IFRS 10 Consolidation of trust

[Wynand Brits]

Hi All

Does anyone have guidance on whether a trust can be consolidated as part of a group of companies?

Can you apply the normal IFRS 10 control principles for a trust as well as you are a beneficiary to the trust and does not have share capital with voting rights.

The trust deed will most probably be a good starting point.

Thanks in advance

[Marek Muc]

Hi, general IFRS 10 provisions apply:
https://ifrscommunity.com/knowledge-bas ... tatements/

can you give more details about this trust?

[Wynand Brits]

I only had a general discussion with someone and don't have all the detail of the trust deed.

Based on the discussions, I could understand the following:

1. The trust has a property which its operates for rental purposes, should the trust deed permit IFRS, the property will be accounted for as an investment property.
2. Company A (Holding company) is a beneficiary to the trust with a 25% interest in the trust. As there won't be share capital, I am not sure what the interest is. It is most probably the right to return from the investment property.
3. Company AA (Company within the same group of Company A) is also a beneficiary of the trust with 25%;
4. Company X (Non related party), owns the remaining 50% of the trust as a beneficiary.
5. Company A and Company AA rents the property portions from the trust

Questions:

1. How will the interest in the trust be accounted for in the standalone records of Company A and Company AA, will you be able to recognise it as an investment in associate? (Between 20% - 50%) and will this be recognised at a cost? i.e. Initial amount invested in the trust to build the property;
2. From a consolidation perspective, we will need to look further to IFRS 10 - whether we have control over the trust from Company A' s consolidation; if we have control over the trust (Company A + AA's interest which is only 50%) based on IFRS 10, will the property be owner occupied from the consolidation perspective?
3. If the holding company do not have control from a consolidation perspective, how will you account for the interest in the trust from a consolidation perspective? Will equity accounting IAS 28 can be applied?

Thanks

[Marek Muc]

1. it will most likely be an investment in associate, but be carefull to assess whether it is significant influence or joint control, see our knowledge base (IAS 28 or IAS 31) for all the details
2. yes, see IFRS 10, and again IAS 28 and IAS 31. Re. owner occupied vs investment property - see par. IAS 40.10
3. it depends on whether there is a significant influence or joint control, again see IAS 28 and IAS 31 in our knowledge base

[Wynand Brits]

Thanks

It will be a good starting point. Do you perhaps have any financial statements of listed companies where interest in trusts are disclosed?

[Marek Muc]

nope, but I don't expect that you will find many explicit references to 'trusts' - it still is an entity that needs to be accounted for under general IFRS requirements

[AQS]

Hi,

See below some references that might help you to determine whether the structured entity should be consolidated or not. Two questions you need to look into at first.

1.Is the entity a structured entity?

Relevant IFRS :

[IFRS 12.A, B21]
A ‘structured entity’ is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity – e.g. when any voting rights relate only to administrative tasks and the relevant activities are directed by means of contractual arrangements.

[IFRS 10.B8]
The discussion here refers to ‘investor’ as the entity undertaking the consolidation analysis, and ‘investee’ as the entity being assessed for consolidation. This is consistent with the use of the terms in IFRS 10 but is not meant to imply that the investor holds debt or equity securities in the investee.

[IFRS 12 B22]
A structured entity often has some or all of the following features or attributes:
(a) restricted activities.
(b) a narrow and well-defined objective, such as to effect a tax-efficient lease, carry out research and development activities, provide a source of capital or funding to an entity or provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors.
(c) insufficient equity to permit the structured entity to finance its activities without subordinated financial support.
(d) financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches).

In assessing whether an investee is a structed entity, an investor also considers how the power assessment was made under IFRS 10.

2. Whether the structured entity is a consolidated structured entity or not.


• If an entity (parent) is required to prepare consolidated financial statements , then those consolidated financial statements include all subsidiaries of the parent – i.e. there is no exception from consolidation – except as follows.
o An investment entity, to record its investment at fair value
o Post-employment benefits plans or other long term employee benefits

• A ‘subsidiary’ is an entity that is controlled by another entity (IFRS 10.A)

• Some investees are designed so that voting rights are not relevant to the determination of power, but instead other rights are relevant . These entities generally meet the structured entity definition of IFRS 12 .

• If voting rights are not relevant to the analysis, then the investors considers the purpose and design of the investee & consider if
o investor has the practical ability to direct the relevant activities.
o Special relationship and,
o Large exposure to variability of returns

Thanks

[Marek Muc]

I don’t think this is a structured entity and I wouldn’t focus too much on it