Need to Know: IFRS 10 - Consolidated Financial ... - BDO Canada

14 IFRS 10 Consolidated Financial Statements7.2. Relevant activities7.2.1. DefinitionRelevant activities are defined as:‘…activities of the investee that significantly affect the investee’s returns’ (IFRS 10 Appendix A).The concept of relevant activities is a key part of the analysis required by IFRS 10. While in many cases these will bestraightforward to identify, in others careful consideration will be required. This is particularly the case for structuredentities, where the relevant activities only take place in specified circumstances (such as recovery action taken on theoccurrence of default of specified debts).7.2.2. IdentificationIn order to identify relevant activities, an investor considers the purpose and design of an investee. In other words,relevant activities depend on the business model of an investee and how revenue is generated. Investees will usuallyhave a range of operating and financing activities that significantly affect their returns.Examples of relevant activities and the ability to direct those activities are:Relevant Activities (IFRS 10.B11)––Selling and purchasing of goods or services––Managing financial assets during their life (including upon default)––Selecting, acquiring or disposing of assets––Researching and developing new products or processes––Determining a funding structure or obtaining funding.Decisions about relevant activities (IFRS 10.B12)––Establishing operating and capital decisions of the investee, including budgets––Appointing and remunerating an investee’s key management personnel or service providers and terminating theirservices or employment.Example 1 shows an example of how control could be assessed.Example 1 – Assessing control over relevant activities [IFRS 10.B13 Application Example 2]An investment vehicle (the investee) is created and financed with a debt instrument held by an investor (the debtinvestor) 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% of the equity is also the asset manager. The investee uses its proceedsto purchase a portfolio of financial assets, exposing the investee to the credit risk associated with the possibledefault 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 riskassociated with the possible default of the assets in the portfolio because of the nature of these assets andbecause the equity tranche is designed to absorb the first losses of the investee.