PBE IPSAS 35

1. The objective of this Standard is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

2. To meet the objective in paragraph 1, this Standard:

1. Requires an entity (the controlling entity) that controls one or more other entities (controlled entities) to present consolidated financial statements;

2. Defines the principle of control, and establishes control as the basis for consolidation;

3. Sets out how to apply the principle of control to identify whether an entity controls another entity and therefore must consolidate that entity;

4. Sets out the accounting requirements for the preparation of consolidated financial statements; and

5. Defines an investment entity and sets out an exception to consolidating particular controlled entities of an investment entity.

2.1 This Standard applies to Tier 1 and Tier 2 public benefit entities.

2.2 A Tier 2 entity is not required to comply with the requirements in this Standard denoted with an asterisk (*). Where a Tier 2 entity elects to apply a concession it shall comply with any RDR paragraphs associated with that concession.

3. An entity that prepares and presents financial statements shall apply this Standard in the preparation and presentation of consolidated financial statements for the economic entity.

4. This Standard does not deal with the accounting requirements for entity combinations and their effect on consolidation, including goodwill arising on an entity combination (guidance on accounting for entity combinations can be found in PBE IPSAS 40 PBE Combinations).

5. An entity that is a controlling entity shall present consolidated financial statements. This Standard applies to all entities, except that a controlling entity need not present consolidated financial statements if it meets all the following conditions:

1. It is itself a controlled entity and the information needs of users are met by its controlling entity’s consolidated financial statements, and, in the case of a partially owned controlled entity, all its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the entity not presenting consolidated financial statements;

2. Its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);

3. It did not file, nor is it in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and

4. * Its ultimate or any intermediate controlling entity produces financial statements that are available for public use and comply with PBE Standards, in which controlled entities are consolidated or are measured at fair value through surplus or deficit in accordance with this Standard.

RDR5.1 A Tier 2 entity is not required to comply with paragraph 5(d). In order to qualify for the exemption not to present consolidated financial statements, an entity must still comply with all the other conditions in paragraph 5.

6. This Standard does not apply to post-employment benefit plans or other long-term employee benefit plans to which PBE IPSAS 39 Employee Benefits applies.

7. A controlling entity that is an investment entity shall not present consolidated financial statements if it is required, in accordance with paragraph 56 of this Standard, to measure all of its controlled entities at fair value through surplus or deficit.

8. A controlled entity is not excluded from consolidation because its activities are dissimilar to those of the other entities within the economic entity, for example, the consolidation of for-profit entities with entities in the public or not-for-profit sectors. Relevant information is provided by consolidating such controlled entities and disclosing additional information in the consolidated financial statements about the different activities of controlled entities.

9. The exemption from preparing consolidated financial statements in paragraph 5 does not apply where the information needs of a controlled entity’s users would not be met by the consolidated financial statements of its controlling entity. For example, consolidated financial statements at a whole-of-government level may not meet the information needs of users in respect of key sectors or activities of a government. In many jurisdictions there are legislated financial reporting requirements intended to address the information needs of such users. Similarly, in the not-for-profit sector, founding documents or legislation may establish requirements for intermediate controlling entities to prepare consolidated financial statements. For example, the founding documents of a not-for-profit entity with a national office, regional offices and branches may require that the regional office and branches prepare consolidated financial statements.

10. An entity may be required, (for example, by legislation, or by external users) to prepare aggregated financial statements which are for a different economic entity than that required by this Standard. Although such financial statements fall outside the scope of this Standard and would not comply with the requirements in this Standard, an entity could use the guidance in this Standard in the preparation of such aggregated financial statements.

11–13. [Not used]

14. The following terms are used in this Standard with the meanings specified:

Benefits are the advantages an entity obtains from its involvement with other entities. Benefits may be financial or non-financial. The actual impact of an entity’s involvement with another entity can have positive or negative aspects.

Binding arrangement: For the purposes of this Standard, a binding arrangement is an arrangement that confers enforceable rights and obligations on the parties to it as if it were in the form of a contract. It includes rights from contracts or other legal rights.

Consolidated financial statements are the financial statements of an economic entity in which the assets, liabilities, net assets/equity, revenue, expenses and cash flows of the controlling entity and its controlled entities are presented as those of a single economic entity.

Control: An entity controls another entity when the entity is exposed, or has rights, to variable benefits from its involvement with the other entity and has the ability to affect the nature or amount of those benefits through its power over the other entity.

A controlled entity is an entity that is controlled by another entity. A controlling entity is an entity that controls one or more entities.

A decision-maker is an entity with decision-making rights that is either a principal or an agent for other parties.

An economic entity is a controlling entity and its controlled entities. An investment entity is an entity that:

1. Obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;

2. Has the purpose of investing funds solely for returns from capital appreciation, investment revenue, or both; and

3. Measures and evaluates the performance of substantially all of its investments on a fair value basis.

A non-controlling interest is the net assets/equity in a controlled entity not attributable, directly or indirectly, to a controlling entity.

Power consists of existing rights that give the current ability to direct the relevant activities of another entity.¹

Protective rights are rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate.

Relevant activities: For the purpose of this Standard, relevant activities are activities of the potentially controlled entity that significantly affect the nature or amount of the benefits that an entity receives from its involvement with that other entity.

Removal rights are rights to deprive the decision maker of its decision-making authority.

Terms defined in other PBE Standards are used in this Standard with the same meaning as in those Standards, and are reproduced in the Glossary of Defined Terms published separately. The following terms are defined in either PBE IPSAS 36 Investments in Associates and Joint Ventures, PBE IPSAS 37 Joint Arrangements or PBE IPSAS 38 Disclosure of Interests in Other Entities: associate, interest in another entity, joint venture and significant influence.

15. Binding arrangements can be evidenced in several ways. A binding arrangement is often, but not always, in writing, in the form of a contract or documented discussions between the parties. Statutory mechanisms such as legislative or executive authority can also create enforceable arrangements, similar to contractual arrangements, either on their own or in conjunction with contracts between the parties.

16. The term economic entity is used in this Standard to define, for financial reporting purposes, a group of entities comprising the controlling entity and any controlled entities. Other terms sometimes used to refer to an economic entity include administrative entity, financial entity, consolidated entity and group. An economic entity may include entities with both social policy and commercial objectives.

17. In the case of public sector entities, the determination of the economic entity will need to be made having regard to the constitutional arrangements in a jurisdiction, in particular the ways in which government power is limited and allocated, and how the government system is set up and operates. For example, in jurisdictions with an executive, legislature and judiciary, these may collectively form an economic entity in respect of which there is a user need for consolidated financial statements. Such consolidated financial statements are commonly referred to as whole-of-government financial statements.

17.1 An economic entity may include entities with both social and commercial objectives. For example, a not- for-profit controlling entity may establish a separate entity under its control, such as a trading company, to carry out specific activities on a commercial basis.

18. An entity, regardless of the nature of its involvement with another entity, shall determine whether it is a controlling entity by assessing whether it controls the other entity.

19. An entity controls another entity when it is exposed, or has rights, to variable benefits from its involvement with the other entity and has the ability to affect the nature or amount of those benefits through its power over the other entity.

20. Thus, an entity controls another entity if and only if the entity has all the following:

1. Power over the other entity (see paragraphs 23–29);

2. Exposure, or rights, to variable benefits from its involvement with the other entity (see paragraphs 30–34); and

3. The ability to use its power over the other entity to affect the nature or amount of the benefits from its involvement with the other entity (see paragraphs 35–37).

21. An entity shall consider all facts and circumstances when assessing whether it controls another entity. The entity shall reassess whether it controls another entity if facts and circumstances indicate that there are changes to one or more of the three elements of control listed in paragraph 20 (see paragraphs AG82–AG87). In considering all facts and circumstances, an entity shall consider the purpose and design of the entity being assessed for control. The purpose and design of the entity being assessed for control can affect the relevant activities, how decisions about the relevant activities are made, who has the current ability to direct those activities and who benefits from those activities (see paragraphs AG5–AG8.1).

22. Two or more entities collectively control another entity when they must act together to direct the relevant activities. In such cases, because no single entity can direct the activities without the co-operation of the others, no single entity controls the other entity. Each entity would account for its interest in the other entity in accordance with the relevant PBE Standards, such as PBE IPSAS 36, PBE IPSAS 37 or the PBE Standards dealing with financial instruments (PBE IPSAS 28 Financial Instruments: Presentation, PBE IPSAS 30 Financial Instruments: Disclosures and PBE IPSAS 41 Financial Instruments).

23. An entity has power over another entity when the entity has existing rights that give it the current ability to direct the relevant activities, i.e., the activities that significantly affect the nature or amount of the benefits from its involvement with the other entity. The right to direct the financial and operating policies of another entity indicates that an entity has the ability to direct the relevant activities of another entity and is frequently the way in which power is demonstrated in the public and not-for-profit sectors.

24. Power arises from rights. In some cases assessing power is straightforward, such as when power over another entity is obtained directly and solely from the voting rights granted by equity instruments such as shares, and can be assessed by considering the voting rights from those shareholdings. However, public benefit entities often obtain power over another entity from rights other than voting rights. They may also obtain power over another entity without having an equity instrument providing evidence of a financial investment. An entity may have rights conferred by binding arrangements. These rights may give an entity power to require the other entity to deploy assets or incur liabilities in a way that affects the nature or amount of benefits received by the first-mentioned entity. The assessment of whether such rights give rise to power over another entity may be complex and require more than one factor to be considered.

25. An entity can have power over another entity even if it does not have responsibility for the day-to-day operation of the other entity or the manner in which prescribed functions are performed by that other entity. Legislation may give statutory bodies or statutory officers powers to carry out their functions independently of government. For example, the Auditor-General and Government Statistician usually have statutory powers to obtain information and publish reports without recourse to government and the judiciary often has special powers to give effect to the concept of judicial independence. Legislation may also set out the broad parameters within which the statutory body is required to operate, and result in the statutory body operating in a manner consistent with the objectives set by Parliament or a similar body. The existence of statutory powers to operate independently does not, of itself, preclude an entity having the ability to direct the operating and financial policies of another entity with statutory powers so as to obtain benefits. For example, the independence of a central bank in relation to monetary policy does not preclude the possibility of the central bank being controlled. All facts and circumstances would still need to be considered.

26. The existence of rights over another entity does not necessarily give rise to power for the purposes of this Standard. An entity does not have power over another entity solely due to the existence of:

1. Regulatory control (see paragraph AG12); or

2. Economic dependence (see paragraphs AG41–AG42).

26.1 An entity can have power over an entity being assessed for control if, by virtue of its purpose and design, the relevant activities and the way in which the relevant activities can be directed has been predetermined, either by the potential controlling entity or by another party on its behalf (see paragraph AG8.1). The predetermination of activities may have resulted in the right to direct the relevant activities being exercised at the time that the entity was established, with any remaining rights to direct the relevant activities being insignificant in relation to the predetermined rights. Hence, throughout this Standard, for the purposes of applying the definition of power in paragraph 14, the terms “existing rights” and “current ability” in that definition shall encompass any decision-making rights that an entity has already exercised at the time the entity being assessed for control was established. Thus, an assessment of existing rights needs to consider the relative importance of all decision-making rights over the life of the entity being assessed for control and the relative importance of the decision-making rights able to be exercised by others.

27. An entity with the current ability to direct the relevant activities has power even if its rights to direct have yet to be exercised. Evidence that the entity has been directing the relevant activities of the entity being assessed for control can help determine whether the entity has power, but such evidence is not, in itself, conclusive in determining whether the entity has power over the entity being assessed for control.

28. If two or more entities each have existing rights that give them the unilateral ability to direct different relevant activities, the entity that has the current ability to direct the activities that most significantly affect the nature or amount of benefits from that entity has power over that other entity.

29. An entity can have power over an entity being assessed for control even if other entities have existing rights that give them the current ability to participate in the direction of the relevant activities, for example when another entity has significant influence. However, an entity that holds only protective rights does not have power over another entity (see paragraphs AG29–AG31) and consequently does not control the other entity.

30. An entity is exposed, or has rights, to variable benefits from its involvement with an entity being assessed for control when the benefits that it seeks from its involvement have the potential to vary as a result of the other entity’s performance. Entities become involved with other entities with the expectation of positive financial or non-financial benefits over time. However, in a particular reporting period, the actual impact of an entity’s involvement with the entity being assessed for control can be only positive, only negative or a mix of both positive and negative.

31. The entity’s benefits from its involvement with the entity being assessed for control can be only financial, only non-financial or both financial and non-financial. Financial benefits include returns on investment such as dividends or similar distributions and are sometimes referred to as “returns”. Non-financial benefits include advantages arising from scarce resources that are not measured in financial terms and economic benefits received directly by service recipients of the entity. Non-financial benefits can occur when the activities of another entity are congruent with, (that is, they are in agreement with), the objectives of the entity and support the entity in achieving its objectives. For example, an entity may obtain benefits when another entity with congruent activities provides services that the first entity would have otherwise been obliged to provide. Congruent activities may be undertaken voluntarily or the entity may have the power to direct the other entity to undertake those activities. Non-financial benefits can also occur when two entities have complementary objectives (that is, the objectives of one entity add to, and make more complete, the objectives of the other entity).

32. The following examples illustrate financial benefits that an entity may receive from its involvement with another entity:

1. Dividends, variable interest on debt securities, other distributions of economic benefits;

2. Exposure to increases or decreases in the value of an investment in another entity;

3. Exposure to loss from agreements to provide financial support, including financial support for major projects;

4. Cost savings (for example, if an entity would achieve economies of scale or synergies by combining the operations or assets of the other entity with its own operations or assets);

5. Residual interests in the other entity’s assets and liabilities on liquidation of that other entity; and

6. Other exposures to variable benefits that are not available to other entities.

33. Examples of non-financial benefits include:

1. The ability to benefit from the specialised knowledge of another entity;

2. The value to the entity of the other entity undertaking activities that assist the entity in achieving its objectives;

3. Improved outcomes;

4. More efficient delivery of outcomes;

5. More efficient or effective production and delivery of goods and services;

6. Having an asset and related services available earlier than otherwise would be the case; and

7. Having a higher level of service quality than would otherwise be the case.

34. Although only one entity can control another entity, more than one party can share in the benefits of that other entity. For example, holders of non-controlling interests can share in the financial benefits such as surpluses or distributions from an entity or the non-financial benefits such as congruence of activities with desired outcomes.

35. An entity controls another entity if the entity not only has power over the entity being assessed for control and exposure or rights to variable benefits from its involvement with the other entity, but also has the ability to use its power to affect the nature or amount of the benefits from its involvement with the entity being assessed for control.

35.1 Consistent with the discussion of power and predetermination of activities in paragraph 26.1, an assessment of an entity’s ability to use its power to affect the nature or amount of benefits shall encompass any decision- making rights that an entity has already exercised at the time the entity being assessed for control was established.

36. The existence of congruent objectives alone is insufficient for an entity to conclude that it controls another entity. In order to have control the entity would also need to have the ability to use its power over the entity being assessed for control to direct that other entity to work with it to further its objectives.

37. An entity with decision-making rights shall determine whether it is a principal or an agent. An entity shall also determine whether another entity with decision-making rights is acting as an agent for the entity. An agent is a party primarily engaged to act on behalf and for the benefit of another party or parties (the principal(s)) and therefore does not control the other entity when it exercises its decision- making authority. Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf of the principal.

38. A controlling entity shall prepare consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances.

39. Consolidation of a controlled entity shall begin from the date the entity obtains control of the other entity and cease when the entity loses control of the other entity.

40. Consolidated financial statements:

1. Combine like items of assets, liabilities, net assets/equity, revenue, expenses and cash flows of the controlling entity with those of its controlled entities.

2. Offset (eliminate) the carrying amount of the controlling entity’s investment in each controlled entity and the controlling entity’s portion of net assets/equity of each controlled entity (PBE IPSAS 40 explains how to account for any related goodwill).

3. Eliminate in full intra-economic entity assets, liabilities, net assets/equity, revenue, expenses and cash flows relating to transactions between entities of the economic entity (surpluses or deficits resulting from intra-economic entity transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full). Intra-economic entity losses may indicate an impairment that

requires recognition in the consolidated financial statements. PBE IAS 12 Income Taxes applies to temporary differences that arise from the elimination of surpluses and deficits resulting from intra- economic entity transactions.

41. If a member of the economic entity uses accounting policies other than those adopted in the consolidated financial statements for like transactions and events in similar circumstances, appropriate adjustments are made to that member’s financial statements in preparing the consolidated financial statements to ensure conformity with the economic entity’s accounting policies.

42. An entity includes the revenue and expenses of a controlled entity in the consolidated financial statements from the date it gains control until the date when the entity ceases to control the controlled entity. Revenue and expenses of the controlled entity are based on the amounts of the assets and liabilities recognised in the consolidated financial statements at the acquisition date. For example, depreciation expense recognised in the consolidated statement of comprehensive revenue and expense after the acquisition date is based on the values of the related depreciable assets recognised in the consolidated financial statements at the acquisition date.

43. When potential voting rights, or other derivatives containing potential voting rights, exist, the proportion of surplus or deficit and changes in net assets/equity allocated to the controlling entity and non-controlling interests in preparing consolidated financial statements is determined solely on the basis of existing ownership interests and does not reflect the possible exercise or conversion of potential voting rights and other derivatives, unless paragraph 44 applies.

44. In some circumstances an entity has, in substance, an existing ownership interest as a result of a transaction that currently gives the entity access to the benefits associated with an ownership interest. In such circumstances, the proportion allocated to the controlling entity and non-controlling interests in preparing consolidated financial statements is determined by taking into account the eventual exercise of those potential voting rights and other derivatives that currently give the entity access to the benefits.

45. PBE IPSAS 28 and PBE IPSAS 41 do not apply to interests in controlled entities that are consolidated. When instruments containing potential voting rights in substance currently give access to the benefits associated with an ownership interest in a controlled entity, the instruments are not subject to the requirements of PBE IPSAS 28 and PBE IPSAS 41. In all other cases, instruments containing potential voting rights in a controlled entity are accounted for in accordance with PBE IPSAS 28 and PBE IPSAS 41.

46. The financial statements of the controlling entity and its controlled entities used in the preparation of the consolidated financial statements shall be prepared as at the same reporting date. When the end of the reporting period of the controlling entity is different from that of a controlled entity, the controlling entity either:

1. Obtains, for consolidation purposes, additional financial information as of the same date as the financial statements of the controlling entity; or

2. Uses the most recent financial statements of the controlled entity adjusted for the effects of significant transactions or events that occur between the date of those financial statements and the date of the consolidated financial statements.

47. A controlling entity shall present non-controlling interests in the consolidated statement of financial position within net assets/equity, separately from the net assets/equity of the owners of the controlling entity.

48. Changes in a controlling entity’s interest in a controlled entity that do not result in the controlling entity losing control of the controlled entity are transactions with owners in their capacity as owners.

49. An entity shall attribute the surplus or deficit and each component of other comprehensive revenue and expense to the owners of the controlling entity and to the non-controlling interests. The entity shall also attribute the total amount recognised in the statement of comprehensive revenue and expense to the owners of the controlling entity and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

50. If a controlled entity has outstanding cumulative preference shares that are classified as equity instruments and are held by non-controlling interests, the entity shall compute its share of surplus or deficit after adjusting for the dividends on such shares, whether or not such dividends have been declared.

51. When the proportion of the net assets/equity held by non-controlling interests changes, an entity shall adjust the carrying amounts of the controlling and non-controlling interests to reflect the changes in their relative interests in the controlled entity. The entity shall recognise directly in net assets/equity any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received, and attribute it to the owners of the controlling entity.

52. If a controlling entity loses control of a controlled entity, the controlling entity:

1. Derecognises the assets and liabilities of the former controlled entity from the consolidated statement of financial position;

2. Recognises any investment retained in the former controlled entity at its fair value when control is lost and subsequently accounts for it and for any amounts owed by or to the former controlled entity in accordance with relevant PBE Standards. That fair value shall be regarded as the fair value on initial recognition of a financial asset in accordance with PBE IPSAS 41 or the cost on initial recognition of an investment in an associate or joint venture; and

3. Recognises the gain or loss associated with the loss of control attributable to the former controlling interest.

53. A controlling entity might lose control of a controlled entity in two or more arrangements (transactions). However, sometimes circumstances indicate that the multiple arrangements should be accounted for as a single transaction. In determining whether to account for the arrangements as a single transaction, a controlling entity shall consider all the terms and conditions of the arrangements and their economic effects. One or more of the following indicate that the controlling entity should account for the multiple arrangements as a single transaction:

1. They are entered into at the same time or in contemplation of each other.

2. They form a single transaction designed to achieve an overall commercial effect.

3. The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.

4. One arrangement considered on its own is not economically justified, but it is economically justified when considered together with other arrangements. An example is when a disposal of an investment is priced below market and is compensated for by a subsequent disposal priced above market.

54. If a controlling entity loses control of a controlled entity, it shall:

1. Derecognise:

   1. The assets (including any goodwill) and liabilities of the controlled entity at their carrying amounts at the date when control is lost; and

   2. The carrying amount of any non-controlling interests in the former controlled entity at the date when control is lost (including any components of other comprehensive revenue and expense attributable to them).

2. Recognise:

   1. The fair value of the consideration received, if any, from the transaction, event or circumstances that resulted in the loss of control;

   2. If the transaction, event or circumstances that resulted in the loss of control involves a distribution of shares of the controlled entity to owners in their capacity as owners, that distribution; and

   3. Any investment retained in the former controlled entity at its fair value at the date when control is lost.

3. Reclassify to surplus or deficit or transfer directly to accumulated comprehensive revenue and expense if required by other PBE Standards, the amounts recognised in other comprehensive revenue and expense in relation to the controlled entity on the basis described in paragraph 55.

4. Recognise any resulting difference as a gain or loss in surplus or deficit attributable to the controlling entity.

55. If a controlling entity loses control of a controlled entity, the controlling entity shall account for all amounts previously recognised in other comprehensive revenue and expense in relation to that controlled entity on the same basis as would be required if the controlling entity had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive revenue and expense would be reclassified to surplus or deficit on the disposal of the related assets or liabilities, the controlling entity shall reclassify the gain or loss from accumulated comprehensive revenue and expense to surplus or deficit (as a reclassification adjustment) when it loses control of the controlled entity. If a revaluation surplus previously recognised in other comprehensive revenue and expense would be transferred directly to accumulated comprehensive revenue and expense on the disposal of the asset, the controlling entity shall transfer the revaluation surplus directly to accumulated comprehensive revenue and expense when it loses control of the controlled entity.

55A. [Not used]

56. Except as described in paragraph 57, an investment entity shall not consolidate its controlled entities or apply PBE IPSAS 40 when it obtains control of another entity. Instead, an investment entity shall measure an investment in a controlled entity at fair value through surplus or deficit in accordance with PBE IPSAS 41.

57. Notwithstanding the requirement in paragraph 56, if an investment entity has a controlled entity that is not itself an investment entity and whose main purpose and activities are providing services that relate to the investment entity’s investment activities (see paragraphs AG98–AG100), it shall consolidate that controlled entity in accordance with paragraphs 38–55 of this Standard and apply the requirements of PBE IPSAS 40 to the acquisition of any such controlled entity.

58. A controlling entity of an investment entity that is not itself an investment entity shall present consolidated financial statements in which it (i) measures the investments of a controlled investment entity at fair value through surplus or deficit in accordance with PBE IPSAS 41 and (ii) consolidates the other assets and liabilities and revenue and expenses of the controlled investment entity in accordance with paragraphs 38–55 of this Standard.

59. An entity shall consider all facts and circumstances when assessing whether it is an investment entity, including its purpose and design. Paragraphs AG89–AG106 describe aspects of the definition of an investment entity in more detail. If facts and circumstances indicate that there are changes to one or more of the three elements that make up the definition of an investment entity, a controlling entity shall reassess whether it is an investment entity.

60. A controlling entity that either ceases to be an investment entity or becomes an investment entity shall account for the change in its status prospectively from the date at which the change in status occurred (see paragraphs 63–64).

61. An investment entity shall disclose the information required by paragraph 15 of PBE IPSAS 38 about significant judgements and assumptions made in determining that it is an investment entity unless it has all of the following characteristics:

1. It has obtained funds from more than one investor (see paragraphs AG89–AG90);

2. It has ownership interests in the form of equity or similar interests (see paragraphs AG91–AG92); and

3. It has more than one investment (see paragraphs AG96–AG97).

62. The absence of any of these characteristics does not necessarily disqualify an entity from being classified as an investment entity. However, the absence of any of these characteristics means that an entity is required to disclose information about the significant judgements and assumptions made in determining that it is an investment entity.

63. When an entity ceases to be an investment entity, it shall apply PBE IPSAS 40 to any controlled entity that was previously measured at fair value through surplus or deficit in accordance with paragraph 56. The date of the change of status shall be the deemed acquisition date. The fair value of the controlled entity at the deemed acquisition date shall represent the transferred deemed consideration when measuring any goodwill or gain from a bargain purchase that arises from the deemed acquisition. All controlled entities shall be consolidated in accordance with paragraphs 38– 51 of this Standard from the date of change of status.

64. When an entity becomes an investment entity, it shall cease to consolidate its controlled entities at the date of the change in status, except for any controlled entity that shall continue to be consolidated in accordance with paragraph 57. The investment entity shall apply the requirements of paragraphs 52 and 53 to those controlled entities that it ceases to consolidate as though the investment entity had lost control of those controlled entities at that date.

65. An entity shall apply this Standard retrospectively, in accordance with PBE IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors, except as specified in paragraphs 66–78.

66. Notwithstanding the requirements of paragraph 33 of PBE IPSAS 3, when this Standard is first applied an entity need only present the quantitative information required by paragraph 33(f) of PBE IPSAS 3 for the annual period immediately preceding the date of initial application of this Standard (the “immediately preceding period”). An entity may also present this information for the current period or for earlier comparative periods, but is not required to do so.

67. For the purposes of this Standard, the date of initial application is the beginning of the annual reporting period for which this Standard is applied for the first time.

68. At the date of initial application, an entity is not required to make adjustments to the previous accounting for its involvement with either:

1. Entities that would be consolidated at that date in accordance with PBE IPSAS 6 (PS), Consolidated and Separate Financial Statements (Public Sector) or PBE IPSAS 6 (NFP), Consolidated and Separate Financial Statements (Not-for-profit) and are still consolidated in accordance with this Standard; or

2. Entities that would not be consolidated at that date in accordance with PBE IPSAS 6 (PS) or PBE IPSAS 6 (NFP) and are not consolidated in accordance with this Standard.

69. At the date of initial application, an entity shall assess whether it is an investment entity on the basis of the facts and circumstances that exist at that date. If, at the date of initial application, an entity concludes that it is an investment entity, it shall apply the requirements of paragraphs 70–73 instead of paragraphs 77–78.

70. Except for any controlled entity that is consolidated in accordance with paragraph 57 (to which paragraph 68 or paragraphs 77–78, whichever is relevant, apply), an investment entity shall measure its investment in each controlled entity at fair value through surplus or deficit as if the requirements of this Standard had always been effective. The investment entity shall retrospectively adjust both the annual period that immediately precedes the date of initial application and net assets/equity at the beginning of the immediately preceding period for any difference between:

1. The previous carrying amount of the controlled entity; and

2. The fair value of the investment entity’s investment in the controlled entity.

The cumulative amount of any fair value adjustments previously recognised in other comprehensive revenue and expense shall be transferred to accumulated comprehensive revenue and expense at the beginning of the annual period immediately preceding the date of initial application.

71. An investment entity shall use the fair value amounts that were previously reported to investors or to management.

72. If measuring an investment in a controlled entity in accordance with paragraph 70 is impracticable (as defined in PBE IPSAS 3), an investment entity shall apply the requirements of this Standard at the beginning of the earliest period for which application of paragraph 70 is practicable, which may be the current period. The investor shall retrospectively adjust the annual period that immediately precedes the date of initial application, unless the beginning of the earliest period for which application of this paragraph is practicable is the current period. If this is the case, the adjustment to net assets/equity shall be recognised at the beginning of the current period.

73. If an investment entity has disposed of, or has lost control of, an investment in a controlled entity before the date of initial application of this Standard, the investment entity is not required to make adjustments to the previous accounting for that controlled entity.

74. If, at the date of initial application, an entity concludes that it shall consolidate another entity that was not consolidated in accordance with PBE IPSAS 6 (PS) or PBE IPSAS 6 (NFP), the entity shall:

1. If the other entity is a business (as defined in PBE IFRS 3),² measure the assets, liabilities and non-controlling interests in that previously unconsolidated entity as if that entity had been consolidated (and thus had applied acquisition accounting in accordance with PBE IFRS 3) from the date when the entity obtained control of that other entity on the basis of the requirements of this Standard. The entity shall adjust retrospectively the annual period immediately preceding the date of initial application. When the date that control was obtained is earlier than the beginning of the immediately preceding period, the entity shall recognise, as an adjustment to net assets/equity at the beginning of the immediately preceding period, any difference between:

   1. The amount of assets, liabilities and non-controlling interest recognised; and

   2. The previous carrying amount of the entity’s involvement with the other entity.

2. If the other entity is not a business (as defined in PBE IFRS 3), measure the assets, liabilities and non-controlling interests in that previously unconsolidated entity as if that other entity had been consolidated (applying the acquisition method as described in PBE IFRS 3 but without recognising any goodwill for the other entity) from the date when the entity obtained control of that other entity on the basis of the requirements of this Standard. The entity shall adjust retrospectively the annual period immediately preceding the date of initial application. When the date that control was obtained is earlier than the beginning of the immediately preceding period, the entity shall recognise, as an adjustment to net assets/equity at the beginning of the immediately preceding period, any difference between:

   1. The amount of assets, liabilities and non-controlling interests recognised; and

   2. The previous carrying amount of the entity’s involvement with the other entity.

75. If measuring a controlled entity’s assets, liabilities and non-controlling interests in accordance with paragraph 74(a) or (b) is impracticable (as defined in PBE IPSAS 3), an entity shall:

1. If the other entity is a business, apply the requirements of PBE IFRS 3 as of the deemed acquisition date. The deemed acquisition date shall be the beginning of the earliest period for which application of paragraph 74(a) is practicable, which may be the current period.

2. If the other entity is not a business, apply the acquisition method as described in PBE IFRS 3 but without recognising any goodwill for the other entity as of the deemed acquisition date. The deemed acquisition date shall be the beginning of the earliest period for which the application of paragraph 74(b) is practicable, which may be the current period.The entity shall adjust retrospectively the annual period immediately preceding the date of initial application, unless the beginning of the earliest period for which application of this paragraph is practicable is the current period. When the deemed acquisition date is earlier than the beginning of the immediately preceding period, the entity shall recognise, as an adjustment to net assets/equity at the beginning of the immediately preceding period, any difference between:

3. The amount of assets, liabilities and non-controlling interests recognised; and

4. The previous carrying amounts of the entity’s involvement with the other entity.

If the earliest period for which application of this paragraph is practicable is the current period, the adjustment to net assets/equity shall be recognised at the beginning of the current period.

76. [Not used]

77. If, at the date of initial application, an entity concludes that it will no longer consolidate an entity that was consolidated in accordance with PBE IPSAS 6 (PS) or PBE IPSAS 6 (NFP), the entity shall measure its interest in the other entity at the amount at which it would have been measured if the requirements of this Standard had been effective when the entity became involved with, or lost control of, the other entity. The entity shall adjust retrospectively the annual period immediately preceding the date of initial application. When the date that the entity became involved with (but did not obtain control in accordance with this Standard), or lost control of, the other entity is earlier than the beginning of the immediately preceding period, the entity shall recognise, as an adjustment to net assets/equity at the beginning of the immediately preceding period, any difference between:

1. The previous carrying amount of the assets, liabilities and non-controlling interests; and

2. The recognised amount of the entity’s interest in the other entity.

78. If measuring the interest in the other entity in accordance with paragraph 77 is impracticable (as defined in PBE IPSAS 3), an entity shall apply the requirements of this Standard at the beginning of the earliest period for which application of paragraph 77 is practicable, which may be the current period. The entity shall adjust retrospectively the annual period immediately preceding the date of initial application, unless the beginning of the earliest period for which application of this paragraph is practicable is the current period. When the date that the entity became involved with (but did not obtain control in accordance with this Standard), or lost control of, the other entity is earlier than the beginning of the immediately preceding period, the entity shall recognise, as an adjustment to net assets/equity at the beginning of the immediately preceding period, any difference between:

1. The previous carrying amount of the assets, liabilities and non-controlling interests; and

2. The recognised amount of the entity’s interest in the other entity.

If the earliest period for which application of this paragraph is practicable is the current period, the adjustment to net assets/equity shall be recognised at the beginning of the current period.

79. [Not used]

79.1 A public benefit entity shall apply this Standard for annual financial statements covering periods beginning on or after 1 January 2019. Earlier application is permitted. If a public benefit entity applies this Standard for a period beginning before 1 January 2019, it shall disclose that fact and apply PBE IPSAS 34 Separate Financial Statements, PBE IPSAS 36, PBE IPSAS 37 and PBE IPSAS 38 at the same time.

79.2 PBE IFRS 9 Financial Instruments, issued in January 2017, amended paragraphs 22, 45, 52(b), 56, 58 and AG105, B12(b)(ii). An entity shall apply those amendments when it applies PBE IFRS 9.³

79.3 PBE IPSAS 39, issued in May 2017, amended paragraph 6. An entity shall apply that amendment when it applies PBE IPSAS 39.

79.4 PBE IPSAS 40, issued in July 2019, amended paragraphs 4 and its related heading, 40, 56, 57, 63, and 74, and added paragraph 55A. An entity shall apply those amendments when it applies PBE IPSAS 40.

80. [Not used]

81.1 This Standard is issued concurrently with PBE IPSAS 34. Together, the two Standards supersede PBE IPSAS 6 (PS) Consolidated and Separate Financial Statements (September 2014) and PBE IPSAS 6 (NFP) Consolidated and Separate Financial Statements (September 2014). PBE IPSAS 6 (PS) and PBE IPSAS 6 (NFP) remain applicable until PBE IPSAS 34 and PBE IPSAS 35 are applied or become effective, whichever is earlier.

AG1. The examples in this appendix portray hypothetical situations. Although some aspects of the examples may be present in actual fact patterns, all facts and circumstances of a particular fact pattern would need to be evaluated when applying PBE IPSAS 35 Consolidated Financial Statements.

AG2. To determine whether it controls another entity an entity shall assess whether it has all the following:

1. Power over the other entity;

2. Exposure, or rights, to variable benefits from its involvement with the other entity; and

3. The ability to use its power over the other entity to affect the nature or amount of the benefits from its involvement with the other entity.

AG3. Consideration of the following factors may assist in making that determination:

1. The purpose and design of the other entity (see paragraphs AG5–AG8.1);

2. What the relevant activities are and how decisions about those activities are made (see paragraphs AG13–AG15);

3. Whether the rights of the entity give it the current ability to direct the relevant activities of the other entity (see paragraphs AG16–AG56);

4. Whether the entity is exposed, or has rights, to variable benefits from its involvement with the other entity (see paragraph AG57–AG58); and

5. Whether the entity has the ability to use its power over the other entity to affect the nature or amount of the benefits from its involvement with the other entity (see paragraphs AG60–AG74).

AG4. When assessing whether it controls another entity, an entity shall consider the nature of its relationship with other parties (see paragraphs AG75–AG77).

AG5. An entity shall consider the purpose and design of the entity being assessed for control in order to identify the relevant activities, how decisions about the relevant activities are made, who has the current ability to direct those activities and who benefits from those activities.

AG6. When the purpose and design of the entity being assessed for control are considered, it may be clear that the entity being assessed for control is controlled by means of equity instruments that give the holder proportionate voting rights, such as ordinary shares. In this case, in the absence of any additional arrangements that alter decision-making, the assessment of control focuses on which party, if any, is able to exercise voting rights sufficient to determine the operating and financing policies of the entity being assessed for control (see paragraphs AG32–AG52). In the most straightforward case, the entity that holds a majority of those voting rights, in the absence of any other factors, controls the other entity.

AG7. To determine whether an entity controls another entity in more complex cases, it may be necessary to consider some or all of the other factors in paragraph AG3.

AG8. Voting rights may not be the dominant factor in deciding who controls the entity being assessed for control. If there are voting rights they may be limited in scope. The relevant activities of the entity being assessed for control may be directed by means of binding arrangements or provisions in founding documents such as articles of association or a constitution. In such cases, an entity’s consideration of the purpose and design of the entity being assessed for control shall also include consideration of the risks to which the other entity was designed to be exposed, the risks it was designed to pass on to the parties involved and whether the entity is exposed to some or all of those risks. Consideration of the risks includes not only the downside risk, but also the potential for upside.

AG8.1 Consideration of purpose and design is especially important when there has been predetermination of relevant activities, the way in which those relevant activities can be directed and who benefits from those activities. Where an entity has established another entity with predetermined activities (or another party has done so on its behalf), an assessment of whether it controls that other entity considers the restrictions on the relevant activities of the other entity, the ways in which predetermination has limited the ability of others to make decisions about those relevant activities and whether those restrictions ensure that the establishing entity receives the significant benefits from those activities. An entity may not need to have the day-to-day ability to use its power over the other entity to affect the nature or amount of the benefits from its involvement with the other entity if it has already, by virtue of its involvement in the entity’s purpose and design, exercised its power to determine the nature or amount of those benefits and ensured that those benefits flow to it, and not to others. In such cases, having the ability to determine the purpose and design of an entity may be more relevant to the control assessment than any on-going decision-making rights.

AG9. To have power over another entity, an entity must have existing rights that give it the current ability to direct the relevant activities. For the purpose of assessing power, only substantive rights and rights that are not protective shall be considered (see paragraphs AG25–AG31).

AG10. The determination about whether an entity has power depends on the relevant activities, the way decisions about the relevant activities are made and the rights of the entity and other entities in relation to the potentially controlled entity. As discussed in paragraph AG8.1, an entity may not need to have the day-to-day ability to use its power over the other entity to affect the nature or amount of the benefits from its involvement with the other entity if it has already, by virtue of its involvement in the entity’s purpose and design, exercised its power to determine the nature or amount of those benefits and ensured that those benefits flow to it, and not to others.

AG11. An entity normally will have power over an entity that it has established when the constituting document or enabling legislation specifies the operating and financing activities that are to be carried out by that entity. However, the impact of the constituting document or legislation is evaluated in the light of other prevailing circumstances, as all facts and circumstances need to be considered in assessing whether an entity has power over another entity. For example, a public sector entity may not have power over a research and development corporation that operates under a mandate created, and limited, by legislation if that or other legislation assigns power to direct the relevant activities to other entities that are not controlled by the public sector entity.

AG12. Regulatory control does not usually give rise to power over an entity for the purposes of this Standard. Governments and other public sector bodies, including supranational bodies, may have wide ranging powers to establish the regulatory framework within which entities operate, to impose conditions or sanctions on their operations and to enforce those conditions or sanctions. For example, governments and other public sector bodies may enact regulations to protect the health and safety of the community, restrict the sale or use of dangerous goods or specify the pricing policies of monopolies. However, when regulation is so tight as to effectively dictate how the entity performs its business, then it may be necessary to consider whether the purpose and design of the entity is such that it is controlled by the regulating entity.

AG13. For many entities, a range of operating and financing activities significantly affect the benefits they generate. Any activity that assists in achieving or furthering the objectives of a controlled entity may affect the benefits to the controlling entity. Examples of activities that, depending on the circumstances, can be relevant activities include, but are not limited to:

1. Using assets and incurring liabilities to provide services to service recipients;

2. Distributing funds to specified individuals or groups;

3. Collecting revenue through non-exchange transactions;

4. Selling and purchasing of goods or services;

5. Managing physical assets;

6. Managing financial assets during their life (including upon default);

7. Selecting, acquiring or disposing of assets;

8. Managing a portfolio of liabilities;

9. Researching and developing new products or processes; and

10. Determining a funding structure or obtaining funding.

AG14. Examples of decisions about relevant activities include but are not limited to:

1. Establishing operating and capital decisions of an entity, including budgets; and

2. Appointing and remunerating an entity’s key management personnel or service providers and terminating their services or employment.

AG15. In some situations, activities both before and after a particular set of circumstances arises or event occurs, may be relevant activities. When two or more entities have the current ability to direct relevant activities and those activities occur at different times, those entities shall determine which entity is able to direct the activities that most significantly affect those benefits consistently with the treatment of concurrent decision-making rights (see paragraph 28). The entities concerned shall reconsider this assessment over time if relevant facts or circumstances change.

AG16. Power arises from rights. To have power over another entity, an entity must have existing rights that give the entity the current ability to direct the relevant activities of the other entity. The rights that may give an entity power can differ.

AG17. Examples of rights that, either individually or in combination, can give an entity power include but are not limited to:

1. Rights to give policy directions to the governing body of another entity that give the holder the ability to direct the relevant activities of the other entity;

2. Rights in the form of voting rights (or potential voting rights) of another entity (see paragraphs AG32–AG52);

3. Rights to appoint, reassign or remove members of another entity’s key management personnel who have the ability to direct the relevant activities;

4. Rights to appoint or remove another entity that directs the relevant activities;

5. Rights to approve or veto operating and capital budgets relating to the relevant activities of another entity;

6. Rights to direct the other entity to enter into, or veto any changes to, transactions for the benefit of the entity;

7. Rights to veto key changes to the other entity, such as the sale of a major asset or of the other entity as a whole;

8. Rights that have previously been exercised through predetermination of relevant activities; and

9. Other rights (such as decision-making rights specified in a management contract) that give the holder the ability to direct the relevant activities.

AG18. In considering whether it has power, an entity will need to consider the binding arrangements that are in place and the mechanism(s) by which it has obtained power. Ways in which an entity may have obtained power, either individually or in combination with other arrangements, include:

1. Legislative or executive authority;

2. Administrative arrangements;

3. Contractual arrangements;

4. Founding documents (for example, articles of association);

5. Voting or similar rights; and

6. Predetermination of relevant activities.

AG19. To determine whether an entity has rights sufficient to give it power, the entity shall also consider the purpose and design of the other entity (see paragraphs AG5–AG8.1) and the requirements in paragraphs AG53–AG56 together with paragraphs AG20–AG22.

AG20. In some circumstances it may be difficult to determine whether an entity’s rights are sufficient to give it power over another entity. In such cases, to enable the assessment of power to be made, the entity shall consider evidence of whether it has the practical ability to direct the relevant activities unilaterally. Consideration is given, but is not limited, to the following, which, when considered together with its rights and the indicators in paragraphs AG21 and AG22, may provide evidence that the entity’s rights are sufficient to give it power over the other entity:

1. The entity can, without having the contractual right to do so, appoint or approve the other entity’s key management personnel who have the ability to direct the relevant activities;

2. The entity can, without having the contractual right to do so, direct the other entity to enter into, or can veto any changes to, significant transactions for the benefit of the entity;

3. The entity can dominate either the nominations process for electing members of the other entity’s governing body or the obtaining of proxies from other holders of voting rights;

4. The other entity’s key management personnel are related parties of the entity (for example, the chief executive officer of the other entity and the chief executive officer of the entity are the same person); or

5. The majority of the members of the other entity’s governing body are related parties of the entity.

AG21. Sometimes there will be indications that the entity has a special relationship with the other entity, which suggests that the entity has more than a passive interest in the other entity. The existence of any individual indicator, or a particular combination of indicators, does not necessarily mean that the power criterion is met. However, if an entity has more than a passive interest in another entity this may indicate that the entity has other related rights sufficient to give it power or provide evidence of existing power over another entity. For example, the following suggests that the entity has more than a passive interest in the other entity and, in combination with other rights, may indicate power:

1. The relationship between the entity and the other entity’s operations is one of dependence, such as in the following situations:

   1. The entity funds a significant portion of the other entity’s operations and the other entity depends on this.

   2. The entity guarantees a significant portion of the other entity’s obligations, and the other entity depends on this.

   3. The entity provides critical services, technology, supplies or raw materials to the other entity, and the other entity depends on this.

   4. The entity controls assets such as licenses or trademarks that are critical to the other entity’s operations and the other entity depends on this.

   5. The entity provides key management personnel to the other entity (for example, when the entity’s personnel have specialised knowledge of the other entity’s operations) and the other entity depends on this.

2. A significant portion of the other entity’s activities either involve or are conducted on behalf of the entity.

3. The entity’s exposure, or rights, to benefits from its involvement with the other entity is disproportionately greater than its voting or other similar rights. For example, there may be a situation in which an entity is entitled, or exposed, to more than half of the benefits of the other entity but holds less than half of the voting rights of the other entity.

AG22. Public benefit entities often have special relationships with other parties as a result of the indicators listed in paragraph AG21. Public benefit entities often fund the activities of other entities. Economic dependence is discussed in paragraphs AG41 to AG42.

AG23. The greater an entity’s exposure, or rights, to variability of benefits from its involvement with another entity, the greater is the incentive for the entity to obtain rights sufficient to give it power. Therefore, having a large exposure to variability of benefits is an indicator that the entity may have power. However, the extent of the entity’s exposure does not, in itself, determine whether an entity has power over the other entity.

AG24. When the factors set out in paragraph AG20 and the indicators set out in paragraphs AG21–AG23 are considered together with an entity’s rights, greater weight shall be given to the evidence of power described in paragraph AG20.

AG25. An entity, in assessing whether it has power, considers only substantive rights relating to another entity (held by the entity and others). For a right to be substantive, the holder must have the practical ability to exercise that right.

AG26. Determining whether rights are substantive requires judgement, taking into account all facts and circumstances. Factors to consider in making that determination include but are not limited to:

1. Whether there are any barriers (economic or otherwise) that prevent the holder (or holders) from exercising the rights. Examples of such barriers include but are not limited to:

   1. Financial penalties and incentives that would prevent (or deter) the holder from exercising its rights.

   2. An exercise or conversion price that creates a financial barrier that would prevent (or deter) the holder from exercising its rights.

   3. Terms and conditions that make it unlikely that the rights would be exercised, for example, conditions that narrowly limit the timing of their exercise.

   4. The absence of an explicit, reasonable mechanism in the founding documents of another entity or in applicable laws or regulations that would allow the holder to exercise its rights.

   5. The inability of the holder of the rights to obtain the information necessary to exercise its rights.

   6. Operational barriers or incentives that would prevent (or deter) the holder from exercising its rights (e.g., the absence of other managers willing or able to provide specialised services or provide the services and take on other interests held by the incumbent manager).

   7. Legal or regulatory requirements that limit the manner in which rights may be exercised or that prevent the holder from exercising its rights (e.g., where another entity has statutory powers which permit it to operate independently of the government or where a foreign entity is prohibited from exercising its rights).

2. When the exercise of rights requires the agreement of more than one party, or when the rights are held by more than one party, whether a mechanism is in place that provides those parties with the practical ability to exercise their rights collectively if they choose to do so. The lack of such a mechanism is an indicator that the rights may not be substantive. The more parties that are required to agree to exercise the rights, the less likely it is that those rights are substantive. However, a board of directors (or other governing body) whose members are independent of the decision maker may serve as a mechanism for numerous entities (or other parties) to act collectively in exercising their rights. Therefore, removal rights exercisable by an independent board of directors (or other governing body) are more likely to be substantive than if the same rights were exercisable individually by a large number of entities (or other parties).

3. Whether the party or parties that hold the rights would benefit from the exercise of those rights. For example, the holder of potential voting rights in another entity (see paragraphs AG49–AG52) shall consider the exercise or conversion price of the instrument. The terms and conditions of potential voting rights are more likely to be substantive when the instrument is in the money or the entity would benefit for other reasons (e.g., by realising synergies between the entity and the other entity) from the exercise or conversion of the instrument.

AG27. To be substantive, rights also need to be exercisable when decisions about the direction of the relevant activities need to be made. Usually, to be substantive, the rights need to be currently exercisable. However, sometimes rights can be substantive, even though the rights are not currently exercisable.

AG28. Substantive rights exercisable by other parties can prevent an entity from controlling the entity being assessed for control, to which those rights relate. Such substantive rights do not require the holders to have the current ability to initiate decisions. As long as the rights are not merely protective (see paragraphs AG29–AG31), substantive rights held by other parties may prevent the entity from controlling the entity being assessed for control even if the rights give the holders only the ability to approve or block decisions that relate to the relevant activities.

AG29. In evaluating whether rights give an entity power over another entity, the entity shall assess whether its rights, and rights held by others, are protective rights. Protective rights relate to fundamental changes to the activities of another entity or apply in exceptional circumstances. However, not all rights that apply in exceptional circumstances or are contingent on events are protective (see paragraphs AG15 and AG55).

AG30. Because protective rights are designed to protect the interests of their holder without giving that party power over the entity to which those rights relate, an entity that holds only protective rights cannot have power or prevent another party from having power over the entity to which those rights relate (see paragraph 29).

AG31. Examples of protective rights include but are not limited to:

1. A lender’s right to restrict a borrower from undertaking activities that could significantly change the credit risk of the borrower to the detriment of the lender.

2. The right of a party holding a non-controlling interest in an entity to approve capital expenditure greater than that required in the ordinary course of business, or to approve the issue of equity or debt instruments.

3. The right of a lender to seize the assets of a borrower if the borrower fails to meet specified loan repayment conditions.

4. The right of a regulator to curtail or close the operations of entities that are not complying with regulations or other requirements. For example, a pollution control authority may be able to close down activities of an entity that breaches environmental regulations.

5. The right to remove members of the governing body of another entity under certain restricted circumstances. For example, a state government may be able to remove or suspend the chairman of a municipality and appoint an administrator if the municipality is unable to make timely decisions about key policies.

6. The right of the government to remove tax deductibility for contributions to a not-for-profit entity if the entity significantly changes its objectives or activities.

7. The right of an entity providing resources to a charity to demand that, if the charity were to be liquidated, the net assets of the charity would be distributed to an organisation undertaking similar activities. (However, if the entity had the power to determine specifically to where the charity’s net assets would be distributed upon liquidation, the entity would have substantive rights in relation to the charity).

AG31.1 Public benefit entities may enter into network or partner agreements that are similar to franchise agreements entered into by for-profit entities and which may be referred to as social franchises. The nature of the agreements can vary. For example:

1. An entity may grant another entity rights to use a system or operational model in return for royalty payments. The entity receiving the rights may be required to cover its own expenses, pay royalties and comply with certain requirements to protect the reputation or image of the “brand”. The entity receiving the royalty payments would then use the funds to further its own social objectives.

2. An entity may grant another entity rights to use a system or operational model. However, rather than requiring royalty payments, it may agree to meet its own costs, and possibly to contribute to the operating costs of the entity to whom it is granting the rights.

AG31.2 In both cases the entity granting the rights is granting others the right to replicate a model of a successfully tested social concept, including the tested system and a brand name. In return, the entity granting the rights may receive royalty payments, or improved quality, access to, awareness of/or affordable pricing of products and services with social benefits. Where such agreements exist, the entity granting the rights may need to assess whether it controls the entity receiving the rights.

AG31.3 A network or partner agreement often gives an entity rights that are designed to protect a brand. Network or partnership agreements typically give the entity granting the rights some decision-making rights with respect to the operations of the entity receiving the rights.

AG31.4 Generally, such decision-making rights do not restrict the ability of parties other than the entity granting the rights to make decisions that have a significant effect on the benefits of the entity being assessed for control. Nor do the rights of the entity granting the rights in network or partner agreements necessarily give the entity granting the rights the current ability to direct the activities that significantly affect the benefits of the entity being assessed for control.

AG31.5 It is necessary to distinguish between having the current ability to make decisions that significantly affect the benefits of the entity being assessed for control and having the ability to make decisions that protect the brand. The entity granting the rights does not have power over the entity being assessed for control if other parties have existing rights that give them the current ability to direct the relevant activities of the entity being assessed for control.

AG31.6 By entering into the network or partner agreement the entity being assessed for control has made a unilateral decision to operate its activity in accordance with the terms of the agreement, but to meet its own objectives. However, the ultimate decision-making capacity is retained by the entity being assessed for control through its ability to withdraw from the agreement, reacquire any decision-making ability which it had previously relinquished in accordance with the network or partner agreement, and continue operating its activity.

AG31.7 Control over such fundamental decisions as the legal form of the entity being assessed for control and its funding structure may be determined by parties other than the entity granting the rights and may significantly affect the benefits of the entity being assessed for control. The lower the level of financial support provided by the entity granting the rights and the lower that entity’s exposure to variability of benefits from the entity being assessed for control the more likely it is that the entity granting the rights has only protective rights.

AG32. Where an entity has voting or similar rights in respect of another entity, an entity should consider whether those rights give it the current ability to direct the relevant activities of the other entity. An entity considers the requirements in this section (paragraphs AG33–AG52) in making that assessment.

AG33. An entity that holds more than half of the voting rights of another entity has power in the following situations, unless paragraph AG34 or paragraph AG35 applies:

1. The relevant activities are directed by a vote of the holder of the majority of the voting rights; or

2. A majority of the members of the governing body that directs the relevant activities are appointed by a vote of the holder of the majority of the voting rights.

AG34. For an entity that holds more than half of the voting rights of another entity, to have power over that other entity, the entity’s voting rights must be substantive, in accordance with paragraphs AG25–AG28, and must provide the entity with the current ability to direct the relevant activities, which often will be through determining operating and financing policies. If another entity has existing rights that provide that entity with the right to direct the relevant activities and that entity is not an agent of the entity making the assessment of control, the entity making the assessment of control does not have power over the other entity.

AG35. An entity does not have power over another entity, even though the entity holds the majority of the voting rights in the other entity, when those voting rights are not substantive. For example, an entity that has more than half of the voting rights in another entity cannot have power if the relevant activities are subject to direction by a government, court, administrator, receiver, liquidator or regulator.

AG36. An entity can have power even if it holds less than a majority of the voting rights of another entity. An entity can have power with less than a majority of the voting rights of another entity, for example, through:

1. The power to appoint or remove a majority of the members of the board of directors (or other governing body), and control of the other entity is by that board or by that body (see paragraph AG38);

2. A binding arrangement between the entity and other vote holders (see paragraph AG39);

3. Rights arising from other binding arrangements (see paragraph AG40);

4. The entity’s voting rights (see paragraphs AG37 and AG43–AG48);

5. Potential voting rights (see paragraphs AG49–AG52); or

6. A combination of (a)–(e).

AG37. An entity may have the right of decisive vote, thus to veto all other voting rights of another entity. This type of right is sometimes referred to as a “golden share”. Such special voting rights may give rise to power. Usually these rights are documented in the founding documents of the other entity (such as articles of association), and are designed to restrict the level of voting or other rights that may be held by certain parties. They may also give an entity veto powers over any major change in the other entity, such as the sale of a major asset or the sale of the other entity as a whole.

AG38. An entity may have the power to appoint or remove a majority of the members of the board of directors (or other governing body) as a result of binding arrangements (including existing legislation, executive authority, regulation, contractual, or other arrangements).

AG39. A binding arrangement between an entity and other vote holders can give the entity the right to exercise voting rights sufficient to give the entity power, even if the entity does not have voting rights sufficient to give it power without the binding arrangement. However, a binding arrangement might ensure that the entity can direct enough other vote holders on how to vote to enable the entity to make decisions about the relevant activities.

AG40. Other decision-making rights, in combination with voting rights, can give an entity the current ability to direct the relevant activities. For example, the rights specified in a binding arrangement in combination with voting rights may give an entity the current ability to direct the operating or financing policies or other key activities of another entity that significantly affect the benefits received by the entity. However, an entity would not control another entity if that other entity were able to determine its policy or programme to a significant extent, (for example, by failing to comply with the binding arrangement and accepting the consequences, or by changing its constitution or dissolving itself).

AG41. Economic dependence, alone, does not give rise to power over an entity for the purposes of this Standard. Economic dependence may occur when:

1. An entity has a single major client and the loss of that client could affect the existence of the entity’s operations; or

2. An entity’s activities are predominantly funded by grants and donations and it receives the majority of its funding from a single entity.

AG42. An entity may be able to influence the financial and operating policies of another entity that is dependent on it for funding. However, a combination of factors will need to be considered to determine whether the economic dependence is such that the economically dependent entity no longer has the ultimate power to govern its own financial or operating policies. If an economically dependent entity retains discretion as to whether it will take funding from an entity, or do business with an entity, the economically dependent entity still has the ultimate power to govern its own financial or operating policies. For example, a private school that accepts funding from a government but whose governing body has retained discretion with respect to accepting funds or the manner in which those funds are to be used, would still have the ultimate power to govern its own financial or operating policies. This may be so even if government grants provided to such an entity requires it to comply with specified conditions. Although the entity might receive government grants for the construction of capital assets and operating costs subject to specified service standards or restrictions on user fees, its governing bodies may have ultimate discretion about how assets are used; the entity would therefore control its financial and operating policies. It is also important to distinguish between the operations of an entity and an entity itself. The loss of a major client might affect the viability of the operations of an entity but not the existence of the entity itself.

AG43. An entity with less than a majority of the voting rights has rights that are sufficient to give it power when the entity has the practical ability to direct the relevant activities unilaterally.

AG44. When assessing whether an entity’s voting rights are sufficient to give it power, an entity considers all facts and circumstances, including:

1. The size of the entity’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders, noting that:

   1. The more voting rights an entity holds, the more likely the entity is to have existing rights that give it the current ability to direct the relevant activities;

   2. The more voting rights an entity holds relative to other vote holders, the more likely the entity is to have existing rights that give it the current ability to direct the relevant activities;

   3. The more parties that would need to act together to outvote the entity, the more likely the entity is to have existing rights that give it the current ability to direct the relevant activities;

2. Potential voting rights held by the entity, other vote holders or other parties (see paragraphs AG49–AG52);

3. Rights arising from other binding arrangements (see paragraph AG40); and

4. Any additional facts and circumstances that indicate the entity has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

AG45. When the direction of relevant activities is determined by majority vote and an entity holds significantly more voting rights than any other vote holder or organised group of vote holders, and the other shareholdings are widely dispersed, it may be clear, after considering the factors listed in paragraph AG44(a)–(c) alone, that the entity has power over the other entity.

AG46. In other situations, it may be clear after considering the factors listed in paragraph AG44(a)–(c) alone that an entity does not have power.

AG47. However, the factors listed in paragraph AG44(a)–(c) alone may not be conclusive. If an entity, having considered those factors, is unclear whether it has power, it shall consider additional facts and circumstances, such as whether other shareholders are passive in nature as demonstrated by voting patterns at previous shareholders’ meetings. This includes the assessment of the factors set out in paragraph AG20 and the indicators in paragraphs AG21–AG23. The fewer voting rights the entity holds, and the fewer parties that would need to act together to outvote the entity, the more reliance would be placed on the additional facts and circumstances to assess whether the entity’s rights are sufficient to give it power. When the facts and circumstances in paragraphs AG20–AG23 are considered together with the entity’s rights, greater weight shall be given to the evidence of power in paragraph AG20 than to the indicators of power in paragraphs AG21–AG23.

AG48. If it is not clear, having considered the factors listed in paragraph AG44(a)–(d), that the entity has power, the entity does not control the other entity.

AG49. When assessing control, an entity considers its potential voting rights as well as potential voting rights held by other parties, to determine whether it has power. Potential voting rights are rights to obtain voting rights of another entity, such as those arising from convertible instruments or options, including forward contracts. Those potential voting rights are considered only if the rights are substantive (see paragraphs AG25–AG28).

AG50. When considering potential voting rights, an entity shall consider the purpose and design of the instrument, as well as the purpose and design of any other involvement the entity has with the other entity. This includes an assessment of the various terms and conditions of the instrument as well as the entity’s apparent expectations, motives and reasons for agreeing to those terms and conditions.

AG51. If the entity also has voting or other decision-making rights relating to the other entity’s activities, the entity assesses whether those rights, in combination with potential voting rights, give the entity power.

AG52. Substantive potential voting rights alone, or in combination with other rights, can give an entity the current ability to direct the relevant activities. For example, this is likely to be the case when an entity holds 40 per cent of the voting rights of another entity and, in accordance with paragraph AG26, holds substantive rights arising from options to acquire a further 20 per cent of the voting rights.

AG53. In assessing the purpose and design of another entity (see paragraphs AG5–AG8.1), an entity shall consider the involvement and decisions made at the inception of the other entity as part of its design and evaluate whether the transaction terms and features of the involvement provide the entity with rights that are sufficient to give it power. Being involved in the design of another entity alone is not sufficient to give an entity control of that other entity. However, involvement in the design of the other entity may indicate that the entity had the opportunity to obtain rights that are sufficient to give it power over the other entity and hence the ability to determine the purpose and design of an entity may give rise to power. In the case of an entity established with most (or all) of its relevant activities predetermined at inception, having the ability to determine the purpose and design of an entity may be more relevant to the control assessment than any on-going decision-making rights. This is particularly so when the entity that established the other entity has already, by virtue of its involvement in the entity’s purpose and design, exercised its power to determine the nature or amount of those benefits and ensured that those benefits flow to it, and not to others.

AG54. In addition, an entity shall consider rights arising from binding arrangements such as call rights, put rights, liquidation rights and rights arising from legislative or executive authority established at the inception of the other entity. When binding arrangements involve activities that are closely related to the other entity, then these activities are, in substance, an integral part of the other entity’s overall activities, even though they may occur outside the legal boundaries of the other entity. Therefore, explicit or implicit decision-making rights embedded in binding arrangements that are closely related to the other entity need to be considered as relevant activities when determining power over the other entity.

AG55. For some other entities, relevant activities occur only when particular circumstances arise or events occur. The other entity may be designed so that the direction of its activities and the benefits from those activities are predetermined unless and until those particular circumstances arise or events occur. In this case, only the decisions about the other entity’s activities when those circumstances or events occur can significantly affect its benefits and thus be relevant activities. The circumstances or events need not have occurred for an entity with the ability to make those decisions to have power. The fact that the right to make decisions is contingent on circumstances arising or an event occurring does not, in itself, make those rights protective.

AG56. An entity may have an explicit or implicit commitment to ensure that another entity continues to operate as designed. Such a commitment may increase the entity’s exposure to variability of benefits and thus increase the incentive for the entity to obtain rights sufficient to give it power. Therefore a commitment to ensure that another entity operates as designed may be an indicator that the entity has power, but does not, by itself, give an entity power, nor does it prevent another party from having power.

AG57. When assessing whether an entity has control of another entity, the entity determines whether it is exposed, or has rights, to variable benefits from its involvement with the other entity.

AG58. Variable benefits are benefits that are not fixed and have the potential to vary as a result of the performance of another entity. Variable benefits can be only positive, only negative or both positive and negative (see paragraph 30). An entity assesses whether benefits from another entity are variable and how variable those benefits are on the basis of the substance of the arrangement and regardless of the legal form of the benefits. For example:

1. In the context of non-financial benefits an entity may receive benefits as a result of the activities of another entity furthering its objectives. The benefits may be variable benefits for the purpose of this Standard because they may expose the entity to the performance risk of the other entity. If the other entity were unable to perform those activities then the entity might incur additional costs, either from undertaking the activities itself or by providing additional funds or other forms of assistance to enable the other entity to continue providing those activities.

2. In the context of financial benefits an entity can hold a bond with fixed interest payments. The fixed interest payments are variable benefits for the purpose of this Standard because they are subject to default risk and they expose the entity to the credit risk of the issuer of the bond. The amount of variability (i.e., how variable those benefits are) depends on the credit risk of the bond. Similarly, fixed performance fees for managing another entity’s assets are variable benefits because they expose the entity to the performance risk of the other entity. The amount of variability depends on the other entity’s ability to generate sufficient revenue to pay the fee.

AG59. A liquidator would not normally have rights to variable benefits from its involvement with the entity being liquidated.

AG60. It is common for public benefit entities to be responsible for carrying out the policies of a controlling entity or a funder, such as the Government. In some cases they may have the authority to act in their own right, in other cases they may act as an agent for an individual or another entity. For example:

1. A government department, which is authorised by a Minister to act on the Minister’s behalf, might act solely as an agent of the responsible Minister in relation to another entity. In such cases the department would not control the other entity and would not consolidate it.

2. A government department may operate under a delegation of power from a Minister. The department uses its own discretion in making decisions and taking actions and is not subject to direction from the Minister. In such cases the department is acting in its own right and would need to apply the other requirements of this Standard to determine whether it controlled another entity. The scope of the department’s decision-making authority over another entity would be a significant factor in distinguishing whether it is acting as an agent or as a principal.

3. An entity may establish a trust to carry out specified activities and appoint the trustee. The trustee is responsible for making decisions about the financing and operating activities of the trust in accordance with the trust deed. If the entity can replace the trustee at its discretion, the entity would need to assess whether it controls the trust given that, for example, it would be exposed, or have rights, to variable benefits in terms of the extent to which its objectives are achieved or furthered through the activities of the trust. The entity would also need to consider whether it has obtained control through predetermination of relevant activities.

AG61. An entity may delegate its decision-making authority to an agent on some specific issues or on all relevant activities. When assessing whether it controls another entity, the entity shall treat the decision- making rights delegated to its agent as held by the entity directly. In situations where there is more than one principal, each of the principals shall assess whether it has power over the other entity by considering the requirements in paragraphs AG5–AG56. Paragraphs AG62–AG74 provide guidance on determining whether a decision maker is an agent or a principal.

AG62. A decision maker shall consider the overall relationship between itself, the other entity being managed (and assessed for control) and other parties involved with that entity. In particular, a decision maker shall consider all the factors below, in determining whether it is an agent:

1. The scope of its decision-making authority over the other entity (paragraphs AG64 and AG65);

2. The rights held by other parties (paragraphs AG66–AG69);

3. The remuneration to which it is entitled in accordance with the remuneration agreement(s) (paragraphs AG70–AG72); and

4. The decision maker’s exposure to variability of benefits from other interests that it holds in the other entity (paragraphs AG73 and AG74).

Different weightings shall be applied to each of the factors on the basis of particular facts and circumstances.

AG63. Determining whether a decision maker is an agent requires an evaluation of all the factors listed in paragraph AG62 unless a single party holds substantive rights to remove the decision maker (removal rights) and can remove the decision maker without cause (see paragraph AG67).

AG64. The scope of a decision maker’s decision-making authority is evaluated by considering:

1. The activities that are permitted according to the decision-making agreement(s) and specified by law, and

2. The discretion that the decision maker has when making decisions about those activities.

AG65. A decision maker shall consider the purpose and design of the other entity, the risks to which the other entity was designed to be exposed, the risks it was designed to pass on to the parties involved and the level of involvement the decision maker had in the design of another entity. For example, if a decision maker is significantly involved in the design of the other entity (including in determining the scope of decision-making authority), that involvement may indicate that the decision maker had the opportunity and incentive to obtain rights that result in the decision maker having the ability to direct the relevant activities.

AG66. Substantive rights held by other parties may affect the decision maker’s ability to direct the relevant activities of another entity. Substantive removal or other rights may indicate that the decision maker is an agent.

AG67. When a single party holds substantive removal rights and can remove the decision maker without cause, this, in isolation, is sufficient to conclude that the decision maker is an agent. If more than one party holds such rights (and no individual party can remove the decision maker without the agreement of other parties) those rights are not, in isolation, conclusive in determining that a decision maker acts primarily on behalf and for the benefit of others. In addition, the greater the number of parties required to act together to exercise rights to remove a decision maker and the greater the magnitude of, and variability associated with, the decision maker’s other economic interests (i.e., remuneration and other interests), the less the weighting that shall be placed on this factor.

AG68. Substantive rights held by other parties that restrict a decision maker’s discretion shall be considered in a similar manner to removal rights when evaluating whether the decision maker is an agent. For example, a decision maker that is required to obtain approval from a small number of other parties for its actions is generally an agent. (See paragraphs AG25–AG28 for additional guidance on rights and whether they are substantive).

AG69. Consideration of the rights held by other parties shall include an assessment of any rights exercisable by another entity’s board of directors (or other governing body) and their effect on the decision-making authority (see paragraph AG26(b)).

AG70. The greater the magnitude of, and variability associated with, the decision maker’s remuneration relative to the benefits expected from the activities of the other entity, the more likely the decision maker is a principal.

AG71. In determining whether it is a principal or an agent the decision maker shall also consider whether the remuneration agreement includes only terms, conditions or amounts that are customarily present in arrangements for similar services and level of skills negotiated on an arm’s length basis.

AG72. A decision maker cannot be an agent unless the conditions set out in paragraph AG74(a) and (b) are present. However, meeting those conditions in isolation is not sufficient to conclude that a decision maker is an agent.

AG73. A decision maker that holds other interests in another entity (e.g., investments in the other entity or provides guarantees with respect to the performance of the other entity), shall consider its exposure to variability of benefits from those interests in assessing whether it is an agent. Holding other interests in another entity indicates that the decision maker may be a principal.

AG74. In evaluating its exposure to variability of benefits from other interests in the other entity a decision maker shall consider the following:

1. The greater the magnitude of, and variability associated with, its economic interests, considering its remuneration and other interests in aggregate, the more likely the decision maker is a principal.

2. Whether its exposure to variability of benefits is different from that of the other entities that receive benefits from the entity being assessed for control and, if so, whether this might influence its actions. For example, this might be the case when a decision maker holds subordinated interests in, or provides other forms of credit enhancement to, another entity.

The decision maker shall evaluate its exposure relative to the total variability of benefits of the other entity. This evaluation is made primarily on the basis of benefits expected from the activities of the other entity but shall not ignore the decision maker’s maximum exposure to variability of benefits of the other entity through other interests that the decision maker holds.

AG74.1 In some cases, it is generally expected that an entity will assist another entity that is in distress because of some form of relationship (such as sharing a common name). This is often referred to as “reputational risk” – the risk that an entity will consider that it needs to act even if it has no obligation to do so. Reputational risk is not, of itself, sufficient to create control.

AG75. When assessing control, an entity shall consider the nature of its relationship with other parties and whether those other parties are acting on the entity’s behalf (i.e., they are “de facto agents”). The determination of whether other parties are acting as de facto agents requires judgement, considering not only the nature of the relationship but also how those parties interact with each other and the entity.

AG76. Such a relationship need not involve a binding arrangement. Such relationships could also arise from legislative or executive authority that does not meet the definition of a binding arrangement. A party is a de facto agent when the entity has, or those that direct the activities of the entity have, the ability to direct that party to act on the entity’s behalf. In these circumstances, the entity shall consider its de facto agent’s decision-making rights and its indirect exposure, or rights, to variable benefits through the de facto agent together with its own when assessing control of another entity.

AG77. The following are examples of such other parties that, by the nature of their relationship, might act as de facto agents for the entity:

1. The entity’s related parties.

2. A party that received its interest in the other entity as a contribution or loan from the entity making the assessment of control.

3. A party that has agreed not to sell, transfer or encumber its interests in the other entity without the entity’s prior approval (except for situations in which the entity and the other party have the right of prior approval and the rights are based on mutually agreed terms by willing independent parties).

4. A party that cannot finance its operations without subordinated financial support from the entity.

5. Another entity for which the majority of the members of its governing body or for which its key management personnel are the same as those of the entity.

6. A party that has a close business relationship with the entity, such as the relationship between a professional service provider and one of its significant clients.

AG78. An entity shall consider whether it treats a portion of another entity as a deemed separate entity and, if so, whether it controls the deemed separate entity.

AG79. An entity shall treat a portion of another entity as a deemed separate entity if and only if the following condition is satisfied:

Specified assets of the other entity (and related credit enhancements, if any) are the only source of payment for specified liabilities of, or specified other interests in, the other entity. Parties other than those with the specified liability do not have rights or obligations related to the specified assets or to residual cash flows from those assets. In substance, none of the benefits from the specified assets can be used by the remaining portion of the other entity and none of the liabilities of the deemed separate entity are payable from the assets of the remainder of the other entity. Thus, in substance, all the assets, liabilities and equity instruments of that deemed separate entity are ring-fenced from the overall other entity. Such a deemed separate entity is often called a “silo”.

AG80. When the condition in paragraph AG79 is satisfied, an entity shall identify the activities that significantly affect the benefits of the deemed separate entity and how those activities are directed in order to assess whether it has power over that portion of the other entity. When assessing control of the deemed separate entity, the entity shall also consider whether it has exposure or rights to variable benefits from its involvement with that deemed separate entity and the ability to use its power over that portion of the other entity to affect the amount of the benefits from that entity.

AG81. If the entity controls the deemed separate entity, the entity shall consolidate that portion of the other entity. In that case, other parties exclude that portion of the other entity when assessing control of, and in consolidating, the other entity.

AG82. An entity shall reassess whether it controls another entity if facts and circumstances indicate that there are changes to one or more of the three elements of control listed in paragraph 20.

AG83. If there is a change in how power over another entity can be exercised, that change must be reflected in how an entity assesses its power over another entity. For example, changes to decision-making rights can mean that the relevant activities are no longer directed through voting rights, but instead other agreements, such as contracts, give another party or parties the current ability to direct the relevant activities.

AG84. An event can cause an entity to gain or lose power over another entity without the entity being involved in that event. For example, an entity can gain power over another entity because decision-making rights held by another party or parties that previously prevented the entity from controlling another entity have lapsed.

AG85. An entity also considers changes affecting its exposure, or rights, to variable benefits from its involvement with another entity. For example, an entity that has power over another entity can lose control of that other entity if the entity ceases to be entitled or have the ability to receive benefits or to be exposed to obligations, because the entity would fail to satisfy paragraph 20(b) (e.g., if a contract to receive performance-related fees is terminated).

AG86. An entity shall consider whether its assessment that it acts as an agent or a principal has changed. Changes in the overall relationship between the entity and other parties can mean that an entity no longer acts as an agent, even though it has previously acted as an agent, and vice versa. For example, if changes to the rights of the entity, or of other parties, occur, the entity shall reconsider its status as a principal or an agent.

AG87. An entity’s initial assessment of control or its status as a principal or an agent would not change simply because of a change in market conditions (e.g., a change in the other entity’s benefits driven by market conditions), unless the change in market conditions changes one or more of the three elements of control listed in paragraph 20 or changes the overall relationship between a principal and an agent.

AG88. An entity shall consider all facts and circumstances when assessing whether it is an investment entity, including its purpose and design. Paragraphs AG89–AG106 describe aspects of the definition of an investment entity in more detail.

AG89. The definition of an investment entity requires that the entity have one or more investors. An investment entity may have several investors who pool their funds to gain access to investment management services and investment opportunities that they might not have had access to individually. Having several investors would make it less likely that the entity, or other members of the economic entity containing the entity, would obtain benefits other than capital appreciation or investment revenue.

AG90. However, in the public sector it is also common for an investment entity to be formed by, or for, a single controlling entity that represents or supports the interests of a wider group of investors (e.g., a pension fund, government investment fund or trust).

AG91. An investment entity is typically, but is not required to be, a separate legal entity. The investors in an investment entity will often, but not always, have ownership interests in the form of equity or similar interests (e.g., partnership interests), to which proportionate shares of the net assets of the investment entity are attributed. The definition of an investment entity does not specify that all investors must have the same rights. Having different classes of investors, some of which have rights only to a specific investment or groups of investments or which have different proportionate shares of the net assets, does not preclude an entity from being an investment entity.

AG92. The definition of an investment entity does not specify that the investors must have an ownership interest that meets the definition of net assets/equity in accordance with other applicable PBE Standards. An entity that has significant ownership interests in the form of debt that does not meet the definition of net assets/equity may still qualify as an investment entity, provided that the debt holders are exposed to variable returns from changes in the fair value of the entity’s net assets.

AG93. The definition of an investment entity requires that the purpose of the entity is to invest solely for returns from capital appreciation, investment revenue (such as dividends or similar distributions, interest or rental revenue), or both. Documents that indicate what the entity’s investment objectives are, such as the entity’s mandate, constitution, offering memorandum, publications distributed by the entity and

other corporate or partnership documents, will typically provide evidence of an investment entity’s purpose. Further evidence may include the manner in which the entity presents itself to other parties; for example, an entity may present its objective as providing medium-term investment for capital appreciation.

AG94. An entity that has additional objectives that are inconsistent with the purpose of an investment entity would not meet the definition of an investment entity. Examples of when this may occur are as follows:

1. An investor whose objective is to jointly develop, produce or market products with its investees. The entity will earn returns from the development, production or marketing activity as well as from its investments;

2. An investor whose objectives require it to be aligned with the economic, social or environmental policies of another entity. For example, if an entity is required to align its investment policies with other objectives such as owning certain businesses or improving employment outcomes in a jurisdiction; and

3. An investor whose individual investment decisions have to be ratified or approved by a controlling entity or which is required to follow the direction of a controlling entity. Such ratifications, approvals or decisions are likely to be inconsistent with the purpose of an investment entity.

AG95. An entity’s purpose may change over time. In assessing whether it continues to meet the definition of an investment entity, an entity would need to have regard to any changes in the environment in which it operates and the impact of such changes on its investment strategy.

AG96. An investment entity may have a number of ways in which it can demonstrate that its purpose is to invest funds for capital appreciation, investment revenue or both. One way is by holding several investments to diversify its risk and maximise its returns. An entity may hold a portfolio of investments directly or indirectly, for example by holding a single investment in another investment entity that itself holds several investments.

AG97. There may be times when the entity holds a single investment. However, holding a single investment does not necessarily prevent an entity from meeting the definition of an investment entity. For example, an investment entity may hold only a single investment when the entity:

1. Is in its start-up period and has not yet identified suitable investments and, therefore, has not yet executed its investment plan to acquire several investments;

2. Has not yet made other investments to replace those it has disposed of;

3. Is established to pool investors’ funds to invest in a single investment when that investment is unobtainable by individual investors (e.g., when the required minimum investment is too high for an individual investor); or

4. Is in the process of being disestablished.

AG98. An investment entity may provide investment-related services (e.g., investment advisory services, investment management, investment support and administrative services), either directly or through a controlled entity, to third parties as well as to its controlling entity or other investors, even if those activities are substantial to the entity, subject to the entity continuing to meet the definition of an investment entity.

AG99. An investment entity may also participate in the following investment-related activities, either directly or through a controlled entity, if these activities are undertaken to maximise the investment return (capital appreciation or investment revenue) from its investees and do not represent a separate substantial activity or a separate substantial source of revenue to the investment entity:

1. Providing management services and strategic advice to an investee; and

2. Providing financial support to an investee, such as a loan, capital commitment or guarantee.

AG100. If an investment entity has a controlled entity that is not itself an investment entity and whose main purpose and activities are providing investment-related services or activities that relate to the investment entity’s investment activities, such as those described in paragraphs AG98–AG99, to the entity or other parties, it shall consolidate that controlled entity in accordance with paragraph 57. If the controlled entity that provides the investment-related services or activities is itself an investment entity, the controlling investment entity shall measure that controlled entity at fair value through surplus or deficit in accordance with paragraph 56.

AG101. An entity’s investment plans also provide evidence of its purpose. One feature that differentiates an investment entity from other entities is that an investment entity does not plan to hold its investments indefinitely; it holds them for a limited period. Because equity investments and non-financial asset investments have the potential to be held indefinitely, an investment entity shall have an exit strategy documenting how the entity plans to realise capital appreciation from substantially all of its equity investments and non-financial asset investments. An investment entity shall also have an exit strategy for any debt instruments that have the potential to be held indefinitely, for example perpetual debt investments. The entity need not document specific exit strategies for each individual investment but shall identify different potential strategies for different types or portfolios of investments, including a substantive time frame for exiting the investments. Exit mechanisms that are only put in place for default events, such as a breach of contract or non-performance, are not considered exit strategies for the purpose of this assessment.

AG102. Exit strategies can vary by type of investment. For investments in private equity securities, examples of exit strategies include an initial public offering, a private placement, a trade sale of a business, distributions (to investors) of ownership interests in investees and sales of assets (including the sale of an investee’s assets followed by a liquidation of the investee). For equity investments that are traded in a public market, examples of exit strategies include selling the investment in a private placement or in a public market. For real estate investments, an example of an exit strategy includes the sale of the real estate through specialised property dealers or the open market.

AG103. An investment entity may have an investment in another investment entity that is formed in connection with the entity for legal, regulatory, tax or similar business reasons. In this case, the investment entity investor need not have an exit strategy for that investment, provided that the investment entity investee has appropriate exit strategies for its investments.

AG104. An essential element of the definition of an investment entity is that it measures and evaluates the performance of substantially all of its investments on a fair value basis, because using fair value results in more relevant information than, for example, consolidating its controlled entities or using the equity method for its interests in associates or joint ventures. In order to demonstrate that it meets this element of the definition, an investment entity:

1. Provides investors with fair value information and measures substantially all of its investments at fair value in its financial statements whenever fair value is required or permitted in accordance with PBE Standards; and

2. Reports fair value information internally to the entity’s key management personnel (as defined in PBE IPSAS 20 Related Party Disclosures), who use fair value as the primary measurement attribute to evaluate the performance of substantially all of its investments and to make investment decisions.

AG105. In order to meet the requirement in AG104(a), an investment entity would:

1. Elect to account for any investment property using the fair value model in PBE IPSAS 16 Investment Property;

1. Elect the exemption from applying the equity method in PBE IPSAS 36 for its investments in associates and joint ventures; and

2. Measure its financial assets at fair value using the requirements in PBE IPSAS 41 Financial Instruments.

AG106. An investment entity may have some non-investment assets, such as a head office property and related equipment, and may also have financial liabilities. The fair value measurement element of the definition of an investment entity applies to an investment entity’s investments. Accordingly, an investment entity need not measure its non-investment assets or its liabilities at fair value.

B1. XRB A1 Application of the Accounting Standards Framework (XRB A1) requires a reporting entity, including a group reporting entity, to determine whether it is a for-profit entity or a public benefit entity (PBE). This needs to be determined in order that the reporting entity applies the relevant accounting standards, that is, NZ IFRS for for-profit entities and PBE Standards for public benefit entities.

B2. It is a requirement of both PBE Standards and NZ IFRS that a reporting entity applies its accounting policies on a consistent basis. Paragraph 49 of this Standard requires consolidated financial statements to be prepared “using uniform accounting policies for like transactions and other events in similar circumstances”. This requirement means that, during the consolidation process, the amounts reported in the financial statements of a member of a group might need to be adjusted where that member uses accounting policies that differ from the accounting policies applied in the consolidated financial statements for like transactions and other events in similar circumstances.

B3. This Appendix addresses the specific case where a for-profit entity that has applied NZ IFRS in preparing its financial statements is part of a group that applies PBE Standards in preparing its financial statements. In preparing the consolidated financial statements, consideration needs to be given to the extent to which the amounts reported in the financial statements of the for-profit entity need to be adjusted on consolidation. Similar considerations would also need to be given to other situations in which a PBE group includes an entity that has prepared its financial statements on a basis that differs from PBE Standards, such as where a PBE within a PBE group has applied Tier 3 PBE Accounting Requirements or Tier 4 PBE Accounting Requirements.

B4. The potential need for consolidation adjustments results from entities within a group using recognition and measurement accounting policies that differ from the group’s recognition and measurement accounting policies. Differences in presentation and disclosure between PBE Standards and NZ IFRS will not lead to consolidation adjustments.

B5. The Public Benefit Entities’ Conceptual Framework (PBE Conceptual Framework) identifies the objectives of financial reporting as being to “provide information about the entity that is useful to users of general purpose financial reports (GPFRs) for accountability purposes and decision-making purposes”.

B6. The PBE Conceptual Framework describes the key characteristics of a reporting entity as (i) an entity that raises resources from, or on behalf of, constituents and/or uses resources to undertake activities for the benefit of, or on behalf of, those constituents; and (ii) there are service recipients or resource providers dependent on GPFRs of the entity for information for accountability or decision-making purposes.

B7. A reporting entity is not necessarily a separate legal entity: for example, it could be a group of legal entities, a partnership or an unincorporated trust. When the reporting entity prepares general purpose financial statements, it considers transactions and balances from the perspective of that specific reporting entity. This means that (i) the reporting entity determines whether it is a PBE or a for-profit entity and (ii) transactions, events and balances are reported from the perspective of the reporting entity. For example, the assets included in the statement of financial position are the assets controlled by that reporting entity, measured in accordance with the accounting policies of that entity.

B8. Consolidated financial statements present the transactions, events and balances of all the entities that are part of the group as a single entity. The term “economic entity” is frequently used to describe the group reporting entity. That is, the consolidated financial statements present the financial performance, financial position and cash flows of all the entities in the group from the perspective of a single economic entity. The boundaries of the separate legal entities within the group are disregarded to enable the group to be presented as a single entity.

B9. In preparing consolidated financial statements, adjustments are made to the financial statements of the individual entities within the group so that the consolidated financial statements are prepared from the perspective of the group reporting entity using uniform accounting policies for like transactions and other events in similar circumstances. These adjustments are necessary to ensure that the resulting financial statements provide relevant and faithfully representative information for the group entity that is reporting. Adjustments are necessary to:

1. Eliminate inter-entity transactions and balances. This leaves only transactions and balances with parties external to the group reporting entity in the consolidated financial statements;

2. Apply uniform accounting policies for like transactions and events in similar circumstances. This is to ensure that the information is consistently and coherently presented; and

3. Reflect the perspective of the entity reporting.

B10. It is not necessary to adjust on consolidation the amounts reported in the financial statements of for-profit entities when preparing a PBE group’s financial statements in the following situations:

1. For-profit entities within a PBE group are immaterial both individually and in aggregate; or

2. The transactions or other events of for-profit entities within a PBE group are recognised using accounting policies that are sufficiently similar to those applied by the PBE group that any differences in the application of these accounting policies would have no material impact on the consolidated financial statements; or

3. The transactions or other events of for-profit entities within a PBE group are recognised using accounting policies that differ from those of the PBE group but the impact of the differences in the two accounting policies is immaterial both individually and in aggregate in the context of the group; or

4. The transactions and other events recognised by PBEs and for-profit entities within a PBE group relate to different circumstances i.e., situations in which the different accounting policies of members of the PBE group stem from different circumstances rather than from different requirements in PBE Standards compared with NZ IFRS.

B11. The NZASB takes the view that the mere fact that an entity within a PBE group is a for-profit entity is not sufficient in itself to justify that the circumstances are not similar when considering the requirement to apply uniform accounting policies to “like transactions and events in similar circumstances”. In presenting its individual financial statements, the for-profit entity will reflect its for-profit perspective, and will apply accounting policies that are appropriate to its circumstances. When a for-profit entity is included within a PBE group, its separate nature as a for-profit entity is disregarded and, other than in the circumstances identified in paragraph B10 above, the PBE group presents all transactions and events by applying PBE Standards. As a result, in preparing consolidated financial statements, the transactions and events recognised in the for-profit entity are adjusted, where necessary, to conform to the accounting policies applied by the PBE group to ensure that the consolidated financial statements of the PBE group reflect its PBE nature.

B12. Assuming that the impact of applying different accounting policies is material, consolidation adjustments are required in the following circumstances:

1. PBE Standards and NZ IFRS include the same set of options and some entities within the group use one option while the alternative option is used by the group in the consolidated financial statements. Adjustments are required to the amounts reported by those entities that do not apply the group accounting policy;

2. PBE Standards and NZ IFRS differ. Differences in the application of accounting policies can arise in the following circumstances:

   1. PBE Standards and NZ IFRS contain different requirements, such as the difference between PBE IPSAS 17 Property, Plant and Equipment and NZ IAS 16 Property, Plant and Equipment relating to the treatment of increases/decreases for revalued property, plant and equipment. PBE IPSAS 17 requires these increases/decreases to be accounted for on a class of asset basis whereas NZ IAS 16 requires these increases/decreases to be accounted for on an individual asset basis;

   2. Either PBE Standards or NZ IFRS are silent or contain less guidance on a particular topic, for example, there is less guidance in NZ IFRS regarding concessionary loans. Therefore, a for-profit entity within the PBE group may have applied an accounting policy that differs from the requirements in PBE IPSAS 41 Financial Instruments; or

   3. A transaction occurs only within a for-profit entity within a PBE group, where the for-profit entity will have applied the relevant NZ IFRS and no PBE within the group undertakes the same transaction. If the NZ IFRS accounting policy is retained at the PBE group level and that policy is inconsistent with the requirements of PBE Standards, the PBE group would be applying accounting policies derived from both NZ IFRS and PBE Standards. As a result, the PBE group would not comply (or be able to claim compliance) with PBE Standards; and

3. The perspective of the for-profit entity differs from the perspective of the group. For example, the PBE group intends to sell the for-profit entity and has classified its assets and liabilities as a disposal group held for sale under PBE IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations. As a consequence, the PBE group writes down some of the assets in the disposal group to their fair value less costs to sell (where lower than their carrying amount) in the consolidated financial statements, whereas the for-profit entity, in its financial statements, would continue to measure those assets in accordance with other applicable NZ IFRS.

B13. Some standards clarify when adjustments are required in the consolidated financial statements. For example, PBE IPSAS 16 Investment Property (paragraph 19) states that where an entity owns property that is leased to, and occupied by, other entities within the group, this property does not qualify as investment property in the consolidated financial statements because the property is owner-occupied from the perspective of the group.

BC1. The New Zealand Accounting Standards Board (NZASB) has modified IPSAS 35 Consolidated Financial Statements for application by Tier 1 and Tier 2 public benefit entities (PBEs). Where applicable, disclosure concessions have been identified for Tier 2 entities and the language generalised for use by PBEs. The NZASB considers that the requirements of IPSAS 35 are generally appropriate for application by PBEs.

BC2. In the interests of coherence within PBE Standards, the NZASB has modified IPSAS 35 to incorporate guidance that relates to other PBE Standards, for which there is no equivalent IPSAS.

BC3. PBE IPSAS 35 does not incorporate the IASB’s narrow scope amendments in Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28), which the IASB issued in September 2014 and the NZASB issued for application by for-profit entities shortly thereafter. These narrow scope amendments established requirements for the recognition of a partial gain or loss for transactions between an investor and its associate or joint venture dependent on whether the sale or contribution of assets constitutes a business as defined in IFRS 3 Business Combinations. The IPSASB did not incorporate these requirements in IPSAS 35 because the IPSASB, at that stage, had not developed a standard dealing with combinations of entities. Given the existence of PBE IFRS 3 Business Combinations within PBE Standards, the NZASB considered incorporating these amendments in PBE IPSAS 35. However, following the IASB’s decision to defer the effective date of these amendments (pending further work on its equity method project) the NZASB decided not to incorporate these amendments in PBE IPSAS 35.

BC3.1 In January 2017 the IPSASB issued IPSAS 40 Public Sector Combinations. IPSAS 40 incorporated Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) and Effective Date of Amendments to IFRS 10 and IAS 28 (issued by the IASB in December 2015) in IPSAS 35. In developing PBE IPSAS 40 PBE Combinations the NZASB reconsidered incorporating these amendments in PBE IPSAS 35 but, given the IASB’s decision in May 2016 to defer work on its Equity Method research project until it has undertaken post-implementation reviews of certain standards, decided not to incorporate these amendments in PBE IPSAS 35.

BC4. The NZASB expanded the discussion of predetermined activities in IPSAS 35. This was due to concerns that the language used in the definition of power, could, in the absence of further guidance, be read as excluding control obtained through predetermination of activities. The NZASB wanted to clarify that the definition of power does not preclude the possibility that an entity could control another entity in situations where power has already been exercised through predetermination of activities.

BC5. IPSAS 35 states that power consists of existing rights that give an entity the current ability to direct the relevant activities of another entity. In developing IPSAS 35 the IPSASB modified the guidance in IFRS 10 about assessing power to highlight that, in the case of an entity established with predetermined activities, the right to direct the relevant activities may have been exercised at the time that the entity was established. The NZASB considered that the IPSASB’s additional guidance about predetermination in IPSAS 35 was helpful, but was of the view that the guidance in IPSAS 35 was not sufficient to lead to consistent and appropriate assessments of control by PBEs in New Zealand. The NZASB noted that PBEs often have to make assessments about the existence of control when there has been predetermination of activities and that these assessments can be difficult. The NZASB’s intention in expanding the discussion of predetermined activities in IPSAS 35 was to clarify, as much as possible, the circumstances in which predetermination is likely to result in control.

BC6. Based on its experience with assessments of control in New Zealand, the NZASB considered that the Standard should acknowledge that a broad range of scenarios are possible and indicate the circumstances in which predetermination generally leads to control. The NZASB agreed that control is likely to exist when the entity determined the purpose and design of the other entity being assessed for control and, in so doing, established significant restrictions on the relevant activities of that entity, which limit the ability of others to make decisions about those relevant activities and ensure that the establishing entity receives the significant benefits from those activities.

BC7. The NZASB modified the discussion of power and highlighted the importance of considering the purpose and design of an entity when assessing control, including explaining that such considerations of purpose and design should include consideration of the relevant activities, who has the power to make decisions about the relevant activities over the life of the entity and who receives the benefits from those activities (for example, see paragraphs 21, 26.1, 35.1, AG8.1, AG10 and AG53). That is, assessments of control should include the impact of predetermination, not just the remaining decisions that are left following predetermination.

BC8. Respondents were generally supportive of the NZASB’s proposed changes. In response to feedback that the need to consider purpose and design when assessing control should be highlighted throughout the Standard, the NZASB used additional footnotes and cross-referencing to better embed the concept of predetermination in the Standard.

BC9. The NZASB had also proposed to include an additional illustrative example (Example 29A) dealing with predetermined activities. The example was focused solely on predetermination of activities and was based on a very narrow fact pattern. Following feedback from respondents that the example was not typical of real-life examples and could be construed as narrowing the circumstances in which predetermination could give rise to control, the NZASB considered whether to change the example. The NZASB noted that it is not always possible to illustrate aspects of standards using real-life examples and that its intention had not been to narrow the definition of control or the circumstances in which predetermination could give rise to control. The NZASB noted that it did not expect that application of PBE IPSAS 35 would result in a substantial reduction in the number of controlled entities required to be consolidated, although individual facts and circumstances could result in the assessments for some individual entities changing. The NZASB therefore decided to omit Example 29A from the Standard. In response to comments indicating confusion about aspects of Example 28 the NZASB also decided to omit that example.

BC10. The NZASB acknowledged that both the IPSASB’s guidance on predetermination in IPSAS 35, together with the NZASB’s proposed further guidance, could result in different assessments of control compared to IFRS 10. This could have implications for mixed groups. For example, a PBE applying PBE IPSAS 35 in assessing whether it controls a for-profit entity with predetermined activities could come to a different conclusion than a for-profit entity making the same assessment using IFRS 10.

BC11. The IPSASB omitted the integral application guidance on franchises in IFRS 10 (paragraphs B29 to B33) from IPSAS 35 because it considered that there were likely to be few franchises in the public sector. The NZASB was of the view that PBEs, particularly not-for-profit PBEs, might enter into arrangements similar to franchises. The NZASB therefore included guidance on network and partner agreements, based on the guidance on franchises in IFRS 10 and an additional example on network and partner agreements (Example 11.1).

BC12. The NZASB had included integral guidance in PBE IPSAS 6 on the application of consistent accounting policies within an economic entity. This guidance provided examples to help determine when the financial statements of a for-profit subsidiary in a PBE group need to be restated in the preparation of consolidated financial statements. The NZASB agreed that this guidance would continue to be useful and incorporated it, with minor adjustments, in PBE IPSAS 35. The discussion of the reporting entity in this guidance was aligned with the discussion of the reporting entity in the Public Benefit Entities’ Conceptual Framework.

IG1. The diagram below summarises the accounting for various types of involvement with another entity.

Flowchart 1: Forms of Involvement with Other Parties

IE1. The examples in this appendix portray hypothetical situations. Although some aspects of the examples may be present in actual fact patterns, all facts and circumstances of a particular fact pattern would need to be evaluated when applying PBE IPSAS 35.

IE2. The following example illustrates an assessment of whether power exists for the purposes of this Standard.

Example 1

A state government partially funds the activities of a local government. Some of this funding is required to be spent on specified activities. The local government has a council that is elected every four years by the local community. The council decides how to use the local government’s resources for the benefit of the local community. The activities of the local government are diverse and include library services, provision of leisure facilities, management of refuse and wastewater, and enforcement of building and health and safety regulations. These activities are the relevant activities of the local government. Many of these activities also coincide with the interests of the state government.

Despite its partial funding of the local government’s activities, the state government does not have the power to direct the relevant activities of the local government. The rights of the local government over the relevant activities preclude the state government from having control.

IE3. The following examples illustrate various forms of regulatory control. None of these forms of regulatory control give rise to power over the relevant activities for the purposes of this Standard. However, those examples do not rule out that there may be instances where power over the relevant activities for the purposes of this Standard may derive from regulatory control.

IE4. The following examples illustrate assessments of whether an entity has the power to direct the relevant activities of another entity for the purposes of this Standard.

IE5. The following examples illustrate assessments of whether an entity has the power to direct the relevant activities of another entity for the purposes of this Standard.

IE6. The following examples illustrate assessments of whether special voting rights attaching to ownership interests in another entity give rise to power for the purposes of this Standard.

IE7. The following example illustrates assessments of whether an entity has control of the board or governing body of another entity for the purposes of this Standard. The existence of such control may provide evidence that an entity has sufficient rights to have power over another entity.

Example 15

A museum is governed by a board of trustees who are chosen by the entity that funds the museum. The trustees have freedom to make decisions about the operation of the museum.

The entity that funds the museum has the power to appoint the majority of the museum’s trustees and has the potential to exercise power over the museum.

IE8. The following examples illustrate assessments of whether dependence on funding from another entity gives rise to power in the context of this Standard.

IE9. The following examples illustrate assessments of whether an entity with less than a majority of the voting rights in another entity has the practical ability to direct the relevant activities unilaterally, and whether its rights are sufficient to give it power over that other entity for the purposes of this Standard.

IE10. The following examples illustrate assessments of whether potential voting rights are substantive for the purposes of this Standard.

IE11. The following examples illustrate assessments of whether an entity has power in the absence of voting rights or similar rights for the purposes of this Standard.

IE12. The following examples illustrate assessments of whether an entity receives variable benefits from another entity for the purposes of this Standard.

IE13. The following examples illustrate assessments of whether an entity is acting as a principal or an agent for the purposes of this Standard.

IE13A. [Not used]

IE14. The following examples illustrate assessments of whether an entity is an investment entity for the purposes of this Standard.