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IFRS 10 Consolidated Financial Statements - The effect will depend on the terms of each structure - EY - Global

IFRS 10 Consolidated Financial Statements

The effect will depend on the terms of each structure

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IFRS 10 includes a new definition of control, which may affect insurers with interests in funds, structured entities, unit linked assets and liabilities or control of specified assets.

Disclosures under IFRS 12
IFRS 12 Disclosure of Interests in Other Entities combines the disclosure requirements for an entity's interests in subsidiaries, joint arrangements, associates and structured entities into one comprehensive disclosure standard.

The objective of IFRS 12 is for an entity to disclose information that helps users of its financial statements evaluate:

  • The nature of, and risks associated with, its interests in other entities
  • The effects of those interests on its financial position, financial performance and cash flows IFRS 12 requires disclosure of the significant judgements and assumptions used in determining which entities an insurer controls and consolidates.

IFRS 10 for insurers

In this publication, we explore some of the key issues for insurers under IFRS 10.1

Interests in funds

An insurer's investment portfolio normally includes different asset classes, such as a mixture of directly held investments (i.e., equities or debt instruments) and indirectly held investments, such as funds.

It is not unusual for an insurer to act as a fund manager, with responsibility for day-to-day investing fund activities. If a fund is not consolidated, the insurer will typically measure its investment in the fund as the product of the number of units held multiplied by the unit price.2 

What insurers need to consider under IFRS 10 is whether funds that are not consolidated under IAS 27 will remain unconsolidated under IFRS 10, as well as whether funds consolidated in the past will qualify for consolidation under IFRS 10.

When evaluating if a fund should be consolidated, there are two fundamental considerations for insurers:

  1. Whether it has control over the fund
  2. Whether it is acting in the capacity of principal or agent

Control assessment

Insurers should consider various factors when assessing whether they have control over an investment fund, such as:

  • Whether they have power over the fund. IFRS 10 states that power arises from rights, such as voting rights, potential voting rights (e.g., options) and contractual rights to appoint key personnel (e.g., the fund manager). When considering voting rights, insurers need to consider whether the rights are substantive. To be substantive, rights needs to be exercisable.
  • Insurers also must consider whether they have defacto control of the investment fund. Applying this concept is likely to be a major change in practice for insurers that have significant, but not majority (i.e., less than 50%) equity interests in investment funds, and may result in fund consolidation. For example, an insurer will need to assess its voting rights, relative to the size and dispersion of other vote holdings.

Principal /agent analysis

If the insurer acts as the fund manager, it needs to assess whether it is acting as principal or agent, when decision-making rights have been delegated to the insurer as fund manager.

Insurers will need to consider all facts and circumstances in making this assessment, for example:

  • What range of activities can the insurer direct in its capacity as fund manager, and what level of discretion does it have in making decisions about those activities?
  • What rights are held by others (e.g., 'kickout rights'), and whether they are held by a single party, or require the agreement of many parties to kick out the insurer from its role as fund manager?
  • Is the asset management fee that is paid to the fund manager commensurate with the activities performed? Is the magnitude and variability of the fee in comparison to the variability of the fund's return such that the insurer as fund manager is a principal?
  • What other interests are held by the insurer (or other entities in its consolidated group), and is the magnitude and variability of those interests in comparison to the variability of the fund's return such that the insurer as fund manager is a principal?
  • Whether any other parties are acting on the insurer's behalf without a contractual agreement, such that the insurer has the ability to direct that party to act on its own behalf (de facto agents)?

Control of specified assets (silos)

IFRS 10 provides application guidance around whether an investor may have control over a silo. A silo is part of an entity, for which control is assessed as if it were a separate entity, when all of the following criteria are met:

  • Specified assets of the entity are the only source of payment for specified liabilities of (or other interests in) the entity.
  • Apart from the party with the specified liability of the silo, other parties do not have rights or obligations related to the specified assets or to residual cash flows from the assets.

Effectively, the assets and liabilities are ring-fenced. For insurers, this situation may arise in a structure such as a multi-cell reinsurance vehicle, which is an entity comprised of a number of 'cells' where the assets and liabilities of each cell are ring-fenced.

Insurers will have to evaluate whether investments made on behalf of policyholders would be considered silos under IFRS 10, and if so, whether the insurer controls that silo.

If it does, consolidation is required at the silo level and not at the entity level.

In considering whether a silo exists, insurers will need to assess all the facts and circumstances in the arrangement, including local statutes in the particular jurisdiction.

Other considerations include:

  • Do the policyholders select the investments?
  • Will other funds beyond the value of the specified assets in the silo be necessary to fulfill the policyholder obligation?
  • Is there an exact matching of the policy to the assets held?

Unit-linked assets and liabilities

Many insurers issue unit-linked insurance and investment contracts to policyholders under terms that vary depending on the nature of the coverage, benefits offered and jurisdictions in which they are issued.

Typically under these unit-linked policies, an insurer promises to make payments to policyholders based on the performance of a specified pool of assets (or indices) and the insurer purchases assets to match these linked liabilities. Linked liabilities are generally measured as the product of the number of units issued to policyholders and the relevant fund unit price.

A similar measure is used for an insurer's investment in the fund. The result is a matching of assets and liabilities on the insurer's balance sheet, with the value of unit-linked assets normally equaling the value of the liability to unit–linked policyholders.

An insurer will need to assess whether it is considered to be the principal or the agent in this arrangement, and whether silos of specified assets exist. This will drive the conclusion of whether investment funds in unit-linked assets are consolidated under IFRS 10.

Considerations include:

  • Whether assets backing unit-linked liabilities are separate from other assets held. For example, in the case of liquidation, are these assets ring-fenced such that they can only be used to settle the liabilities of the unit-linked policyholders? If not, insurers may experience difficulty in demonstrating that these assets are being held strictly for the benefit of the unit-linked policyholders and not for the benefit of the insurer's shareholders.
  • Whether there is any obligation for the insurance company to invest in the assets backing these unit-linked liabilities, and therefore, whether the decision to invest in these assets lies with the insurer and not the policyholders.

After considering the issues noted above, insurers may have to consolidate the investment funds that back the liabilities of unit-linked policyholders. There may be situations where an insurer already consolidates investment funds backing unit-linked liabilities, a decision that is driven by the size of its investment in the fund and insurers will need to re-assess whether or not the fund should continue to be consolidated under the single control model in IFRS 10.

Either way, changes in whether funds are consolidated may have a significant impact on the insurer's balance sheet. Management may wish to focus its attention on this issue early to help avoid surprises upon the adoption of IFRS 10.

Investment in structured entities

IFRS 12 defines a structured entity as "an entity that has been designed so that voting rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements."

A structured entity often has restricted activities, a narrow or well-defined objective, minimal equity and is financed by multiple contractually linked instruments. It is not unusual for insurers to create structured entities to facilitate specialized transactions, (e.g., the reinsurance of risks into a special purpose vehicle).

In these circumstances, the insurer may have consolidated these entities based on the risk and reward model under SIC-12. Under IFRS 10, insurers will consider whether they have control over these entities, paying special attention to those entities that operate under an 'auto-pilot' mechanism.

Insurers may find it challenging to determine what the relevant activities for these structured entities are and who directs these activities. This assessment may produce different results from those under SIC-12.


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1. Refer to IFRS Developments — IASB issues three new standards: Consolidated Financial Statements, Joint Arrangements, and Disclosure of Interests Other Entities, Issue 1 (IFRS Developments, Issue 1) and Applying IFRS: IFRS 10 Consolidated Financial Statements — Challenges in Adopting and Applying the New Standard (September 2011) for more complete summaries and analyses of IFRS 10 and 12. These publications are available at www.ey.com/IFRS.

2. Assuming that the insurer does not have significant influence over the investee, in which case it may account for the investment as an associate using the equity method, in accordance with IAS 28 Investments in Associates and Joint Ventures

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