices:
A. Defined Terms Page 13
B. Application Guidance B1
Assessing control B2 – B4
Purpose and design of an investee B5 – B8
Power B9 – B54
Exposure, or rights, to variable returns from an investee B55 – B57
Link between power and returns B58 – B72
Relationship with other parties B73 – B75
Control of specified assets B76 – B79
Continuous assessment B80 – B85
Determining whether an entity is an investment entity B85A
Business purpose B85B – B85J
Fair value measurement B85K – B85M
Typical characteristics of an investment entity B85N – B85W
Accounting requirements
Consolidation procedures B86
Uniform accounting policies B87
Measurement B88
Potential voting rights B89 – B91
Reporting date B92 – B93
Non-controlling interests B94 – B96
Loss of control B97 – B99
Accounting for a change in investment entity status B100 – B101
C. Effective Date and Transition
Effective date C1A – C1D
Transition C2 – C6
References to the ‘immediately preceding period’ C6A – C6B
References to AASB 9 C7
E. Australian Implementation Guidance for Not-for-Profit Entities IG1 – IG3
Control IG4
Power IG5 – IG17
Rights that give an investor power over an investee IG9 – IG12
Substantive rights IG13 – IG14
Protective rights IG15 – IG17
Returns
Exposure, or rights, to variable returns from an investee IG18 – IG19
Link between power and returns IG20
Delegated power IG21 – IG24
Implementation examples IG25 – IG26
AUSTRALIAN APPLICATION GUIDANCE Page 53
DELETED IFRS 10 TEXT Page 54
BASIS FOR CONCLUSIONS ON PARAGRAPH Aus4.1
(see Basis for Conclusions on AASB 2011‑5)
BASIS FOR CONCLUSIONS ON IFRS 10
(available on the AASB website)
Australian Accounting Standard AASB 10 Consolidated Financial Statements (as amended) is set out in paragraphs 1 –33, Appendices A – C and E. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time they appear in the Standard. AASB 10 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation of Standards, which identifies the Australian Accounting Interpretations. In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies.
COMPILATION DETAILS
Accounting Standard AASB 10 Consolidated Financial Statements as amended
This compiled Standard applies to annual reporting periods beginning on or after 1 January 2016 but before 1 July 2016. It takes into account amendments up to and including 22 December 2015 and was prepared on 14 February 2016 by the staff of the Australian Accounting Standards Board (AASB).
This compilation is not a separate Accounting Standard made by the AASB. Instead, it is a representation of AASB 10 (August 2011) as amended by other Accounting Standards, which are listed in the Table below.
Table of Standards
| Standard | Date made | Application date | Application, saving or transitional provisions |
| AASB 10 | 29 Aug 2011 | (beginning) 1 Jan 2013 | see (a) below |
| AASB 2012-10 | 18 Dec 2012 | (beginning) 1 Jan 2013 | see (b) below |
| AASB 2012-11 | 18 Dec 2012 | (beginning) 1 Jul 2013 | see (c) below |
| AASB 2013-5 | 14 Aug 2013 | (beginning) 1 Jan 2014 | see (d) below |
| AASB 2013-8 | 31 Oct 2013 | (beginning) 1 Jan 2014 | see (e) below |
| AASB 2014-10 | 23 Dec 2014 | (beginning) 1 Jan 2016 | see (f) below |
| AASB 2015-3 | 28 Jan 2015 | (beginning) 1 Jul 2015 | see (g) below |
| AASB 2015-5 | 30 Jan 2015 | (beginning) 1 Jan 2016 | see (f) below |
| AASB 2015-6 | 31 Mar 2015 | (beginning) 1 Jul 2016 | not compiled* |
| AASB 2015-10 | 22 Dec 2015 | (beginning) 1 Jan 2016 | see (h) below |
* The amendments made by this Standard (which commences on 30 June 2016) are not included in this compilation, which presents the principal Standard as applicable to annual reporting periods beginning on or after 1 January 2016 but before 1 July 2016.
(a) For-profit entities (but not not-for-profit entities) may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013, provided that certain related Standards are also applied to such periods. This early application provision was subsequently amended by AASB 2012-10.
(b) For-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013. Not-for-profit entities may elect to apply the amendments to AASB 10 in this Standard to annual reporting periods beginning on or after 1 January 2013 but before 1 January 2014.
(c) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 July 2009 but before 1 July 2013, provided that AASB 1053 Application of Tiers of Australian Accounting Standards is also applied to such periods.
(d) For-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2014. Not-for-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2013 but before 1 January 2014. If an entity elects to apply this Standard to such annual reporting periods, it shall also apply AASB 10 Consolidated Financial Statements and associated Standards to such periods.
(e) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2013 but before 1 January 2014.
(f) For-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2016. Not-for-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2013 but before 1 January 2016.
(g) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2014 but before 1 July 2015.
(h) Entities may elect to apply this Standard to annual reporting periods beginning before 1 January 2016. The amendments originally set out in AASB 2014-10 (which were reversed by AASB 2015-10) nevertheless may be applied by for-profit entities to annual periods beginning on or after 1 January 2005 and by not-for-profit entities to annual periods beginning on or after 1 January 2013.
Table of Amendments to Standard
| Paragraph affected | How affected | By … [paragraph] |
| 2 | amended | AASB 2013-5 [7] |
| Aus3.2-Aus3.3 | amended | AASB 2012-10 [25] |
| Aus3.4 | deleted | AASB 2015-3 [13, 14] |
| Aus3.6 | added | AASB 2013-8 [7] |
| 4 | amended amended | AASB 2013-5 [7] AASB 2015-5 [7] |
| Aus4.1 | amended amended | AASB 2012-11 [14] AASB 2015-5 [7] |
| Aus4.2 | amended amended | AASB 2014-10 [7] AASB 2015-5 [7] |
| 4A-4B | added | AASB 2015-5 [7] |
| 25-26 | amended amended | AASB 2014-10 [8] AASB 2015-10 [6] |
| 27-31 (and preceding headings) | added | AASB 2013-5 [8] |
| 32 | added amended | AASB 2013-5 [8] AASB 2015-5 [7] |
| 33 | added | AASB 2013-5 [8] |
| Appendix A | amended | AASB 2013-5 [9] |
| B13 | amended | AASB 2012-10 [26] |
| B43 | amended | AASB 2012-10 [27] |
| B82 | amended | AASB 2012-10 [28] |
| B85A-B85B (and preceding headings) | added | AASB 2013-5 [10] |
| B85C | added amended | AASB 2013-5 [10] AASB 2015-5 [8] |
| B85D | added | AASB 2013-5 [10] |
| B85E | added amended | AASB 2013-5 [10] AASB 2015-5 [8] |
| B85F-B85W (and preceding headings) | added | AASB 2013-5 [10] |
| B99A | added deleted | AASB 2014-10 [9] AASB 2015-10 [6] |
| B100-B101 (and preceding heading) | added | AASB 2013-5 [11] |
| C1A | added | AASB 2012-10 [29] |
| C1B | added | AASB 2013-5 [12] |
| C1C | added deleted | AASB 2014-10 [10] AASB 2015-10 [6] |
| C1D | added | AASB 2015-5 [9] |
| C2 | amended | AASB 2012-10 [30] |
| C2A | added amended amended | AASB 2012-10 [31] AASB 2013-5 [13] AASB 2015-5 [9] |
| C2B | added | AASB 2012-10 [31] |
| C3-C4 | amended | AASB 2012-10 [32] |
| C3A-C3F | added | AASB 2013-5 [14] |
| C4A | added | AASB 2012-10 [32] |
| C4B-C4C | added | AASB 2012-10 [33] |
| C5 | amended | AASB 2012-10 [34] |
| C5A | added | AASB 2012-10 [34] |
| C6 | amended | AASB 2012-10 [34] |
| C6A (preceding heading) | added | AASB 2012-10 [35] |
| C6A | added amended | AASB 2012-10 [35] AASB 2013-5 [15] |
| C6B | added | AASB 2012 10[35] |
| Appendix E | added | AASB 2013-8 [8] |
Table of Amendments to Australian Application Guidance
| Paragraph affected | How affected | By … [paragraph] |
| AG1 | amended | AASB 2012-11 [15] |
COMPARISON WITH IFRS 10
AASB 10 Consolidated Financial Statements as amended incorporates IFRS 10 Consolidated Financial Statements as issued and amended by the International Accounting Standards Board (IASB). Paragraphs that have been added to this Standard (and do not appear in the text of IFRS 10) are identified with the prefix “Aus”, followed by the number of the preceding IASB paragraph and decimal numbering.
For-profit entities that comply with AASB 10 as amended will simultaneously be in compliance with IFRS 10 as amended.
Entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements and not-for-profit entities using the added “Aus” paragraphs in the Standard may not be simultaneously complying with IFRS 10.
ACCOUNTING STANDARD AASB 10
The Australian Accounting Standards Board made Accounting Standard AASB 10 Consolidated Financial Statements under section 334 of the Corporations Act 2001 on 29 August 2011.
This compiled version of AASB 10 applies to annual reporting periods beginning on or after 1 January 2016 but before 1 July 2016. It incorporates relevant amendments contained in other AASB Standards made by the AASB up to and including 22 December 2015 (see Compilation Details).
ACCOUNTING STANDARD AASB 10
CONSOLIDATED FINANCIAL STATEMENTS
Objective
1 The objective of this Standard is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.
Meeting the objective
2 To meet the objective in paragraph 1, this Standard:
(a) requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements;
(b) defines the principle of control, and establishes control as the basis for consolidation;
(c) sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee;
(d) sets out the accounting requirements for the preparation of consolidated financial statements; and
(e) defines an investment entity and sets out an exception to consolidating particular subsidiaries of an investment entity.
3 This Standard does not deal with the accounting requirements for business combinations and their effect on consolidation, including goodwill arising on a business combination (see AASB 3 Business Combinations).
Application
Aus3.1 This Standard applies to:
(a) each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b) general purpose financial statements of each other reporting entity; and
(c) financial statements that are, or are held out to be, general purpose financial statements.
Aus3.2 This Standard applies to annual reporting periods beginning on or after 1 January 2013, except that for not-for-profit entities it applies to annual reporting periods beginning on or after 1 January 2014.
[Note: For application dates of paragraphs changed or added by an amending Standard, see Compilation Details.]Aus3.3 This Standard may be applied by:
(a)for-profit entities to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013; and
(b)not-for-profit entities to annual reporting periods beginning on or after 1 January 2013 but before 1 January 2014.
If an entity applies this Standard to such an annual reporting period in accordance with paragraph (a) or (b), it shall disclose that fact and apply AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, AASB 127 Separate Financial Statements (August 2011) and AASB 128 Investments in Associates and Joint Ventures (August 2011), at the same time.
Aus3.4 [Deleted by the AASB]
Aus3.5 When applied or operative, this Standard supersedes:
(a)the requirements relating to consolidated financial statements in AASB 127 Consolidated and Separate Financial Statements (March 2008, as amended); and
(b)Interpretation 112 Consolidation – Special Purpose Entities (December 2004, as amended).
Aus3.6 Appendix E Australian Implementation Guidance for Not-for-Profit Entities explains and illustrates the principles in this Standard from the perspective of not-for-profit entities in the private and public sectors, particularly in circumstances where the for-profit perspective reflected in the body of the Standard and the other appendices does not readily translate to a not-for-profit perspective.
Scope
4 An entity that is a parent shall present consolidated financial statements. This Standard applies to all entities, except as follows:
(a) a parent need not present consolidated financial statements if it meets all the following conditions:
(i)it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements;
(ii)its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);
(iii)it did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and
(iv)its ultimate or any intermediate parent produces financial statements that are available for public use and comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with this Standard.
(b) [deleted by the IASB]
(c) [deleted by the IASB]
Aus4.1 Notwithstanding paragraph 4(a)(iv), a parent that meets the criteria in paragraphs 4(a)(i), 4(a)(ii) and 4(a)(iii) need not present consolidated financial statements if its ultimate or any intermediate parent produces financial statements that are available for public use in which subsidiaries are consolidated or are measured at fair value through profit or loss in accordance with this Standard and:
(a)the parent and its ultimate or intermediate parent are:
(i)both not-for-profit entities complying with Australian Accounting Standards; or
(ii)both entities complying with Australian Accounting Standards – Reduced Disclosure Requirements; or
(b)the parent is an entity complying with Australian Accounting Standards – Reduced Disclosure Requirements and its ultimate or intermediate parent is a not-for-profit entity complying with Australian Accounting Standards.
Aus4.2 Notwithstanding paragraphs 4(a) and Aus4.1, the ultimate Australian parent shall present consolidated financial statements that consolidate its investments in subsidiaries in accordance with this Standard when either the parent or the group is a reporting entity or both the parent and the group are reporting entities, except if the ultimate Australian parent is required, in accordance with paragraph 31 of this Standard, to measure all of its subsidiaries at fair value through profit or loss.
4A This Standard does not apply to post-employment benefit plans or other long-term employee benefit plans to which AASB 119 Employee Benefits applies.
4B A parent that is an investment entity shall not present consolidated financial statements if it is required, in accordance with paragraph 31 of this Standard, to measure all of its subsidiaries at fair value through profit or loss.
Control
5 An investor, regardless of the nature of its involvement with an entity (the investee), shall determine whether it is a parent by assessing whether it controls the investee.
6 An investor controls an investee when it is exposed, or 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.
7 Thus, an investor controls an investee if and only if the investor has all the following:
(a) power over the investee (see paragraphs 10–14);
(b) exposure, or rights, to variable returns from its involvement with the investee (see paragraphs 15 and 16); and
(c) the ability to use its power over the investee to affect the amount of the investor’s returns (see paragraphs 17 and 18).
8 An investor shall consider all facts and circumstances when assessing whether it controls an investee. The investor shall reassess whether it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed in paragraph 7 (see paragraphs B80–B85).
9 Two or more investors collectively control an investee when they must act together to direct the relevant activities. In such cases, because no investor can direct the activities without the co-operation of the others, no investor individually controls the investee. Each investor would account for its interest in the investee in accordance with the relevant Standards, such as AASB 11 Joint Arrangements, AASB 128 Investments in Associates and Joint Ventures or AASB 9 Financial Instruments.
Power
10 An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, ie the activities that significantly affect the investee’s returns.
11 Power arises from rights. Sometimes assessing power is straightforward, such as when power over an investee is obtained directly and solely from the voting rights granted by equity instruments such as shares, and can be assessed by considering the voting rights from those shareholdings. In other cases, the assessment will be more complex and require more than one factor to be considered, for example when power results from one or more contractual arrangements.
12 An investor with the current ability to direct the relevant activities has power even if its rights to direct have yet to be exercised. Evidence that the investor has been directing relevant activities can help determine whether the investor has power, but such evidence is not, in itself, conclusive in determining whether the investor has power over an investee.
13 If two or more investors each have existing rights that give them the unilateral ability to direct different relevant activities, the investor that has the current ability to direct the activities that most significantly affect the returns of the investee has power over the investee.
14 An investor can have power over an investee even if other entities have existing rights that give them the current ability to participate in the direction of the relevant activities, for example when another entity has significant influence. However, an investor that holds only protective rights does not have power over an investee (see paragraphs B26–B28), and consequently does not control the investee.
Returns
15 An investor is exposed, or has rights, to variable returns from its involvement with the investee when the investor’s returns from its involvement have the potential to vary as a result of the investee’s performance. The investor’s returns can be only positive, only negative or both positive and negative.
16 Although only one investor can control an investee, more than one party can share in the returns of an investee. For example, holders of non-controlling interests can share in the profits or distributions of an investee.
Link between power and returns
17 An investor controls an investee if the investor not only has power over the investee and exposure or rights to variable returns from its involvement with the investee, but also has the ability to use its power to affect the investor’s returns from its involvement with the investee.
18 Thus, an investor with decision-making rights shall determine whether it is a principal or an agent. An investor that is an agent in accordance with paragraphs B58–B72 does not control an investee when it exercises decision-making rights delegated to it.
Accounting requirements
19 A parent shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances.
20 Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee.
21 Paragraphs B86–B93 set out guidance for the preparation of consolidated financial statements.
Non-controlling interests
22 A parent shall present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.
23 Changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control of the subsidiary are equity transactions (ie transactions with owners in their capacity as owners).
24 Paragraphs B94–B96 set out guidance for the accounting for non-controlling interests in consolidated financial statements.
Loss of control
25 If a parent loses control of a subsidiary, the parent:
(a) derecognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position.
(b) recognises any investment retained in the former subsidiary at its fair value when control is lost and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance with relevant Standards. That fair value shall be regarded as the fair value on initial recognition of a financial asset in accordance with AASB 9 or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture.
(c) recognises the gain or loss associated with the loss of control attributable to the former controlling interest.
26 Paragraphs B97–B99 set out guidance for the accounting for the loss of control.
Determining whether an entity is an investment entity
27 A parent shall determine whether it is an investment entity. An investment entity is an entity that:
(a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;
(b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and
(c) measures and evaluates the performance of substantially all of its investments on a fair value basis.
Paragraphs B85A–B85M provide related application guidance.
28 In assessing whether it meets the definition described in paragraph 27, an entity shall consider whether it has the following typical characteristics of an investment entity:
(a) it has more than one investment (see paragraphs B85O–B85P);
(b) it has more than one investor (see paragraphs B85Q–B85S);
(c) it has investors that are not related parties of the entity (see paragraphs B85T–B85U); and
(d) it has ownership interests in the form of equity or similar interests (see paragraphs B85V–B85W).
The absence of any of these typical characteristics does not necessarily disqualify an entity from being classified as an investment entity. An investment entity that does not have all of these typical characteristics provides additional disclosure required by paragraph 9A of AASB 12.
29 If facts and circumstances indicate that there are changes to one or more of the three elements that make up the definition of an investment entity, as described in paragraph 27, or the typical characteristics of an investment entity, as described in paragraph 28, a parent shall reassess whether it is an investment entity.
30 A parent that either ceases to be an investment entity or becomes an investment entity shall account for the change in its status prospectively from the date at which the change in status occurred (see paragraphs B100–B101).
Investment entities: exception to consolidation
31 Except as described in paragraph 32, an investment entity shall not consolidate its subsidiaries or apply AASB 3 when it obtains control of another entity. Instead, an investment entity shall measure an investment in a subsidiary at fair value through profit or loss in accordance with AASB 9.[1]
[1] Paragraph C7 of AASB 10 Consolidated Financial Statements states “If an entity applies this Standard but does not yet apply AASB 9, any reference in this Standard to AASB 9 shall be read as a reference to AASB 139 Financial Instruments: Recognition and Measurement.”
32 Notwithstanding the requirement in paragraph 31, if an investment entity has a subsidiary that is not itself an investment entity and whose main purpose and activities are providing services that relate to the investment entity’s investment activities (see paragraphs B85C–B85E), it shall consolidate that subsidiary in accordance with paragraphs 19–26 of this Standard and apply the requirements of AASB 3 to the acquisition of any such subsidiary.
33 A parent of an investment entity shall consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity.
APPENDIX A
DEFINED TERMS
This appendix is an integral part of AASB 10.
| consolidated financial statements | The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. |
| control of an investee | An investor controls an investee when the investor is exposed, or 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. |
| decision maker | An entity with decision-making rights that is either a principal or an agent for other parties. |
| group | A parent and its subsidiaries. |
| investment entity | An entity that: (a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services; (b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and (c) measures and evaluates the performance of substantially all of its investments on a fair value basis. |
| non-controlling interest | Equity in a subsidiary not attributable, directly or indirectly, to a parent. |
| parent | An entity that controls one or more entities. |
| power | Existing rights that give the current ability to direct the relevant activities. |
| protective rights | Rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate. |
| relevant activities | For the purpose of this Standard, relevant activities are activities of the investee that significantly affect the investee’s returns. |
| removal rights | Rights to deprive the decision maker of its decision-making authority. |
| subsidiary | An entity that is controlled by another entity. |
The following terms are defined in AASB 11, AASB 12 Disclosure of Interests in Other Entities, AASB 128 (August 2011) or AASB 124 Related Party Disclosures and are used in this Standard with the meanings specified in those Standards:
associate
interest in another entity
joint venture
key management personnel
related party
significant influence.
APPENDIX B
APPLICATION GUIDANCE
This appendix is an integral part of AASB 10. It describes the application of paragraphs 1–26 and has the same authority as the other parts of the Standard.
B1 The examples in this appendix portray hypothetical situations. Although some aspects of the examples may be present in actual fact patterns, all facts and circumstances of a particular fact pattern would need to be evaluated when applying AASB 10.
Assessing control
B2 To determine whether it controls an investee an investor shall assess whether it has all the following:
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor’s returns.
B3 Consideration of the following factors may assist in making that determination:
(a) the purpose and design of the investee (see paragraphs B5–B8);
(b) what the relevant activities are and how decisions about those activities are made (see paragraphs B11–B13);
(c) whether the rights of the investor give it the current ability to direct the relevant activities (see paragraphs B14–B54);
(d) whether the investor is exposed, or has rights, to variable returns from its involvement with the investee (see paragraphs B55–B57); and
(e) whether the investor has the ability to use its power over the investee to affect the amount of the investor’s returns (see paragraphs B58–B72).
B4 When assessing control of an investee, an investor shall consider the nature of its relationship with other parties (see paragraphs B73–B75).
Purpose and design of an investee
B5 When assessing control of an investee, an investor shall consider the purpose and design of the investee in order to identify the relevant activities, how decisions about the relevant activities are made, who has the current ability to direct those activities and who receives returns from those activities.
B6 When an investee’s purpose and design are considered, it may be clear that an investee is controlled by means of equity instruments that give the holder proportionate voting rights, such as ordinary shares in the investee. In this case, in the absence of any additional arrangements that alter decision-making, the assessment of control focuses on which party, if any, is able to exercise voting rights sufficient to determine the investee’s operating and financing policies (see paragraphs B34–B50). In the most straightforward case, the investor that holds a majority of those voting rights, in the absence of any other factors, controls the investee.
B7 To determine whether an investor controls an investee in more complex cases, it may be necessary to consider some or all of the other factors in paragraph B3.
B8 An investee may be designed so that voting rights are not the dominant factor in deciding who controls the investee, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. In such cases, an investor’s consideration of the purpose and design of the investee shall also include consideration of the risks to which the investee was designed to be exposed, the risks it was designed to pass on to the parties involved with the investee and whether the investor is exposed to some or all of those risks. Consideration of the risks includes not only the downside risk, but also the potential for upside.
Power
B9 To have power over an investee, an investor must have existing rights that give it the current ability to direct the relevant activities. For the purpose of assessing power, only substantive rights and rights that are not protective shall be considered (see paragraphs B22–B28).
B10 The determination about whether an investor has power depends on the relevant activities, the way decisions about the relevant activities are made and the rights the investor and other parties have in relation to the investee.
Relevant activities and direction of relevant activities
B11 For many investees, a range of operating and financing activities significantly affect their returns. Examples of activities that, depending on the circumstances, can be relevant activities include, but are not limited to:
(a) selling and purchasing of goods or services;
(b) managing financial assets during their life (including upon default);
(c) selecting, acquiring or disposing of assets;
(d) researching and developing new products or processes; and
(e) determining a funding structure or obtaining funding.
B12 Examples of decisions about relevant activities include but are not limited to:
(a) establishing operating and capital decisions of the investee, including budgets; and
(b) appointing and remunerating an investee’s key management personnel or service providers and terminating their services or employment.
B13 In some situations, activities both before and after a particular set of circumstances arises or event occurs may be relevant activities. When two or more investors have the current ability to direct relevant activities and those activities occur at different times, the investors shall determine which investor is able to direct the activities that most significantly affect those returns consistently with the treatment of concurrent decision-making rights (see paragraph 13). The investors shall reconsider this assessment over time if relevant facts or circumstances change.
Application examples Example 1 Two investors form an investee to develop and market a medical product. One investor is responsible for developing and obtaining regulatory approval of the medical product—that responsibility includes having the unilateral ability to make all decisions relating to the development of the product and to obtaining regulatory approval. Once the regulator has approved the product, the other investor will manufacture and market it—this investor has the unilateral ability to make all decisions about the manufacture and marketing of the product. If all the activities—developing and obtaining regulatory approval as well as manufacturing and marketing of the medical product—are relevant activities, each investor needs to determine whether it is able to direct the activities that most significantly affect the investee’s returns. Accordingly, each investor needs to consider whether developing and obtaining regulatory approval or the manufacturing and marketing of the medical product is the activity that most significantly affects the investee’s returns and whether it is able to direct that activity. In determining which investor has power, the investors would consider:
(a) the purpose and design of the investee;
(b) the factors that determine the profit margin, revenue and value of the investee as well as the value of the medical product;
(c) the effect on the investee’s returns resulting from each investor’s decision-making authority with respect to the factors in (b); and
(d) the investors’ exposure to variability of returns.
In this particular example, the investors would also consider:
(e) the uncertainty of, and effort required in, obtaining regulatory approval (considering the investor’s record of successfully developing and obtaining regulatory approval of medical products); and
(f) which investor controls the medical product once the development phase is successful.
Example 2 An investment vehicle (the investee) is created and financed with a debt instrument held by an investor (the debt investor) and equity instruments held by a number of other investors. The equity tranche is designed to absorb the first losses and to receive any residual return from the investee. One of the equity investors who holds 30 per cent of the equity is also the asset manager. The investee uses its proceeds to purchase a portfolio of financial assets, exposing the investee to the credit risk associated with the possible default of principal and interest payments of the assets. The transaction is marketed to the debt investor as an investment with minimal exposure to the credit risk associated with the possible default of the assets in the portfolio because of the nature of these assets and because the equity tranche is designed to absorb the first losses of the investee. The returns of the investee are significantly affected by the management of the investee’s asset portfolio, which includes decisions about the selection, acquisition and disposal of the assets within portfolio guidelines and the management upon default of any portfolio assets. All those activities are managed by the asset manager until defaults reach a specified proportion of the portfolio value (ie when the value of the portfolio is such that the equity tranche of the investee has been consumed). From that time, a third-party trustee manages the assets according to the instructions of the debt investor. Managing the investee’s asset portfolio is the relevant activity of the investee. The asset manager has the ability to direct the relevant activities until defaulted assets reach the specified proportion of the portfolio value; the debt investor has the ability to direct the relevant activities when the value of defaulted assets surpasses that specified proportion of the portfolio value. The asset manager and the debt investor each need to determine whether they are able to direct the activities that most significantly affect the investee’s returns, including considering the purpose and design of the investee as well as each party’s exposure to variability of returns.
Rights that give an investor power over an investee
B14 Power arises from rights. To have power over an investee, an investor must have existing rights that give the investor the current ability to direct the relevant activities. The rights that may give an investor power can differ between investees.
B15 Examples of rights that, either individually or in combination, can give an investor power include but are not limited to:
(a) rights in the form of voting rights (or potential voting rights) of an investee (see paragraphs B34–B50);
(b) rights to appoint, reassign or remove members of an investee’s key management personnel who have the ability to direct the relevant activities;
(c) rights to appoint or remove another entity that directs the relevant activities;
(d) rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the investor; and
(e) other rights (such as decision-making rights specified in a management contract) that give the holder the ability to direct the relevant activities.
B16 Generally, when an investee has a range of operating and financing activities that significantly affect the investee’s returns and when substantive decision-making with respect to these activities is required continuously, it will be voting or similar rights that give an investor power, either individually or in combination with other arrangements.
B17 When voting rights cannot have a significant effect on an investee’s returns, such as when voting rights relate to administrative tasks only and contractual arrangements determine the direction of the relevant activities, the investor needs to assess those contractual arrangements in order to determine whether it has rights sufficient to give it power over the investee. To determine whether an investor has rights sufficient to give it power, the investor shall consider the purpose and design of the investee (see paragraphs B5–B8) and the requirements in paragraphs B51–B54 together with paragraphs B18–B20.
B18 In some circumstances it may be difficult to determine whether an investor’s rights are sufficient to give it power over an investee. In such cases, to enable the assessment of power to be made, the investor shall consider evidence of whether it has the practical ability to direct the relevant activities unilaterally. Consideration is given, but is not limited, to the following, which, when considered together with its rights and the indicators in paragraphs B19 and B20, may provide evidence that the investor’s rights are sufficient to give it power over the investee:
(a) The investor can, without having the contractual right to do so, appoint or approve the investee’s key management personnel who have the ability to direct the relevant activities.
(b) The investor can, without having the contractual right to do so, direct the investee to enter into, or can veto any changes to, significant transactions for the benefit of the investor.
(c) The investor can dominate either the nominations process for electing members of the investee’s governing body or the obtaining of proxies from other holders of voting rights.
(d) The investee’s key management personnel are related parties of the investor (for example, the chief executive officer of the investee and the chief executive officer of the investor are the same person).
(e) The majority of the members of the investee’s governing body are related parties of the investor.
B19 Sometimes there will be indications that the investor has a special relationship with the investee, which suggests that the investor has more than a passive interest in the investee. The existence of any individual indicator, or a particular combination of indicators, does not necessarily mean that the power criterion is met. However, having more than a passive interest in the investee may indicate that the investor has other related rights sufficient to give it power or provide evidence of existing power over an investee. For example, the following suggests that the investor has more than a passive interest in the investee and, in combination with other rights, may indicate power:
(a) The investee’s key management personnel who have the ability to direct the relevant activities are current or previous employees of the investor.
(b) The investee’s operations are dependent on the investor, such as in the following situations:
(i)The investee depends on the investor to fund a significant portion of its operations.
(ii)The investor guarantees a significant portion of the investee’s obligations.
(iii)The investee depends on the investor for critical services, technology, supplies or raw materials.
(iv)The investor controls assets such as licences or trademarks that are critical to the investee’s operations.
(v)The investee depends on the investor for key management personnel, such as when the investor’s personnel have specialised knowledge of the investee’s operations.
(c) A significant portion of the investee’s activities either involve or are conducted on behalf of the investor.
(d) The investor’s exposure, or rights, to returns from its involvement with the investee is disproportionately greater than its voting or other similar rights. For example, there may be a situation in which an investor is entitled, or exposed, to more than half of the returns of the investee but holds less than half of the voting rights of the investee.
B20 The greater an investor’s exposure, or rights, to variability of returns from its involvement with an investee, the greater is the incentive for the investor to obtain rights sufficient to give it power. Therefore, having a large exposure to variability of returns is an indicator that the investor may have power. However, the extent of the investor’s exposure does not, in itself, determine whether an investor has power over the investee.
B21 When the factors set out in paragraph B18 and the indicators set out in paragraphs B19 and B20 are considered together with an investor’s rights, greater weight shall be given to the evidence of power described in paragraph B18.
Substantive rights
B22 An investor, in assessing whether it has power, considers only substantive rights relating to an investee (held by the investor and others). For a right to be substantive, the holder must have the practical ability to exercise that right.
B23 Determining whether rights are substantive requires judgement, taking into account all facts and circumstances. Factors to consider in making that determination include but are not limited to:
(a) Whether there are any barriers (economic or otherwise) that prevent the holder (or holders) from exercising the rights. Examples of such barriers include but are not limited to:
(i)financial penalties and incentives that would prevent (or deter) the holder from exercising its rights.
(ii)an exercise or conversion price that creates a financial barrier that would prevent (or deter) the holder from exercising its rights.
(iii)terms and conditions that make it unlikely that the rights would be exercised, for example, conditions that narrowly limit the timing of their exercise.
(iv)the absence of an explicit, reasonable mechanism in the founding documents of an investee or in applicable laws or regulations that would allow the holder to exercise its rights.
(v)the inability of the holder of the rights to obtain the information necessary to exercise its rights.
(vi)operational barriers or incentives that would prevent (or deter) the holder from exercising its rights (eg the absence of other managers willing or able to provide specialised services or provide the services and take on other interests held by the incumbent manager).
(vii)legal or regulatory requirements that prevent the holder from exercising its rights (eg where a foreign investor is prohibited from exercising its rights).
(b) When the exercise of rights requires the agreement of more than one party, or when the rights are held by more than one party, whether a mechanism is in place that provides those parties with the practical ability to exercise their rights collectively if they choose to do so. The lack of such a mechanism is an indicator that the rights may not be substantive. The more parties that are required to agree to exercise the rights, the less likely it is that those rights are substantive. However, a board of directors whose members are independent of the decision maker may serve as a mechanism for numerous investors to act collectively in exercising their rights. Therefore, removal rights exercisable by an independent board of directors are more likely to be substantive than if the same rights were exercisable individually by a large number of investors.
(c) Whether the party or parties that hold the rights would benefit from the exercise of those rights. For example, the holder of potential voting rights in an investee (see paragraphs B47–B50) shall consider the exercise or conversion price of the instrument. The terms and conditions of potential voting rights are more likely to be substantive when the instrument is in the money or the investor would benefit for other reasons (eg by realising synergies between the investor and the investee) from the exercise or conversion of the instrument.
B24 To be substantive, rights also need to be exercisable when decisions about the direction of the relevant activities need to be made. Usually, to be substantive, the rights need to be currently exercisable. However, sometimes rights can be substantive, even though the rights are not currently exercisable.
Application examples Example 3 The investee has annual shareholder meetings at which decisions to direct the relevant activities are made. The next scheduled shareholders’ meeting is in eight months. However, shareholders that individually or collectively hold at least 5 per cent of the voting rights can call a special meeting to change the existing policies over the relevant activities, but a requirement to give notice to the other shareholders means that such a meeting cannot be held for at least 30 days. Policies over the relevant activities can be changed only at special or scheduled shareholders’ meetings. This includes the approval of material sales of assets as well as the making or disposing of significant investments.
The above fact pattern applies to examples 3A–3D described below. Each example is considered in isolation.
Example 3A An investor holds a majority of the voting rights in the investee. The investor’s voting rights are substantive because the investor is able to make decisions about the direction of the relevant activities when they need to be made. The fact that it takes 30 days before the investor can exercise its voting rights does not stop the investor from having the current ability to direct the relevant activities from the moment the investor acquires the shareholding.
Example 3B An investor is party to a forward contract to acquire the majority of shares in the investee. The forward contract’s settlement date is in 25 days. The existing shareholders are unable to change the existing policies over the relevant activities because a special meeting cannot be held for at least 30 days, at which point the forward contract will have been settled. Thus, the investor has rights that are essentially equivalent to the majority shareholder in example 3A above (ie the investor holding the forward contract can make decisions about the direction of the relevant activities when they need to be made). The investor’s forward contract is a substantive right that gives the investor the current ability to direct the relevant activities even before the forward contract is settled.
Example 3C An investor holds a substantive option to acquire the majority of shares in the investee that is exercisable in 25 days and is deeply in the money. The same conclusion would be reached as in example 3B.
Example 3D An investor is party to a forward contract to acquire the majority of shares in the investee, with no other related rights over the investee. The forward contract’s settlement date is in six months. In contrast to the examples above, the investor does not have the current ability to direct the relevant activities. The existing shareholders have the current ability to direct the relevant activities because they can change the existing policies over the relevant activities before the forward contract is settled.
B25 Substantive rights exercisable by other parties can prevent an investor from controlling the investee to which those rights relate. Such substantive rights do not require the holders to have the ability to initiate decisions. As long as the rights are not merely protective (see paragraphs B26–B28), substantive rights held by other parties may prevent the investor from controlling the investee even if the rights give the holders only the current ability to approve or block decisions that relate to the relevant activities.
Protective rights
B26 In evaluating whether rights give an investor power over an investee, the investor shall assess whether its rights, and rights held by others, are protective rights. Protective rights relate to fundamental changes to the activities of an investee or apply in exceptional circumstances. However, not all rights that apply in exceptional circumstances or are contingent on events are protective (see paragraphs B13 and B53).
B27 Because protective rights are designed to protect the interests of their holder without giving that party power over the investee to which those rights relate, an investor that holds only protective rights cannot have power or prevent another party from having power over an investee (see paragraph 14).
B28 Examples of protective rights include but are not limited to:
(a) a lender’s right to restrict a borrower from undertaking activities that could significantly change the credit risk of the borrower to the detriment of the lender.
(b) the right of a party holding a non-controlling interest in an investee to approve capital expenditure greater than that required in the ordinary course of business, or to approve the issue of equity or debt instruments.
(c) the right of a lender to seize the assets of a borrower if the borrower fails to meet specified loan repayment conditions.
Franchises
B29 A franchise agreement for which the investee is the franchisee often gives the franchisor rights that are designed to protect the franchise brand. Franchise agreements typically give franchisors some decision-making rights with respect to the operations of the franchisee.
B30 Generally, franchisors’ rights do not restrict the ability of parties other than the franchisor to make decisions that have a significant effect on the franchisee’s returns. Nor do the rights of the franchisor in franchise agreements necessarily give the franchisor the current ability to direct the activities that significantly affect the franchisee’s returns.
B31 It is necessary to distinguish between having the current ability to make decisions that significantly affect the franchisee’s returns and having the ability to make decisions that protect the franchise brand. The franchisor does not have power over the franchisee if other parties have existing rights that give them the current ability to direct the relevant activities of the franchisee.
B32 By entering into the franchise agreement the franchisee has made a unilateral decision to operate its business in accordance with the terms of the franchise agreement, but for its own account.
B33 Control over such fundamental decisions as the legal form of the franchisee and its funding structure may be determined by parties other than the franchisor and may significantly affect the returns of the franchisee. The lower the level of financial support provided by the franchisor and the lower the franchisor’s exposure to variability of returns from the franchisee the more likely it is that the franchisor has only protective rights.
Voting rights
B34 Often an investor has the current ability, through voting or similar rights, to direct the relevant activities. An investor considers the requirements in this section (paragraphs B35–B50) if the relevant activities of an investee are directed through voting rights.
Power with a majority of the voting rights
B35 An investor that holds more than half of the voting rights of an investee has power in the following situations, unless paragraph B36 or paragraph B37 applies:
(a) the relevant activities are directed by a vote of the holder of the majority of the voting rights, or
(b) a majority of the members of the governing body that directs the relevant activities are appointed by a vote of the holder of the majority of the voting rights.
Majority of the voting rights but no power
B36 For an investor that holds more than half of the voting rights of an investee, to have power over an investee, the investor’s voting rights must be substantive, in accordance with paragraphs B22–B25, and must provide the investor with the current ability to direct the relevant activities, which often will be through determining operating and financing policies. If another entity has existing rights that provide that entity with the right to direct the relevant activities and that entity is not an agent of the investor, the investor does not have power over the investee.
B37 An investor does not have power over an investee, even though the investor holds the majority of the voting rights in the investee, when those voting rights are not substantive. For example, an investor that has more than half of the voting rights in an investee cannot have power if the relevant activities are subject to direction by a government, court, administrator, receiver, liquidator or regulator.
Power without a majority of the voting rights
B38 An investor can have power even if it holds less than a majority of the voting rights of an investee. An investor can have power with less than a majority of the voting rights of an investee, for example, through:
(a) a contractual arrangement between the investor and other vote holders (see paragraph B39);
(b) rights arising from other contractual arrangements (see paragraph B40);
(c) the investor’s voting rights (see paragraphs B41–B45);
(d) potential voting rights (see paragraphs B47–B50); or
(e) a combination of (a)–(d).
Contractual arrangement with other vote holders
B39 A contractual arrangement between an investor and other vote holders can give the investor the right to exercise voting rights sufficient to give the investor power, even if the investor does not have voting rights sufficient to give it power without the contractual arrangement. However, a contractual arrangement might ensure that the investor can direct enough other vote holders on how to vote to enable the investor to make decisions about the relevant activities.
Rights from other contractual arrangements
B40 Other decision-making rights, in combination with voting rights, can give an investor the current ability to direct the relevant activities. For example, the rights specified in a contractual arrangement in combination with voting rights may be sufficient to give an investor the current ability to direct the manufacturing processes of an investee or to direct other operating or financing activities of an investee that significantly affect the investee’s returns. However, in the absence of any other rights, economic dependence of an investee on the investor (such as relations of a supplier with its main customer) does not lead to the investor having power over the investee.
The investor’s voting rights
B41 An investor with less than a majority of the voting rights has rights that are sufficient to give it power when the investor has the practical ability to direct the relevant activities unilaterally.
B42 When assessing whether an investor’s voting rights are sufficient to give it power, an investor considers all facts and circumstances, including:
(a) the size of the investor’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders, noting that:
(i)the more voting rights an investor holds, the more likely the investor is to have existing rights that give it the current ability to direct the relevant activities;
(ii)the more voting rights an investor holds relative to other vote holders, the more likely the investor is to have existing rights that give it the current ability to direct the relevant activities;
(iii)the more parties that would need to act together to outvote the investor, the more likely the investor is to have existing rights that give it the current ability to direct the relevant activities;
(b) potential voting rights held by the investor, other vote holders or other parties (see paragraphs B47–B50);
(c) rights arising from other contractual arrangements (see paragraph B40); and
(d) any additional facts and circumstances that indicate the investor has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.
B43 When the direction of relevant activities is determined by majority vote and an investor holds significantly more voting rights than any other vote holder or organised group of vote holders, and the other shareholdings are widely dispersed, it may be clear, after considering the factors listed in paragraph B42(a)–(c) alone, that the investor has power over the investee.
Application examples
Example 4 An investor acquires 48 per cent of the voting rights of an investee. The remaining voting rights are held by thousands of shareholders, none individually holding more than 1 per cent of the voting rights. None of the shareholders has any arrangements to consult any of the others or make collective decisions. When assessing the proportion of voting rights to acquire, on the basis of the relative size of the other shareholdings, the investor determined that a 48 per cent interest would be sufficient to give it control. In this case, on the basis of the absolute size of its holding and the relative size of the other shareholdings, the investor concludes that it has a sufficiently dominant voting interest to meet the power criterion without the need to consider any other evidence of power.
Example 5 Investor A holds 40 per cent of the voting rights of an investee and twelve other investors each hold 5 per cent of the voting rights of the investee. A shareholder agreement grants investor A the right to appoint, remove and set the remuneration of management responsible for directing the relevant activities. To change the agreement, a two-thirds majority vote of the shareholders is required. In this case, investor A concludes that the absolute size of the investor’s holding and the relative size of the other shareholdings alone are not conclusive in determining whether the investor has rights sufficient to give it power. However, investor A determines that its contractual right to appoint, remove and set the remuneration of management is sufficient to conclude that it has power over the investee. The fact that investor A might not have exercised this right or the likelihood of investor A exercising its right to select, appoint or remove management shall not be considered when assessing whether investor A has power.
B44 In other situations, it may be clear after considering the factors listed in paragraph B42(a)–(c) alone that an investor does not have power.
Application example
Example 6 Investor A holds 45 per cent of the voting rights of an investee. Two other investors each hold 26 per cent of the voting rights of the investee. The remaining voting rights are held by three other shareholders, each holding 1 per cent. There are no other arrangements that affect decision-making. In this case, the size of investor A’s voting interest and its size relative to the other shareholdings are sufficient to conclude that investor A does not have power. Only two other investors would need to co-operate to be able to prevent investor A from directing the relevant activities of the investee.
B45 However, the factors listed in paragraph B42(a)–(c) alone may not be conclusive. If an investor, having considered those factors, is unclear whether it has power, it shall consider additional facts and circumstances, such as whether other shareholders are passive in nature as demonstrated by voting patterns at previous shareholders’ meetings. This includes the assessment of the factors set out in paragraph B18 and the indicators in paragraphs B19 and B20. The fewer voting rights the investor holds, and the fewer parties that would need to act together to outvote the investor, the more reliance would be placed on the additional facts and circumstances to assess whether the investor’s rights are sufficient to give it power. When the facts and circumstances in paragraphs B18–B20 are considered together with the investor’s rights, greater weight shall be given to the evidence of power in paragraph B18 than to the indicators of power in paragraphs B19 and B20.
Application examples
Example 7 An investor holds 45 per cent of the voting rights of an investee. Eleven other shareholders each hold 5 per cent of the voting rights of the investee. None of the shareholders has contractual arrangements to consult any of the others or make collective decisions. In this case, the absolute size of the investor’s holding and the relative size of the other shareholdings alone are not conclusive in determining whether the investor has rights sufficient to give it power over the investee. Additional facts and circumstances that may provide evidence that the investor has, or does not have, power shall be considered.
Example 8 An investor holds 35 per cent of the voting rights of an investee. Three other shareholders each hold 5 per cent of the voting rights of the investee. The remaining voting rights are held by numerous other shareholders, none individually holding more than 1 per cent of the voting rights. None of the shareholders has arrangements to consult any of the others or make collective decisions. Decisions about the relevant activities of the investee require the approval of a majority of votes cast at relevant shareholders’ meetings—75 per cent of the voting rights of the investee have been cast at recent relevant shareholders’ meetings. In this case, the active participation of the other shareholders at recent shareholders’ meetings indicates that the investor would not have the practical ability to direct the relevant activities unilaterally, regardless of whether the investor has directed the relevant activities because a sufficient number of other shareholders voted in the same way as the investor. B46 If it is not clear, having considered the factors listed in paragraph B42(a)–(d), that the investor has power, the investor does not control the investee.
Potential voting rights
B47 When assessing control, an investor considers its potential voting rights as well as potential voting rights held by other parties, to determine whether it has power. Potential voting rights are rights to obtain voting rights of an investee, such as those arising from convertible instruments or options, including forward contracts. Those potential voting rights are considered only if the rights are substantive (see paragraphs B22–B25).
B48 When considering potential voting rights, an investor shall consider the purpose and design of the instrument, as well as the purpose and design of any other involvement the investor has with the investee. This includes an assessment of the various terms and conditions of the instrument as well as the investor’s apparent expectations, motives and reasons for agreeing to those terms and conditions.
B49 If the investor also has voting or other decision-making rights relating to the investee’s activities, the investor assesses whether those rights, in combination with potential voting rights, give the investor power.
B50 Substantive potential voting rights alone, or in combination with other rights, can give an investor the current ability to direct the relevant activities. For example, this is likely to be the case when an investor holds 40 per cent of the voting rights of an investee and, in accordance with paragraph B23, holds substantive rights arising from options to acquire a further 20 per cent of the voting rights.
Application examples Example 9 Investor A holds 70 per cent of the voting rights of an investee. Investor B has 30 per cent of the voting rights of the investee as well as an option to acquire half of investor A’s voting rights. The option is exercisable for the next two years at a fixed price that is deeply out of the money (and is expected to remain so for that two-year period). Investor A has been exercising its votes and is actively directing the relevant activities of the investee. In such a case, investor A is likely to meet the power criterion because it appears to have the current ability to direct the relevant activities. Although investor B has currently exercisable options to purchase additional voting rights (that, if exercised, would give it a majority of the voting rights in the investee), the terms and conditions associated with those options are such that the options are not considered substantive.
Example 10 Investor A and two other investors each hold a third of the voting rights of an investee. The investee’s business activity is closely related to investor A. In addition to its equity instruments, investor A also holds debt instruments that are convertible into ordinary shares of the investee at any time for a fixed price that is out of the money (but not deeply out of the money). If the debt were converted, investor A would hold 60 per cent of the voting rights of the investee. Investor A would benefit from realising synergies if the debt instruments were converted into ordinary shares. Investor A has power over the investee because it holds voting rights of the investee together with substantive potential voting rights that give it the current ability to direct the relevant activities.
Power when voting or similar rights do not have a significant effect on the investee’s returns
B51 In assessing the purpose and design of an investee (see paragraphs B5–B8), an investor shall consider the involvement and decisions made at the investee’s inception as part of its design and evaluate whether the transaction terms and features of the involvement provide the investor with rights that are sufficient to give it power. Being involved in the design of an investee alone is not sufficient to give an investor control. However, involvement in the design may indicate that the investor had the opportunity to obtain rights that are sufficient to give it power over the investee.
B52 In addition, an investor shall consider contractual arrangements such as call rights, put rights and liquidation rights established at the investee’s inception. When these contractual arrangements involve activities that are closely related to the investee, then these activities are, in substance, an integral part of the investee’s overall activities, even though they may occur outside the legal boundaries of the investee. Therefore, explicit or implicit decision-making rights embedded in contractual arrangements that are closely related to the investee need to be considered as relevant activities when determining power over the investee.
B53 For some investees, relevant activities occur only when particular circumstances arise or events occur. The investee may be designed so that the direction of its activities and its returns are predetermined unless and until those particular circumstances arise or events occur. In this case, only the decisions about the investee’s activities when those circumstances or events occur can significantly affect its returns and thus be relevant activities. The circumstances or events need not have occurred for an investor with the ability to make those decisions to have power. The fact that the right to make decisions is contingent on circumstances arising or an event occurring does not, in itself, make those rights protective.
Application examples
Example 11
An investee’s only business activity, as specified in its founding documents, is to purchase receivables and service them on a day-to- day basis for its investors. The servicing on a day-to-day basis includes the collection and passing on of principal and interest payments as they fall due. Upon default of a receivable the investee automatically puts the receivable to an investor as agreed separately in a put agreement between the investor and the investee. The only relevant activity is managing the receivables upon default because it is the only activity that can significantly affect the investee’s returns. Managing the receivables before default is not a relevant activity because it does not require substantive decisions to be made that could significantly affect the investee’s returns – the activities before default are predetermined and amount only to collecting cash flows as they fall due and passing them on to investors. Therefore, only the investor’s right to manage the assets upon default should be considered when assessing the overall activities of the investee that significantly affect the investee’s returns. In this example, the design of the investee ensures that the investor has decision-making authority over the activities that significantly affect the returns at the only time that such decision-making authority is required. The terms of the put agreement are integral to the overall transaction and the establishment of the investee. Therefore, the terms of the put agreement together with the founding documents of the investee lead to the conclusion that the investor has power over the investee even though the investor takes ownership of the receivables only upon default and manages the defaulted receivables outside the legal boundaries of the investee.
Example 12 The only assets of an investee are receivables. When the purpose and design of the investee are considered, it is determined that the only relevant activity is managing the receivables upon default. The party that has the ability to manage the defaulting receivables has power over the investee, irrespective of whether any of the borrowers have defaulted.
B54 An investor may have an explicit or implicit commitment to ensure that an investee continues to operate as designed. Such a commitment may increase the investor’s exposure to variability of returns and thus increase the incentive for the investor to obtain rights sufficient to give it power. Therefore a commitment to ensure that an investee operates as designed may be an indicator that the investor has power, but does not, by itself, give an investor power, nor does it prevent another party from having power.
Exposure, or rights, to variable returns from an investee
B55 When assessing whether an investor has control of an investee, the investor determines whether it is exposed, or has rights, to variable returns from its involvement with the investee.
B56 Variable returns are returns that are not fixed and have the potential to vary as a result of the performance of an investee. Variable returns can be only positive, only negative or both positive and negative (see paragraph 15). An investor assesses whether returns from an investee are variable and how variable those returns are on the basis of the substance of the arrangement and regardless of the legal form of the returns. For example, an investor can hold a bond with fixed interest payments. The fixed interest payments are variable returns for the purpose of this Standard because they are subject to default risk and they expose the investor to the credit risk of the issuer of the bond. The amount of variability (ie how variable those returns are) depends on the credit risk of the bond. Similarly, fixed performance fees for managing an investee’s assets are variable returns because they expose the investor to the performance risk of the investee. The amount of variability depends on the investee’s ability to generate sufficient income to pay the fee.
B57 Examples of returns include:
(a) dividends, other distributions of economic benefits from an investee (eg interest from debt securities issued by the investee) and changes in the value of the investor’s investment in that investee.
(b) remuneration for servicing an investee’s assets or liabilities, fees and exposure to loss from providing credit or liquidity support, residual interests in the investee’s assets and liabilities on liquidation of that investee, tax benefits, and access to future liquidity that an investor has from its involvement with an investee.
(c) returns that are not available to other interest holders. For example, an investor might use its assets in combination with the assets of the investee, such as combining operating functions to achieve economies of scale, cost savings, sourcing scarce products, gaining access to proprietary knowledge or limiting some operations or assets, to enhance the value of the investor’s other assets.
Link between power and returns
Delegated power
B58 When an investor with decision-making rights (a decision maker) assesses whether it controls an investee, it shall determine whether it is a principal or an agent. An investor shall also determine whether another entity with decision-making rights is acting as an agent for the investor. An agent is a party primarily engaged to act on behalf and for the benefit of another party or parties (the principal(s)) and therefore does not control the investee when it exercises its decision-making authority (see paragraphs 17 and 18). Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf of the principal. A decision maker is not an agent simply because other parties can benefit from the decisions that it makes.
B59 An investor may delegate its decision-making authority to an agent on some specific issues or on all relevant activities. When assessing whether it controls an investee, the investor shall treat the decision-making rights delegated to its agent as held by the investor directly. In situations where there is more than one principal, each of the principals shall assess whether it has power over the investee by considering the requirements in paragraphs B5–B54. Paragraphs B60–B72 provide guidance on determining whether a decision maker is an agent or a principal.
B60 A decision maker shall consider the overall relationship between itself, the investee being managed and other parties involved with the investee, in particular all the factors below, in determining whether it is an agent:
(a) the scope of its decision-making authority over the investee (paragraphs B62 and B63).
(b) the rights held by other parties (paragraphs B64–B67).
(c) the remuneration to which it is entitled in accordance with the remuneration agreement(s) (paragraphs B68–B70).
(d) the decision maker’s exposure to variability of returns from other interests that it holds in the investee (paragraphs B71 and B72).
Different weightings shall be applied to each of the factors on the basis of particular facts and circumstances.
Implementation examples
Example IG4
XYZ University was established under an Act of the State Government. The University receives approximately 40% of its total revenue in the form of grants for various purposes, comprising 30% from the Australian Government and 10% from the State Government. The University is required by the Act to submit an annual report to the State Minister for Education.
Objectives of the University
The Act specifies that the University’s objects include:
· to provide higher education at an international standard;
· to undertake scholarship and research for the advancement of knowledge and the benefit of the well-being of the State, Australian and international communities;
· to equip graduates to excel in their careers and contribute to the life of the community; and
· to serve the State, Australian and international communities and the public interest by enriching cultural and community life and promoting critical and free inquiry and public debate.
Management of the University
The governing body of the University is the University Council. The Council consists of 17 members, five of whom were appointed directly or indirectly by the State Minister. Four members were elected by the staff and students of the University. The remaining eight members were appointed by the Council itself, comprising the three official members (the Chancellor, the Vice-Chancellor and the President of the Academic Board) and five other (non-official) members.
The Act specifies that the number of Minister-appointed members (five members in this case) must be equal to or greater than the number of non-official Council-appointed members (also five).
The Act specifies that the University Council’s responsibilities, powers and functions include:
· approving the mission, strategic direction and annual budget and business plan of the University;
· establishing policies (‘university statutes and regulations’) relating to the governance and operation of the University, including trusts and endowments, and research, development, consultancy, commercial activities and other services undertaken for commercial organisations or public bodies;
· developing guidelines (if any) concerning the carrying out of commercial activities, finance and property matters, or any other related matter;
· overseeing the management of the property, finances and business affairs of the University, such as risk management across the University, including its commercial activities;
· any other powers and functions conferred on it by or under legislation or any university statute or regulation; and
· the power to do anything else necessary or convenient to be done for or in connection with its powers and functions.
Activities of the University
In carrying out its functions, the University undertakes a wide range of activities, including employing academic, teaching and administrative staff, determining fees and charges for courses provided to students and for commercial activities, entering into contracts, and forming or becoming a member of other entities.
State Government Involvement with the University
The State Government’s objectives for the University are consistent with, but not limited to, those specified in the Act for the University. For example, the State Government anticipates State economic development as a result of the University’s activities, such as the provision of housing and tourism services to international students.
The State Minister has the following powers and functions, which are classified in this example as substantive rights under the Standard:
· fix the remuneration and fees to be paid to Council members who are not full-time staff of the University or holders of statutory office;
· approve (or veto) University statutes and guidelines made by the Council;
· declare an activity to be a university commercial activity;
· make interim guidelines concerning university commercial activities and finance and property matters – these apply unless replaced by University-submitted guidelines approved by the Minister;
· certain rights specified in State Government grants provided to the University – some of the grants detail the education or research activities to be carried out under the grant;
· in conjunction with the State Treasurer, approve the limits and conditions (eg security) for University borrowings; and
· approve (or veto) the disposal of land that was previously Crown land granted to the University.
The Minister also has the following powers, which are classified as protective rights for the purpose of this example:
· request commercial and financial reports from the University;
· refer a university commercial activity or any aspect thereof to the auditor-general for investigation and report to the Minister; and
· certain rights specified in State Government grants provided to the University – some of the grants are required to be repaid if not applied as specified.
Australian Government Involvement with the University
The Australian Government’s objectives for the University are consistent with, but not limited to, those specified in the State Act for the University. For example, the Australian Government anticipates national economic development as a result of the University’s activities and may seek to advance foreign policy objectives through universities attracting international students.
The Australian Minister for Education also has the rights specified in Australian Government grants provided to the University. Some of these grants specify how they are to be applied to education or research activities (which are substantive rights for the purpose of this example) and some require their repayment if not applied as specified (protective rights for the purpose of this example).
The Minister can also request reports from the University.
University Council-directed Activities
As indicated above, the University’s commercial activities and finance and property matters are subject to various State Government Ministerial powers, and government grants may be conditional. However, the University Council also has a range of powers and functions that it can exercise directly, such as the following:
· appoint the Vice-Chancellor, who is the chief executive officer of the University and responsible for the conduct of the University’s affairs in all matters;
· determine the composition of borrowings within the parameters set by the State Government;
· approve the University’s budget for a financial year, incorporating total revenue and the planned revenue sources, including planning the mix between teaching, research and commercial activities, the fees and charges to apply to those activities, and the type and value of government grants desired;
· determine the course mix and target student mix, such as vocational, undergraduate, graduate and executive courses, on-campus or distance learning, and local and international students;
· appoint staff and determine their terms and conditions;
· decide whether to operate through multiple campuses and how to utilise the University’s infrastructure; and
· make university regulations with respect to any matter relating to the University.
Example IG4A
Control of the University
Based on the facts and circumstances outlined above, does the State Government or the Australian Government control the University in accordance with the definition of control in the Standard? If not, who controls the University?
Economic dependence
The State and Australian Governments each has a range of rights in relation to the University. The University may be economically dependent on the grants from those Governments in order to carry out its activities at their present scope and scale, but paragraphs B19 and B40 of the Standard make clear that economic dependence alone does not lead to the investor having power (as that term is used in AASB 10) over the investee. The State Government and Australian Government rights under some of their grants to the University to recover misapplied funds amount to protective rights. The repayment of such grants, potentially coupled with a reduction of Government grants in the future given the lack of compliance with grant conditions, may require the University to curtail its activities due to the reduction in funding. However, such a curtailment does not involve either Government in directing activities of the University, since it is the University that would determine which activities would be curtailed.
Relevant activities
Judgement is required to identify the University’s relevant activities, that is, the activities that significantly affect the University’s returns. All of the University’s activities and functions contribute in some way (positive or negative) to the University achieving or furthering its objectives. Thus they are activities that affect the financial and non-financial returns of the University. However, as the University has fairly limited commercial activities in this example, the activities that most significantly affect the University’s returns are the education and research activities.
Power
Protective rights held by the State and Australian Governments cannot give them power over the University. Instead, their substantive rights concerning the University’s education and research activities (the relevant activities) need to be weighed against the rights of the University Council itself, in order to assess which party has the current ability to direct the activities that most significantly affect the University’s returns (or outcomes).
It is the University Council that generally directs the education and research activities. For example, the Council decides the mix between education, research and commercial activities, the courses to be offered, the target student mix, the fee structure and how to use the University’s infrastructure for the activities. Some grants from the State and Australian Governments direct how they are to be applied, but these affect only a relatively small proportion of the education and research activities overall. On balance, the University Council itself appears to have the current ability to direct the relevant activities of the University.
Since the State Minister is able to appoint members of the University Council, it is necessary to consider whether the State Minister has power over the University through substantive rights to appoint a majority of the members of the University Council. In this example, the State Minister can appoint only five of the 17 members of the University Council. Therefore, the State Government is unable to direct the relevant activities of the University through appointments to the University Council.
The State Government’s substantive rights in relation to the University’s commercial activities or business operations are not considered in this assessment of control, since they do not relate to the relevant activities.
Neither the State Government nor the Australian Government would have power (as described in the Standard) over the University.
Returns
The State and Australian Governments are exposed, or have rights, to variable returns from their involvement with the University since the activities of the University contribute to the achievement or furtherance of the State Government’s and the Australian Government’s objectives for higher education. The Governments have additional objectives regarding the activities of the University, but there is no need for a direct alignment between the Governments’ objectives and the University’s objectives.
Ability to use power to affect returns
Since it was concluded above that in the circumstances presented neither the State Government nor the Australian Government has power (as described in the Standard) over the University, then the third control criterion linking power and returns is also not satisfied. The Governments are able to affect the returns of the University, and thus their own indirect returns, through exercising their substantive rights. However, the Governments are unable to direct the activities that most significantly affect the University’s returns.
Control conclusion
The conclusion from the above assessment is that neither the State Government nor the Australian Government has power over the University and therefore neither Government controls the University.
In this case, the University would not be consolidated by any other entity. The University Council as a group is not an investor as contemplated by the Standard. It is akin to the board of directors of a company, that is, the Council is a part of the University itself.
Example IG4B
In this example, the facts are the same as in Example IG4A except that:
· XYZ University is a research university with extensive commercial activities, and teaching activities that are limited to a small range of graduate and executive courses;
· the University receives approximately 30% of its total revenue in the form of grants for various purposes, comprising 10% from the Australian Government and 20% from the State Government;
· 50% of the total revenue is derived from commercial activities, and the balance of 20% from industry funding and course fees; and
· the State Government requires all significant commercial activities and finance and property decisions of the University to be approved by the Minister.
Based on these revised facts and circumstances, the State Government’s substantive rights in respect of the University’s commercial activities and its finance and property matters have a much more significant role in the operations of the University than in Example IG4A. The substantive rights may now be of such effect that the State Government has the current ability to direct the activities that significantly affect the University’s returns. In that case, the State Government would have power over the University as described in the Standard, satisfying the first control criterion.
As explained in Example IG4A, the State Government is exposed or has rights to variable returns from its involvement with the University, thus satisfying the second control criterion.
Finally, the State Government is able to use its power over the University’s commercial activities to affect its returns from the University, thus meeting the third control criterion.
Control Conclusion
The conclusion from the above assessment is that in this case the State Government controls the University, assuming that the State Government’s substantive rights give it the ability to direct the relevant activities of the University.
Implementation examples
Example IG5
A statutory authority SHS is established under State health services legislation to deliver services to the community. The statutory authority has a governing council that oversees the authority’s operations and is responsible for its day-to-day operations. The State Health Minister appoints the authority’s governing council and, subject to the Minister’s approval, the authority’s governing council appoints the chief executive of the authority.
The State Health Department acts as the ‘system manager’ for the State public health system. This role includes:
· strategic leadership, such as the development of State-wide health service plans;
· directions for the delivery of health services, such as entering into service agreements, capital works approval and management of State-wide industrial relations, including employment terms and conditions for the authority’s employees; and
· monitoring of performance (eg quality of health services and financial data) of the authority and taking remedial action when performance does not meet specified performance measures.
The Minister’s approval is specifically required for the following major decisions:
· entering into service agreements with the authority;
· issuing binding health service directives;
· finalisation of State-wide health service plans and capital works planning; and
· employment and remuneration of the authority’s executive staff.
Example IG5A
Based on the facts and circumstances outlined above, the Department generally acts as an agent of the State Health Minister in relation to the statutory authority. This is evident from the restricted decision-making authority held by the Department. The Department does not control the statutory authority.
As the State Health Minister appoints the statutory authority’s governing council and approves the major decisions affecting the authority’s activities, the Minister has the power to direct the relevant activities of the authority. Assuming that the other control criteria (variable returns and link between power and returns) are satisfied, as would be expected, then the Minister would control the statutory authority. As a result, the statutory authority would not be consolidated by the Department, but would be consolidated directly into the whole of government general purpose financial statements.
Example IG5B
The facts are the same as in Example IG5A except that:
· the Minister has delegated the power to appoint members of the statutory authority’s governing council to the Department head;
· the appointment of the authority’s chief executive by the governing council does not require Ministerial approval;
· the Minister has delegated the power to approve the major decisions to the Department head; and
· assessments of the Department’s performance encompass the performance of the statutory authority.
In this example, the scope of the decision-making authority held by the Department has increased significantly as a result of the delegations by the Minister to the Department head. As the Department acts as a principal under the delegations, the Department has the current ability to direct the relevant activities of the authority so as to achieve the health service objectives of the Department. As the Department also has the ability to use its power over the authority to affect the nature and amount of the Department’s returns, the Department controls the statutory authority.
The Department would consolidate the statutory authority into its consolidated financial statements. The Department’s consolidated financial statements would then be consolidated into the whole of government financial statements.
AUSTRALIAN APPLICATION GUIDANCE
This guidance accompanies, but is not part of, AASB 10.
Exemption from Presenting Consolidated Financial Statements
AG1 The following table summarises the circumstances in which the exemption from presenting consolidated financial statements set out in paragraphs 4-Aus4.2 of this Standard may be available to a parent entity. The exemption is available only if the requirements of those paragraphs are satisfied. For example, the exemption is not available to a parent entity if it is a disclosing entity.
Same type of entity – same tier
Ultimate or Intermediate Parent FP – Tier 1 FP – Tier 2 NFP – Tier 1 NFP – Tier 2 Parent FP – Tier 1 FP – Tier 2 NFP – Tier 1 NFP – Tier 2 Exemption Available* Available Available Available
Same type of entity – different tier Ultimate or Intermediate Parent FP – Tier 1 FP – Tier 2 NFP – Tier 1 NFP – Tier 2 Parent FP – Tier 2 FP – Tier 1 NFP – Tier 2 NFP – Tier 1 Exemption Available* Not available Available Not available
Different type of entity – same tier Ultimate or Intermediate Parent FP – Tier 1 FP – Tier 2 NFP – Tier 1 NFP – Tier 2 Parent NFP – Tier 1 NFP – Tier 2 FP – Tier 1 FP – Tier 2 Exemption Available* Available Not available^ Available
Different type of entity – different tier Ultimate or Intermediate Parent FP – Tier 1 FP – Tier 2 NFP – Tier 1 NFP – Tier 2 Parent NFP – Tier 2 NFP – Tier 1 FP – Tier 2 FP – Tier 1 Exemption Available* Not available Available Not available FP = For-profit entity
NFP = Not-for-profit entity
* The exemption would not be available by reference to the intermediate parent when it is a for-profit public sector entity unable to claim compliance with IFRSs – see paragraph Aus16.2 of AASB 101 Presentation of Financial Statements.
^ When the parent entity’s NFP ultimate or intermediate parent is able to claim compliance with IFRSs, the exemption is available.
Australian Accounting Standards consist of two tiers of reporting requirements for preparing general purpose financial statements:
(a) Tier 1: Australian Accounting Standards; and
(b) Tier 2: Australian Accounting Standards – Reduced Disclosure Requirements.
DELETED IFRS 10 TEXT
Deleted IFRS 10 text is not part of AASB 10.
Paragraph C1
An entity shall apply this IFRS for annual periods beginning on or after 1 January 2013. Earlier application is permitted. If an entity applies this IFRS earlier, it shall disclose that fact and apply IFRS 11, IFRS 12, IAS 27 Separate Financial Statements and IAS 28 (as amended in 2011) at the same time.
Paragraph C8
This IFRS supersedes the requirements relating to consolidated financial statements in IAS 27 (as amended in 2008).
Paragraph C9
This IFRS also supersedes SIC-12 Consolidation – Special Purpose Entities.
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