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The control concept in IFRS 10

TEN things investment managers need to know

By Giselle Cini

Introduction

The change to the definition of control in IFRS 10, Consolidated Financial Statements [“IFRS 10”] is expected to have a significant effect on the investment management industry. Investment managers will have to apply the more comprehensive guidance in IFRS 10 when determining whether they control the entities they are involved with and consequently, whether they will need to consolidate those entities in their own financial statements. This article focuses on the practical issues that will need to be addressed by investment managers when applying the new control definition in IFRS 10 and provides a number of examples that will assist them in the successful implementation of this Standard.  Read the full article.

Highlighted points include:

  1. IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. 
  2. An investment manager 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. 
  3. Inherent in the definition of control is the requirement to understand the purpose and design of the investee and its relevant activities. 
  4. An investment manager has power over an investee when it has existing rights that give it the current ability to direct the relevant activities. 
  5. An investment manager 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. 
  6. An investment manager is required to determine whether it is a principal or an agent. 
  7. An investment manager needs to consider the nature of its relationship with other parties and whether those parties are acting on its behalf (that is, they are ‘de facto agents’). 
  8. An investment manager shall consider whether it treats a portion of an investee as a deemed separate entity and, if so, whether it controls the deemed separate entity. 
  9. An investment manager 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. 
  10. Investment managers will need to determine whether the exception to consolidation introduced by the October 2012 Amendment to IFRS 10, entitled Investment Entities, applies. 

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