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

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30 IFRS 10 Consolidated Financial StatementsVariable returns of an arrangement are assessed widely, and not simply on the basis of the legal form. This can resultin returns that appear, initially, to be fixed but are considered to be variable for the purposes of IFRS 10. The followingexamples illustrate how variability is assessed for two forms of returns:Bond with fixed interest rate paymentsThe holder of a bond is contractually entitled to fixed interest payments. However from an IFRS 10 perspective theinterest payments are regarded as variable returns. This is because they are subject to default risk and in substanceexpose the investor to the credit risk of the issuer of the bond. The investor could receive all, some or none of theinterest payments in the case of default.Fixed feesFixed fees for managing an investee’s assets are variable returns because they expose the investor to the performancerisk of the investee. The amount of variability depends on the investee’s ability to generate sufficient income to paythe fee (IFRS 10.B56).
IFRS 10 Consolidated Financial Statements317.5. Link between power and variable returnsThe third control criterion requires an investor to have the ability to use its power to affect the investor’s variablereturns. This criterion is included in the standard to address principal-agent relationships. IFRS 10 does not provideother examples where there is no link between power and variable returns.In practice managed funds fall within this category. The key question is whether a fund is required to be consolidatedby the fund manager.7.5.1. Principal – Agent relationshipsAn investor with decision-making rights is required to assess whether it has the ability to use its rights to affect theinvestee’s returns. An investor will be considered a principal if the investor is able to use its rights to influence returns.This means that the investor is required to consolidate the investee because they meet all three criteria. An agentwill not be able to consolidate the investee in this case because an agent does not meet the third criterion. Thisis because an agent is primarily engaged to act on behalf and for the benefit of another party(or parties). Figure 4shows the principal-agent classification (IFRS 10.17/18).Power+Exposure tovariable returns+Returns for thebenefit ofthe investor=Investor isaprincipalPower+Exposure tovariable returns+Returns forthe benefit ofothers=Investor isanAgentFigure 4: Link between power and returns (principal-agent classification)Removal rightsA single party holding substantive rights to remove the decision maker (such as a fund manager) without cause atany time will always result in the decision maker being classified as an agent. If more than one party holds removalright together and no single party can remove the decision maker on its own, other factors are also required tobe considered. IFRS 10 notes that the higher the number of investors with removal rights who would need to acttogether, the more weight is required to be given to these other factors (see below) (IFRS 10.B65).BDO commentIFRS 10 as currently issued is not entirely clear about whether the rights of an investor to close a fund are required to betreated in the same way as removal rights. It is therefore not clear whether the right of an investor to close a fund wouldresult in the decision maker being classified as an agent by default.
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Need to Know: IFRS 10 - Consolidated Financial ... - BDO Canada

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