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IFRS 10 – Control of a structured entity by a lender

Date recorded:

The Senior Technical Manager said that the agenda paper revolved around what the relevant activities of a structured entity were. The structured entity in the paper was financed by a number of lenders and the lease was a finance lease. In the event of default the junior lender had the right to dispose of the leased asset. The submitter asked whether the junior lender controlled the structured entity in this transaction. Once again, the submitter provided two views. Under View A the junior lender controlled the structured entity because the sale of the asset on default was the activity that had the greatest effect on the return. Under View B, the right to sell the asset on default was a protective right that did not confer power on the junior lender. The outreach revealed that there was not much information as the transaction was quite rare but some constituents said that they would see the rights as protective. The staff analysis included an assessment of the relevant activities of the structured entity, assessing the junior lender’s right to sell the asset and an examination on whether the other requirements of control were satisfied.

The staff concluded that there was no evidence of diversity in practice and therefore they recommended the Committee to not take this issue onto its agenda.

A Committee member agreed with the staff recommendation as it was a very specific fact pattern and it was not wide-spread. She said that similarly to the previous agenda item the classification of the lease should not drive the conclusion in the control assessment. The Chairman agreed that the agenda decisions should be consistent.

One Committee member said that it was widespread in her view as the issue did not only occur in leasing arrangements. An observing Board member said that the purpose and design of the structure should be taken into consideration and for her it looked like this design was elected to mitigate credit risk. She said that IFRS 10 provided enough guidance to assess control in such cases.

The Chairman said that his sense was that the Committee did not want to add this item to the agenda but that it wanted to articulate the rationale that there was no reason to believe that IFRS 10 did not provide enough guidance on those issues. One Committee member objected by saying that the standard did not provide enough guidance in her view and that there was inconsistency in practice. When asked by the Chairman, none of the other Committee members supported that view.

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