International GAAP (2023)

Cover Introductory materials About this book 2023 Edition Preface Lists of chapters Abbreviations Authoritative literature CH01 International GAAP Overview 1 Why international financial reporting standards matter 2 The IFRS Foundation and the IASB 2.1 The standard–setting structure 2.2 The IFRS Foundation 2.3 The Monitoring Board 2.4 The International Accounting Standards Board (IASB) 2.4.1 Agenda consultation 2.5 The IFRS Interpretations Committee (the Interpretations Committee) 2.5.1 Agenda decisions 2.6 The Due Process Handbook 2.7 The IFRS Advisory Council 2.8 Accounting Standards Advisory Forum 2.9 Other advisory bodies 2.10 The International Sustainability Standards Board 3 The IASB’s technical agenda and convergence with US GAAP 3.1 The IASB’s current priorities and future agenda 3.2 IFRS/US GAAP convergence 4 The adoption of IFRS around the world 4.1 Worldwide adoption 4.2 Europe 4.2.1 EU 4.2.1.A Endorsed IFRS standards 4.2.1.B Evaluation of the Regulation 4.2.2 Russia 4.2.3 United Kingdom 4.3 Americas 4.3.1 US 4.3.2 Canada 4.3.3 Brazil 4.4 Asia 4.4.1 China 4.4.1.A Mainland China 4.4.1.B Hong Kong 4.4.2 Japan 4.4.3 India 4.5 Australia 4.6 South Africa 5 Consistency in application of IFRS 6 Summary CH02 The IASB’s Conceptual Framework Overview 1 Introduction 1.1 What is a conceptual framework? 1.2 Why is a conceptual framework necessary? 2 Development of the IASB’s Conceptual Framework and effective date 3 Contents, purpose and scope of the IASB’s Conceptual Framework 3.1 Contents of the Conceptual Framework 3.2 Status and purpose of the Conceptual Framework 4 Chapter 1: The objective of general purpose financial reporting 4.1 Objective, usefulness and limitations of general purpose financial reporting 4.1.1 Objective and usefulness 4.1.2 Limitations 4.2 Information about the economic resources of an entity and the use made of them, claims against the entity, and changes in resources and claims 4.2.1 Economic resources and claims 4.2.2 Changes in economic resources and claims 4.2.3 Information about the use of economic resources (stewardship) 5 Chapter 2: Qualitative characteristics of useful financial information 5.1 Fundamental qualitative characteristics 5.1.1 Relevance (including materiality) 5.1.2 Faithful representation 5.1.3 Applying the fundamental qualitative characteristics 5.2 Enhancing qualitative characteristics 5.2.1 Comparability 5.2.2 Verifiability 5.2.3 Timeliness 5.2.4 Understandability 5.2.5 Applying the enhancing qualitative characteristics 5.3 The cost constraint 6 Chapter 3: Financial statements and the reporting entity 6.1 Financial statements 6.1.1 Objective and scope of financial statements 6.1.2 Reporting period and comparative information 6.1.3 Perspective adopted in financial statements 6.1.4 Going concern assumption 6.2 The reporting entity 6.2.1 Consolidated and unconsolidated financial statements 7 Chapter 4: The elements of financial statements 7.1 Matters concerning both assets and liabilities 7.1.1 Unit of account 7.1.2 Executory contracts 7.1.3 Substance of contractual rights and contractual obligations 7.2 Definition of assets 7.2.1 Rights 7.2.2 Potential to produce economic benefits 7.2.3 Control 7.3 Definition of liabilities 7.3.1 Obligation 7.3.2 Transfer an economic resource 7.3.3 Present obligation existing as a result of past events 7.4 Definition of equity 7.5 Definition of income and expenses 8 Chapter 5: Recognition and derecognition 8.1 The recognition process 8.2 Recognition criteria 8.2.1 Relevance 8.2.1.A Existence uncertainty 8.2.1.B Low probability of an inflow or outflow of economic benefits 8.2.2 Faithful representation 8.2.2.A Measurement uncertainty 8.2.2.B Other factors 8.3 Derecognition 9 Chapter 6: Measurement 9.1 Measurement bases 9.1.1 Historical cost 9.1.2 Current value 9.1.2.A Fair value 9.1.2.B Value in use and fulfilment value 9.1.2.C Current cost 9.2 Information provided by different measurement bases 9.2.1 Historical cost 9.2.2 Current value 9.2.2.A Fair value 9.2.2.B Value in use and fulfilment value 9.2.2.C Current cost 9.3 Factors to consider in selecting measurement bases 9.3.1 Relevance 9.3.1.A Characteristics of the asset or liability 9.3.1.B Contribution to future cash flows 9.3.2 Faithful representation 9.3.3 Enhancing characteristics and the cost constraint 9.3.3.A Historical cost 9.3.3.B Current value 9.3.4 Factors specific to initial measurement 9.3.5 More than one measurement basis 9.4 Measurement of equity 9.5 Cash–flow–based measurement techniques 10 Chapter 7: Presentation and disclosure 10.1 Presentation and disclosure objectives and principles 10.2 Classification 10.2.1 Classification of assets and liabilities 10.2.1.A Offsetting 10.2.2 Classification of equity 10.2.3 Classification of income and expenses 10.2.3.A Profit or loss and other comprehensive income 10.3 Aggregation 11 Chapter 8: Concepts of capital and capital maintenance 11.1 Financial capital maintenance 11.2 Physical capital maintenance 12 Management commentary 12.1 The IASB’s practice statement 12.2 Possible future changes to the practice statement Appendix A – Defined terms CH03 Presentation of financial statements and accounting policies Overview 1 Introduction 1.1 Objective and scope of IAS 1 1.2 Objective and scope of IAS 8 2 The purpose and composition of financial statements 2.1 The purpose of financial statements 2.2 Frequency of reporting and period covered 2.3 The components of a complete set of financial statements 2.4 Comparative information 2.4.1 General requirements 2.4.2 Reclassification 2.5 Identification of the financial statements and accompanying information 2.5.1 Identification of financial statements 2.5.2 Statement of compliance with IFRS 3 The structure of financial statements 3.1 The statement of financial position 3.1.1 The distinction between current/non–current assets and liabilities 3.1.2 Non–current assets and disposal groups held for sale or distribution 3.1.3 Current assets 3.1.4 Current liabilities 3.1.4.A Requirements for periods beginning before 1 January 2023 3.1.4.B Changes to IAS 1 for periods beginning on or after 1 January 2023 3.1.4.C Practical Illustrations of the requirements 3.1.5 Information required on the face of the statement of financial position 3.1.6 Information required either on the face of the statement of financial position or in the notes 3.1.7 Illustrative statements of financial position 3.2 The statement of comprehensive income and the statement of profit or loss 3.2.1 Profit and loss and comprehensive income 3.2.2 Information required on the face of the statement of profit or loss 3.2.2.A Operating profit 3.2.3 Classification of expenses recognised in profit or loss by nature or function 3.2.3.A Analysis of expenses by nature 3.2.3.B Analysis of expenses by function 3.2.4 The statement of comprehensive income 3.2.4.A The face of the statement of comprehensive income 3.2.4.B Reclassification adjustments 3.2.4.C Tax on items of other comprehensive income 3.2.5 Discontinued operations 3.2.6 Material and ‘extraordinary’ items 3.2.6.A Material items 3.2.6.B Ordinary activities and ‘extraordinary’ items 3.3 The statement of changes in equity 3.4 The notes to the financial statements 4 Accounting policies 4.1 General principles 4.1.1 Fair presentation 4.1.1.A Fair presentation and compliance with IFRS 4.1.1.B The fair presentation override 4.1.2 Going concern 4.1.2.A Assessment of going concern 4.1.2.B Basis other than going concern 4.1.3 The accrual basis of accounting 4.1.4 Consistency 4.1.5 Materiality and aggregation 4.1.6 Offset 4.1.7 Profit or loss for the period 4.1.8 Practice Statement 2 – Making Materiality Judgements 4.1.8.A General characteristics of materiality 4.1.8.B Making materiality judgements 4.1.8.C Specific topics 4.2 The definition of and distinction between accounting policies and accounting estimates 4.2.1 Requirements for periods beginning before 1 January 2023 4.2.2 Requirements for periods beginning on or after 1 January 2023 4.3 The selection and application of accounting policies 4.4 Changes in accounting policies 4.4.1 Basic principles 4.4.2 The revaluation exception 4.5 Changes in accounting estimates 4.5.1 Requirements for periods before 1 January 2023 4.5.2 Requirements for periods beginning on or after 1 January 2023 4.6 Correction of errors 4.7 Impracticability of restatement 4.7.1 Impracticability of restatement for a change in accounting policy 4.7.2 Impracticability of restatement for a material error 5 Disclosure requirements 5.1 Disclosures relating to accounting policies 5.1.1 Disclosure of accounting policies 5.1.1.A Summary of significant accounting policies 5.1.1.B Judgements made in applying accounting policies 5.1.2 Disclosure of changes in accounting policies 5.1.2.A Accounting policy changes pursuant to the initial application of an IFRS 5.1.2.B Voluntary changes in accounting policy 5.1.2.C Future impact of a new IFRS 5.2 Disclosure of estimation uncertainty and changes in estimates 5.2.1 Sources of estimation uncertainty 5.2.2 Changes in accounting estimates 5.3 Disclosure of prior period errors 5.4 Disclosures about capital 5.4.1 General capital disclosures 5.4.2 Puttable financial instruments classified as equity 5.5 Other disclosures 6 Possible future developments 6.1 Standard–setting projects 6.1.1 Management commentary 6.1.2 Primary financial statements 6.1.3 Disclosure Initiative – Targeted Standards–level Review of Disclosures 6.2 Maintenance projects 6.2.1 Classification of Debt with Covenants as Current or Non–current Appendix A – Index of Illustrations CH04_Non–current assets held for sale and discontinued operations Overview 1 Objective and scope of IFRS 5 2 Non–current assets (and disposal groups) held for sale or held for distribution to owners 2.1 Classification of non–current assets (and disposal groups) held for sale or held for distribution to owners 2.1.1 The concept of a disposal group 2.1.1.A Deferred tax assets and liabilities in a disposal group held for sale 2.1.2 Classification as held for sale or as held for distribution to owners 2.1.2.A Meaning of available for immediate sale 2.1.2.B Meaning of highly probable 2.1.2.C Abandonment 2.1.3 Partial disposals of operations 2.1.3.A Loss of control of a subsidiary 2.1.3.B Partial disposal of an associate or joint venture 2.1.4 Deemed disposals 2.2 Measurement of non–current assets (and disposal groups) held for sale 2.2.1 Scope of the measurement requirements 2.2.2 Measurement of non–current assets and disposal groups held for sale 2.2.2.A Measurement on initial classification as held for sale 2.2.2.B Subsequent remeasurement 2.2.3 Impairments and reversals of impairment 2.2.4 Presentation in the statement of financial position of non–current assets and disposal groups held for sale 2.2.5 Changes to a plan of sale or to a plan of distribution 2.2.5.A Assets (or disposal groups) to be retained by the entity 2.2.5.B Change in method of disposal 3 Discontinued operations 3.1 Definition of a discontinued operation 3.2 Presentation of discontinued operations 3.3 Trading between continuing and discontinued operations 4 Comparative information 4.1 Treatment of comparative information on initial classification as held for sale 4.1.1 The statement of comprehensive income 4.1.2 The statement of financial position 4.2 Treatment of comparative information on the cessation of classification as held for sale 5 Disclosure requirements 5.1 Requirements of IFRS 5 5.2 Disclosures required by standards other than IFRS 5 6 Possible future developments Appendix A – Index of Illustrations Appendix B – Defined terms CH05 First–time adoption Overview 1 Introduction 1.1 Objectives of first–time adoption 1.2 Convergence with US GAAP 1.3 Future developments 1.4 Defined terms 2 Who is a first–time adopter? 2.1 The first IFRS financial statements in scope of IFRS 1 2.1.1 What are general purpose financial statements? 2.2 When is IFRS 1 applied? 2.2.1 Repeat application of IFRS 1 2.3 Determining the previous GAAP 2.3.1 Transition to IFRSs from a similar GAAP 3 Opening IFRS statement of financial position 3.1 First–time adoption timeline 3.2 Opening IFRS statement of financial position and accounting policies 3.3 Fair value and deemed cost 3.4 Transitional provisions in other standards 3.5 Departures from full retrospective application 4 Exceptions to the retrospective application of other IFRSs 4.1 Introduction 4.2 Estimates 4.3 Derecognition of financial assets and financial liabilities 4.4 Hedge accounting: general 4.4.1 Paragraphs B5 and B6 of IFRS 1 when applying IFRS 9 4.4.2 Applicability of IAS 39 hedge requirements 4.5 Hedge accounting in the opening IFRS statement of financial position 4.5.1 Measurement of derivatives and elimination of deferred gains and losses 4.5.2 Hedge relationships reflected in the opening IFRS statement of financial position 4.5.2.A Prohibition on retrospective designation 4.5.2.B Designation in anticipation of adoption of IFRSs 4.5.3 Reflecting cash flow hedges in the opening IFRS statement of financial position 4.5.4 Reflecting fair value hedges in the opening IFRS statement of financial position 4.5.5 Reflecting foreign currency net investment hedges in the opening IFRS statement of financial position 4.5.6 ‘Costs of hedging’ (where excluded from the hedge relationship under previous GAAP) 4.6 Hedge accounting: subsequent treatment 4.6.1 Discontinuation of a hedge relationship 4.6.2 Ineffectiveness of cash flow and foreign currency net investment hedges in continuing hedge relationships 4.6.3 Ineffectiveness of fair value hedges in continuing hedge relationships 4.6.4 ‘Costs of hedging’ (where excluded from the hedge relationship under previous GAAP) 4.7 Hedge accounting: Illustrations 4.8 Non–controlling interests 4.9 Classification and measurement of financial instruments under IFRS 9 4.9.1 Classification of financial instruments 4.9.1.A Assessment of a modified time value of money element 4.9.1.B Assessment of whether the fair value of a prepayment feature is insignificant 4.9.2 Measurement of financial instruments measured at amortised cost 4.9.3 Transition adjustments 4.10 Impairment of financial assets under IFRS 9 4.11 Embedded derivatives 4.12 Government loans 4.13 Insurance contracts 4.14 Deferred tax related to leases and decommissioning, restoration and similar liabilities 5 Optional exemptions from the requirements of certain IFRSs 5.1 Introduction 5.2 Business combinations and acquisitions of associates and joint arrangements 5.2.1 Scope of the business combinations exemption in IFRS 1 5.2.1.A Asset acquisitions 5.2.2 Option to restate business combinations retrospectively 5.2.2.A Associates and joint arrangements 5.2.3 Classification of business combinations 5.2.4 Assets and liabilities to be recognised in the opening IFRS statement of financial position 5.2.4.A Assets and liabilities to be excluded 5.2.4.B Recognition of assets and liabilities 5.2.4.C Previous GAAP carrying amount as deemed cost 5.2.4.D In–process research and development 5.2.4.E Subsequent measurement under IFRSs not based on cost 5.2.4.F Illustration of recognition and measurement requirements 5.2.5 Restatement of goodwill 5.2.5.A Prohibition of other adjustments to goodwill 5.2.5.B Derecognition of negative goodwill 5.2.5.C Goodwill previously deducted from equity 5.2.6 Currency adjustments to goodwill 5.2.7 Previously unconsolidated subsidiaries 5.2.8 Previously consolidated entities that are not subsidiaries 5.2.9 Measurement of deferred taxes and non–controlling interests 5.2.10 Transition accounting for contingent consideration 5.3 Share–based payment transactions 5.3.1 Use of previously published fair values 5.3.2 Restatement of costs recognised under previous GAAP 5.4 Deemed cost 5.4.1 Fair value or revaluation as deemed cost 5.4.1.A Determining deemed cost 5.4.1.B Deemed cost determined before the date of transition to IFRSs 5.4.2 Event–driven fair value measurement as deemed cost 5.4.2.A ‘Push down’ accounting 5.4.2.B ‘Fresh start’ accounting 5.4.2.C Exemption for event–driven revaluations after the date of transition 5.4.3 Deemed cost for oil and gas assets 5.4.4 Deemed cost for assets used (or previously used) in operations subject to rate regulation 5.4.5 Summary 5.5 Leases 5.6 Cumulative translation differences 5.6.1 Gains and losses arising on related hedges 5.7 Investments in subsidiaries, joint ventures and associates 5.7.1 Consolidated financial statements: subsidiaries and structured entities 5.7.2 Separate financial statements: Cost of an investment in a subsidiary, joint venture or associate 5.8 Assets and liabilities of subsidiaries, associates and joint ventures 5.8.1 Subsidiary becomes a first–time adopter later than its parent 5.8.1.A Cumulative translation differences 5.8.2 Parent becomes a first–time adopter later than its subsidiary 5.8.3 Implementation guidance on accounting for assets and liabilities of subsidiaries, associates and joint ventures 5.8.4 Adoption of IFRSs on different dates in separate and consolidated financial statements 5.8.5 Application to investment entities under IFRS 10 5.8.5.A Subsidiary adopts IFRSs after investment entity parent 5.8.5.B Non–investment entity parent adopts IFRSs after investment entity subsidiary 5.9 Compound financial instruments 5.10 Designation of previously recognised financial instruments 5.10.1 Designation of financial asset as measured at fair value through profit or loss 5.10.2 Designation of financial liability at fair value through profit or loss 5.10.3 Designation of investment in an equity instrument 5.10.4 Determination of an accounting mismatch for presenting a gain or loss on financial liability 5.11 Fair value measurement of financial assets or financial liabilities at initial recognition 5.12 Decommissioning liabilities included in the cost of property, plant and equipment 5.12.1 IFRIC 1 exemption 5.12.2 IFRIC 1 exemption for oil and gas assets at deemed cost 5.13 Financial assets or intangible assets accounted for in accordance with IFRIC 12 5.14 Borrowing costs 5.14.1 Borrowing cost exemption 5.14.2 Interaction with other exemptions 5.15 Extinguishing financial liabilities with equity instruments 5.16 Severe hyperinflation 5.17 Joint arrangements 5.18 Stripping costs in the production phase of a surface mine 5.19 Designation of contracts to buy or sell a non–financial item 5.20 Revenue from contracts with customers 5.20.1 Definition of a completed contract 5.20.2 Implementation questions on definition of a completed contract 5.20.2.A Elements in a contract to be considered 5.20.2.B Identification of a contract under previous GAAP 5.20.2.C Some or all of revenue has not been recognised under previous GAAP 5.20.2.D Accounting for completed contracts excluded from transition 5.21 Foreign currency transactions and advance consideration 5.22 Regulatory deferral accounts 5.22.1 Defined terms in IFRS 14 5.22.2 Scope 5.22.3 Continuation of previous GAAP accounting policies (temporary exemption from IAS 8.11) 5.22.4 Recognition of regulatory deferral account balances 5.22.5 Changes in accounting policies 5.22.6 Presentation 5.22.6.A Presentation of deferred tax balances 5.22.6.B Presentation of earnings per share amounts 5.22.6.C Presentation of discontinued operations and disposal groups 5.22.6.D Illustrative presentation of financial statements 5.22.7 Disclosures 5.22.7.A Explanation of activities subject to rate regulation 5.22.7.B Explanation of recognised amounts 5.22.8 Interaction with other standards 5.22.8.A Application of IAS 10 5.22.8.B Application of IAS 12 5.22.8.C Application of IAS 36 5.22.8.D Application of IFRS 3 5.22.8.E Application of IFRS 5 5.22.8.F Application of IFRS 10 and IAS 28 5.22.9 Future developments 6 Presentation and disclosure 6.1 Comparative information 6.2 Non–IFRS comparative information and historical summaries 6.3 Explanation of transition to IFRSs 6.3.1 Disclosure of reconciliations 6.3.1.A Reconciliation by a first–time adopter that continues to publish previous GAAP financial statements 6.3.2 Line–by–line reconciliations and detailed explanations 6.3.3 Recognition and reversal of impairments 6.3.4 Inclusion of IFRS 1 reconciliations by cross reference 6.4 Disclosure of financial instruments 6.4.1 Designation of financial instruments 6.4.2 Classification of financial instruments 6.5 Disclosures regarding deemed cost 6.5.1 Use of fair value as deemed cost 6.5.2 Use of deemed cost for investments in subsidiaries, joint ventures and associates in separate financial statements 6.5.3 Use of deemed cost for oil and gas assets 6.5.4 Use of deemed cost for assets used in operations subject to rate regulation 6.5.5 Use of deemed cost after severe hyperinflation 6.6 Interim financial reports 6.6.1 Reconciliations in the interim financial reports 6.6.2 Disclosures in the interim financial report 6.7 Disclosure of IFRS information before adoption of IFRSs 7 Accounting policies and practical application issues 7.1 IAS 7 Statement of Cash Flows 7.2 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 7.2.1 Changes in IFRS accounting policies during the first IFRS reporting period 7.2.2 Changes in estimates and correction of errors 7.3 IAS 12 Income Taxes 7.3.1 Previous revaluation of plant, property and equipment treated as deemed cost on transition 7.3.2 Share–based payment transactions subject to transitional provisions of IFRS 1 7.3.3 Retrospective restatements or applications 7.3.4 Defined benefit pension plans 7.4 IAS 16 Property, Plant and Equipment and IAS 40 Investment Property (cost model) 7.4.1 Depreciation method and rate 7.4.2 Estimates of useful life and residual value 7.4.3 Revaluation model 7.4.4 Parts approach 7.5 IFRS 16 Leases 7.5.1 Straight–lining of lease payments including incentives by the lessor 7.6 IFRS 15 Revenue from Contracts with Customers 7.7 IAS 19 Employee Benefits 7.7.1 Sensitivity analysis for each significant actuarial assumption 7.7.2 Full actuarial valuations 7.7.3 Actuarial assumptions 7.7.4 Unrecognised past service costs 7.8 IAS 21 The Effects of Changes in Foreign Exchange Rates 7.8.1 Functional currency 7.9 IAS 28 Investments in Associates and Joint Ventures 7.9.1 Impairment review at date of transition to IFRSs 7.10 IAS 29 Financial Reporting in Hyperinflationary Economies 7.11 IFRS 11 Joint Arrangements 7.12 IAS 36 Impairment of Assets 7.13 IAS 37 Provisions, Contingent Liabilities and Contingent Assets 7.14 IAS 38 Intangible Assets 8 Regulatory issues 8.1 First–time adoption by foreign private issuers that are US SEC registrants 8.1.1 US SEC guidance 8.1.2 IPTF guidance 8.2 Disclosure of IFRS information in financial statements for periods prior to an entity’s first IFRS reporting period 8.2.1 IFRS guidance 8.2.2 Disclosure of expected changes in accounting policies Appendix A – Index of Illustrations Appendix B – Defined terms CH06 Consolidated financial statements Overview 1 Introduction 1.1 Background 1.2 Development of IFRS 10 1.2.1 Post–Implementation Review of IFRS 10 1.3 Consolidation procedures 1.4 Disclosure requirements 2 Objective and scope of IFRS 10 2.1 Objective 2.2 Scope 2.2.1 Exemption from preparing consolidated financial statements by an intermediate parent 2.2.1.A Condition (a) – consent of non–controlling shareholders 2.2.1.B Condition (b) – securities not traded in a public market 2.2.1.C Condition (c) – not filing financial statements for listing securities 2.2.1.D Condition (d) – parent’s IFRS financial statements are publicly available and include subsidiaries that are consolidated or measured at fair value through profit or loss in accordance with IFRS 10 2.2.2 Employee benefit plans and employee share trusts 2.2.3 Investment entity exception 2.2.4 Entity no longer a parent at the end of the reporting period 2.2.5 Interaction of IFRS 10 and EU law 2.2.6 Combined and carve–out financial statements 2.2.6.A Common control 2.2.6.B Purpose and users of combined financial statements 2.2.6.C Preparation of combined financial statements 2.2.6.D When combined financial statements are not general purpose 2.2.6.E The reporting entity in combined financial statements and in consolidated financial statements 3 Control 3.1 Assessing control 3.2 Purpose and design of an investee 4 Power over an investee 4.1 Relevant activities 4.1.1 More than one relevant activity 4.1.2 No relevant activities 4.1.3 Single asset, single lessee vehicles 4.1.4 Management of assets in the event of default 4.2 Existing rights 4.2.1 Evaluating whether rights are substantive 4.2.2 Evaluating whether rights are protective 4.2.2.A Veto rights 4.2.2.B Franchises 4.2.2.C Budget approval rights 4.2.2.D Independent directors 4.2.3 Incentives to obtain power 4.3 Voting rights 4.3.1 Power with a majority of the voting rights 4.3.2 A majority of voting rights without power 4.3.2.A Evaluating voting rights during bankruptcy 4.3.3 Power without a majority of voting rights (de facto control) 4.3.4 Potential voting rights 4.3.4.A Exercise price or conversion price 4.3.4.B Financial ability 4.3.4.C Exercise period 4.3.5 Contractual arrangement with other vote holders 4.3.6 Additional rights from other contractual arrangements 4.4 Contractual arrangements 4.4.1 Structured entities 4.5 Other evidence of power 4.6 Determining whether sponsoring (designing) a structured entity gives power 5 Exposure to variable returns 5.1 Exposure to variable returns can be an indicator of power 5.2 Returns that appear fixed can be variable 5.3 Evaluating whether derivatives provide an exposure to variable returns 5.3.1 Plain vanilla foreign exchange swaps and interest rate swaps 5.3.2 Total return swaps 5.4 Exposures to variable returns not directly received from an investee 5.5 Exposure to variable returns in bankruptcy filings 5.6 Interaction of IFRS 10 with the derecognition requirements in IFRS 9 5.7 Reputational risk 6 Link between power and returns: principal–agency situations 6.1 Delegated power: principals and agents 6.2 Scope of decision–making 6.2.1 Involvement in design 6.2.2 Assessing whether the scope of powers is narrow or broad 6.3 Rights held by other parties 6.3.1 Evaluating whether a removal right is substantive 6.3.1.A Available replacements 6.3.1.B Exercise period 6.3.2 Liquidation rights and redemption rights 6.4 Remuneration 6.4.1 Evaluating remuneration in the asset management industry 6.4.2 Evaluating remuneration in other industries 6.5 Exposure to variability of returns from other interests 6.5.1 Evaluating returns received via an indirect investment in another entity 6.6 Application examples in IFRS 10 6.7 Other illustrative examples 7 Related parties and de facto agents 7.1 Customer–supplier relationships 7.2 Non–controlling interests when there is a de facto agent 8 Control of specified assets 8.1 Identifying a silo 8.1.1 Identifying silos in the insurance industry 8.1.2 Identifying silos in the investment funds industry 8.2 Evaluating control of a silo 8.3 Consolidation of a silo 9 Continuous assessment 9.1 Changes in market conditions 9.2 Bankruptcy filings and troubled debt restructurings 9.3 Control reassessment as a result of action by others 10 Investment entities 10.1 Definition of an investment entity 10.2 Determining whether an entity is an investment entity 10.2.1 Business purpose 10.2.1.A Entities that provide investment–related services 10.2.1.B Entities that are intermediate holding companies established for tax optimisation purposes 10.2.2 Exit strategies 10.2.3 Earnings from investments 10.2.4 Fair value measurement 10.2.5 Holding more than one investment 10.2.6 Having more than one investor 10.2.7 Unrelated investors 10.2.8 Ownership interests 10.2.9 Investment entity illustrative examples 10.2.10 Multi–layered fund structures 10.3 Accounting by an investment entity 10.3.1 Accounting for a change in investment entity status 10.3.1.A Becoming an investment entity 10.3.1.B Ceasing to be an investment entity 10.4 Accounting by a parent of an investment entity Appendix A – Index of Illustrations Appendix B – Defined terms CH07 Consolidation procedures and non–controlling interests Overview 1 Introduction 2 Consolidation procedures 2.1 Basic principles 2.2 Proportion consolidated 2.2.1 Attribution when NCI change in an accounting period 2.3 Consolidating foreign operations 2.4 Intragroup eliminations 2.5 Non–coterminous accounting periods 2.6 Consistent accounting policies 3 Changes in control 3.1 Commencement and cessation of consolidation 3.1.1 Acquisition of a subsidiary that is not a business 3.1.2 Step acquisition of an associate or joint venture (equity accounted) that is not a business and becomes a subsidiary 3.1.2.A Measuring the previously held interest 3.1.2.B Measuring the NCI 3.2 Accounting for a loss of control 3.2.1 IFRS IC and IASB discussions about the sale of a single asset entity containing real estate 3.2.2 IFRS IC discussions about a transaction where the entire equity interest in a subsidiary holding only a single building is sold and the building is leased back 3.3 Accounting for a loss of control where an interest is retained in the former subsidiary 3.3.1 Interest retained in the former subsidiary – financial asset 3.3.2 Interest retained in the former subsidiary – associate or joint venture 3.3.2.A Conflict between IFRS 10 and IAS 28 (September 2014 amendments not applied) 3.3.2.B Conflict between IFRS 10 and IAS 28 (September 2014 amendments applied) 3.3.2.C Reclassification of items of OCI where the interest retained in the former subsidiary is an associate or joint venture accounted using the equity method 3.3.2.D Application of partial gain recognition where the gain exceeds the carrying amount of the investment in the associate or joint venture accounted using the equity method 3.3.2.E Examples of accounting for sales or contributions to an existing associate (where the September 2014 amendments are not applied) 3.3.2.F Det