Under control? A practical guide to applying IFRS 10 Consolidated Financial Statements February 2017 Under control? A practical guide to IFRS 10 Contents Introduction 4 1 Overview 6 1.1 Summary of IFRS 10’s main requirements 7 1.2 Areas where IFRS 10 can affect the scope of consolidation 9 1.3 IFRS 10 in the context of the overall ‘consolidation package’ 10 1.4 Effective date and Transition of IFRS 10 11 2 Scope and consolidation exemptions 12 2.1 Scope of IFRS 10 13 2.2 Consolidation exceptions and exemptions 14 3 The control definition and guidance 16 3.1 The practical implications of the control definition 18 3.2 The three key elements of control in more detail 19 3.3 Purpose and design of investee 30 3.4 Situations where the control assessment is unclear 31 3.5 Summary of the control assessment process 32 3.6 Continuous assessment 33 Under control? A practical guide to IFRS 10 4 Applying the control model in specific circumstances 34 4.1 Majority holdings in an investee 35 4.2 Large minority holdings in an investee 36 4.3 Potential voting rights 40 4.4 Special purpose and structured entities 43 4.5 Principal-agent situations 50 4.6 Franchises 58 5 Consolidation procedures 60 5.1 The consolidation process 61 5.2 Changes in non-controlling interests 71 5.3 Losing control of a subsidiary 73 6 Investment Entities 76 6.1 Definition of an investment entity 77 6.2 Applying the definition 81 6.3 Accounting treatment for an investment entity 86 Appendix – Disclosures under IFRS 12: Understanding the requirements 92 Introduction Assessing when one entity controls another (in other words, when a parent-subsidiary relationship exists) is essential to the preparation of financial statements in accordance with International Financial Reporting Standards (IFRS). The control assessment determines which entities are consolidated in a parent’s financial statements and therefore affects a group’s reported results, cash flows and financial position – and the activities that are ‘on’ and ‘off’ the group’s balance sheet. Under IFRS, this control assessment is accounted for in accordance with IFRS 10 ‘Consolidated financial statements’. Under control? A practical guide to IFRS 10 IFRS 10 was issued in May 2011, and was part of a package of changes addressing different levels of involvement with other entities. IFRS 10 redefines ‘control’ and provides extensive guidance on applying the definition. IFRS 10 applies both to traditional entities and to special The Guide is organised as follows: purpose (or structured) entities and replaced the corresponding • Section 1 provides an overview of IFRS 10 and areas requirements of both IAS 27 ‘Consolidated and Separate where IFRS 10 can impact the scope of consolidation. It Financial Statements’ (IAS 27) (2008) and SIC-12 ‘Consolidation also explains how IFRS 10 fits into the overall package of – Special Purpose Entities’ (SIC-12). Standards on involvement with other entities. It is unusual for IFRS 10 to affect the scope of consolidation • Section 2 explains the scope of IFRS 10 from an investor in simple situations involving control through ownership of a and investee perspective, and the situations in which a majority of the voting power in an investee. However, more parent entity is exempt from presenting consolidated complex and borderline control assessments need to be financial statements. reviewed carefully. • Section 3 sets out IFRS 10’s control definition and its key The member firms within Grant Thornton International Ltd elements, and identifies key practical issues in applying the (‘GTIL’) have gained extensive insights into the application of guidance. IFRS 10. GTIL, through its IFRS team, develops general • Section 4 discusses the specific situations and types of guidance that supports its member firms’ commitment to high investee for which IFRS 10 can affect control conclusions quality, consistent application of IFRS. We are pleased to share and the scope of consolidation in practice. these insights by publishing ‘Under Control? A Practical Guide to • Section 5 discusses consolidation procedures and the Applying IFRS 10 Consolidated Financial Statements’ (the Guide). requirements on changes in ownership and loss of control. • Section 6 explains the consolidation exception for Using the Guide investment entities. The Guide has been written to assist management in applying • Appendix A summarises the disclosure requirements in IFRS 10. More specifically it aims to assist in: IFRS 12 ‘Disclosure of Interests in Other Entities’ and • understanding IFRS 10’s requirements provides selected application examples. • identifying situations in which IFRS 10 can impact control Grant Thornton International Ltd assessments February 2017 • identifying and addressing the key practical application issues and judgements. When applying IFRS 10, complex and borderline control assessments need to be reviewed carefully. February 2017 5 1 Overview IFRS 10 establishes a single, control-based model for assessing control and determining the scope of consolidation. It applies to all entities, including ‘structured entities’, which were previously referred to as ‘special purpose entities’ under SIC-12. Under control? A practical guide to IFRS 10 This section summarises IFRS 10’s main requirements, provides insights into areas where IFRS 10 most often impacts consolidation assessments and explains how IFRS 10 fits into the broader ‘consolidation package’. 1.1 Summary of IFRS 10’s main requirements Summary of IFRS 10’s main requirements IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements. To meet this objective it: • requires an entity that controls another (a parent) to present consolidated financial Objective statements (subject to limited exemptions – see below) • defines ‘control’, and confirms control as the basis for consolidation • provides guidance on how to apply the definition • provides guidance on preparing consolidated financial statements. IFRS 10 applies to all entities (including structured entities) except long-term employment benefit plans within the scope of IAS 19 ‘Employee Benefits’. A parent that is itself a subsidiary of another entity (an intermediate parent) need not present consolidated financial statements if it meets strict conditions, including that: • none of its owners object • its shares/debt instruments are not traded in a public market Scope and exemptions • a higher-level parent produces publicly-available IFRS consolidated financial statements. A parent that is an investment entity must not present consolidated financial statements if it is required to measure all of it subsidiaries at fair value through profit or loss. IFRS 10 applies only to consolidated financial statements. Requirements on preparing separate financial statements are retained in IAS 27. 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. Control requires: Control definition • power over the investee • exposure, or rights, to variable returns • ability to use power to affect returns. February 2017 7 Under control? A practical guide to IFRS 10 Summary of IFRS 10’s main requirements IFRS 10 includes additional guidance on the elements of the control definition and their interaction, including: • purpose and design of the investee • the ‘relevant activities’ of an investee • whether the rights of the investor give it the current ability to direct the relevant activities Applying the • whether the investor is exposed, or has rights, to variable returns. control definition IFRS 10 includes guidance on more difficult control assessments including: • agency relationships • control over structured entities • potential voting rights • control without a majority of voting rights. IFRS 10 retains established principles on consolidation procedures, including • elimination of intra-group transactions and the parent’s investment: • uniform accounting policies Preparing consolidated • the need for financial statements used in consolidation to have the same reporting date financial statements • the allocation of comprehensive income and equity to non-controlling interests • accounting for changes in ownership interests without loss of control • accounting for losing control of a subsidiary. IFRS 10 came into effect for accounting periods beginning on or after 1 January 2013. Transition was mainly retrospective but was subject to reliefs for situations in which: • the control assessment was the same as under IAS 27 (2008) Effective date and transition • a fully retrospective consolidation or de-consolidation would be impracticable. Early adoption was permitted as long as the other standards in the consolidation package were adopted at the same time. IFRS 10 does not include any disclosure requirements but an entity that applies Disclosures IFRS 10 is also required to apply IFRS 12 – which sets out comprehensive disclosure principles. Terminology – ‘special purpose entities’ (SPEs) and ‘structured entities’ The Guide makes extensive references to ‘special purpose entities’ (SPEs). These references are used to broadly describe entities which used to be considered within the scope of SIC-12. SIC-12 described SPEs only in general terms, so deciding whether a particular entity is an SPE required judgement. IFRS 10 does not refer to SPEs, but instead refers to entities that have been designed so that voting or similar rights