Hong Kong Financial Reporting Standard 10 - Consolidated Financial Statements

At June 2011, the Hong Kong Institute of Certified Public Accountants (HKICPA) issued Hong Kong Financial Reporting Standard 10 ("HKFRS 10") Consolidated Financial Statements.

HKFRS 10 a new single control model is applied to all investee. Thus, an investor controls an investee if and only if the investor has all the following:

(a) power over the investee;

(b) exposure, or rights, to variable returns from its involvement with the investee; and

(c) the ability to use its power over the investee to affect the amount of the investor's returns.

The investor shall assess the all the facts and circumstances on a continuous basis, that is, it is reassessed as facts and circumstances change.

Assess power over the investee

Power is defined as the investor has existing rights that give the current ability to direct the relevant activities. Relevant activities are the activities that significantly affect the investee's returns. Only substantive rights and rights that are not protective shall be considered. Substantive rights are the rights need to be exercisable when decisions about the director of the relevant activities need to be made and the holder needs to have the practical ability to exercise the rights.

Assess exposure to variable returns

Variable returns are returns that are not fixed and have the potential to vary as a result of the performance of an investee. Variable returns can be positive, negative or both. Returns include:

- distributes of economic benefits and changes in the value of the investment;
- remuneration, fees, tax benefits and access to future liquidity that an investor has from its involvement with an investee;
- returns that are not available to other invest holders.

Assess the ability to use its power over the investee to affect the amount of the investor's returns

An investor controls an investee if the investor not only has power over the investee and exposure or rights to variable returns from its involvement with the investee, but also has the ability to use its power to affect the investor's returns from its involvement with the investee. An investor that has decision making power over an investee determines whether it acts as an agent or as a principal when assessing whether it controls an investee. If the decision maker is an agent, then the link between power and return is no long exist. Therefore, it is necessary to determine whether the investor is a principal or an agent. In order to determine whether the decision maker is an agent, need to consider the followings:

- the scope it s decision-making authority over the investee;

- the rights held by other parties;

- the remuneration to which it is entitled in accordance with the remuneration agreements;

- the decision maker's exposure to variability of returns from other interests that it holds in the investee.

(a) Scope of decision-making authority
The scope of decision-making authority is assessed by:
- the activities that are permitted according to the decision-making agreement(s) and specified by law; and
- the level of discretion.

(b) Rights held by others parties
When a single party holds substantive removal rights and can remove the decision maker without cause, this can conclude that the decision maker is an agent. This in a similar manner to when substantive rights held by other parties that restrict a decision maker's discretion.

(c) Remuneration
The decision maker is consider as an agent when follow conditions exist:
- the remuneration of the decision maker is commensurate with the services provided;
- the remuneration agreement includes only terms, conditions or amounts are on an arm's length basis.

(d) Exposure to variability of returns from other interest
When a decision maker holds other interests in an investee indicates that the decision maker may be a principal.

Effective date

An entity shall apply HKFRS 10 for annual periods beginning on or after 1 January 2013. Earlier application is permitted. If an entity applies this HKFRS earlier, it shall disclose that fact and apply HKFRS 11, HKFRS 12, HKAS Separate Financial Statements and HKAS 28 (as amended in 2011) at the same time.

Disclaimer:

The publication contains information in summary form and is therefore intended for general guidance only. This publication is not intended as legal, accounting or other professional advice and should not be relied upon as such. If legal, accounting or other professional advice or expert assistance is required, the services of a competent professional should be sought. Neither Reanda Lau & Au Yeung Limited nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication.

For details, please refer to HKICPA website:
http://app1.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeII/hkfrs10.pdf