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| AASB Standard | AASB 10 July 2015 |
Consolidated Financial Statements
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Contents
COMPARISON WITH IFRS 10
ACCOUNTING STANDARD
AASB 10 CONSOLIDATED FINANCIAL STATEMENTS
from paragraph
OBJECTIVE 1
Meeting the objective 2
SCOPE 4
CONTROL 5
Power 10
Returns 15
Link between power and returns 17
ACCOUNTING REQUIREMENTS 19
Non-controlling interests 22
Loss of control 25
DETERMINING WHETHER AN ENTITY IS AN INVESTMENT ENTITY 27
INVESTMENT ENTITIES: EXCEPTION TO CONSOLIDATION 31
COMMENCEMENT OF THE LEGISLATIVE INSTRUMENT Aus33.1
WITHDRAWAL OF AASB PRONOUNCEMENTS Aus33.2
APPENDICES
A Defined terms
B Application guidance
C Effective date and transition
E Australian implementation guidance for not-for-profit entities
AUSTRALIAN APPLICATION GUIDANCE
DELETED IFRS 10 TEXT
BASIS FOR CONCLUSIONS ON AASB 2011-5 AND AASB 2011-6
BASIS FOR CONCLUSIONS ON AASB 2013-5 AND DISSENTING VIEWS
BASIS FOR CONCLUSIONS ON AASB 2013-8
AVAILABLE ON THE AASB WEBSITE
Basis for Conclusions on IFRS 10
Australian Accounting Standard AASB 10 Consolidated Financial Statements is set out in paragraphs 1 – Aus33.2 and 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, and AASB 1057 Application of Australian Accounting Standards. 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.
Comparison with IFRS 10
AASB 10 Consolidated Financial Statements incorporates IFRS 10 Consolidated Financial Statements issued by the International Accounting Standards Board (IASB). Australian‑specific paragraphs (which are not included in IFRS 10) are identified with the prefix “Aus”. Paragraphs that apply only to not-for-profit entities begin by identifying their limited applicability.
Tier 1
For-profit entities complying with AASB 10 also comply with IFRS 10.
Not-for-profit entities’ compliance with IFRS 10 will depend on whether any “Aus” paragraphs that specifically apply to not-for-profit entities provide additional guidance or contain applicable requirements that are inconsistent with IFRS 10.
AASB 1053 Application of Tiers of Australian Accounting Standards explains the two tiers of reporting requirements.
Accounting Standard AASB 10
The Australian Accounting Standards Board makes Accounting Standard AASB 10 Consolidated Financial Statements under section 334 of the Corporations Act 2001.
| Kris Peach | |
| Dated 24 July 2015 | Chair – AASB |
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).
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]
(c) [deleted]
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 Australian Accounting 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 and subsequently accounts for it and for any amounts owed by or to the former subsidiary in accordance with relevant Standards. That retained interest is remeasured, as described in paragraphs B98(b)(iii) and B99A. The remeasured value at the date that control is lost shall be regarded as the fair value on initial recognition of a financial asset in accordance with AASB 9 or the cost on initial recognition of an investment in an associate or joint venture, if applicable.
(c) recognises the gain or loss associated with the loss of control attributable to the former controlling interest , as specified in paragraphs B98–B99A.
26 Paragraphs B97–B99A set out guidance for the accounting for the loss of control of a subsidiary.
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 Disclosure of Interests in Other Entities.
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.
Commencement of the legislative instrument
Aus33.1 For legal purposes, this legislative instrument commences on 30 June 2016.
Withdrawal of AASB pronouncements
Aus33.2 This Standard repeals AASB 10 Consolidated Financial Statements issued in August 2011. Despite the repeal, after the time this Standard starts to apply under section 334 of the Corporations Act (either generally or in relation to an individual entity), the repealed Standard continues to apply in relation to any period ending before that time as if the repeal had not occurred.
[Note: When this Standard applies under section 334 of the Corporations Act (either generally or in relation to an individual entity), it supersedes the application of the repealed Standard.]
Appendix A
Defined terms
This appendix is an integral part of the Standard.
| 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 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 the Standard. It describes the application of paragraphs 1–33 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.
B61 Determining whether a decision maker is an agent requires an evaluation of all the factors listed in paragraph B60 unless a single party holds substantive rights to remove the decision maker (removal rights) and can remove the decision maker without cause (see paragraph B65).
The scope of the decision-making authority
B62 The scope of a decision maker’s decision-making authority is evaluated by considering:
(a) the activities that are permitted according to the decision-making agreement(s) and specified by law, and
(b) the discretion that the decision maker has when making decisions about those activities.
B63 A decision maker shall consider the purpose and design of the investee, the risks to which the investee was designed to be exposed, the risks it was designed to pass on to the parties involved and the level of involvement the decision maker had in the design of an investee. For example, if a decision maker is significantly involved in the design of the investee (including in determining the scope of decision-making authority), that involvement may indicate that the decision maker had the opportunity and incentive to obtain rights that result in the decision maker having the ability to direct the relevant activities.
Rights held by other parties
B64 Substantive rights held by other parties may affect the decision maker’s ability to direct the relevant activities of an investee. Substantive removal or other rights may indicate that the decision maker is an agent.
B65 When a single party holds substantive removal rights and can remove the decision maker without cause, this, in isolation, is sufficient to conclude that the decision maker is an agent. If more than one party holds such rights (and no individual party can remove the decision maker without the agreement of other parties) those rights are not, in isolation, conclusive in determining that a decision maker acts primarily on behalf and for the benefit of others. In addition, the greater the number of parties required to act together to exercise rights to remove a decision maker and the greater the magnitude of, and variability associated with, the decision maker’s other economic interests (ie remuneration and other interests), the less the weighting that shall be placed on this factor.
B66 Substantive rights held by other parties that restrict a decision maker’s discretion shall be considered in a similar manner to removal rights when evaluating whether the decision maker is an agent. For example, a decision maker that is required to obtain approval from a small number of other parties for its actions is generally an agent. (See paragraphs B22–B25 for additional guidance on rights and whether they are substantive.)
B67 Consideration of the rights held by other parties shall include an assessment of any rights exercisable by an investee’s board of directors (or other governing body) and their effect on the decision-making authority (see paragraph B23(b)).
Remuneration
B68 The greater the magnitude of, and variability associated with, the decision maker’s remuneration relative to the returns expected from the activities of the investee, the more likely the decision maker is a principal.
B69 In determining whether it is a principal or an agent the decision maker shall also consider whether the following conditions exist:
(a) The remuneration of the decision maker is commensurate with the services provided.
(b) The remuneration agreement includes only terms, conditions or amounts that are customarily present in arrangements for similar services and level of skills negotiated on an arm’s length basis.
B70 A decision maker cannot be an agent unless the conditions set out in paragraph B69(a) and (b) are present. However, meeting those conditions in isolation is not sufficient to conclude that a decision maker is an agent.
Exposure to variability of returns from other interests
B71 A decision maker that holds other interests in an investee (eg investments in the investee or provides guarantees with respect to the performance of the investee), shall consider its exposure to variability of returns from those interests in assessing whether it is an agent. Holding other interests in an investee indicates that the decision maker may be a principal.
B72 In evaluating its exposure to variability of returns from other interests in the investee a decision maker shall consider the following:
(a) the greater the magnitude of, and variability associated with, its economic interests, considering its remuneration and other interests in aggregate, the more likely the decision maker is a principal.
(b) whether its exposure to variability of returns is different from that of the other investors and, if so, whether this might influence its actions. For example, this might be the case when a decision maker holds subordinated interests in, or provides other forms of credit enhancement to, an investee.
The decision maker shall evaluate its exposure relative to the total variability of returns of the investee. This evaluation is made primarily on the basis of returns expected from the activities of the investee but shall not ignore the decision maker’s maximum exposure to variability of returns of the investee through other interests that the decision maker holds.
Application examples
Example 13
A decision maker (fund manager) establishes, markets and manages a publicly traded, regulated fund according to narrowly defined parameters set out in the investment mandate as required by its local laws and regulations. The fund was marketed to investors as an investment in a diversified portfolio of equity securities of publicly traded entities. Within the defined parameters, the fund manager has discretion about the assets in which to invest. The fund manager has made a 10 per cent pro rata investment in the fund and receives a market-based fee for its services equal to 1 per cent of the net asset value of the fund. The fees are commensurate with the services provided. The fund manager does not have any obligation to fund losses beyond its 10 per cent investment. The fund is not required to establish, and has not established, an independent board of directors. The investors do not hold any substantive rights that would affect the decision-making authority of the fund manager, but can redeem their interests within particular limits set by the fund.
Although operating within the parameters set out in the investment mandate and in accordance with the regulatory requirements, the fund manager has decision-making rights that give it the current ability to direct the relevant activities of the fund—the investors do not hold substantive rights that could affect the fund manager’s decision-making authority. The fund manager receives a market-based fee for its services that is commensurate with the services provided and has also made a pro rata investment in the fund. The remuneration and its investment expose the fund manager to variability of returns from the activities of the fund without creating exposure that is of such significance that it indicates that the fund manager is a principal.
In this example, consideration of the fund manager’s exposure to variability of returns from the fund together with its decision-making authority within restricted parameters indicates that the fund manager is an agent. Thus, the fund manager concludes that it does not control the fund.
Example 14
A decision maker establishes, markets and manages a fund that provides investment opportunities to a number of investors. The decision maker (fund manager) must make decisions in the best interests of all investors and in accordance with the fund’s governing agreements. Nonetheless, the fund manager has wide decision-making discretion. The fund manager receives a market-based fee for its services equal to 1 per cent of assets under management and 20 per cent of all the fund’s profits if a specified profit level is achieved. The fees are commensurate with the services provided.
Although it must make decisions in the best interests of all investors, the fund manager has extensive decision-making authority to direct the relevant activities of the fund. The fund manager is paid fixed and performance-related fees that are commensurate with the services provided. In addition, the remuneration aligns the interests of the fund manager with those of the other investors to increase the value of the fund, without creating exposure to variability of returns from the activities of the fund that is of such significance that the remuneration, when considered in isolation, indicates that the fund manager is a principal.
The above fact pattern and analysis applies to examples 14A–14C described below. Each example is considered in isolation.
Example 14A
The fund manager also has a 2 per cent investment in the fund that aligns its interests with those of the other investors. The fund manager does not have any obligation to fund losses beyond its 2 per cent investment. The investors can remove the fund manager by a simple majority vote, but only for breach of contract.
The fund manager’s 2 per cent investment increases its exposure to variability of returns from the activities of the fund without creating exposure that is of such significance that it indicates that the fund manager is a principal. The other investors’ rights to remove the fund manager are considered to be protective rights because they are exercisable only for breach of contract. In this example, although the fund manager has extensive decision-making authority and is exposed to variability of returns from its interest and remuneration, the fund manager’s exposure indicates that the fund manager is an agent. Thus, the fund manager concludes that it does not control the fund.
Example 14B
The fund manager has a more substantial pro rata investment in the fund, but does not have any obligation to fund losses beyond that investment. The investors can remove the fund manager by a simple majority vote, but only for breach of contract.
In this example, the other investors’ rights to remove the fund manager are considered to be protective rights because they are exercisable only for breach of contract. Although the fund manager is paid fixed and performance-related fees that are commensurate with the services provided, the combination of the fund manager’s investment together with its remuneration could create exposure to variability of returns from the activities of the fund that is of such significance that it indicates that the fund manager is a principal. The greater the magnitude of, and variability associated with, the fund manager’s economic interests (considering its remuneration and other interests in aggregate), the more emphasis the fund manager would place on those economic interests in the analysis, and the more likely the fund manager is a principal.
For example, having considered its remuneration and the other factors, the fund manager might consider a 20 per cent investment to be sufficient to conclude that it controls the fund. However, in different circumstances (ie if the remuneration or other factors are different), control may arise when the level of investment is different.
Example 14C
The fund manager has a 20 per cent pro rata investment in the fund, but does not have any obligation to fund losses beyond its 20 per cent investment. The fund has a board of directors, all of whose members are independent of the fund manager and are appointed by the other investors. The board appoints the fund manager annually. If the board decided not to renew the fund manager’s contract, the services performed by the fund manager could be performed by other managers in the industry.
Although the fund manager is paid fixed and performance-related fees that are commensurate with the services provided, the combination of the fund manager’s 20 per cent investment together with its remuneration creates exposure to variability of returns from the activities of the fund that is of such significance that it indicates that the fund manager is a principal. However, the investors have substantive rights to remove the fund manager—the board of directors provides a mechanism to ensure that the investors can remove the fund manager if they decide to do so.
In this example, the fund manager places greater emphasis on the substantive removal rights in the analysis. Thus, although the fund manager has extensive decision-making authority and is exposed to variability of returns of the fund from its remuneration and investment, the substantive rights held by the other investors indicate that the fund manager is an agent. Thus, the fund manager concludes that it does not control the fund.
Example 15
An investee is created to purchase a portfolio of fixed rate asset-backed securities, funded by fixed rate debt instruments and equity instruments. The equity instruments are designed to provide first loss protection to the debt investors and receive any residual returns of the investee. The transaction was marketed to potential debt investors as an investment in a portfolio of asset-backed securities with exposure to the credit risk associated with the possible default of the issuers of the asset-backed securities in the portfolio and to the interest rate risk associated with the management of the portfolio. On formation, the equity instruments represent 10 per cent of the value of the assets purchased. A decision maker (the asset manager) manages the active asset portfolio by making investment decisions within the parameters set out in the investee’s prospectus. For those services, the asset manager receives a market-based fixed fee (ie 1 per cent of assets under management) and performance-related fees (ie 10 per cent of profits) if the investee’s profits exceed a specified level. The fees are commensurate with the services provided. The asset manager holds 35 per cent of the equity in the investee. The remaining 65 per cent of the equity, and all the debt instruments, are held by a large number of widely dispersed unrelated third party investors. The asset manager can be removed, without cause, by a simple majority decision of the other investors.
The asset manager is paid fixed and performance-related fees that are commensurate with the services provided. The remuneration aligns the interests of the fund manager with those of the other investors to increase the value of the fund. The asset manager has exposure to variability of returns from the activities of the fund because it holds 35 per cent of the equity and from its remuneration.
Although operating within the parameters set out in the investee’s prospectus, the asset manager has the current ability to make investment decisions that significantly affect the investee’s returns—the removal rights held by the other investors receive little weighting in the analysis because those rights are held by a large number of widely dispersed investors. In this example, the asset manager places greater emphasis on its exposure to variability of returns of the fund from its equity interest, which is subordinate to the debt instruments. Holding 35 per cent of the equity creates subordinated exposure to losses and rights to returns of the investee, which are of such significance that it indicates that the asset manager is a principal. Thus, the asset manager concludes that it controls the investee.
Example 16
A decision maker (the sponsor) sponsors a multi-seller conduit, which issues short-term debt instruments to unrelated third party investors. The transaction was marketed to potential investors as an investment in a portfolio of highly rated medium-term assets with minimal exposure to the credit risk associated with the possible default by the issuers of the assets in the portfolio. Various transferors sell high quality medium-term asset portfolios to the conduit. Each transferor services the portfolio of assets that it sells to the conduit and manages receivables on default for a market-based servicing fee. Each transferor also provides first loss protection against credit losses from its asset portfolio through over-collateralisation of the assets transferred to the conduit. The sponsor establishes the terms of the conduit and manages the operations of the conduit for a market-based fee. The fee is commensurate with the services provided. The sponsor approves the sellers permitted to sell to the conduit, approves the assets to be purchased by the conduit and makes decisions about the funding of the conduit. The sponsor must act in the best interests of all investors.
The sponsor is entitled to any residual return of the conduit and also provides credit enhancement and liquidity facilities to the conduit. The credit enhancement provided by the sponsor absorbs losses of up to 5 per cent of all of the conduit’s assets, after losses are absorbed by the transferors. The liquidity facilities are not advanced against defaulted assets. The investors do not hold substantive rights that could affect the decision-making authority of the sponsor.
Even though the sponsor is paid a market-based fee for its services that is commensurate with the services provided, the sponsor has exposure to variability of returns from the activities of the conduit because of its rights to any residual returns of the conduit and the provision of credit enhancement and liquidity facilities (ie the conduit is exposed to liquidity risk by using short-term debt instruments to fund medium-term assets). Even though each of the transferors has decision-making rights that affect the value of the assets of the conduit, the sponsor has extensive decision-making authority that gives it the current ability to direct the activities that most significantly affect the conduit’s returns (ie the sponsor established the terms of the conduit, has the right to make decisions about the assets (approving the assets purchased and the transferors of those assets) and the funding of the conduit (for which new investment must be found on a regular basis)). The right to residual returns of the conduit and the provision of credit enhancement and liquidity facilities expose the sponsor to variability of returns from the activities of the conduit that is different from that of the other investors. Accordingly, that exposure indicates that the sponsor is a principal and thus the sponsor concludes that it controls the conduit. The sponsor’s obligation to act in the best interest of all investors does not prevent the sponsor from being a principal.
BC12 The Appendix added to AASB 10 is labelled as Appendix E, to be consistent with the labelling of the appendices to IFRS 10 Consolidated Financial Statements. In IFRS 10, Appendix D consists of the consequential amendments to other Standards and Interpretations arising from the issuance of IFRS 10. AASB 10 does not have any Appendix D since those consequential amendments were made in AASB 2011‑7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (August 2011), following the Board’s practice of making amendments via separate Standards rather than through appendices to Standards.
Terminology in AASB 10
BC13 As AASB 10 incorporates IFRS 10, issued by the International Accounting Standards Board (IASB), the text of the body of AASB 10 and Appendices A–C is expressed from the perspective of for-profit entities in the private sector. The Board considered that some of the terminology in the Standard does not readily translate to a not-for-profit perspective and decided that it would be useful to explain that terminology for application in a not-for-profit context, rather than revise the terminology in some way for not-for-profit entities. The terms ‘investor’ and ‘investee’, for example, figure prominently in AASB 10, including in the definition of control, and are described in general terms in paragraph IG3 of Appendix E for AASB 10. The nature of ‘returns’, as another example, is also addressed in the implementation guidance. The Board believes the explanations provided will assist a not-for-profit entity to better relate to and apply the requirements of AASB 10.
Implementation guidance on control
BC14 In developing the implementation guidance, including some comprehensive examples, the Board sought to address the implementation issues that were identified in the research referred to in paragraph BC3 on the application of the notion of control by not-for-profit entities in the private and public sectors. For example, the guidance addresses rights arising from statutory arrangements (paragraphs IG6–IG7), economic dependence (paragraphs IG11–IG12), regulatory powers (paragraphs IG16–IG17), indirect returns (or benefits) to not-for-profit entities and congruent objectives (paragraphs IG18–IG20), and delegated power (paragraphs IG21–IG24).
BC15 The Board did not include implementation guidance in respect of some topics covered by AASB 10 due to the Board’s assessment that the issues arise similarly for both for-profit entities and not-for-profit entities. For example, the requirements regarding de facto agents and control of specified assets raise issues in practice for any entity, not just not-for-profit entities.
Examples
BC16 To illustrate the requirements of AASB 10, the implementation guidance includes examples within guidance paragraphs as well as five discrete, comprehensive examples. The examples refer to particular types of not-for-profit entities, some in the private sector and others in the public sector. However, the Board intended that the examples apply by analogy to other types of not-for-profit entities and similar circumstances as relevant, rather than being limited to the specific cases presented.
BC17 The comprehensive examples emphasise a principles-based approach, which requires an analysis of the relevant activities of the investee and of the substantive rights of various investors in considering whether the investor has power (as that term is used in AASB 10) over the investee. The Board noted that it could be difficult to distinguish substantive rights from protective rights held by an investor in relation to an investee. Therefore, the Board decided to note in the introduction to the comprehensive examples that distinguishing substantive and protective rights requires analysis of the circumstances, including considering the reasons for different investors holding various rights in relation to the investee. The Board also decided to include a range of scenarios in most of the comprehensive examples to illustrate that alternative outcomes for the assessment of control by the investor reflect the facts and circumstances in any particular case.
BC18 The Board included specific comprehensive examples in respect of a local government (Example IG3) and a university (Example IG4), given the anticipated uncertainty in respect of how AASB 10 might apply in determining whether such entities are controlled by another entity. Two scenarios under which different control conclusions might be drawn are presented in the university example, whereas the local government example includes only one case, in which it is concluded that the local government is not controlled by another government. The Board took the view that this would be the normal outcome in relation to local governments under current arrangements in Australia, but noted in paragraph IG8 and at the end of Example IG3 that the assessment of whether a local government is controlled by another government would depend on the particular facts and circumstances.
BC19 Given the types of arrangements often found in the public sector, the Board also decided that an example concerning delegated powers and agency relationships affecting public sector entities would be useful guidance. Example IG5 presents two scenarios regarding whether a government department controls a statutory authority. The example might be relevant in some jurisdictions but not in others.
Former guidance in superseded AASB 127
BC20 The Board reviewed the specific public sector guidance in the superseded AASB 127 Consolidated and Separate Financial Statements (paragraphs Aus17.1–Aus17.10) in the context of the three criteria for control set out in AASB 10: power, returns, and a link between power and returns. Some of the guidance in the superseded AASB 127 was not incorporated into Appendix E, on the grounds that the Board considered that it was either inconsistent with or beyond the scope of the requirements of AASB 10 or no longer necessary. The following paragraphs address the major aspects of the guidance in the superseded AASB 127.
BC21 Paragraph Aus17.1 stated that AASB 127 did not attempt to identify all groups and reporting entities in the public sector. Nevertheless, paragraph Aus17.5 described the nature of some reporting entities in the public sector. Paragraph Aus17.7 also discussed identifying economic entities in relation to Ministerial portfolios and functions with separate objectives. The Board decided that it was not appropriate to include these general statements in the implementation guidance since the nature of reporting entities in the public sector is a fundamental issue beyond the scope of AASB 10 (see paragraph BC4).
BC22 The statement in paragraph Aus17.2 that control of an entity by the government may be indicated by the accountability of the entity to the Parliament (or the Executive or a Minister) and by the government holding the residual financial interest in the net assets of the entity has not been incorporated into the implementation guidance. Accountability to the Parliament, the Executive or a Minister might or might not indicate that the government has substantive rights in relation to the entity, so the power criterion might not be satisfied. Holding the residual financial interest in the entity shows that the government has exposure or rights to variable returns from the entity, but does not indicate whether the government has the ability to use power over the entity to affect the government’s returns. Consequently, these two factors are insufficient to conclude whether an entity is controlled by the government.
BC23 Paragraph Aus17.3 listed circumstances that, individually or in combination, indicate that an entity is accountable to Parliament, the Executive or a Minister. The circumstances listed in paragraphs Aus17.3(a)–(d) are addressed in paragraphs B15 and IG9 in terms of rights that can give an investor power in relation to an investee. However, paragraph Aus17.3(e) has not been included in the implementation guidance because a requirement to submit reports to Parliament might reflect either protective or substantive rights, and hence is not useful as an indicator of power. Paragraph Aus17.3(f) regarding an entity established through legislation has been updated and included in paragraph IG7.
BC24 Paragraph Aus17.4 listed circumstances that indicate whether a government has a residual financial interest in the net assets of another entity. These circumstances (exposure to residual liabilities and the right to receive residual net assets on dissolution of the entity) indicate that the government would be exposed to variable returns from the entity. These returns are covered by the investment returns noted in paragraph B57(a).
BC25 Paragraph Aus17.6 stated that a government will usually control statutory authorities that it has established through legislation. This circumstance has been addressed through paragraph IG7 in respect of whether the government has power over an entity established through legislation. Power is just one of the control criteria.
BC26 Restrictions on the allocation of funds between activities and the existence of separate administrations are listed in paragraph Aus17.7 as factors that may affect the ability of an entity to deploy resources and should be considered in determining the existence of a group in the public sector. The ability to deploy resources is relevant to assessing whether an investor has power over an investee (see paragraph IG5). Restrictions on the ability to deploy resources may reflect barriers that prevent the holder of rights from exercising them. Examples of barriers are listed in paragraph B23, including operational barriers and legal or regulatory requirements.
BC27 Paragraph Aus17.8 noted that for a government to control an entity, it must have the power to require the entity’s assets to be deployed towards achieving the government’s objectives, and listed various actions that the government might be able to direct in respect of the controlled entity’s assets. Whether these circumstances result in the government controlling the entity under AASB 10 would depend on whether the government has power to direct the relevant activities of the entity. The actions listed are broadly consistent with the activities listed in paragraph B11 that can be relevant activities of an investee, depending on the circumstances of the investee.
BC28 Paragraph Aus17.9 outlined a range of circumstances in which a government does not control another entity, such as an entity dependent on government funding but able to decide whether to accept resources from the government and how to use the resources (paragraphs Aus17.9(a) and (c)). These examples are no longer needed as paragraphs IG11 and IG12 concerning economic dependence and paragraph IG20 in respect of congruent objectives adequately address the issues.
BC29 Paragraph Aus17.9(b) stated that a government acting as the trustee of a trust would not control the trust as it would not be able to deploy the resources of the trust for its own benefit. In contrast, the implementation guidance includes an example of a trust that is controlled through the trustee (paragraph IG22). Under AASB 10, the investor’s returns from a trust may be indirect non-financial returns, which the former guidance did not acknowledge.
BC30 Regulatory powers were addressed in paragraph Aus17.9(d) as not giving rise to control of regulated entities. Paragraph IG16 states that regulatory powers may represent either substantive rights (which could result in control of regulated entities) or protective rights (which would not result in control). Examples of protective rights are included in paragraph IG17.
BC31 Paragraph Aus17.9(e) stated that under existing legislative arrangements, State and Territory governments do not control local governments. The Board reconsidered the question of control of local governments but did not reach a categoric view. As noted in paragraph BC18, the Board concluded that although a local government normally would not be controlled by another government under current arrangements, the assessment of whether a local government is controlled by another government would depend on the particular facts and circumstances (paragraph IG8). Example IG3 illustrates how a decision as to whether a local government is controlled by another government could be addressed.
BC32 The final paragraph in the former public sector guidance, paragraph Aus17.10, addressed government control of independent statutory offices such as auditors-general and the judiciary. The same examples have been incorporated into the implementation guidance in paragraph IG10, which addresses more particularly the organisations assisting the independent statutory office holders.
AASB 12 and structured entities
BC33 While considering issues regarding AASB 10, the Board noted that the definition of ‘structured entity’ in AASB 12 Disclosure of Interests in Other Entities does not readily translate to a not-for-profit perspective as it focusses on voting or similar rights, which have less significance in general for many not-for-profit entities. The Board decided to propose implementation guidance to assist not-for-profit entities in applying this definition. As AASB 12 applies to not-for-profit entities in conjunction with AASB 10, the Board included the proposals in the same Exposure Draft (ED 238).
BC34 After considering the submissions received on the ED, the Board decided to add implementation guidance as Appendix E to AASB 12, integral to the Standard and thus with the same authority as the body and other appendices of the Standard. These decisions reflect the decisions on the nature and location of guidance as set out in paragraphs BC9–BC12 in respect of the AASB 10 guidance.
BC35 The Board decided that the implementation guidance for AASB 12 should be based on the principle underlying the definition of structured entity, and identified that principle as limiting the scope of structured entities to entities that are controlled through less conventional means. This is based on the definition emphasising that voting or similar rights are not the dominant factor in deciding who controls a structured entity – and for for-profit entities, voting rights are a common or conventional means of determining control.
BC36 The Board identified administrative arrangements and statutory provisions (legislation) as common means by which control may be determined for many not-for-profit entities, particularly those in the public sector. Accordingly, the Board took the view that the reference to ‘similar rights’ in the definition of structured entity encompasses, for not-for-profit entities, administrative arrangements and statutory provisions. Thus, not-for-profit entities for which administrative arrangements or statutory provisions are dominant factors in determining control of the entity are not regarded as structured entities. Appendix E for AASB 12 includes a range of examples to illustrate this approach.
AASB 1049 amendments
BC37 AASB 1049 Whole of Government and General Government Sector Financial Reporting was not addressed in the consequential amendments arising from AASB 10 (and related Standards) that were included in AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (August 2011), given that the Board intended to address the application of AASB 10 to not-for-profit entities through its Control in the Not-for-Profit Public and Private Sectors project. This Standard (AASB 2013-8) sets out the consequential amendments to AASB 1049 arising from AASB 10 and the related Standards. Most of these amendments are editorial.
BC38 The Board noted that paragraph 45 of AASB 1049 does not require the General Government Sector (GGS) financial statements to comply with any of the disclosure requirements of the superseded AASB 127 Consolidated and Separate Financial Statements. The Board reconsidered this position in respect of the disclosure requirements set out in AASB 12, and concluded that the GGS financial statements should not be required to comply with those requirements. This is effected through the amendments in this Standard to paragraph 45 of AASB 1049.
BC39 The Board took the view that the GGS financial statements need not be required to comply with the disclosure requirements of AASB 12 on the grounds that such disclosures would essentially duplicate AASB 12 disclosures in the whole of government financial statements. As entities included in the GGS financial statements are also included in the whole of government financial statements, the entities’ association with structured entities could be addressed in either set of financial statements. The nature of the risks associated with interests in structured entities is unlikely to change between the GGS level and the whole of government level.
Main changes from the Exposure Draft
BC40 The main changes made by the Board to the implementation guidance proposed in ED 238 following consideration of respondents’ comments are noted in the following paragraphs.
BC41 Some respondents considered that the major examples emphasised substantive and protective rights of various investors without adequately identifying the relevant activities of the investee and in some cases did not clearly apply the three criteria for control in coming to their conclusions. The Board agreed that the relevant activities of the investee should be addressed clearly, since an investor can have power over an investee only when it has substantive rights that give it the current ability to direct the relevant activities of the investee. The examples were amended accordingly, including addressing the control criteria more directly. Nevertheless, the Board retained the substantive and protective rights details in the examples, albeit with some reclassification, as part of the background information for the examples.
BC42 Of the four major examples proposed in the ED, three related specifically to public sector entities (local governments, universities, and government departments and authorities) and one to not-for-profit private sector entities (a religious organisation and an association). Some respondents requested additional not-for-profit private sector examples. The Board added a further major example (Example IG2) based on not-for-profit private sector entities (a charity and a company) and illustrating four scenarios. As stated in paragraph BC16, the Board also decided to note in the implementation guidance that the illustrative examples apply by analogy to types of not-for-profit entities other than those specifically identified in the examples and similar circumstances, as relevant (see paragraph IG3).
BC43 The ED proposed that rights specified in substantively enacted legislation could not give an investor the current ability to direct the relevant activities of an investee. This was questioned by some respondents, who compared substantive enactment of substantive rights with substantive rights that were exercisable only in the future. The Board reconsidered the issue and decided to change the guidance to acknowledge that in limited circumstances rights under substantively enacted legislation could become exercisable in time for making decisions about an investee’s relevant activities. For example, the progression from substantively enacted legislation to enacted legislation may be merely a matter of the formal approval of the legislation by the Governor in Council within a limited timeframe.
BC44 Several respondents questioned whether the notion of delegation in the not-for-profit public sector was adequately reflected in the proposed example illustrating whether a government department controlled a statutory authority. The Board revised the example and paragraph IG24 to clarify that a delegate in the not-for-profit public sector is not an agent of the delegator. The Board also deleted references to ‘delegated control’ as it was not necessary to introduce a new term. The Board noted that the term ‘delegation’ has a narrower meaning in the not-for-profit public sector than its general usage in the Standard to denote an agent/principal relationship.
Issues raised but guidance not revised
BC45 The Board discussed a range of issues raised by respondents to ED 238 that did not lead to changes to the implementation guidance that had been proposed in the ED. The more significant such issues included requests for guidance concerning assessing the relative significance of the rights of different parties, a controlled local government scenario, collective control in the public sector, and the effect of removal rights in the public sector, and comments on the power to enact or change legislation.
BC46 Respondents noted the difficulty in many cases of identifying which investor has power over an investee when more than one investor is able to direct different relevant activities of the investee. The Board was asked to provide further guidance on how to identify which investor was able to direct the activities that most significantly affected the investee’s returns. The Board concluded that it was not feasible to provide guidance for weighing the relative significance of different relevant activities since this would be subject to judgement in the context of the facts and circumstances in any particular case.
BC47 Some respondents to ED 238 noted that, unlike the other comprehensive examples, the local government example did not include an alternative scenario. The only scenario illustrated concluded that in the circumstances presented the local government was not controlled by the State government. Some respondents suggested that if it was not possible for a local government to be controlled by another government, then the guidance should state that. Other respondents suggested the addition of an alternative scenario so that the alternative control outcome would not be overlooked when the guidance was being applied. The Board decided that an alternative scenario was not required, since the proposed example already referred to the possibility of an alternative outcome (ie the local government being controlled by another government) in different circumstances or based on different judgements. The proposed implementation guidance also indicated that the assessment of whether a local government is controlled by another government would depend on the particular facts and circumstances. As noted in paragraph BC18, this approach has been retained in the implementation guidance.
BC48 The Board considered whether to extend the proposed example concerning whether a department controlled a statutory authority to address so-called collective rights at a whole of government level, under which a particular entity would be consolidated in the whole of government financial statements despite no individual entity or Minister in the jurisdiction being considered to control the particular entity. The Board decided not to extend the example on the basis that judgement would be required to determine in the circumstances whether the collective rights amounted to control at the whole of government level, with or without joint control by entities in the jurisdiction, or some other outcome.
BC49 The Board was asked to provide guidance regarding the implications of removal rights since, in the public sector, a government or a Minister will often have the right to dismiss key executives of public sector entities, such as the head of a department. The Board noted that the AASB 10 requirements relating to agency relationships and removal rights might be interpreted to imply that the key executives or their organisations act only as an agent of the government or Minister and therefore would be unable to control other entities. However, the Board considers that the requirements do not prevent intermediate parent entities from controlling other entities or preparing consolidated financial statements. For example, a department head is a part of the department, and a Minister’s ability to remove the department head does not prevent the department from being able to control other entities. The Board concluded that specific implementation guidance was not required.
BC50 Some respondents questioned the position proposed in the ED that the power to enact or change legislation could not give an investor the current ability to direct the relevant activities of an investee. The Board affirmed this view for the implementation guidance (paragraph IG14). If the power to legislate were relevant to determining whether a government controlled other entities, then, subject to the constitutional reach of its powers, the government might be considered to control all of the entities in its jurisdiction (including private sector entities) since it could conceivably cause Parliament to pass legislation to enable it to direct the activities of any or all of those entities so as to achieve its economic and social objectives. However, the political and social barriers (see paragraph IG13) to passing such legislation mean that the government realistically would not have the ability to exercise such power, and thus the power would not represent substantive rights.
ACNC requirements
BC51 Some respondents to ED 238 commented that, in determining the application of AASB 10 to not-for-profit entities, the Board should have regard to the financial reporting requirements of the Australian Charities and Not-for-profits Commission (ACNC).
BC52 The Board considered the requirements for annual financial reports under the Australian Charities and Not-for-profits Commission Act 2012 (ACNC Act) and the Australian Charities and Not-for-profits Commission Regulation 2013 (ACNC Regulation), in particular Subdivisions 60-C ‘Annual financial reports’ and 60-G ‘Collective and joint reporting’ of the ACNC Act and Subdivisions 60-B ‘Requirements for annual financial reports (core rules)’ and 60-C ‘Requirements for annual financial reports (special rules)’ of the ACNC Regulation. For example, under joint reporting, two or more registered entities may be permitted to prepare and lodge a single financial report, which might or might not be consistent with the AASB 10 requirements for consolidated financial statements. Collective reporting would not be consistent with AASB 10.
BC53 The Board also noted that section 60.30 of the ACNC Regulation requires a registered entity to prepare a special purpose financial statement, if it is not required to and does not propose to prepare a general purpose financial statement. The Board’s focus in setting accounting standards is on general purpose financial statements rather than special purpose financial statements.
BC54 The Board acknowledges that regulators might impose financial reporting requirements that differ from AASB Standards for their own regulatory purposes. The Board noted that the ACNC requirements would be expected to coincide with AASB Accounting Standards in most cases. However, the ACNC may permit registered entities to depart from AASB 10 in limited circumstances. The Board decided that it would not be appropriate for its requirements for general purpose financial statements to reflect those limited circumstances.
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