IFRS 10 Consolidated Financial Statements Consolidation for Fund Managers Please tailor these slides as appropriate to the audience. This slide deck is detailed, and is likely to be more appropriate to financial controllers and those requiring a more detailed understanding of the new IFRS. There is a separate slide deck that includes an Executive Summary section, which is likely to be more appropriate to CFOs/CEOs and audiences reviewing the changes at a high level. You may wish to add/delete slides. For example: De facto control – holding less than a majority of voting rights may not be of great interest if an entity typically owns a majority interest in other entities. Options - may not be of great interest if an entity typically does not have options to acquire other entities Franchise slide may not be applicable to many entities Principal/agency – probably of most interest to the asset management (including PE and real estate fund sectors) and also situations where one party has been delegated power as an operator (e.g., extractive industries, construction) You may wish to add more examples relevant to the client. You may wish to combine with the investment entity ED presentation, the presentation on joint arrangements, or the presentation on disclosures (although some limited information on disclosures is available herein). Throughout this presentation, ‘investor’ and ‘investee’ are generic terms that refer to the potentially controlling party, (i.e., the parent) and the entity that is potentially controlled (i.e., the subsidiary). The ‘investor’ is not required to actually have an investment in the ‘investee’ to be an ‘investor’ under IFRS 10.

Today’s agenda Background and objectives New definition of control Consolidation for fund managers Application under the local laws Investment entities Continuous assessment Transition Current issues / challenges

Background and objectives This is a predetermined divider slide and should not be modified

Background and objectives Changes – WHO consolidates; no change in – HOW to consolidate Tension between the control model in IAS 27 and the risks and rewards approach in SIC-12 Divergent application of IAS 27 and SIC-12 in practice Global financial crisis – off-balance sheet entities Convergence with US GAAP (in part) Objectives Develop single control model applicable to all entities Improve disclosures – basis of judgments (IFRS 10.IN1-IN5) The changes introduced by IFRS 10 primarily relate to who consolidates another entity (or whether to consolidate another entity). That is, IFRS 10 doesn’t change how an entity is consolidated, once it is determined that a parent controls another entity. The IASB wanted to produce one single standard on consolidation: Eliminating the perceived inconsistency that two separate consolidation models existed – one based on control and one based on risks and rewards. Increasing consistency in application. These changes were made by the IASB in part in response to the financial crisis, where accounting rules that permitted certain entities to remain off-balance sheet received much criticism. Another reason for the changes was to converge, in part, with US GAAP – an MOU project. The IASB issued IFRS 10 The FASB completed one project to address consolidation of variable interest entities (and disclosures). The US FASB plans to propose amendments to US GAAP to help distinguish whether a decision-maker is an agent or a principal, and so that the evaluation of how kick-out rights are treated is the same for both voting interest entities and variable interest entities. However, differences between IFRS and US GAAP will remain with respect to the control principle, and consolidation procedures (see Appendix to this presentation and our US publication ‘To the Point’ , which is available on ey.com/accountinglink for more information). Another objective of the IASB was to increase the transparency of financial reporting. Even if management determines that it does not control another entity, management has to disclose the information that it considered in reaching that decision, so that judgment becomes more transparent. The new disclosures will also help users of the financial statements to make their own assessment of the financial impact if management had made a different decision – by providing more information about unconsolidated entities.

New definition of control This is a predetermined divider slide and should not be modified

New definition of control Control of an investee requires an investor to possess all three essential elements: Power over the investee; Exposure, or rights, to variable returns from its involvement with the investee; and Ability to use its power over the investee to affect the amount of the investor’s returns An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (IFRS 10.5-8) An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Control of an investee requires an investor to possess three essential elements: Power over the investee; Exposure, or rights, to variable returns from its involvement with the investee; and Ability to use its power over the investee to affect the amount of the investor’s returns. A group presents consolidated financial statements, which includes the parent and all entities that it controls, as those of a single economic entity. Differences from IAS 27: IAS 27 defined control as “the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.” The new definition recognises the fact that for some entities (such as those that were previously considered ‘special-purpose’ entities) – financial and operating policies might be meaningless – they aren’t really what gives power. Effectively, the IASB broadened the definition of power so that a single definition can apply to all entities. IAS 27 did not require a linkage between power and returns – IFRS 10 does. The new definition of control also refers to “returns” instead of “benefits” – which might be a change for some entities.

New definition of control Activities Identify which activities of the investee are considered to be the relevant activities, i.e., those that significantly affect the investee‘s returns Power Determine which party, if any, has power, that is, having existing rights that give it the current ability to direct the relevant activities Returns Assess whether the investor is exposed, or has rights, to variable returns from its involvement with the investee Identifying activities Evaluating power Assessing returns (IFRS 10.11, B2-B8) In some cases, it will be obvious that one party controls another party Example: One entity holds 100% of the voting rights of an operating entity Clear that operating and financial policies are the relevant activities of that entity Clear that voting rights are what gives power over operating and financial policies Therefore, whoever has the votes, has power If the voting shares also entitle the holder to returns, then the holder has control However, in other cases, it might not be clear whether a party controls another party: In these cases, it is helpful to think through 3 steps: Identifying the relevant activities Evaluating what gives power over those activities Assessing whether the holder is exposed to variable returns Understanding the purpose and design of the entity and the arrangements are crucial to determining which party, if any, has control over the other party (for example, who set up the arrangement, what powers were created upon set-up). Understand purpose and design

New definition of control Identifying relevant activities Relevant activities are those that significantly affect the investee‘s returns Examples: Establishing operating, capital and financing policies Appointing, remunerating, and terminating employment of service providers or key management personnel Understand purpose and design of the investee If two investors direct different relevant activities Identify which investor can direct the activities that most significantly affect returns (IFRS 10.B11-B13) Identify the activities that significantly affect returns. For many investees, operating and financing activities significantly affect their returns. Examples include: (a) sales and purchases of goods or services; (b) managing financial assets during their life (including upon default); (c) selecting, acquiring or disposing of assets; (d) researching and developing new products or processes; or (e) determining a funding structure or obtaining funding. Often, these activities are controlled by voting rights – that is, whoever has the most voting rights, has power over the Board and therefore, management, which means it has power over the relevant activities. Examples of activities that may affect investee’s returns: Establishing operating, capital and financing policies Appointing, remunerating, and terminating employment of service providers or key management personnel Understand the purpose and design of the investee If two investors both have ability to direct different relevant activities –identify which investor can direct the activities that most significantly affect returns

New definition of control Evaluating power Power is having existing rights that give an investor the current ability to direct the relevant activities Main aspects of power: Arises from rights Need not be exercised (includes potential voting rights) Does not arise from protective rights Can exist even if others participate in directing the relevant activities (e.g., they have significant influence) Evidence that an investor directed activities in the past is an indicator of power, but is not conclusive (IFRS 10.B14-B21) IAS 27 refers to the “power to govern the financial and operating policies of an entity”. This wording was changed to “current ability to direct the activities” to broaden the scope of the standard. The Board clarified that the ‘activities’ are those activities of an entity that significantly affect the returns, which are referred to as the “relevant activities.” Power arises from rights. Power need not be exercised. An investor with the current ability to direct the relevant activities has power even if its rights to direct have yet to be exercised. An investor that holds only protective rights cannot have power over an investee, and consequently cannot have control over the investee. An investor can control an investee even if other entities have existing rights that give them the current ability to participate in the direction of the relevant activities. Indicators of power. Evidence that the investor has been directing relevant activities can help determine whether the investor has power, but such evidence is not in itself conclusive in determining whether the investor has power over an investee. In some cases, assessing power is straightforward, such as when power over an investee 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. In other cases the assessment will be more complex, requiring a number of factors to be considered, for example when power is embedded in one or more contractual arrangements. Later slides will discuss power in more detail.

New definition of control Assessing returns Returns can be only positive, only negative or positive and negative, but must have the potential to vary as a result of the investee’s performance Examples: Dividends, distributions of economic benefits, changes in the value of an investment Remuneration, fees, residual interests, tax benefits, exposure from providing support Synergies, cost savings, economies of scale, scarce resources, proprietary knowledge (IFRS 10.15-16 and B55-B57) An investor is exposed, or has rights, to variable returns from its involvement with the investee when the investor’s returns from its involvement have the potential to vary as a result of the investee’s performance. The investor’s returns can be only positive, only negative or both positive and negative. Although only one investor can control an investee, more than one party can share in the returns of an investee. For example, holders of non-controlling interests can share in the profits or distributions of an investee. Previously (under IAS 27), control was defined in terms of benefits, which was interpreted to imply only positive returns. It is now explicit that returns can also be negative. Examples of returns (see slide text). When identifying the relevant activities and assessing which party can direct those relevant activities, an investor needs to identify and consider both the returns to which it itself has the exposure, and also, the returns to which other parties might have exposures. This might be difficult; for example, it might be difficult to identify the synergies that would create a return to other parties. Returns may be an indicator of control. This is because the greater an investor’s exposure to the variability of returns from its involvement with an investee, the greater the incentive for the investor to obtain rights that give the investor power. Even a return that appears ‘fixed’ may actually be variable. Examples: An investor that holds a bond with fixed interest payments. The fixed interest payments are considered variable returns, because they expose the investor to the credit risk of the issuer of the bond. How variable those returns are depends on the credit risk of the bond. Note that the credit risk may change over time, which is important given the requirement for continuous assessment [More on this in a later slide] Fixed performance fees earned for managing an investee’s assets are considered variable returns, because they expose the investor to the performance risk of the investee. That is, the amount of variability depends on the investee’s ability to generate sufficient income to pay the fee.

New definition of control Protective rights Protective rights do not give power When are rights merely protective rights? Fundamental changes in the activities of an investee Only apply in exceptional circumstances Examples of protective rights include the right to: Restrict an investee from undertaking activities that could significantly change the credit risk of the investee Approve an investee’s capital expenditures (greater than the amount spent in the ordinary business) Protective rights do not prevent another investor from having control (IFRS 10.B26-B28) IFRS 10 describes protective rights where IAS 27 was previously silent. However, we believe that for most entities, this will not cause a change in practice since most entities would have considered the rights of investors in their assessment of control. Protective rights are defined as ‘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’. Since power is an essential element of control, protective rights do not give the investor control over the investee to which they relate. Protective rights relate to fundamental changes in the activities of an investee, or apply only in exceptional circumstances. Examples of protective rights include the right to: • Restrict an investee from undertaking activities that could significantly change the credit risk of the investee to the detriment of the investor • Approve an investee’s capital expenditures (greater than the amount spent in the ordinary course of business) • Approve an investee’s issuance of equity or debt instruments •Seize assets if an investee fails to meet specified loan repayment conditions Holding protective rights does not prevent another investor from having control over an investee.

New definition of control Substantive rights Does the investor have the current ability to exercise power? Rights need to be substantive (i.e. the holder must have the practical ability to exercise those rights) Factors to consider – whether? Economic or other barriers exist (penalties, timing, etc.) Multiple parties have to agree to exercise right Holders would benefit from exercising the right Right is currently exercisable (IFRS 10.B22-B25) Determine whether the investor has the current ability to exercise those rights. Rights are only considered if they are substantive (i.e., the holder has the practical ability to exercise the right). Facts and circumstances that are considered in this evaluation include: Whether the rights are currently exercisable or convertible (although ‘current’ does not mean ‘this instant’ and need not apply in all circumstances). Whether the party or parties that hold the rights would benefit from their exercise. For example, a holder of potential voting rights considers the exercise price, (including whether the option is ‘in the money’) and other benefits (by realising synergies between the investor and investee) when determining whether the rights are substantive. Whether there are barriers that would prevent the holder from exercising the right? financial penalties and incentives that would prevent the holder from exercising its rights. terms and conditions that make it unlikely that the rights will be exercised, for example, conditions that narrowly limit the timing of their exercise. the absence of an explicit, reasonable, mechanism in the founding documents of an investee or in applicable laws or regulations that allows the holder to exercise its rights. the inability of the holders of the rights to obtain the information necessary to exercise their rights. 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 the specialised services or financial support provided by the incumbent manager). ‘Current’ does not necessarily mean ‘this instant’ – no bright line and judgment must be applied. [See example 1 on potential voting rights on slide 21] [See example 1 on identifying relevant activities on slide 7]

Consolidation for fund managers This is a predetermined divider slide and should not be modified

Consolidation for fund managers What do they need to know? Whether the fund manager (FM) is acting as principal or as agent. If the FM is deemed to be acting as principal for a fund it manages the FM would consolidate the fund. Conversely, if the FM is acting as an agent, it would not consolidate the fund it manages.

Consolidation for fund managers A new concept of control Power Determine which party, if any, has power, that is, the current ability to direct the relevant activities. Power arises from rights, which may include: Voting rights Potential voting rights Rights to appoint key personnel Decision making rights within a management contract Removal or kick-out rights Power does not arise from protective rights Returns Assess whether the investor is exposed, or has rights, to variable returns from its involvement with the investee. Returns can be positive, negative or both. Example of returns include: Dividends (from direct interest in the fund either directly or potentially through certain related parties) Remuneration (as result of earning management fees and performance fees) Linkage Evaluate whether the investor has the ability to use its power to affect the investor’s returns from its involvement with the investee. If applicable, determine whether the investor is a principal or an agent, considering: Scope of its authority Rights held by other parties Remuneration Exposure to variability from other interests. Evaluate linkage Assessing returns Identifying power (IFRS 10.11, B2-B8) In some cases, it will be obvious that one party controls another party Example: One entity holds 100% of the voting rights of an operating entity Clear that operating and financial policies are the relevant activities of that entity Clear that voting rights are what gives power over operating and financial policies Therefore, whoever has the votes, has power If the voting shares also entitle the holder to returns, then the holder has control However, in other cases, it might not be clear whether a party controls another party: In these cases, it is helpful to think through 3 steps: Identifying the relevant activities Evaluating what gives power over those activities Assessing whether the holder is exposed to variable returns Understanding the purpose and design of the entity and the arrangements are crucial to determining which party, if any, has control over the other party (for example, who set up the arrangement, what powers were created upon set-up). Understand the purpose and design of investee

Consolidation for fund managers Linkage between power and variable returns Typically, a fund manager is likely to satisfy the first two criteria of the control model, as follows: Power — likely to have power, as the fund manager would normally have decision-making rights over the relevant activities. Variable returns — exposed to variable returns, as a result of earning management fees and performance fees and direct interest, if any. The key determinant in deciding whether a fund manager has control over a fund is the link between power and variable returns.

Consolidation for fund managers Linkage between power and variable returns Delegated power – principal or agent? An agent is a party engaged to act on behalf of another party or parties (the principal(s)) An agent does not control an investee Question – whether the FM is acting as a principal or as an agent that is acting primarily on behalf of other investors? Principal? Agent? (IFRS 10.B58-B72) Sometimes rights can be delegated. When an investor with decision-making rights (a decision maker) assesses whether it controls an investee, it determines whether it is a principal or an agent. An investor also determines whether another entity with decision-making rights is acting as an agent for the investor. A decision maker is not an agent simply because other parties can benefit from the decisions that it makes. This is because if a decision-maker is an agent, that means it does not really have the power; the principal has the power. Without power, the decision-maker cannot have control. [Even if it is concluded that the decision-maker is a principal, and has power, you still need to assess whether the decision-maker has returns, and can use power to affect returns, to conclude with the decision-maker controls.] This could be a big issue for the asset management, banking, private equity, and insurance industries. It may also be a significant issue for extractive industries and construction, where one party becomes the ‘operator’ for a project, and has decision-making authority. In reaching this conclusion, there are 4 things to consider: (a) the scope of its decision-making authority over the investee (b) the rights held by other parties (c) the remuneration arrangement (d) the decision-maker’s exposure to variability of returns from other interests that it holds in the investee IAS 27 and SIC 12 did not really discuss the concept of delegated power, which created divergence in practice. It’s too early to tell whether the new requirements will result in fewer entities being consolidated than under IAS 27 and SIC 12, or more.

Consolidation for fund managers Linkage between power and variable returns De facto Agents - nature of relationships with other parties (such as related parties) needs to be considered - fund manager’s decision-making rights and exposure to variable returns via the de facto agent, together with its own, will need to be considered in totality when assessing control.

Consolidation for fund managers Factors to consider IFRS 10 paragraph B60 requires that the following factors are evaluated to determine whether the fund manager is acting as principal or agent: Scope of the fund manager’s decision-making authority over the fund. Rights held by third parties (including removal rights) Remuneration to which the fund manager is entitled in accordance with the remuneration agreement(s) Fund manager’s exposure to variability of returns from other interests that it holds in the fund.

Consolidation for fund managers 1. Scope of decision-making Range of activities that are permitted by the decision-making agreement or by law Whether relevant activities have been delegated Discretion that the decision-maker has when making decisions about those activities Level of involvement that the decision-maker had in determining the scope of its authority Opportunity and incentive to gain power Purpose and design Risks to which the investee was designed to be exposed Risks investee was designed to pass on to investors (IFRS 10.B62-B63) In determining whether you are a principal or an agent, consider scope of the decision-making: The range of activities that the decision-maker is permitted to direct (both by agreement or by law) – this is only an issue if the relevant activities have been delegated (if not, then power has not been delegated, and the decision-maker is irrelevant – purely administrative). The discretion that the decision-maker has when making decisions The level of involvement the decision-maker had in determining the scope of its authority The purpose for which the entity was created, and the design of the arrangement Example in the asset management industry: The asset manager sets up a fund. In the prospectus, the asset manager (or its parent) sets out what powers will be held by the asset manager, if you invest in that fund. They typically also would set out the nature of the investments – high risk, emerging markets, mid-cap companies – whatever the strategy for that fund might be. In assessing whether the asset manager is a principal or agent with respect to the fund, management would need to consider how broad or narrow those powers are. That will require a lot of judgement. Example 13 (B72 from Appendix B to IFRS 10): Narrow discretion – A decision maker (fund manager) establishes, markets and manages a publicly traded, regulated fund according to narrowly defined parameters set out in the investment mandate as required by its local laws and regulations. The fund was marketed to investors as an investment in a diversified portfolio of equity securities of publicly traded entities. Within the defined parameters, the fund manager has discretion about the assets in which to invest. EY View – some might view this as quite broad, given how many publicly traded entities exist Example 14 (B72 from Appendix B to IFRS 10): Broad discretion - A decision maker establishes, markets and manages a fund that provides investment opportunities to a number of investors. The decision maker (fund manager) must make decisions in the best interests of all investors and in accordance with the fund’s governing agreements. Nonetheless, the fund manager has wide decision-making discretion. In mining, extractives, real estate, and construction, this might come up when one party has been delegated rights as the “manager” or “operator” of the project. Need to assess whether the party that has been delegated rights is making the decisions, or carrying out the decisions of others.

Consolidation for fund managers 2. Rights held by other parties Held by a single investor  decision-maker is an agent More parties that have to agree on removal  more likely that decision-maker is a principal Removal rights held by an independent board who can remove decision-maker for any reasons  more likely decision-maker is an agent Fund manager Fund Kick-out rights Voting rights Investors (IFRS 10.B64-B67) Management will need to consider rights held by other parties (e.g., removal rights, or similar rights such as some liquidation or redemption rights). When a single investor holds substantive rights to remove the decision-maker without cause, in isolation, that fact is sufficient to conclude that the decision-maker is an agent. When multiple investors hold such rights (i.e., no individual party can remove the decision-maker without the others), these rights be considered protective rights When held by an independent board who can remove decision-maker for any reason, more likely decision-maker is an agent Management will need to consider whether these removal rights are substantive, considering facts and circumstances such as: • Financial penalties or incentives to exercising • Narrow exercise periods • Operational barriers that would prevent or deter the parties from replacing the decision-maker (such as the absence of willing or able replacement decision-makers) • The absence of an explicit, reasonable mechanism, by which the holders can exercise those rights • The inability of the holders of the rights to obtain the information necessary to exercise them. Judgment will also be required. However, in practice, removal rights are typically not substantive, because they typically require numerous parties to agree on exercising them. For example, it might be easy to get 3 or 4 parties to agree on kicking out an investment manager, but if exercising the right requires a majority of 1,000 different shareholders, that might be much more difficult. US GAAP – Area of convergence for removal rights and liquidation rights, but not redemption rights (FASB is proposing changes – see our US publication ‘To the point’)

Consolidation for fund managers 2. Rights held by other parties (cont’d.) Evaluating whether removal rights are substantive Many parties required to act together Single party/few parties required to act together Exercisable only for cause Exercisable without cause Significant financial penalty to exercise Insignificant financial penalty to exercise Skills held by decision-maker are unique Several other parties could fulfil role of decision-maker Not currently exercisable Currently exercisable Principal Agent (IFRS 10.B64-B67) Management will need to consider rights held by other parties (e.g., removal rights, or similar rights such as some liquidation or redemption rights). When a single investor holds substantive rights to remove the decision-maker without cause, in isolation, that fact is sufficient to conclude that the decision-maker is an agent. When multiple investors hold such rights (i.e., no individual party can remove the decision-maker without the others), these rights be considered protective rights When held by an independent board who can remove decision-maker for any reason, more likely decision-maker is an agent Management will need to consider whether these removal rights are substantive, considering facts and circumstances such as: • Financial penalties or incentives to exercising • Narrow exercise periods • Operational barriers that would prevent or deter the parties from replacing the decision-maker (such as the absence of willing or able replacement decision-makers) • The absence of an explicit, reasonable mechanism, by which the holders can exercise those rights • The inability of the holders of the rights to obtain the information necessary to exercise them. Judgment will also be required. However, in practice, removal rights are typically not substantive, because they typically require numerous parties to agree on exercising them. For example, it might be easy to get 3 or 4 parties to agree on kicking out an investment manager, but if exercising the right requires a majority of 1,000 different shareholders, that might be much more difficult. US GAAP – Area of convergence for removal rights and liquidation rights, but not redemption rights (FASB is proposing changes – see our US publication ‘To the point’) Decision-maker

Consolidation for fund managers 3. Remuneration To be an agent, remuneration must : Be commensurate with services provided AND Includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated on an arm’s length basis Commensurate “Market” terms Conclusion  Greater magnitude and variability of remuneration compared to expected returns – more likely principal × Not an agent (IFRS 10.B68-B70) Remuneration is one of the other factors to be considered in principal-agency determination: To be an agent, any remuneration received must be commensurate with the level of skills needed to provide such services, and includes only terms and conditions, or amounts that are customarily present in arrangements for similar services negotiated on an arm’s length basis. Failing either of these conditions means that the entity is not an agent. However, even if you meet both of these criteria, you are not necessarily an agent. You also need to consider the magnitude and variability of remuneration relative to the investee’s expected returns, as well as other facts and circumstances, before concluding that the entity is an agent. The greater the magnitude of, and variability associated with, the decision maker’s remuneration relative to the returns expected from the activities of the entity, the more likely the decision maker is a principal. Although management will need to do some work to make sure of this, we think in most cases that we typically see in asset management, private equity, it will be relatively easy for management to conclude that both criteria are met, because if they weren’t charging a market rate, investors in the fund would simply switch. However, in other industries where power is delegated (mining, extractives, real estate, construction), this might be more difficult to determine because there is less choice, more specialised skills, etc.. – it’s not as easy for investors to pick another party to delegate to. However, they may need to do some market research first. This could be another area where third parties could help do some of the legwork. This will put more tension on the last criteria – evaluating whether the magnitude and variability of returns are indicative of being an agent or a principal.

Consolidation for fund managers 4 Consolidation for fund managers 4. Exposure to variability through other interests Are any interests held by related parties? Greater the magnitude of, and variability associated with, its economic interests, more likely it is a principal Does exposure differ from other investors? Fund manager Fund Delegated 80% Parent Investors Direct 20% (IFRS 10.B71-B72) The last criteria for evaluating whether you are a principal or an agent is considering the exposure to variability through other interests. The fact that a decision-maker holds other interests in an investee may indicate that the decision-maker is not an agent. By virtue of holding that other interest, the IASB believes that decisions made by the decision-maker may differ from those it would have made if it did not hold those other interests. 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. However, an ‘interest’ is not required to be a principal (and therefore to have control) – could have control based on first three criteria alone. Examples of ‘other interests’: a direct or indirect investment in that investee, providing a guarantee, a liquidity facility, a subordinated loan, or a credit enhancement. Interest does not mean just an equity or debt investment. ‘Investor’ is a broad term to mean any party that potentially controls another party. Also need to consider not only the interests held by the decision-maker directly, but also the interests held by related parties, and de facto agents (discussed in later slides). Does its exposure to variability of returns is different from that of the other investors, 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, an investee? The decision maker evaluates its exposure relative to the total variability of returns of the investee. This evaluation is made primarily on the basis of returns expected from the activities of the investee but cannot ignore the decision maker’s maximum exposure to variability of returns of the investee through other interests that the decision maker holds. This could be a big issue for the asset management industry, the private equity firms, and maybe even some insurance companies – depending on how they are structured. It’s very common to see one subsidiary set up as the investment manager, and for investors to delegate their voting rights to the investment manager. But then, another subsidiary within the banking group might have an interest in that fund. Management will have to determine at what point that investment becomes large enough such that it is influencing the behaviour of the investment manager, or the group as a whole, and that actually, the fund is controlled by the group. The examples in the standard suggest that this might at about 20%. Delegated 80%

Consolidation for fund managers Analysis of the examples in IFRS 10 Scope of decision making rights Removal rights Remuneration Other interests Conclusion 13 Narrowly defined parameters None 1% of net asset value 10% direct interest Agent 14A Wide ranging discretion Removal for cause 1% of net asset value and 20% of profits after a hurdle is reached 2% direct interest 14B 20% direct interest Principal 14C Removal without cause by independent board 15 Narrow discretion Removal without cause by widely dispersed investors 1% of net asset value and 10% of profits after a hurdle is reached 35% direct interest The overall evaluation of whether a decision maker is acting in the capacity of principal or an agent is primarily a qualitative evaluation requiring the use of judgement.

Application under the local laws This is a predetermined divider slide and should not be modified

Application under the local laws A typical fund structure Foreign promoters Other Investors Fund Manager No Cross Holding or Common Directorship Mutual Fund / Investment Entity SECP / Registrar Regulator Custodian Trustee Shariah Advisor Auditor Distributor Unit Holders

Application under the local laws (cont’d.) Roles and responsibilities A FM shall: manage the assets of the fund maintain proper accounts and records obtain a rating of the fund process payments immediately manage the fund according to its constitutive documents, etc. establish & maintain sufficient risk management systems and controls A trustee shall: control/hold the property of the fund approve the sale, purchase, issue & transfer of units by the fund ensure that the investment and borrowing limits are complied with ensure that the FM has been diligent in appointing brokers call a meeting of the unit holders not invest in the fund for which it acts as trustee A unit holder shall: be bound by the terms of the trust deed not be liable to make any further contributions to the fund have a beneficial interest in the trust proportionate to the units held by him receive reports from the trustee in accordance with the regulations

Application under the local laws (cont’d.) Criteria under IFRS 10 Explanation As per local laws and practices Conclusion Scope of decision-making authority. (Wide / narrow ranging discretion) Range of activities that the FM is permitted to direct (by agreement or law) Discretion that FM has when making decisions Level of involvement the FM had in determining the scope of authority Regulation 55 of the NBFC Regulations, 2008 and SECP circular no.7 of 2009 specifies the limits on how much to invest (quantitative thresholds) and where to invest (rated debt securities, etc.) The nature of investments is also defined in the offering document / trust deed. Normally a FM sets up a fund and his powers are defined in the offering document / trust deed. Investment parameters are defined by law and are also set out in the offering document and the trust deed. Depending on the facts and circumstances of the case the FM may have wide or narrow ranging discretion, hence it could be either an agent or a principal. (IFRS 10.IN1-IN5) The changes introduced by IFRS 10 primarily relate to who consolidates another entity (or whether to consolidate another entity). That is, IFRS 10 doesn’t change how an entity is consolidated, once it is determined that a parent controls another entity. The IASB wanted to produce one single standard on consolidation: Eliminating the perceived inconsistency that two separate consolidation models existed – one based on control and one based on risks and rewards. Increasing consistency in application. These changes were made by the IASB in part in response to the financial crisis, where accounting rules that permitted certain entities to remain off-balance sheet received much criticism. Another reason for the changes was to converge, in part, with US GAAP – an MOU project. The IASB issued IFRS 10 The FASB completed one project to address consolidation of variable interest entities (and disclosures). The US FASB plans to propose amendments to US GAAP to help distinguish whether a decision-maker is an agent or a principal, and so that the evaluation of how kick-out rights are treated is the same for both voting interest entities and variable interest entities. However, differences between IFRS and US GAAP will remain with respect to the control principle, and consolidation procedures (see Appendix to this presentation and our US publication ‘To the Point’ , which is available on ey.com/accountinglink for more information). Another objective of the IASB was to increase the transparency of financial reporting. Even if management determines that it does not control another entity, management has to disclose the information that it considered in reaching that decision, so that judgment becomes more transparent. The new disclosures will also help users of the financial statements to make their own assessment of the financial impact if management had made a different decision – by providing more information about unconsolidated entities.

Application under the local laws (cont’d.) Criteria under IFRS 10 Explanation As per local laws and practices Conclusion 2. Rights held by third parties. (Are they substantive or protective?) Factors to determine whether rights are substantive include: Financial or other barriers Removal rights held by a single party (without cause) Removal rights held by many parties (with cause) A typical trust deed provides a right to remove the FM if any of the following happens: Wilful contravention of the trust deed Liquidation of FM Receiver being appointed at FM Becoming ineligible to act as a FM The suspension of redemption of units of the fund for more than fifteen working days and the unit holders representing at least three-fourth in value of total outstanding units pass a resolution to remove the FM. Rights that provide for the removal of the FM for committing fraud or wilful contravention are protective rights. Typically, the rights are not substantive because they normally require numerous parties to exercise them. Power does not arise from protective rights and they are not relevant when assessing whether a FM is acting as principal or agent. (IFRS 10.IN1-IN5) The changes introduced by IFRS 10 primarily relate to who consolidates another entity (or whether to consolidate another entity). That is, IFRS 10 doesn’t change how an entity is consolidated, once it is determined that a parent controls another entity. The IASB wanted to produce one single standard on consolidation: Eliminating the perceived inconsistency that two separate consolidation models existed – one based on control and one based on risks and rewards. Increasing consistency in application. These changes were made by the IASB in part in response to the financial crisis, where accounting rules that permitted certain entities to remain off-balance sheet received much criticism. Another reason for the changes was to converge, in part, with US GAAP – an MOU project. The IASB issued IFRS 10 The FASB completed one project to address consolidation of variable interest entities (and disclosures). The US FASB plans to propose amendments to US GAAP to help distinguish whether a decision-maker is an agent or a principal, and so that the evaluation of how kick-out rights are treated is the same for both voting interest entities and variable interest entities. However, differences between IFRS and US GAAP will remain with respect to the control principle, and consolidation procedures (see Appendix to this presentation and our US publication ‘To the Point’ , which is available on ey.com/accountinglink for more information). Another objective of the IASB was to increase the transparency of financial reporting. Even if management determines that it does not control another entity, management has to disclose the information that it considered in reaching that decision, so that judgment becomes more transparent. The new disclosures will also help users of the financial statements to make their own assessment of the financial impact if management had made a different decision – by providing more information about unconsolidated entities.

Application under the local laws (cont’d.) Criteria under IFRS 10 Explanation As per local laws and practices Conclusion 2. Rights held by third parties (cont’d). (Are they substantive or protective?) In some cases, rights held by other parties (such as liquidation rights and redemption rights) may be considered in the same way as removal rights if, in substance, they have the same effect as a removal right when assessing whether a FM is an agent or a principal. 1. Liquidation rights 2. Redemption rights As per NBFC Regulations 2008, regulation 54, sub-regulation 3(a) the net assets of an Open End Scheme shall be one hundred million rupees at all times during the life of the scheme and all existing Open End Schemes shall ensure compliance with this minimum scheme size by the first day of July 2012. If a small number of unit holders hold substantial percentage of units in a fund, this might indicate that they hold substantive rights to remove the FM. (IFRS 10.IN1-IN5) The changes introduced by IFRS 10 primarily relate to who consolidates another entity (or whether to consolidate another entity). That is, IFRS 10 doesn’t change how an entity is consolidated, once it is determined that a parent controls another entity. The IASB wanted to produce one single standard on consolidation: Eliminating the perceived inconsistency that two separate consolidation models existed – one based on control and one based on risks and rewards. Increasing consistency in application. These changes were made by the IASB in part in response to the financial crisis, where accounting rules that permitted certain entities to remain off-balance sheet received much criticism. Another reason for the changes was to converge, in part, with US GAAP – an MOU project. The IASB issued IFRS 10 The FASB completed one project to address consolidation of variable interest entities (and disclosures). The US FASB plans to propose amendments to US GAAP to help distinguish whether a decision-maker is an agent or a principal, and so that the evaluation of how kick-out rights are treated is the same for both voting interest entities and variable interest entities. However, differences between IFRS and US GAAP will remain with respect to the control principle, and consolidation procedures (see Appendix to this presentation and our US publication ‘To the Point’ , which is available on ey.com/accountinglink for more information). Another objective of the IASB was to increase the transparency of financial reporting. Even if management determines that it does not control another entity, management has to disclose the information that it considered in reaching that decision, so that judgment becomes more transparent. The new disclosures will also help users of the financial statements to make their own assessment of the financial impact if management had made a different decision – by providing more information about unconsolidated entities.

Application under the local laws (cont’d.) Criteria under IFRS 10 Explanation As per local laws and practices Conclusion 3. Remuneration. (Commensurate and market based). The greater the magnitude and variability of remuneration - more likely the FM is deemed to be a principal. A FM may charge performance based or fixed fee or a combination of both which shall not exceed the limit prescribed in Regulation 61 of the NBFC Regulations, 2008 and such fee structure shall be disclosed in the Offering Document. Both the criteria are generally met and, hence, it indicates that the FM is an agent. (IFRS 10.IN1-IN5) The changes introduced by IFRS 10 primarily relate to who consolidates another entity (or whether to consolidate another entity). That is, IFRS 10 doesn’t change how an entity is consolidated, once it is determined that a parent controls another entity. The IASB wanted to produce one single standard on consolidation: Eliminating the perceived inconsistency that two separate consolidation models existed – one based on control and one based on risks and rewards. Increasing consistency in application. These changes were made by the IASB in part in response to the financial crisis, where accounting rules that permitted certain entities to remain off-balance sheet received much criticism. Another reason for the changes was to converge, in part, with US GAAP – an MOU project. The IASB issued IFRS 10 The FASB completed one project to address consolidation of variable interest entities (and disclosures). The US FASB plans to propose amendments to US GAAP to help distinguish whether a decision-maker is an agent or a principal, and so that the evaluation of how kick-out rights are treated is the same for both voting interest entities and variable interest entities. However, differences between IFRS and US GAAP will remain with respect to the control principle, and consolidation procedures (see Appendix to this presentation and our US publication ‘To the Point’ , which is available on ey.com/accountinglink for more information). Another objective of the IASB was to increase the transparency of financial reporting. Even if management determines that it does not control another entity, management has to disclose the information that it considered in reaching that decision, so that judgment becomes more transparent. The new disclosures will also help users of the financial statements to make their own assessment of the financial impact if management had made a different decision – by providing more information about unconsolidated entities.

Application under the local laws (cont’d.) Criteria under IFRS 10 Explanation As per local laws and practices Conclusion 4. Exposure to variability of returns from other interests held. (Percentage of holding) Interest does not mean just an equity or debt investment. Examples of other interests: guarantees / indemnity, liquidity facilities, subordinated loans, etc. Also need to consider not only the interests held by the decision-maker directly, but also the interests held by related parties. As per the Companies Ordinance, 1984: 20% interest –associate 50% interest –subsidiary Section 237 of Companies Ordinance, 1984 requires every holding company to present consolidated accounts including the financial statements of the holding company and its subsidiaries. Indemnity provided by FM to the fund to cover exposure such as WWF. Management will have to determine at what point the investment becomes large enough such that it is influencing the behaviour of the FM, or the group as a whole, and that actually, the fund is controlled by the group. The examples in the standard suggest that this might be at about 20%. (IFRS 10.IN1-IN5) The changes introduced by IFRS 10 primarily relate to who consolidates another entity (or whether to consolidate another entity). That is, IFRS 10 doesn’t change how an entity is consolidated, once it is determined that a parent controls another entity. The IASB wanted to produce one single standard on consolidation: Eliminating the perceived inconsistency that two separate consolidation models existed – one based on control and one based on risks and rewards. Increasing consistency in application. These changes were made by the IASB in part in response to the financial crisis, where accounting rules that permitted certain entities to remain off-balance sheet received much criticism. Another reason for the changes was to converge, in part, with US GAAP – an MOU project. The IASB issued IFRS 10 The FASB completed one project to address consolidation of variable interest entities (and disclosures). The US FASB plans to propose amendments to US GAAP to help distinguish whether a decision-maker is an agent or a principal, and so that the evaluation of how kick-out rights are treated is the same for both voting interest entities and variable interest entities. However, differences between IFRS and US GAAP will remain with respect to the control principle, and consolidation procedures (see Appendix to this presentation and our US publication ‘To the Point’ , which is available on ey.com/accountinglink for more information). Another objective of the IASB was to increase the transparency of financial reporting. Even if management determines that it does not control another entity, management has to disclose the information that it considered in reaching that decision, so that judgment becomes more transparent. The new disclosures will also help users of the financial statements to make their own assessment of the financial impact if management had made a different decision – by providing more information about unconsolidated entities.

Application under the local laws (cont’d.) The Decision Tree 1. Scope of decision-making authority Wide ranging discretion Principal Narrow ranging discretion Agent 2. Rights held by third parties Substantive Protective Not relevant 3. Remuneration Commensurate and market based Not commensurate and market based 4. Exposure to variability of returns from other interests held 20% or more < 20% (IFRS 10.IN1-IN5) The changes introduced by IFRS 10 primarily relate to who consolidates another entity (or whether to consolidate another entity). That is, IFRS 10 doesn’t change how an entity is consolidated, once it is determined that a parent controls another entity. The IASB wanted to produce one single standard on consolidation: Eliminating the perceived inconsistency that two separate consolidation models existed – one based on control and one based on risks and rewards. Increasing consistency in application. These changes were made by the IASB in part in response to the financial crisis, where accounting rules that permitted certain entities to remain off-balance sheet received much criticism. Another reason for the changes was to converge, in part, with US GAAP – an MOU project. The IASB issued IFRS 10 The FASB completed one project to address consolidation of variable interest entities (and disclosures). The US FASB plans to propose amendments to US GAAP to help distinguish whether a decision-maker is an agent or a principal, and so that the evaluation of how kick-out rights are treated is the same for both voting interest entities and variable interest entities. However, differences between IFRS and US GAAP will remain with respect to the control principle, and consolidation procedures (see Appendix to this presentation and our US publication ‘To the Point’ , which is available on ey.com/accountinglink for more information). Another objective of the IASB was to increase the transparency of financial reporting. Even if management determines that it does not control another entity, management has to disclose the information that it considered in reaching that decision, so that judgment becomes more transparent. The new disclosures will also help users of the financial statements to make their own assessment of the financial impact if management had made a different decision – by providing more information about unconsolidated entities.

Investment entities This is a predetermined divider slide and should not be modified

Investment entities Overview ‘Investment entity’ is now defined in IFRS 10 An investment entity does not consolidate subsidiaries unless they provide investment-related services (see later) An investment entity measures its subsidiaries at fair value through profit or loss in accordance with IFRS 9 Financial Instruments (IAS 39 in Pakistan) An entity must consider all facts and circumstances, including purpose and design, to make the assessment The amendment is effective for annual periods beginning on or after 1 January 2014, but may be applied earlier IFRS 10 now includes a definition of an investment entity, which is discussed on the next two slides. An investment entity does not consolidate its subsidiaries. However, there is one exception to this. If an investment entity has a subsidiary that provides investment-related services, such as management services, to the investment entity itself, then the investment entity must consolidate that subsidiary. Subsidiaries must be measured at fair value through profit or loss, in accordance with IFRS 9. The application guidance to IFRS 10 (which is part of the standard and is authoritative) clarifies that an entity must consider all facts and circumstances when assessing whether it is an investment entity, including its purpose and design. The amendment applies to annual periods beginning on or after 1 January 2014, which is one year later than the mandatory application date of IFRS 10. However, early application is permitted and so entities can elect to apply the amendment at the same time as applying IFRS 10.

Investment entities Definition An investment entity is an entity that: Obtains funds from one or more investors for the purpose of providing those investors with professional investment management services Commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both And Measures and evaluates the performance of substantially all of its investments on a fair value basis An investment entity must meet the definition on this slide. In addition, it must consider whether it has the typical characteristics of an investment entity (see next slide). Appendix B to IFRS 10 (application guidance) gives further guidance on applying the definition, including the following points: Business purpose The purpose of an investment entity is to invest solely for capital appreciation, investment income or both. An investment entity may also provide investment-related services to third parties as well as investors, even if those activities are substantial to the entity. An investment entity may also provide the following services, provided they are undertaken to maximise investment returns: providing management services and strategic advice to an investee providing financial support to an investee How we see it - The exposure draft proposed that an entity would not qualify as an investment entity if the investment entity provided substantive investment-related services to third parties. However, some respondents, as well as the IASB staff, were concerned that this would exclude a number of private equity companies that should qualify as investment entities. Therefore, the final amendment does not disqualify an entity from being an investment entity only because it provides substantive investment-related services to third parties. Exit strategies As investment entities do not hold investments indefinitely, there must be an exit strategy documenting how the entity intends to realise substantially all its equity investments and non-financial asset investments. How we see it - Earlier drafts of the amendments had proposed that an entity must have an exit strategy for substantially all its investments. However, concerns were raised that entities holding substantial amounts of debt investments to maturity could be disqualified. The final amendment focuses on the fact that investment entities do not hold their investments indefinitely. Therefore, an exit strategy for debt investments will not normally be required if such investments have a set maturity date. Earnings from investments An entity is not an investment entity if it has the objective of obtaining benefits from its investments other than capital appreciation and investment income, such as the acquisition of intangible assets or technology of an investee. Fair value measurement An investment entity must demonstrate that fair value is the primary measurement attribute used. The fair value information must be used internally by key management personnel and must be provided to the entity’s investors. To meet this requirement, an investment entity must: elect to account for investment property using the fair value model in IAS 40 elect the exemption from applying the equity method in IAS 28 for investments in associates and joint ventures, and measure financial assets at fair value in accordance with IFRS 9.

Investment entities Typical characteristics Factors to consider alongside the definition: The entity has more than one investment – to diversify the risk portfolio and maximise returns The entity has more than one investor – to pool funds to maximise investment opportunities Investors in the entity are not related parties of the entity Ownership interests in the entity are in the form of equity or similar interests The typical features must be considered in assessing whether the entity meets the definition of an investment entity. The absence of any of these typical characteristics does not necessarily disqualify an entity from being classified as an investment entity. An investment entity that does not have all of these typical characteristics must provide additional disclosure required by para 9A of IFRS 12 Disclosure of Interests in Other Entities.

Investment entities Reassessment of status If there are changes to: One or more of the three elements of the definition of an investment entity Or The typical characteristics of an investment entity Then the entity must reassess whether it is an investment entity Any change in investment entity status must be accounted for prospectively from the date of change The typical features must be considered in assessing whether the entity meets the definition of an investment entity. The absence of any of these typical characteristics does not necessarily disqualify an entity from being classified as an investment entity. An investment entity that does not have all of these typical characteristics must provide additional disclosure required by para 9A of IFRS 12 Disclosure of Interests in Other Entities.

Investment entities Parent of an investment entity Non-investment entity parent of an investment entity The exception to consolidation is not retained by the parent entity if it is not an investment entity itself Instead, the parent must consolidate all its subsidiaries This is a difference from US GAAP – all parent entities can retain (or ‘roll-up’) the exception to consolidation of its investment entity subsidiary Investment entity parent of an investment entity An investment entity will measure all of its investments in subsidiaries at fair value, even if those investees are themselves an investment entity. This includes both master-feeder structures and fund-of funds structures. Parent entities that are not investment entities The exception to consolidation used by investment entities is not retained by parent entities that are not themselves investment entities. That is, a parent entity is not permitted to roll up the investment entity accounting, but must consolidate all entities that it controls, including those controlled through an investment entity. EY view: The majority of the respondents to the exposure draft (ED) of the proposals supported allowing the roll-up of the investment entity accounting, arguing that fair value information is more relevant at the parent entity level than as at the investment entity level. However, the Board decided not to permit this, largely due to the structuring opportunities it may create. The Board also noted that this will create a difference compared to US GAAP, which requires a non investment entity parent to retain the fair value accounting used by an investment entity subsidiary.

Investment entities Conclusion (Non-Investment Entity Parent) Ultimate Parent (Listed) Fund Manager Investment Entity (Mutual Fund) 50% Investee 40% Investee Consolidation (IFRS 10, Para. 4) > Consolidation, if listed > No consolidation, if unlisted (IFRS 10, Para. 4) No consolidation (IFRS 10, Para. 31) At fair value through profit or loss (IAS 39 / IFRS 9) (IFRS 10.B80-B85) An investor is required to reassess whether it controls an investee if the facts and circumstances indicate that there are changes to one of the three elements of control. Reconsideration is not restricted to reconsidering just at each reporting date, nor does it necessarily require reassessment of all relationships at every reporting date. Examples – change in: How activities are directed - entity A was set up to develop a new product – a technology. Previously it had a Board of Directors elected by shareholders, separate management, etc.. If A enters into an agreement with B so that management is replaced, and now B gets to make all or most of the decisions about the technology (and that is what affects returns), even if the shareholders haven’t changed, you would have to reconsider whether B now controls A. • Event that occurs - say an option lapses, and previously that option was considered to be determining factor as to who has control. • Returns – if previously concluded that an asset manager was a principal because the asset manager (or a related entity) had a significant direct investment in the fund. If that investment was sold, it might change assessment as to whether the asset manager was an agent. Market conditions: An investor’s initial assessment of control would not change simply because of a change in market conditions (e.g. a change in the investee’s returns driven by market conditions), unless the change in market conditions changes one or more of the three elements of control or changes the overall relationship between a principal and an agent – Example: Market conditions deteriorate, causing an entity that was previously profitable – its revenues start decreasing, and it has a net loss. This would not necessarily trigger a re-evaluation, if the relevant activities are financing and operating policies and those are unaffected, and the investor still has exposure to returns. BUT – if market conditions were such that it caused all of an entity’s equity to ‘burn through’, then re-evaluation would likely be necessary, because investors in equity tranche may no longer have exposure to variable returns Risk of flipping in and out. While the IASB has said “you don’t have to go hunting” and “you should know if you control’” we should be aware of structuring abuse.

Continuous assessment This is a predetermined divider slide and should not be modified

Continuous assessment Reassess if facts and circumstances suggest change to one of the criteria of control Examples: Changes to dispersion of other shareholdings Acquisition of new rights or existing rights becoming substantive (IFRS 10.B80-B85) An investor is required to reassess whether it controls an investee if the facts and circumstances indicate that there are changes to one of the three elements of control. Reconsideration is not restricted to reconsidering just at each reporting date, nor does it necessarily require reassessment of all relationships at every reporting date. Examples – change in: How activities are directed - entity A was set up to develop a new product – a technology. Previously it had a Board of Directors elected by shareholders, separate management, etc.. If A enters into an agreement with B so that management is replaced, and now B gets to make all or most of the decisions about the technology (and that is what affects returns), even if the shareholders haven’t changed, you would have to reconsider whether B now controls A. • Event that occurs - say an option lapses, and previously that option was considered to be determining factor as to who has control. • Returns – if previously concluded that an asset manager was a principal because the asset manager (or a related entity) had a significant direct investment in the fund. If that investment was sold, it might change assessment as to whether the asset manager was an agent. Market conditions: An investor’s initial assessment of control would not change simply because of a change in market conditions (e.g. a change in the investee’s returns driven by market conditions), unless the change in market conditions changes one or more of the three elements of control or changes the overall relationship between a principal and an agent – Example: Market conditions deteriorate, causing an entity that was previously profitable – its revenues start decreasing, and it has a net loss. This would not necessarily trigger a re-evaluation, if the relevant activities are financing and operating policies and those are unaffected, and the investor still has exposure to returns. BUT – if market conditions were such that it caused all of an entity’s equity to ‘burn through’, then re-evaluation would likely be necessary, because investors in equity tranche may no longer have exposure to variable returns Risk of flipping in and out. While the IASB has said “you don’t have to go hunting” and “you should know if you control’” we should be aware of structuring abuse.

Transition This is a predetermined divider slide and should not be modified

Transition Effective for annual periods beginning on or after 1 January 2013 (in Pakistan, 1 January 2015) Retrospective application As if it was always consolidated (since the date of gaining control) If under IFRS 10, there is a change in the consolidation conclusion at the date of initial application, the requirement to adjust comparative information is limited to the period immediately preceding the date of initial application. Adjustment to earlier periods is permitted but not required. (IFRS 10.Appendix C) IFRS 10 is effective 2013, but can be adopted early, as long as the entity also adopts IFRS 11 (Joint Arrangements) and IFRS 12 (Disclosure of Interests in Other Entities) at the same time. Investors will generally apply the new standard retrospectively. When this results in consolidating an investee that was previously not consolidated, the investor applies acquisition accounting (for example, business combination accounting) from the date on which it obtained control. However, if this is impracticable, the investor accounts for the transaction in at the beginning of the earliest period practicable, which may be the current period. If an investor no longer controls an investee, then the investor measures the interest in that previously-consolidated entity as if the investor had accounted for that interest from the point when it first became involved with, or no longer had control of, the investee. Alternatively, if this is impracticable, the investor derecognises the assets, liabilities and non-controlling interests of the previously-consolidated entity, and recognises any interest in the investee at fair value at the beginning of the reporting period when first applying the new standard. 2013 seems like a long time from now, it’s not, particularly if companies want to renegotiate current arrangements, or have to provide three years of comparative statements.

Current issues / challenges This is a predetermined divider slide and should not be modified

Current issues / challenges 1. Clarification required with regard to ICAP Circular 2008/01 ‘Consolidation of Mutual Funds by Fund Managers’. 2. Section 3 of CO84 - a subsidiary if another company holds more than fifty percent of its voting power or directors. Section 237 – holding company to present consolidated financial statements of the group as those of a single enterprise. A clarification may prove useful to indicate that the requirement in the Companies Ordinance presents the bare minimum criteria for consolidation.

Current issues / challenges (cont’d.) 3. A survey conducted in EU markets revealed that application of IFRS 10 would lead to consolidation of more entities/funds because of the new definition of control. 4. A challenge will be to continue to reassess the status each year due to a change in percentage of holding as a result of open-end nature of the fund and adjust the accounting treatment accordingly.