Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Dec 2014: Application of IFRS 10
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- October 4, 2017 at 5:25 am #409375
This refers the the situation below where bank exercises control over a entity to whom it has given loans.
The answer given by ACCA says that banks do pass the test of control, but will the entity be considered a subsidiary of the bank is left open.
Can you please say whether the entity is a subsidiary of the Bank?Scenario: Kayte had borrowed heavily to purchase some vessels and was struggling to meet its debt obligations. Kayte had sold some of these vessels but in some cases, the bank did not wish Kayte to sell the vessel. In these cases, the vessel was transferred to a new entity, in which the bank retained a variable interest based upon the level of the indebtedness. Kayte’s directors felt that the entity was a subsidiary of the bank and
are uncertain as to whether they have complied with the requirements of IFRS 3 Business Combinations and IFRS 10 Consolidated Financial Statements as regards the above transactions.ACCA answer as given below agrees that Bank exercises control as defined in IFRS 10, but leaves the question whether the entity is a subsidiary to constitution of entity. IFRS will supersede constitution of entities in so far as accounting treatment, right?
IFRS 10 Consolidated Financial Statements sets out the situation where an investor controls an investee. This is the case, if
and only if, the investor has all of the following elements:
(i) power over the investee, that is, the investor has existing rights which give it the ability to direct the relevant activities
(the activities which significantly affect the investee’s returns);
(ii) exposure, or rights, to variable returns from its involvement with the investee;
(iii) the ability to use its power over the investee to affect the amount of the investor’s returns.
Where a party has all three elements, then it is a parent; where at least one element is missing, then it is not. In every case,
IFRS 10 looks to the substance of the arrangement and not just to its legal form. Each situation needs to be assessed
individually. The question arises in this case as to whether the entities created are subsidiaries of the bank. The bank is likely to have power over the investee, may be exposed to variable returns and certainly may have the power to affect the amount of the returns. Thus the bank is likely to have a measure of control but the extent will depend on the constitution of the entity.October 4, 2017 at 9:21 pm #409484Hi,
IFRS 10 is saying the the constitution of the entity should be used to look at the detail contained within it so as to ten determine if the three elements of IFRS 10 are satisfied.
So it is saying that in general this type of arrangement gives rise to control and so the entity would be consolidated but you need to double check with the constitution to see if this then changes the terms slightly to what is generally perceived from this arrangement.
Thanks
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