BASIS FOR CONCLUSIONS ON IFRS 10 CONTINUOUS ASSESSMENT

BASIS FOR CONCLUSIONS ON IFRS 10 CONTINUOUS ASSESSMENT

CONTINUOUS ASSESSMENT – An investor must continuously assess whether it controls an investee

CONTROL (i.e. the investor controls the investee IF AND ONLY IF ALL of the following three element are met)

POWER OVER THE INVESTEE

‘Power’ is defined as ‘existing rights that give the current ability to direct the relevant activities’ Therefore, when assessing whether an investor has power, there are two critical concepts, existing rights and relevant activities

EXPOSURE OR RIGHTS TO VARIABLE RETURNS

An investor is exposed or has rights to variable returns from its involvement with the investee. This refers to returns that are not fixed but rather vary depending on the performance of the investee

LINK BETWEEN POWER AND RETURNS

The investor must have the ability to use its power to affect the amount of the investor’s returns from its involvement with the inve

BASIS FOR CONCLUSIONS ON IFRS 10 CONTINUOUS ASSESSMENT

IDENTIFYING THE INVESTEE, CONSIDERATION OF ITS PURPOSE AND DESIGN

The term “investee” is not defined in IFRS 10, therefore the purpose and design of an investee shall be considered by the investor when assessing whether it has control of an investee

Investee controlled by means of equity instruments

• An investor controls an investee when the investor holds majority of the voting rights and is able to exercise these rights to determine the investee’s operating and financing policies and no additional arrangements that alter this decision-making are present Where voting rights are not the dominant factor in determining control, the investor would need to consider The design of the investee in terms of

• The risks the investee will be exposed to

• The risk it will pass on to the parties involved with it, and

• Whether the investor is exposed to some or all of that risk By implication, if the investee’s risk exposure is high, it passes part of it on to the investor and the investor is exposed to some of that risk, it is likely that the investee has been set up under the power of the investor

BASIS FOR CONCLUSIONS ON IFRS 10 CONTINUOUS ASSESSMENT

IDENTIFYING THE RELEVANT ACTIVITIES OF THE INVESTEE

Relevant activities’ is a new concept which is integral to the control model as it assists in determining whether an investor has power over an investee

Definition of ‘relevant activities’ – these are activities of the investee that SIGNIFICANTLY affect the investee’s returns

Examples of relevant activities include, but are not limited to:

• Selling and purchasing of goods or services

• Managing financial assets during their life

• Selecting, acquiring and disposing of assets

• Researching and developing new products or processes

• Determining a funding structure or obtaining funding

BASIS FOR CONCLUSIONS ON IFRS 10 CONTINUOUS ASSESSMENT

HOW DECISIONS ABOUT THE RELEVANT ACTIVITIES ARE MADE

The definition of “power” requires consideration of whether the investor has the current ability to direct the relevant activities, therefore it’s important to consider how decisions about the relevant activities are made

Decisions about relevant activities are (but are not only limited to these two examples)

• Establishing operating and capital decisions of the investee, including budgets

• Appointing and remunerating an investee’s key management personnel or service providers and terminating their services or employment

BASIS FOR CONCLUSIONS ON IFRS 10 CONTINUOUS ASSESSMENT

The Board added a project on consolidation to its agenda to deal with divergence in practice in applying IAS 27 and SIC-12. For example, entities varied in their application of the control concept in circumstances in which a reporting entity controls another entity but holds less than a majority of the voting rights of the entity, and in circumstances involving agency relationships.

In addition, a perceived conflict of emphasis between IAS 27 and SIC-12 had led to inconsistent application of the concept of control. IAS 27 required the consolidation of entities that are controlled by a reporting entity, and it defined control as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. SIC-12, which interpreted the requirements of IAS 27 in the context of special purpose entities, placed greater emphasis on risks and rewards.

The global financial crisis that started in 2007 highlighted the lack of transparency about the risks to which investors were exposed from their involvement with ‘off balance sheet vehicles’ (such as securitisation vehicles), including those that they had set up or sponsored. As a result, the G20 leaders, the Financial Stability Board and others asked the Board to review the accounting and disclosure requirements for such ‘off balance sheet vehicles’.

BASIS FOR CONCLUSIONS ON IFRS 10 CONTINUOUS ASSESSMENT

The International Financial Reporting Standards Foundation, or IFRS Foundation, is a nonprofit accounting organization. Its main objectives include the development and promotion of the International Financial Reporting Standards (IFRSs) through the International Accounting Standards Board (IASB), which it oversees.^[1][3]

The foundation was formerly named the International Accounting Standards Committee (IASC) Foundation until a renaming on 1 July 2010, and as of 2012 is governed by a board of 22 trustees.

The IFRS Foundation also develops and maintains the IFRS Taxonomy, which is the representation of the IFRSs in eXtensible Business Reporting Language (XBRL), via its XBRL team. The team is supported by the XBRL Advisory Council and the XBRL Quality Review Team, which respectively provide strategic advice and reviews developed taxonomies.Additionally, in 2012 the foundation issued a call for industry participants in a project to develop “common industry practice concepts” for the taxonomy.

XBRL provides a “common, electronic format for business and financial reporting”, which will contribute to the global convergence of accounting standards towards IFRS; the director of XBRL activities at the IFRS Foundation, Olivier Servais, hopes that “everybody will be using it” in future.As of March 2012, the IFRS Taxonomies have “considerably fewer” tags than GAAP taxonomies, and the Security and Exchange Commission has not approved the IFRS Taxonomy for use in XBRL filings in the United States.

BASIS FOR CONCLUSIONS ON IFRS 10 CONTINUOUS ASSESSMENT

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