ifrs 10 consolidated financial statements consolidation for fund managers

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  • Slide 1
  • IFRS 10 Consolidated Financial Statements Consolidation for Fund Managers
  • Slide 2
  • IFRS 10 Consolidated Financial Statements Page 2Consolidation for Fund Managers Todays agenda Background and objectives New definition of control Consolidation for fund managers Application under the local laws Investment entities Continuous assessment Transition Current issues / challenges
  • Slide 3
  • IFRS 10 Consolidated Financial Statements Page 3Consolidation for Fund Managers Background and objectives
  • Slide 4
  • IFRS 10 Consolidated Financial Statements Page 4Consolidation for Fund Managers Background and objectives Background Changes WHO consolidates; no change in HOW to consolidate Tension between the control model in IAS 27 and the risks and rewards approach in SIC-12 Divergent application of IAS 27 and SIC-12 in practice Global financial crisis off-balance sheet entities Convergence with US GAAP (in part) Objectives Develop single control model applicable to all entities Improve disclosures basis of judgments
  • Slide 5
  • IFRS 10 Consolidated Financial Statements Page 5Consolidation for Fund Managers New definition of control
  • Slide 6
  • IFRS 10 Consolidated Financial Statements Page 6Consolidation for Fund Managers New definition of control Control of an investee requires an investor to possess all three essential elements: Power over the investee; Exposure, or rights, to variable returns from its involvement with the investee; and Ability to use its power over the investee to affect the amount of the investors returns An investor 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
  • Slide 7
  • IFRS 10 Consolidated Financial Statements Page 7Consolidation for Fund Managers New definition of control Activities Identify which activities of the investee are considered to be the relevant activities, i.e., those that significantly affect the investees returns Identifying activities Power Determine which party, if any, has power, that is, having existing rights that give it the current ability to direct the relevant activities Evaluating power Returns Assess whether the investor is exposed, or has rights, to variable returns from its involvement with the investee Assessing returns Understand purpose and design
  • Slide 8
  • IFRS 10 Consolidated Financial Statements Page 8Consolidation for Fund Managers Relevant activities are those that significantly affect the investees returns New definition of control Identifying relevant activities Examples: Establishing operating, capital and financing policies Appointing, remunerating, and terminating employment of service providers or key management personnel Understand purpose and design of the investee If two investors direct different relevant activities Identify which investor can direct the activities that most significantly affect returns
  • Slide 9
  • IFRS 10 Consolidated Financial Statements Page 9Consolidation for Fund Managers New definition of control Evaluating power Main aspects of power: Arises from rights Need not be exercised (includes potential voting rights) Does not arise from protective rights Can exist even if others participate in directing the relevant activities (e.g., they have significant influence) Evidence that an investor directed activities in the past is an indicator of power, but is not conclusive Power is having existing rights that give an investor the current ability to direct the relevant activities
  • Slide 10
  • IFRS 10 Consolidated Financial Statements Page 10Consolidation for Fund Managers New definition of control Assessing returns Examples: Dividends, distributions of economic benefits, changes in the value of an investment Remuneration, fees, residual interests, tax benefits, exposure from providing support Synergies, cost savings, economies of scale, scarce resources, proprietary knowledge Returns can be only positive, only negative or positive and negative, but must have the potential to vary as a result of the investees performance
  • Slide 11
  • IFRS 10 Consolidated Financial Statements Page 11Consolidation for Fund Managers New definition of control Protective rights Protective rights do not give power When are rights merely protective rights? Fundamental changes in the activities of an investee Only apply in exceptional circumstances Examples of protective rights include the right to: Restrict an investee from undertaking activities that could significantly change the credit risk of the investee Approve an investees capital expenditures (greater than the amount spent in the ordinary business) Protective rights do not prevent another investor from having control
  • Slide 12
  • IFRS 10 Consolidated Financial Statements Page 12Consolidation for Fund Managers New definition of control Substantive rights Does the investor have the current ability to exercise power? Rights need to be substantive (i.e. the holder must have the practical ability to exercise those rights) Factors to consider whether? Economic or other barriers exist (penalties, timing, etc.) Multiple parties have to agree to exercise right Holders would benefit from exercising the right Right is currently exercisable
  • Slide 13
  • IFRS 10 Consolidated Financial Statements Page 13Consolidation for Fund Managers Consolidation for fund managers
  • Slide 14
  • IFRS 10 Consolidated Financial Statements Page 14Consolidation for Fund Managers Consolidation for fund managers What do they need to know? Whether the fund manager (FM) is acting as principal or as agent. If the FM is deemed to be acting as principal for a fund it manages the FM would consolidate the fund. Conversely, if the FM is acting as an agent, it would not consolidate the fund it manages.
  • Slide 15
  • IFRS 10 Consolidated Financial Statements Page 15Consolidation for Fund Managers Consolidation for fund managers A new concept of control Power Determine which party, if any, has power, that is, the current ability to direct the relevant activities. Power arises from rights, which may include: -Voting rights -Potential voting rights -Rights to appoint key personnel -Decision making rights within a management contract -Removal or kick-out rights Power does not arise from protective rights Identifying power Returns Assess whether the investor is exposed, or has rights, to variable returns from its involvement with the investee. Returns can be positive, negative or both. Example of returns include: -Dividends (from direct interest in the fund either directly or potentially through certain related parties) -Remuneration (as result of earning management fees and performance fees) Assessing returns Linkage Evaluate whether the investor has the ability to use its power to affect the investors returns from its involvement with the investee. If applicable, determine whether the investor is a principal or an agent, considering: -Scope of its authority -Rights held by other parties -Remuneration -Exposure to variability from other interests. Evaluate linkage Understand the purpose and design of investee
  • Slide 16
  • IFRS 10 Consolidated Financial Statements Page 16Consolidation for Fund Managers Consolidation for fund managers Linkage between power and variable returns Typically, a fund manager is likely to satisfy the first two criteria of the control model, as follows: Power likely to have power, as the fund manager would normally have decision-making rights over the relevant activities. Variable returns exposed to variable returns, as a result of earning management fees and performance fees and direct interest, if any. The key determinant in deciding whether a fund manager has control over a fund is the link between power and variable returns.
  • Slide 17
  • IFRS 10 Consolidated Financial Statements Page 17Consolidation for Fund Managers Principal? Consolidation for fund managers Linkage between power and variable returns Delegated power principal or agent? An agent is a party engaged to act on behalf of another party or parties (the principal(s)) An agent does not control an investee Question whether the FM is acting as a principal or as an agent that is acting primarily on behalf of other investors? Agent?
  • Slide 18
  • IFRS 10 Consolidated Financial Statements Page 18Consolidation for Fund Managers Consolidation for fund managers Linkage between power and variable returns De facto Agents - nature of relationships with other parties (such as related parties) needs to be considered - fund managers decision-making rights and exposure to variable returns via the de facto agent, together with its own, will need to be considered in totality when assessing control.
  • Slide 19
  • IFRS 10 Consolidated Financial Statements Page 19Consolidation for Fund Managers Consolidation for fund managers Factors to consider IFRS 10 paragraph B60 requires that the following factors are evaluated to determine whether the fund manager is acting as principal or agent: 1. Scope of the fund managers decision-making authority over the fund. 2. Rights held by third parties (including removal rights) 3. Remuneration to which the fund manager is entitled in accordance with the remuneration agreement(s) 4. Fund managers exposure to variability of returns from other interes

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