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

28 IFRS 10 Consolidated Financial StatementsPurpose and design of the investeeIn assessing the purpose and design of an investee, an investor is required to consider the involvement and decisionsmade at the investee’s inception as part of its design and evaluate whether the transaction terms and features of theinvolvement provide the investor with rights that are sufficient to give it power.It is important to note that an investor’s involvement in the design of an investee alone is not sufficient to give aninvestor control. However, involvement in the design may indicate that the investor had the opportunity to obtainrights that are sufficient to give it power over the investee (IFRS 10.B51).IFRS 10.B8 notes that some investees are designed in a way that means voting rights are not the most relevant factorin deciding who controls the investee. This may be the case when any voting rights relate to administrative tasksonly and the relevant activities are directed by means of contractual arrangements. These types of arrangement arelikely to relate to structured entities as defined in IFRS 12 Disclosure of Interests in Other Entities, and this part of theguidance in IFRS 10 will be relevant for most entities previously within the scope of SIC-12.In cases where it is determined that voting rights are not the most relevant factor in determining control, an investoris required to give consideration to the purpose and design of the investee and to analyse the risks to which theinvestee was designed to be exposed, the risks it was designed to pass on to the parties involved with the investeeand whether the investor is exposed to some or all of those risks. Consideration of the risks includes both downsideand upside risk. (IFRS 10.B8).Contractual arrangementsAn investor is required to consider contractual arrangements such as call, put and liquidation rights established at theinvestee’s inception. When these contractual arrangements involve activities that are closely related to the investee,then these activities are considered to be, in substance, an integral part of the investee’s overall activities. Thisapplies, even though they may occur outside the legal boundaries of the investee.As a result, explicit or implicit decision-making rights embedded in contractual arrangements that are closely relatedto the investee need to be considered as relevant activities when determining whether an investor has power over aninvestee (IFRS 10.B52).Particular circumstancesFor some investees, relevant activities occur only when particular circumstances arise or events occur. The investeemay be designed so that its activities and returns are predetermined unless and until those particular circumstancesarise or events occur.In those cases, only the decisions about the investee’s activities when those circumstances or events occur cansignificantly affect its returns and thus be relevant activities. The circumstances or events need not have occurredfor an investor with the ability to make those decisions to have power. The fact that the right to make decisions iscontingent on circumstances arising or an event occurring does not, in itself, make those rights protective. For anexample, see section 7.2.4.