What are 'relevant activities' for a structured entity with predetermined activities?

- Power — Does the investor hold rights that give it the current ability to direct the relevant activities? These may be voting rights, but in structured entities they are more commonly contractual rights, call options, liquidation rights, or the right to appoint key personnel. - Variable returns — Is the investor exposed to returns that can vary based on the investee's performance? This includes interest income, residual interests, fees contingent on performance, credit enhancements, and liquidity support. - Link between power and returns — Can the investor use its power to influence the amount of those variable returns? An investor that merely receives variable returns without directing activities does not control the entity. IFRS 10 requires you to reassess control whenever facts and circumstances suggest that one or more of these three elements has changed (IFRS 10.8). This is particularly relevant for SPEs, where trigger events, breaches of covenants, or changes in credit conditions can shift which party holds effective power. Structured entities in practice — key questions to ask:

Can a party with no voting rights still control a structured entity under IFRS 10?

- Who directs the activities that most significantly affect the entity's economic outcomes (e.g., asset selection, reinvestment decisions, wind-down rights)? - Are the decision-making rights substantive, or are they merely protective rights that do not confer power? - Does the investor's exposure to variable returns suggest it was designed to absorb risk on behalf of the investor (a classic SPE indicator)? - Are there potential voting rights or derivatives that currently give access to returns and should be factored into the assessment (IFRS 10.B91)? - Equating legal ownership with control. An investor may control an SPE without holding any equity. Conversely, holding the majority equity tranche does not automatically mean control if another party directs the relevant activities. - Treating protective rights as power. Rights to block extraordinary decisions, approve budgets, or override in default scenarios are typically protective — they do not give the holder power over the investee's relevant activities. - Ignoring the agent/principal distinction. A fund manager or servicer acting as an agent does not control the fund. The analysis must determine whether the decision-maker acts for its own benefit or on behalf of others. - Failing to reassess. SPE structures change. Covenant breaches, step-in rights, and liquidity facility draws can transfer power. IFRS 10 explicitly requires ongoing reassessment (IFRS 10.8). - Overlooking de facto power. Even without a majority of voting rights, an investor may have de facto power if it holds the largest single block of rights and other holders are widely dispersed. - IFRS 10.B4 — Sets out the three-element control test that must be satisfied simultaneously: power, variable returns, and the link between them. - IFRS 10.8 — Requires an investor to consider all facts and circumstances when assessing control, and to reassess whenever relevant changes occur. - IFRS 10.B91 — Addresses potential voting rights and derivatives, clarifying that instruments giving current access to returns must be included in the control assessment. - IFRS 10.4 — Confirms the scope of the standard: a parent must present consolidated financial statements, and the standard applies to all entities including those structured without voting rights as the primary control mechanism.

IFRS 10 Structured Entities and SPEs

IFRS 10 Structured Entities and SPEs — Core Rule

Under IFRS 10, control of any entity — including a structured entity or special purpose entity (SPE) — is assessed using a single, unified control model. An investor controls an investee when it has all three elements simultaneously: power over the investee, exposure or rights to variable returns, and the ability to use that power to affect those returns (IFRS 10.B4). There is no separate standard or exemption for structured entities — the same principles apply regardless of how an entity is designed or governed.

This matters because SPEs and structured entities are often engineered to limit voting rights or concentrate decision-making in narrow contractual arrangements. The control assessment must look beyond legal form to economic substance.

How IFRS 10 Structured Entities and SPEs Works

Assessing control of a structured entity requires a thorough analysis of all facts and circumstances. Unlike operating companies where voting rights often determine control, structured entities typically vest power through contractual rights, options, guarantees, or the ability to direct key activities.

The three elements to assess

Power — Does the investor hold rights that give it the current ability to direct the relevant activities? These may be voting rights, but in structured entities they are more commonly contractual rights, call options, liquidation rights, or the right to appoint key personnel.
Variable returns — Is the investor exposed to returns that can vary based on the investee's performance? This includes interest income, residual interests, fees contingent on performance, credit enhancements, and liquidity support.
Link between power and returns — Can the investor use its power to influence the amount of those variable returns? An investor that merely receives variable returns without directing activities does not control the entity.

IFRS 10 requires you to reassess control whenever facts and circumstances suggest that one or more of these three elements has changed (IFRS 10.8). This is particularly relevant for SPEs, where trigger events, breaches of covenants, or changes in credit conditions can shift which party holds effective power.

Structured entities in practice — key questions to ask

Who directs the activities that most significantly affect the entity's economic outcomes (e.g., asset selection, reinvestment decisions, wind-down rights)?
Are the decision-making rights substantive, or are they merely protective rights that do not confer power?
Does the investor's exposure to variable returns suggest it was designed to absorb risk on behalf of the investor (a classic SPE indicator)?
Are there potential voting rights or derivatives that currently give access to returns and should be factored into the assessment (IFRS 10.B91)?

IFRS 10 Structured Entities and SPEs — Common Pitfalls

Equating legal ownership with control. An investor may control an SPE without holding any equity. Conversely, holding the majority equity tranche does not automatically mean control if another party directs the relevant activities.
Treating protective rights as power. Rights to block extraordinary decisions, approve budgets, or override in default scenarios are typically protective — they do not give the holder power over the investee's relevant activities.
Ignoring the agent/principal distinction. A fund manager or servicer acting as an agent does not control the fund. The analysis must determine whether the decision-maker acts for its own benefit or on behalf of others.
Failing to reassess. SPE structures change. Covenant breaches, step-in rights, and liquidity facility draws can transfer power. IFRS 10 explicitly requires ongoing reassessment (IFRS 10.8).
Overlooking de facto power. Even without a majority of voting rights, an investor may have de facto power if it holds the largest single block of rights and other holders are widely dispersed.

IFRS 10 Structured Entities and SPEs — Key Paragraphs

IFRS 10.B4 — Sets out the three-element control test that must be satisfied simultaneously: power, variable returns, and the link between them.
IFRS 10.8 — Requires an investor to consider all facts and circumstances when assessing control, and to reassess whenever relevant changes occur.
IFRS 10.B91 — Addresses potential voting rights and derivatives, clarifying that instruments giving current access to returns must be included in the control assessment.
IFRS 10.4 — Confirms the scope of the standard: a parent must present consolidated financial statements, and the standard applies to all entities including those structured without voting rights as the primary control mechanism.