INTERNATIONAL PUBLIC SECTOR

ACCOUNTING STANDARDSTM

IPSAS 35, CONSOLIDATED FINANCIAL STATEMENTS

 International Federation of Accountants®
529 Fifth Avenue
New York, New York 10017 USA

This publication was published by the International Federation of Accountants (IFAC®). Its mission is to serve the public interest and strengthen the accountancy
profession by supporting the development of high-quality international standards, promoting the adoption and implementation of these standards, building the
capacity of professional accountancy organizations, and speaking out on public interest issues.

International Public Sector Accounting Standards, Exposure Drafts, Consultation Papers, Recommended Practice Guidelines, and other IPSASB publications
are published by, and copyright of, IFAC.

The IPSASB and IFAC do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this publication,
whether such loss is caused by negligence or otherwise.

The ‘International Public Sector Accounting Standards Board’, ‘International Public Sector Accounting Standards’, ‘Recommended Practice Guidelines’,
‘International Federation of Accountants’, ‘IPSASB’, ‘IPSAS’, ‘RPG’, ‘IFAC’, the IPSASB logo, and IFAC logo are trademarks of IFAC, or registered trademarks
and service marks of IFAC in the US and other countries.

Copyright © May 2025 by the International Federation of Accountants (IFAC). All rights reserved. Written permission from IFAC is required to reproduce, store
or transmit, or to make other similar uses of, this document, save for where the document is being used for individual, non-commercial use only. Contact
permissions@ifac.org.

ISBN: 978-1-60815-596-5

Published by:
 IPSAS 35, CONSOLIDATED FINANCIAL STATEMENTS
Acknowledgment
This International Public Sector Accounting Standard (IPSAS) is drawn primarily from International Financial
Reporting Standard (IFRS®) 10, Consolidated Financial Statements published by the International Accounting
Standards Board (IASB®). Extracts from IFRS 10 are reproduced in this publication of the International Public Sector
Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) with the permission of
the International Financial Reporting Standards Foundation.

The approved text of the IFRS Accounting Standards is that published by the IASB in the English language, and
copies may be obtained directly from IFRS Foundation, Customer Service, Columbus Building, 7 Westferry Circus,
Canary Wharf, London E14 4HD, United Kingdom.

E-mail: customerservices@ifrs.org

Internet: www.ifrs.org
IFRS Accounting Standards, IAS Standards, and other publications of the IASB are copyright of the IFRS Foundation.

“IFRS Accounting Standards”, “IAS Standards”, “IASB”, and “IFRS Foundation” are trademarks of the IFRS
Foundation and should not be used without the approval of the IFRS Foundation.

1199 IPSAS 35
 IPSAS 35, CONSOLIDATED FINANCIAL STATEMENTS
History of IPSAS
This version includes amendments resulting from IPSAS Standards issued up to January 31, 2025.

IPSAS 35, Consolidated Financial Statements was issued in January 2015.

Since then, IPSAS 35 has been amended by the following IPSAS Standards:

• IPSAS 47, Revenue (issued May 2023)

• COVID-19: Deferral of Effective Dates (issued November 2020)

• IPSAS 41, Financial Instruments (issued August 2018)

• IPSAS 40, Public Sector Combinations (issued January 2017)

• IPSAS 39, Employee Benefits (issued July 2016)

• The Applicability of IPSAS (issued April 2016)

Table of Amended Paragraphs in IPSAS 35

Paragraph Affected How Affected Affected By

4 Amended IPSAS 40 January 2017

6 Amended IPSAS 39 July 2016

8 Amended The Applicability of IPSAS April 2016

11 Deleted The Applicability of IPSAS April 2016

12 Deleted The Applicability of IPSAS April 2016

13 Deleted The Applicability of IPSAS April 2016

22 Amended IPSAS 41 August 2018

40 Amended IPSAS 40 January 2017

45 Amended IPSAS 41 August 2018

52 Amended IPSAS 40 January 2017

IPSAS 41 August 2018

55A Amended IPSAS 40 January 2017

IPSAS 41 August 2018

56 Amended IPSAS 40 January 2017

IPSAS 41 August 2018

57 Amended IPSAS 40 January 2017

58 Amended IPSAS 41 August 2018

63 Amended IPSAS 40 January 2017

79A New The Applicability of IPSAS April 2016

IPSAS 35 1200
Paragraph Affected How Affected Affected By

79B New IPSAS 39 July 2016

79C New IPSAS 40 January 2017

79D New IPSAS 40 January 2017

79E Amended COVID-19: Deferral of Effective Dates November 2020

79F New IPSAS 47 May 2023

AG13 Amended IPSAS 47 May 2023

AG105 Amended IPSAS 41 August 2018

1201 IPSAS 35
 January 2015

IPSAS 35, CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS
Paragraph

Objective ......................................................................................................................................................... 1–2

Scope .............................................................................................................................................................. 3–13

Public Sector Combinations ..................................................................................................................... 4

Presentation of Consolidated Financial Statements ................................................................................. 5–10

Government Business Enterprises ........................................................................................................... 11–13

Definitions ........................................................................................................................................................ 14–17

Binding Arrangement ................................................................................................................................ 15

Economic Entity ........................................................................................................................................ 16–17

Control ............................................................................................................................................................. 18–37

Power ........................................................................................................................................................ 23–29

Benefits ..................................................................................................................................................... 30–34

Link between Power and Benefits ............................................................................................................ 35–37

Accounting Requirements ............................................................................................................................... 38–55

Consolidation Procedures ........................................................................................................................ 40

Uniform Accounting Policies ..................................................................................................................... 41

Measurement ............................................................................................................................................ 42

Potential Voting Rights ............................................................................................................................. 43–45

Reporting Dates ........................................................................................................................................ 46

Non-Controlling Interests .......................................................................................................................... 47–51

Loss of Control.......................................................................................................................................... 52–55

Investment Entities: Fair Value Requirement .................................................................................................. 56–64

Determining Whether an Entity is an Investment Entity ........................................................................... 59–60

Judgments and Assumptions ................................................................................................................... 61–62

Accounting for a Change in Investment Entity Status .............................................................................. 63–64

Transitional Provisions .................................................................................................................................... 65–78

Effective Date .................................................................................................................................................. 79–80

Withdrawal and Replacement of IPSAS 6 (December 2006) ......................................................................... 81

Appendix A: Application Guidance

Appendix B: Amendments to Other IPSAS

IPSAS 35 1202
Basis for Conclusions
Implementation Guidance

Illustrative Examples
Comparison with IFRS 10

1203 IPSAS 35
 CONSOLIDATED FINANCIAL STATEMENTS

International Public Sector Accounting Standard 35, Consolidated Financial Statements, is set out in paragraphs 1–81.
All the paragraphs have equal authority. IPSAS 35 should be read in the context of its objective, the Basis for Conclusions,
the Preface to International Public Sector Accounting Standards, and The Conceptual Framework for General Purpose
Financial Reporting by Public Sector Entities. IPSAS 3, Accounting Policies, Changes in Accounting Estimates and Errors,
provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

IPSAS 35 1204
 CONSOLIDATED FINANCIAL STATEMENTS

Objective
1. The objective of this Standard is to establish principles for the presentation and preparation of consolidated
financial statements when an entity controls one or more other entities.

2. To meet the objective in paragraph 1, this Standard:

(a) Requires an entity (the controlling entity) that controls one or more other entities (controlled entities) to
present consolidated financial statements;

(b) Defines the principle of control, and establishes control as the basis for consolidation;

(c) Sets out how to apply the principle of control to identify whether an entity controls another entity and
therefore must consolidate that entity;

(d) Sets out the accounting requirements for the preparation of consolidated financial statements; and

(e) Defines an investment entity and sets out an exception to consolidating particular controlled entities of
an investment entity.

Scope
3. An entity that prepares and presents financial statements under the accrual basis of accounting shall
apply this Standard in the preparation and presentation of consolidated financial statements for the
economic entity.
Public Sector Combinations

4. This Standard does not deal with the accounting requirements for public sector combinations and their effect
on consolidation, including goodwill arising on a public sector combination (see IPSAS 40, Public Sector
Combinations).

Presentation of Consolidated Financial Statements

5. An entity that is a controlling entity shall present consolidated financial statements. This Standard
applies to all entities, except that a controlling entity need not present consolidated financial
statements if it meets all the following conditions:

(a) It is itself a controlled entity and the information needs of users are met by its controlling
entity’s consolidated financial statements, and, in the case of a partially owned controlled
entity, all its other owners, including those not otherwise entitled to vote, have been informed
about, and do not object to, the entity not presenting consolidated financial statements;

(b) Its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets);
(c) It did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class of
instruments in a public market; and
(d) Its ultimate or any intermediate controlling entity produces financial statements that are
available for public use and comply with International Public Sector Accounting Standards
(IPSAS), in which controlled entities are consolidated or are measured at fair value through
surplus or deficit in accordance with this Standard.

6. This Standard does not apply to post-employment benefit plans or other long-term employee benefit plans
to which IPSAS 39, Employee Benefits applies.

1205 IPSAS 35
 CONSOLIDATED FINANCIAL STATEMENTS

7. A controlling entity that is an investment entity shall not present consolidated financial statements if
it is required, in accordance with paragraph 56 of this Standard, to measure all of its controlled
entities at fair value through surplus or deficit.

8. A controlled entity is not excluded from consolidation because its activities are dissimilar to those of the other
entities within the economic entity, for example, the consolidation of commercial public sector entities with
entities in the budget sector. Relevant information is provided by consolidating such controlled entities and
disclosing additional information in the consolidated financial statements about the different activities of
controlled entities. For example, the disclosures required by IPSAS 18, Segment Reporting, help to explain
the significance of different activities within the economic entity.

9. The exemption from preparing consolidated financial statements in paragraph 5 does not apply where the
information needs of a controlled entity’s users would not be met by the consolidated financial statements of
its controlling entity. For example, consolidated financial statements at a whole-of-government level may not
meet the information needs of users in respect of key sectors or activities of a government. In many
jurisdictions there are legislated financial reporting requirements intended to address the information needs
of such users.

10. An entity may be required, (for example, by legislation, or by external users) to prepare aggregated financial
statements which are for a different economic entity than that required by this Standard. Although such
financial statements fall outside the scope of this Standard and would not comply with the requirements in
this Standard, an entity could use the guidance in this Standard in the preparation of such aggregated
financial statements.

Government Business Enterprises

11. [Deleted]

12. [Deleted]
13. [Deleted]

Definitions
14. The following terms are used in this Standard with the meanings specified:

Benefits are the advantages an entity obtains from its involvement with other entities. Benefits may
be financial or non-financial. The actual impact of an entity’s involvement with another entity can
have positive or negative aspects.

Binding arrangement: For the purposes of this Standard, a binding arrangement is an arrangement
that confers enforceable rights and obligations on the parties to it as if it were in the form of a
contract. It includes rights from contracts or other legal rights.

Consolidated financial statements are the financial statements of an economic entity in which the
assets, liabilities, net assets/equity, revenue, expenses and cash flows of the controlling entity and
its controlled entities are presented as those of a single economic entity.

Control: An entity controls another entity when the entity is exposed, or has rights, to variable
benefits from its involvement with the other entity and has the ability to affect the nature or amount
of those benefits through its power over the other entity.

A controlled entity is an entity that is controlled by another entity.

A controlling entity is an entity that controls one or more entities.

IPSAS 35 1206
 CONSOLIDATED FINANCIAL STATEMENTS

A decision-maker is an entity with decision-making rights that is either a principal or an agent for
other parties.
An economic entity is a controlling entity and its controlled entities.
An investment entity is an entity that:
(a) Obtains funds from one or more investors for the purpose of providing those investor(s) with
investment management services;
(b) Has the purpose of investing funds solely for returns from capital appreciation, investment
revenue, or both; and
(c) Measures and evaluates the performance of substantially all of its investments on a fair value
basis.
A non-controlling interest is net assets/equity in a controlled entity not attributable, directly or
indirectly, to a controlling entity.
Power consists of existing rights that give the current ability to direct the relevant activities of another
entity.
Protective rights are 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.
Relevant activities: For the purpose of this Standard, relevant activities are activities of the potentially
controlled entity that significantly affect the nature or amount of the benefits that an entity receives
from its involvement with that other entity.
Removal rights are rights to deprive the decision maker of its decision-making authority.

Terms defined in other IPSASs are used in this Standard with the same meaning as in those
Standards, and are reproduced in the Glossary of Defined Terms published separately. The following
terms are defined in either IPSAS 36, Investments in Associates and Joint Ventures, IPSAS 37, Joint
Arrangements, or IPSAS 38, Disclosure of Interests in Other Entities: associate, interest in another
entity, joint venture and significant influence.

Binding Arrangement

15. Binding arrangements can be evidenced in several ways. A binding arrangement is often, but not always, in
writing, in the form of a contract or documented discussions between the parties. Statutory mechanisms such
as legislative or executive authority can also create enforceable arrangements, similar to contractual
arrangements, either on their own or in conjunction with contracts between the parties.

Economic Entity
16. The term economic entity is used in this Standard to define, for financial reporting purposes, a group of
entities comprising the controlling entity and any controlled entities. Other terms sometimes used to refer to
an economic entity include administrative entity, financial entity, consolidated entity, and group. An economic
entity may include entities with both social policy and commercial objectives.
17. The determination of the economic entity will need to be made having regard to the constitutional
arrangements in a jurisdiction, in particular the ways in which government power is limited and allocated, and
how the government system is set up and operates. For example, in jurisdictions with an executive,
legislature and judiciary, these may collectively form an economic entity in respect of which there is a user
need for consolidated financial statements. Such consolidated financial statements are commonly referred
to as whole-of-government financial statements.

1207 IPSAS 35
 CONSOLIDATED FINANCIAL STATEMENTS

Control (see paragraphs AG2–AG87)

18. An entity, regardless of the nature of its involvement with another entity, shall determine whether it
is a controlling entity by assessing whether it controls the other entity.
19. An entity controls another entity when it is exposed, or has rights, to variable benefits from its
involvement with the other entity and has the ability to affect the nature or amount of those benefits
through its power over the other entity.
20. Thus, an entity controls another entity if and only if the entity has all the following:
(a) Power over the other entity (see paragraphs 23–29);
(b) Exposure, or rights, to variable benefits from its involvement with the other entity (see
paragraphs 30–34); and
(c) The ability to use its power over the other entity to affect the nature or amount of the benefits
from its involvement with the other entity (see paragraphs 35–37).
21. An entity shall consider all facts and circumstances when assessing whether it controls another
entity. The entity shall reassess whether it controls another entity if facts and circumstances indicate
that there are changes to one or more of the three elements of control listed in paragraph 20 (see
paragraphs AG82–AG87).
22. Two or more entities collectively control another entity when they must act together to direct the relevant
activities. In such cases, because no single entity can direct the activities without the co-operation of the
others, no single entity controls the other entity. Each entity would account for its interest in the other entity
in accordance with the relevant IPSAS, such as IPSAS 36, IPSAS 37, or the IPSAS dealing with financial
instruments (IPSAS 28, Financial Instruments: Presentation, IPSAS 30, Financial Instruments: Disclosures,
and IPSAS 41, Financial Instruments).

Power
23. An entity has power over another entity when the entity has existing rights that give it the current ability to
direct the relevant activities, i.e., the activities that significantly affect the nature or amount of the benefits
from its involvement with the other entity. The right to direct the financial and operating policies of another
entity indicates that an entity has the ability to direct the relevant activities of another entity and is frequently
the way in which power is demonstrated in the public sector.
24. Power arises from rights. In some cases assessing power is straightforward, such as when power over
another entity 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. However, public
sector entities often obtain power over another entity from rights other than voting rights. They may also
obtain power over another entity without having an equity instrument providing evidence of a financial
investment. An entity may have rights conferred by binding arrangements. These rights may give an entity
power to require the other entity to deploy assets or incur liabilities in a way that affects the nature or amount
of benefits received by the first-mentioned entity. The assessment of whether such rights give rise to power
over another entity may be complex and require more than one factor to be considered.
25. An entity can have power over another entity even if it does not have responsibility for the day-to-day
operation of the other entity or the manner in which prescribed functions are performed by that other entity.
Legislation may give statutory bodies or statutory officers powers to carry out their functions independently
of government. For example, the Auditor-General and Government Statistician usually have statutory powers
to obtain information and publish reports without recourse to government and the judiciary often has special
powers to give effect to the concept of judicial independence. Legislation may also set out the broad

IPSAS 35 1208
 CONSOLIDATED FINANCIAL STATEMENTS

parameters within which the statutory body is required to operate, and result in the statutory body operating
in a manner consistent with the objectives set by Parliament or a similar body. The existence of statutory
powers to operate independently does not, of itself, preclude an entity having the ability to direct the operating
and financial policies of another entity with statutory powers so as to obtain benefits. For example, the
independence of a central bank in relation to monetary policy does not preclude the possibility of the central
bank being controlled. All facts and circumstances would still need to be considered.
26. The existence of rights over another entity does not necessarily give rise to power for the purposes of this
Standard. An entity does not have power over another entity solely due to the existence of:
(a) Regulatory control (see paragraph AG12); or
(b) Economic dependence (see paragraphs AG41–AG42).
27. An entity with the current ability to direct the relevant activities has power even if its rights to direct have yet
to be exercised. Evidence that the entity has been directing the relevant activities of the entity being assessed
for control can help determine whether the entity has power, but such evidence is not, in itself, conclusive in
determining whether the entity has power over the entity being assessed for control. In the case of an entity
established with predetermined activities, the right to direct the relevant activities may have been exercised
at the time that the entity was established.
28. If two or more entities each have existing rights that give them the unilateral ability to direct different relevant
activities, the entity that has the current ability to direct the activities that most significantly affect the nature
or amount of benefits from that entity has power over that other entity.
29. An entity can have power over an entity being assessed for control even if other entities have existing rights
that give them the current ability to participate in the direction of the relevant activities, for example when
another entity has significant influence. However, an entity that holds only protective rights does not have
power over another entity (see paragraphs AG29–AG31), and consequently does not control the other entity.

Benefits
30. An entity is exposed, or has rights, to variable benefits from its involvement with an entity being assessed for
control when the benefits that it seeks from its involvement have the potential to vary as a result of the other
entity’s performance. Entities become involved with other entities with the expectation of positive financial or
non-financial benefits over time. However, in a particular reporting period, the actual impact of an entity’s
involvement with the entity being assessed for control can be only positive, only negative or a mix of both
positive and negative.
31. The entity’s benefits from its involvement with the entity being assessed for control can be only financial, only
non-financial or both financial and non-financial. Financial benefits include returns on investment such as
dividends or similar distributions and are sometimes referred to as “returns”. Non-financial benefits include
advantages arising from scarce resources that are not measured in financial terms and economic benefits
received directly by service recipients of the entity. Non-financial benefits can occur when the activities of
another entity are congruent with, (that is, they are in agreement with), the objectives of the entity and support
the entity in achieving its objectives. For example, an entity may obtain benefits when another entity with
congruent activities provides services that the first entity would have otherwise been obliged to provide.
Congruent activities may be undertaken voluntarily or the entity may have the power to direct the other entity
to undertake those activities. Non-financial benefits can also occur when two entities have complementary
objectives (that is, the objectives of one entity add to, and make more complete, the objectives of the other
entity).
32. The following examples illustrate financial benefits that an entity may receive from its involvement with an-
other entity:

1209 IPSAS 35
 CONSOLIDATED FINANCIAL STATEMENTS

(a) Dividends, variable interest on debt securities, other distributions of economic benefits;
(b) Exposure to increases or decreases in the value of an investment in another entity;
(c) Exposure to loss from agreements to provide financial support, including financial support for major
projects;
(d) Cost savings (for example, if an entity would achieve economies of scale or synergies by combining
the operations or assets of the other entity with its own operations or assets);
(e) Residual interests in the other entity’s assets and liabilities on liquidation of that other entity; and
(f) Other exposures to variable benefits that are not available to other entities.
33. Examples of non-financial benefits include:
(a) The ability to benefit from the specialized knowledge of another entity;
(b) The value to the entity of the other entity undertaking activities that assist the entity in achieving its
objectives;
(c) Improved outcomes;
(d) More efficient delivery of outcomes;

(e) More efficient or effective production and delivery of goods and services;
(f) Having an asset and related services available earlier than otherwise would be the case; and
(g) Having a higher level of service quality than would otherwise be the case.

34. Although only one entity can control another entity, more than one party can share in the benefits of that
other entity. For example, holders of non-controlling interests can share in the financial benefits such as
surpluses or distributions from an entity or the non-financial benefits such as congruence of activities with
desired outcomes.

Link between Power and Benefits

35. An entity controls another entity if the entity not only has power over the entity being assessed for control
and exposure or rights to variable benefits from its involvement with the other entity, but also has the ability
to use its power to affect the nature or amount of the benefits from its involvement with the entity being
assessed for control.
36. The existence of congruent objectives alone is insufficient for an entity to conclude that it controls another
entity. In order to have control the entity would also need to have the ability to use its power over the entity
being assessed for control to direct that other entity to work with it to further its objectives.
37. An entity with decision-making rights shall determine whether it is a principal or an agent. An entity shall
also determine whether another entity with decision-making rights is acting as an agent for the entity. An
agent is a party primarily engaged to act on behalf and for the benefit of another party or parties (the
principal(s)) and therefore does not control the other entity when it exercises its decision-making
authority. Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf
of the principal.

Accounting Requirements
38. A controlling entity shall prepare consolidated financial statements using uniform accounting
policies for like transactions and other events in similar circumstances.

IPSAS 35 1210
 CONSOLIDATED FINANCIAL STATEMENTS

39. Consolidation of a controlled entity shall begin from the date the entity obtains control of the other
entity and cease when the entity loses control of the other entity.

Consolidation Procedures
40. Consolidated financial statements:
(a) Combine like items of assets, liabilities, net assets/equity, revenue, expenses and cash flows of the
controlling entity with those of its controlled entities.
(b) Offset (eliminate) the carrying amount of the controlling entity’s investment in each controlled entity
and the controlling entity’s portion of net assets/equity of each controlled entity (IPSAS 40 explains
how to account for any related goodwill).
(c) Eliminate in full intra-economic entity assets, liabilities, net assets/equity, revenue, expenses and cash
flows relating to transactions between entities of the economic entity (surpluses or deficits resulting
from intra-economic entity transactions that are recognized in assets, such as inventory and fixed
assets, are eliminated in full). Intra-economic entity losses may indicate an impairment that requires
recognition in the consolidated financial statements.

Uniform Accounting Policies

41. If a member of the economic entity uses accounting policies other than those adopted in the consolidated
financial statements for like transactions and events in similar circumstances, appropriate adjustments are
made to that member’s financial statements in preparing the consolidated financial statements to ensure
conformity with the economic entity’s accounting policies.

Measurement
42. An entity includes the revenue and expenses of a controlled entity in the consolidated financial statements
from the date it gains control until the date when the entity ceases to control the controlled entity. Revenue
and expenses of the controlled entity are based on the amounts of the assets and liabilities recognized in the
consolidated financial statements at the acquisition date. For example, depreciation expense recognized in
the consolidated statement of financial performance after the acquisition date is based on the values of the
related depreciable assets recognized in the consolidated financial statements at the acquisition date.

Potential Voting Rights

43. When potential voting rights, or other derivatives containing potential voting rights, exist, the proportion of
surplus or deficit and changes in net assets/equity allocated to the controlling entity and non-controlling
interests in preparing consolidated financial statements is determined solely on the basis of existing
ownership interests and does not reflect the possible exercise or conversion of potential voting rights and
other derivatives, unless paragraph 44 applies.
44. In some circumstances an entity has, in substance, an existing ownership interest as a result of a transaction
that currently gives the entity access to the benefits associated with an ownership interest. In such
circumstances, the proportion allocated to the controlling entity and non-controlling interests in preparing
consolidated financial statements is determined by taking into account the eventual exercise of those
potential voting rights and other derivatives that currently give the entity access to the benefits.
45. IPSAS 28 and IPSAS 41 do not apply to interests in controlled entities that are consolidated. When
instruments containing potential voting rights in substance currently give access to the benefits associated
with an ownership interest in a controlled entity, the instruments are not subject to the requirements of IPSAS
28 and IPSAS 41. In all other cases, instruments containing potential voting rights in a controlled entity are
accounted for in accordance with IPSAS 28 and IPSAS 41.

1211 IPSAS 35
 CONSOLIDATED FINANCIAL STATEMENTS

Reporting Dates
46. The financial statements of the controlling entity and its controlled entities used in the preparation of the
consolidated financial statements shall be prepared as at the same reporting date. When the end of the
reporting period of the controlling entity is different from that of a controlled entity, the controlling entity
either:
(a) Obtains, for consolidation purposes, additional financial information as of the same date as the
financial statements of the controlling entity; or
(b) Uses the most recent financial statements of the controlled entity adjusted for the effects of
significant transactions or events that occur between the date of those financial statements
and the date of the consolidated financial statements.

Non-Controlling Interests
47. A controlling entity shall present non-controlling interests in the consolidated statement of financial
position within net assets/equity, separately from the net assets/equity of the owners of the
controlling entity.
48. Changes in a controlling entity’s interest in a controlled entity that do not result in the controlling entity losing
control of the controlled entity are transactions with owners in their capacity as owners.
49. An entity shall attribute the surplus or deficit and each gain or loss recognized directly in net
assets/equity to the owners of the controlling entity and to the non-controlling interests. The entity
shall also attribute the total amount recognized in the statement of changes in net assets/equity to
the owners of the controlling entity and to the non-controlling interests even if this results in the non-
controlling interests having a deficit balance.
50. If a controlled entity has outstanding cumulative preference shares that are classified as equity
instruments and are held by non-controlling interests, the entity shall compute its share of surplus
or deficit after adjusting for the dividends on such shares, whether or not such dividends have been
declared.

Changes in the Proportion held by Non-Controlling Interests

51. When the proportion of the net assets/equity held by non-controlling interests changes, an entity
shall adjust the carrying amounts of the controlling and non-controlling interests to reflect the
changes in their relative interests in the controlled entity. The entity shall recognize directly in net
assets/equity any difference between the amount by which the non-controlling interests are adjusted
and the fair value of the consideration paid or received, and attribute it to the owners of the controlling
entity.

Loss of Control
52. If a controlling entity loses control of a controlled entity, the controlling entity:

(a) Derecognizes the assets and liabilities of the former controlled entity from the consolidated
statement of financial position;
(b) Recognizes any investment retained in the former controlled entity and subsequently accounts
for it and for any amounts owed by or to the former controlled entity in accordance with relevant
IPSAS. That retained interest is remeasured, as described in paragraphs 54(b)(iii) and 55A. The
remeasured value at the date that control is lost shall be regarded as the fair value on initial
recognition of a financial asset in accordance with IPSAS 41 or the cost on initial recognition
of an investment in an associate or joint venture, if applicable; and

IPSAS 35 1212
 CONSOLIDATED FINANCIAL STATEMENTS

(c) Recognizes the gain or loss associated with the loss of control attributable to the former
controlling interest, as specified in paragraphs 54–55A.
53. A controlling entity might lose control of a controlled entity in two or more arrangements
(transactions). However, sometimes circumstances indicate that the multiple arrangements should
be accounted for as a single transaction. In determining whether to account for the arrangements as
a single transaction, a controlling entity shall consider all the terms and conditions of the
arrangements and their economic effects. One or more of the following indicate that the controlling
entity should account for the multiple arrangements as a single transaction:
(a) They are entered into at the same time or in contemplation of each other.
(b) They form a single transaction designed to achieve an overall commercial effect.
(c) The occurrence of one arrangement is dependent on the occurrence of at least one other
arrangement.
(d) One arrangement considered on its own is not economically justified, but it is economically
justified when considered together with other arrangements. An example is when a disposal of
an investment is priced below market and is compensated for by a subsequent disposal priced
above market.
54. If a controlling entity loses control of a controlled entity, it shall:

(a) Derecognize:
(i) The assets (including any goodwill) and liabilities of the controlled entity at their carrying
amounts at the date when control is lost; and
(ii) The carrying amount of any non-controlling interests in the former controlled entity at the
date when control is lost (including any gain or loss recognized directly in net
assets/equity attributable to them).
(b) Recognize:
(i) The fair value of the consideration received, if any, from the transaction, event or
circumstances that resulted in the loss of control;
(ii) If the transaction, event or circumstances that resulted in the loss of control involves a
distribution of shares of the controlled entity to owners in their capacity as owners, that
distribution; and
(iii) Any investment retained in the former controlled entity at its fair value at the date when
control is lost.
(c) Transfer directly to accumulated surplus/deficit, if required by other IPSAS, the amounts
recognized directly in net assets/equity in relation to the controlled entity on the basis
described in paragraph 55.
(d) Recognize any resulting difference as a gain or loss in surplus or deficit attributable to the
controlling entity.
55. If a controlling entity loses control of a controlled entity, the controlling entity shall account for all
amounts previously recognized directly in net assets/equity in relation to that controlled entity on the
same basis as would be required if the controlling entity had directly disposed of the related assets
or liabilities. If a revaluation surplus previously recognized directly in net assets/equity would be
transferred directly to accumulated surplus/deficit on the disposal of the asset, the controlling entity

1213 IPSAS 35
 CONSOLIDATED FINANCIAL STATEMENTS

shall transfer the revaluation surplus directly to accumulated surplus/deficit when it loses control of
the controlled entity.
55A. If a controlling entity loses control of a controlled entity that does not contain an operation, as defined
in IPSAS 40, as a result of a transaction involving an associate or a joint venture that is accounted
for using the equity method, the controlling entity determines the gain or loss in accordance with
paragraphs 54–55. The gain or loss resulting from the transaction is recognized in the controlling
entity’s surplus or deficit only to the extent of the unrelated investors’ interests in that associate or
joint venture. The remaining part of the gain is eliminated against the carrying amount of the
investment in that associate or joint venture. In addition, if the controlling entity retains an investment
in the former controlled entity and the former controlled entity is now an associate or a joint venture
that is accounted for using the equity method, the controlling entity recognizes the part of the gain
or loss resulting from the remeasurement at fair value of the investment retained in that former
controlled entity in its surplus or deficit only to the extent of the unrelated investors’ interests in the
new associate or joint venture. The remaining part of that gain is eliminated against the carrying
amount of the investment retained in the former controlled entity. If the controlling entity retains an
investment in the former controlled entity that is now accounted for in accordance with IPSAS 41, the
part of the gain or loss resulting from the remeasurement at fair value of the investment retained in
the former controlled entity is recognized in full in the controlling entity’s surplus or deficit.

Investment Entities: Fair Value Requirement

56. Except as described in paragraph 57, an investment entity shall not consolidate its controlled entities
or apply IPSAS 40 when it obtains control of another entity. Instead, an investment entity shall
measure an investment in a controlled entity at fair value through surplus or deficit in accordance
with IPSAS 41.
57. Notwithstanding the requirement in paragraph 56, if an investment entity has a controlled entity that
is not itself an investment entity and whose main purpose and activities are providing services that
relate to the investment entity’s investment activities (see paragraphs AG98–AG100), it shall
consolidate that controlled entity in accordance with paragraphs 38–55 of this Standard and apply
the requirements of IPSAS 40 to the acquisition of any such controlled entity.
58. A controlling entity of an investment entity that is not itself an investment entity shall present
consolidated financial statements in which it (i) measures the investments of a controlled investment
entity at fair value through surplus or deficit in accordance with IPSAS 41 and (ii) consolidates the
other assets and liabilities and revenue and expenses of the controlled investment entity in
accordance with paragraphs 38–55 of this Standard.

Determining Whether an Entity is an Investment Entity

59. An entity shall consider all facts and circumstances when assessing whether it is an investment
entity, including its purpose and design. Paragraphs AG89–AG106 describe aspects of the definition
of an investment entity in more detail. If facts and circumstances indicate that there are changes to
one or more of the three elements that make up the definition of an investment entity, a controlling
entity shall reassess whether it is an investment entity.
60. A controlling entity that either ceases to be an investment entity or becomes an investment entity
shall account for the change in its status prospectively from the date at which the change in status
occurred (see paragraphs 63–64).

IPSAS 35 1214
 CONSOLIDATED FINANCIAL STATEMENTS

Judgments and Assumptions

61. An investment entity shall disclose the information required by paragraph 15 of IPSAS 38 about
significant judgments and assumptions made in determining that it is an investment entity unless it
has all of the following characteristics:
(a) It has obtained funds from more than one investor (see paragraphs AG89–AG90);
(b) It has ownership interests in the form of equity or similar interests (see paragraphs AG91–
AG92); and
(c) It has more than one investment (see paragraphs AG96–AG97).
62. The absence of any of these characteristics does not necessarily disqualify an entity from being classified as
an investment entity. However, the absence of any of these characteristics means that an entity is required
to disclose information about the significant judgments and assumptions made in determining that it is an
investment entity.

Accounting for a Change in Investment Entity Status

63. When an entity ceases to be an investment entity, it shall apply IPSAS 40 to any controlled entity that
was previously measured at fair value through surplus or deficit in accordance with paragraph 56.
The date of the change of status shall be the deemed acquisition date. The fair value of the controlled
entity at the deemed acquisition date shall represent the transferred deemed consideration when
measuring any goodwill or gain from a bargain purchase that arises from the deemed acquisition. All
controlled entities shall be consolidated in accordance with paragraphs 38–51 of this Standard from
the date of change of status.
64. When an entity becomes an investment entity, it shall cease to consolidate its controlled entities at
the date of the change in status, except for any controlled entity that shall continue to be consolidated
in accordance with paragraph 57. The investment entity shall apply the requirements of paragraphs
52 and 53 to those controlled entities that it ceases to consolidate as though the investment entity
had lost control of those controlled entities at that date.

Transitional Provisions
65. An entity shall apply this Standard retrospectively, in accordance with IPSAS 3, Accounting Policies,
Changes in Accounting Estimates and Errors, except as specified in paragraphs 66–78.
66. Notwithstanding the requirements of paragraph 33 of IPSAS 3, when this Standard is first applied an
entity need only present the quantitative information required by paragraph 33(f) of IPSAS 3 for the
annual period immediately preceding the date of initial application of this Standard (the “immediately
preceding period”). An entity may also present this information for the current period or for earlier
comparative periods, but is not required to do so.
67. For the purposes of this Standard, the date of initial application is the beginning of the annual reporting period
for which this Standard is applied for the first time.
68. At the date of initial application, an entity is not required to make adjustments to the previous accounting for
its involvement with either:
(a) Entities that would be consolidated at that date in accordance with IPSAS 6, Consolidated and
Separate Financial Statements, and are still consolidated in accordance with this Standard; or
(b) Entities that would not be consolidated at that date in accordance with IPSAS 6, and are not
consolidated in accordance with this Standard.

1215 IPSAS 35
 CONSOLIDATED FINANCIAL STATEMENTS

69. At the date of initial application, an entity shall assess whether it is an investment entity on the basis
of the facts and circumstances that exist at that date. If, at the date of initial application, an entity
concludes that it is an investment entity, it shall apply the requirements of paragraphs 70–73 instead
of paragraphs 77–78.
70. Except for any controlled entity that is consolidated in accordance with paragraph 57 (to which
paragraph 68 or paragraphs 77–78, whichever is relevant, apply), an investment entity shall measure
its investment in each controlled entity at fair value through surplus or deficit as if the requirements
of this Standard had always been effective. The investment entity shall retrospectively adjust both
the annual period that immediately precedes the date of initial application and net assets/equity at
the beginning of the immediately preceding period for any difference between:
(a) The previous carrying amount of the controlled entity; and
(b) The fair value of the investment entity’s investment in the controlled entity.
The cumulative amount of any fair value adjustments previously recognized directly in net
assets/equity shall be transferred to accumulated surplus/deficit at the beginning of the annual
period immediately preceding the date of initial application.
71. An investment entity shall use the fair value amounts that were previously reported to investors or
to management.
72. If measuring an investment in a controlled entity in accordance with paragraph 70 is impracticable
(as defined in IPSAS 3), an investment entity shall apply the requirements of this Standard at the
beginning of the earliest period for which application of paragraph 70 is practicable, which may be
the current period. The investor shall retrospectively adjust the annual period that immediately
precedes the date of initial application, unless the beginning of the earliest period for which
application of this paragraph is practicable is the current period. If this is the case, the adjustment to
net assets/equity shall be recognized at the beginning of the current period.
73. If an investment entity has disposed of, or has lost control of, an investment in a controlled entity before the
date of initial application of this Standard, the investment entity is not required to make adjustments to the
previous accounting for that controlled entity.
74. If, at the date of initial application, an entity concludes that it shall consolidate another entity that
was not consolidated in accordance with IPSAS 6, the entity shall measure the assets, liabilities and
non-controlling interests in that previously unconsolidated entity as if that other entity had been
consolidated from the date when the entity obtained control of that other entity on the basis of the
requirements of this Standard. The entity shall adjust retrospectively the annual period immediately
preceding the date of initial application. When the date that control was obtained is earlier than the
beginning of the immediately preceding period, the entity shall recognize, as an adjustment to net
assets/equity at the beginning of the immediately preceding period, any difference between:
(a) The amount of assets, liabilities and non-controlling interests recognized; and
(b) The previous carrying amount of the entity’s involvement with the other entity.
75. If measuring a controlled entity’s assets, liabilities and non-controlling interests in accordance with
paragraph 74(a) or (b) is impracticable (as defined in IPSAS 3), an entity shall measure the assets,
liabilities and non-controlling interests in that previously unconsolidated entity as if that entity had
been consolidated from the deemed acquisition date. The deemed acquisition date shall be the
beginning of the earliest period for which the application of this paragraph is practicable, which may
be the current period.

IPSAS 35 1216
 CONSOLIDATED FINANCIAL STATEMENTS

76. The entity shall adjust retrospectively the annual period immediately preceding the date of initial
application, unless the beginning of the earliest period for which application of this paragraph is
practicable is the current period. When the deemed acquisition date is earlier than the beginning of
the immediately preceding period, the entity shall recognize, as an adjustment to net assets/equity
at the beginning of the immediately preceding period, any difference between:
(a) The amount of assets, liabilities and non-controlling interests recognized; and
(b) The previous carrying amounts of the entity’s involvement with the other entity.
If the earliest period for which application of this paragraph is practicable is the current period, the
adjustment to net assets/equity shall be recognized at the beginning of the current period.
77. If, at the date of initial application, an entity concludes that it will no longer consolidate an entity that
was consolidated in accordance with IPSAS 6, the entity shall measure its interest in the other entity
at the amount at which it would have been measured if the requirements of this Standard had been
effective when the entity became involved with, or lost control of, the other entity. The entity shall
adjust retrospectively the annual period immediately preceding the date of initial application. When
the date that the entity became involved with (but did not obtain control in accordance with this
Standard), or lost control of, the other entity is earlier than the beginning of the immediately
preceding period, the entity shall recognize, as an adjustment to net assets/equity at the beginning
of the immediately preceding period, any difference between:
(a) The previous carrying amount of the assets, liabilities and non-controlling interests; and
(b) The recognized amount of the entity’s interest in the other entity.

78. If measuring the interest in the other entity in accordance with paragraph 77 is impracticable (as
defined in IPSAS 3), an entity shall apply the requirements of this Standard at the beginning of the
earliest period for which application of paragraph 77 is practicable, which may be the current period.
The entity shall adjust retrospectively the annual period immediately preceding the date of initial
application, unless the beginning of the earliest period for which application of this paragraph is
practicable is the current period. When the date that the entity became involved with (but did not
obtain control in accordance with this Standard), or lost control of, the other entity is earlier than the
beginning of the immediately preceding period, the entity shall recognize, as an adjustment to net
assets/equity at the beginning of the immediately preceding period, any difference between:
(a) The previous carrying amount of the assets, liabilities and non-controlling interests; and
(b) The recognized amount of the entity’s interest in the other entity.
If the earliest period for which application of this paragraph is practicable is the current period, the
adjustment to net assets/equity shall be recognized at the beginning of the current period.

Effective Date
79. An entity shall apply this Standard for annual financial statements covering periods beginning on or
after January 1, 2017. Earlier application is encouraged. If an entity applies this Standard for a period
beginning before January 1, 2017, it shall disclose that fact and apply IPSAS 34, Separate Financial
Statements, IPSAS 36, IPSAS 37, and IPSAS 38 at the same time.
79A. Paragraphs 11, 12 and 13 were deleted and paragraph 8 was amended by The Applicability of IPSAS,
issued in April 2016. An entity shall apply those amendments for annual financial statements
covering periods beginning on or after January 1, 2018. Earlier application is encouraged. If an entity
applies the amendments for a period beginning before January 1, 2018, it shall disclose that fact.

1217 IPSAS 35
 CONSOLIDATED FINANCIAL STATEMENTS

79B. Paragraph 6 was amended by IPSAS 39, Employee Benefits, issued in July 2016. An entity shall apply
that amendment for annual financial statements covering periods beginning on or after January 1,
2018. Earlier application is encouraged. If an entity applies the amendment for a period beginning
before January 1, 2018 it shall disclose that fact and apply IPSAS 39 at the same time.
79C. Paragraphs 4, 40, 56, 57 and 63 were amended by IPSAS 40, Public Sector Combinations, issued in
January 2017. An entity shall apply these amendments for annual financial statements covering
periods beginning on or after January 1, 2019. Earlier application is encouraged. If an entity applies
the amendments for a period beginning before January 1, 2019 it shall disclose that fact and apply
IPSAS 40 at the same time.
79D. Paragraph 52 was amended and paragraph 55A added by IPSAS 40, Public Sector Combinations,
issued in January 2017. An entity shall apply these amendments prospectively for annual financial
statements covering periods beginning on or after a date to be determined by the IPSASB. Earlier
application is permitted. If an entity applies the amendments earlier, it shall disclose that fact and, if
it has not already done so, apply IPSAS 40 at the same time.
79E. Paragraphs 22, 45, 52, 55A, 56, 58 and AG105 were amended by IPSAS 41, issued in August 2018. An
entity shall apply these amendments for annual financial statements covering periods beginning on
or after January 1, 2023. Earlier application is encouraged. If an entity applies the amendments for a
period beginning before January 1, 2023 it shall disclose that fact and apply IPSAS 41 at the same
time.
79F. Paragraph AG13 was amended by IPSAS 47, Revenue, issued in May 2023. An entity shall apply this
amendment for annual financial statements covering periods beginning on or after January 1, 2026.
Earlier application is encouraged. If an entity applies the amendment for a period beginning before
January 1, 2026, it shall disclose that fact and apply IPSAS 47 at the same time.
80. When an entity adopts the accrual basis IPSAS as defined in IPSAS 33, First-time Adoption of Accrual Basis
International Public Sector Accounting Standards (IPSAS) for financial reporting purposes subsequent to this
effective date, this Standard applies to the entity’s annual financial statements covering periods beginning
on or after the date of adoption of IPSAS.

Withdrawal and Replacement of IPSAS 6 (December 2006)

81. This Standard is issued concurrently with IPSAS 34. Together, the two Standards supersede IPSAS 6
(December 2006). IPSAS 6 remains applicable until IPSAS 34 and IPSAS 35 are applied or become effective,
whichever is earlier.

IPSAS 35 1218
 CONSOLIDATED FINANCIAL STATEMENTS

Appendix A
Application Guidance
This Appendix is an integral part of IPSAS 35.
AG1. The examples in this appendix portray hypothetical situations. Although some aspects of the examples may
be present in actual fact patterns, all facts and circumstances of a particular fact pattern would need to be
evaluated when applying IPSAS 35, Consolidated Financial Statements.

Assessing Control

AG2. To determine whether it controls another entity an entity shall assess whether it has all the following:

(a) Power over the other entity;

(b) Exposure, or rights, to variable benefits from its involvement with the other entity; and

(c) The ability to use its power over the other entity to affect the nature or amount of the benefits from its
involvement with the other entity.

AG3. Consideration of the following factors may assist in making that determination:

(a) The purpose and design of the other entity (see paragraphs AG5–AG8);

(b) What the relevant activities are and how decisions about those activities are made (see
paragraphs AG13–AG15);

(c) Whether the rights of the entity give it the current ability to direct the relevant activities of the other
entity (see paragraphs AG16–AG56);

(d) Whether the entity is exposed, or has rights, to variable benefits from its involvement with the other
entity (see paragraph AG57–AG58); and

(e) Whether the entity has the ability to use its power over the other entity to affect the nature or amount
of the benefits from its involvement with the other entity (see paragraphs AG60–AG74).

AG4. When assessing whether it controls another entity, an entity shall consider the nature of its relationship with
other parties (see paragraphs AG75–AG77).

Purpose and Design of another Entity

AG5. An entity shall consider the purpose and design of the entity being assessed for control in order to identify
the relevant activities, how decisions about the relevant activities are made, who has the current ability to
direct those activities and who benefits from those activities.

AG6. When the purpose and design of the entity being assessed for control are considered, it may be clear that
the entity being assessed for control is controlled by means of equity instruments that give the holder
proportionate voting rights, such as ordinary shares. In this case, in the absence of any additional
arrangements that alter decision-making, the assessment of control focuses on which party, if any, is able to
exercise voting rights sufficient to determine the operating and financing policies of the entity being assessed
for control (see paragraphs AG32–AG52). In the most straightforward case, the entity that holds a majority
of those voting rights, in the absence of any other factors, controls the other entity.

AG7. To determine whether an entity controls another entity in more complex cases, it may be necessary to
consider some or all of the other factors in paragraph AG3.

AG8. Voting rights may not be the dominant factor in deciding who controls the entity being assessed for control.
If there are voting rights they may be limited in scope. The relevant activities of the entity being assessed for

1219 IPSAS 35 APPLICATION GUIDANCE

 CONSOLIDATED FINANCIAL STATEMENTS

control may be directed by means of binding arrangements or provisions in founding documents such as
articles of association or a constitution. In such cases, an entity’s consideration of the purpose and design of
the entity being assessed for control shall also include consideration of the risks to which the other entity was
designed to be exposed, the risks it was designed to pass on to the parties involved and whether the entity
is exposed to some or all of those risks. Consideration of the risks includes not only the downside risk, but
also the potential for upside.

Power
AG9. To have power over another entity, an entity must have existing rights that give it the current ability to direct
the relevant activities. For the purpose of assessing power, only substantive rights and rights that are not
protective shall be considered (see paragraphs AG25–AG31).

AG10. The determination about whether an entity has power depends on the relevant activities, the way decisions
about the relevant activities are made and the rights of the entity and other entities in relation to the potentially
controlled entity.

AG11. An entity normally will have power over an entity that it has established when the constituting document or
enabling legislation specifies the operating and financing activities that are to be carried out by that entity.
However, the impact of the constituting document or legislation is evaluated in the light of other prevailing
circumstances, as all facts and circumstances need to be considered in assessing whether an entity has
power over another entity. For example, a government may not have power over a research and development
corporation that operates under a mandate created, and limited, by legislation if that or other legislation
assigns power to direct the relevant activities to other entities that are not controlled by the government.

Regulatory Control
AG12. Regulatory control does not usually give rise to power over an entity for the purposes of this Standard.
Governments and other public sector bodies, including supranational bodies, may have wide ranging powers
to establish the regulatory framework within which entities operate, to impose conditions or sanctions on their
operations and to enforce those conditions or sanctions. For example, governments and other public sector
bodies may enact regulations to protect the health and safety of the community, restrict the sale or use of
dangerous goods or specify the pricing policies of monopolies. However, when regulation is so tight as to
effectively dictate how the entity performs its business, then it may be necessary to consider whether the
purpose and design of the entity is such that it is controlled by the regulating entity.

Relevant Activities and Direction of Relevant Activities

AG13. For many entities, a range of operating and financing activities significantly affect the benefits they generate.
Any activity that assists in achieving or furthering the objectives of a controlled entity may affect the benefits
to the controlling entity. Examples of activities that, depending on the circumstances, can be relevant
activities include, but are not limited to:

(a) Using assets and incurring liabilities to provide services to service recipients;

(b) Distributing funds to specified individuals or groups;

(c) Collecting revenue;

(d) Selling and purchasing of goods or services;

(e) Managing physical assets;

(f) Managing financial assets during their life (including upon default);

(g) Selecting, acquiring or disposing of assets;

IPSAS 35 APPLICATION GUIDANCE 1220

 CONSOLIDATED FINANCIAL STATEMENTS

(h) Managing a portfolio of liabilities;

(i) Researching and developing new products or processes; and

(j) Determining a funding structure or obtaining funding.

AG14. Examples of decisions about relevant activities include but are not limited to:
(a) Establishing operating and capital decisions of an entity, including budgets; and

(b) Appointing and remunerating an entity’s key management personnel or service providers and termi-
nating their services or employment.
AG15. In some situations, activities both before and after a particular set of circumstances arises or event occurs,
may be relevant activities. When two or more entities have the current ability to direct relevant activities and
those activities occur at different times, those entities shall determine which entity is able to direct the
activities that most significantly affect those benefits consistently with the treatment of concurrent decision-
making rights (see paragraph 28). The entities concerned shall reconsider this assessment over time if
relevant facts or circumstances change.

Rights that Give an Entity Power over another Entity

AG16. Power arises from rights. To have power over another entity, an entity must have existing rights that give the
entity the current ability to direct the relevant activities of the other entity. The rights that may give an entity
power can differ.

AG17. Examples of rights that, either individually or in combination, can give an entity power include but are not
limited to:

(a) Rights to give policy directions to the governing body of another entity that give the holder the ability
to direct the relevant activities of the other entity;

(b) Rights in the form of voting rights (or potential voting rights) of another entity (see paragraphs AG32–
AG52);

(c) Rights to appoint, reassign or remove members of another entity’s key management personnel who
have the ability to direct the relevant activities;

(d) Rights to appoint or remove another entity that directs the relevant activities;

(e) Rights to approve or veto operating and capital budgets relating to the relevant activities of another
entity;

(f) Rights to direct the other entity to enter into, or veto any changes to, transactions for the benefit of the
entity;

(g) Rights to veto key changes to the other entity, such as the sale of a major asset or of the other entity
as a whole; and
(h) Other rights (such as decision-making rights specified in a management contract) that give the holder
the ability to direct the relevant activities.

AG18. In considering whether it has power, an entity will need to consider the binding arrangements that are in place
and the mechanism(s) by which it has obtained power. Ways in which an entity may have obtained power,
either individually or in combination with other arrangements, include:

(a) Legislative or executive authority;

(b) Administrative arrangements;

1221 IPSAS 35 APPLICATION GUIDANCE

 CONSOLIDATED FINANCIAL STATEMENTS

(c) Contractual arrangements;

(d) Founding documents (for example, articles of association); and

(e) Voting or similar rights.

AG19. To determine whether an entity has rights sufficient to give it power, the entity shall also consider the purpose
and design of the other entity (see paragraphs AG5–AG8) and the requirements in paragraphs AG53–AG56
together with paragraphs AG20–AG22.

AG20. In some circumstances it may be difficult to determine whether an entity’s rights are sufficient to give it power
over another entity. In such cases, to enable the assessment of power to be made, the entity shall consider
evidence of whether it has the practical ability to direct the relevant activities unilaterally. Consideration is
given, but is not limited, to the following, which, when considered together with its rights and the indicators in
paragraphs AG21 and AG22, may provide evidence that the entity’s rights are sufficient to give it power over
the other entity:

(a) The entity can, without having the contractual right to do so, appoint or approve the other entity’s key
management personnel who have the ability to direct the relevant activities;

(b) The entity can, without having the contractual right to do so, direct the other entity to enter into, or can
veto any changes to, significant transactions for the benefit of the entity;

(c) The entity can dominate either the nominations process for electing members of the other entity’s
governing body or the obtaining of proxies from other holders of voting rights;

(d) The other entity’s key management personnel are related parties of the entity (for example, the chief
executive officer of the other entity and the chief executive officer of the entity are the same person);
or

(e) The majority of the members of the other entity’s governing body are related parties of the entity.

AG21. Sometimes there will be indications that the entity has a special relationship with the other entity, which
suggests that the entity has more than a passive interest in the other entity. The existence of any individual
indicator, or a particular combination of indicators, does not necessarily mean that the power criterion is met.
However, if an entity has more than a passive interest in another entity this may indicate that the entity has
other related rights sufficient to give it power or provide evidence of existing power over another entity. For
example, the following suggests that the entity has more than a passive interest in the other entity and, in
combination with other rights, may indicate power:

(a) The relationship between the entity and the other entity’s operations is one of dependence, such as in
the following situations:
(i) The entity funds a significant portion of the other entity’s operations and the other entity depends
on this.

(ii) The entity guarantees a significant portion of the other entity’s obligations, and the other entity
depends on this.

(iii) The entity provides critical services, technology, supplies or raw materials to the other entity,
and the other entity depends on this.

(iv) The entity controls assets such as licenses or trademarks that are critical to the other entity’s
operations and the other entity depends on this.

(v) The entity provides key management personnel to the other entity (for example, when the entity’s
personnel have specialized knowledge of the other entity’s operations) and the other entity de-
pends on this.
IPSAS 35 APPLICATION GUIDANCE 1222
 CONSOLIDATED FINANCIAL STATEMENTS

(b) A significant portion of the other entity’s activities either involve or are conducted on behalf of the entity.
(c) The entity’s exposure, or rights, to benefits from its involvement with the other entity is
disproportionately greater than its voting or other similar rights. For example, there may be a
situation in which an entity is entitled, or exposed, to more than half of the benefits of the other
entity but holds less than half of the voting rights of the other entity.

AG22. Public sector entities often have special relationships with other parties as a result of the indicators listed in
paragraph AG21. Public sector entities often fund the activities of other entities. Economic dependence is
discussed in paragraphs AG41 to AG42.

AG23. The greater an entity’s exposure, or rights, to variability of benefits from its involvement with another entity,
the greater is the incentive for the entity to obtain rights sufficient to give it power. Therefore, having a large
exposure to variability of benefits is an indicator that the entity may have power. However, the extent of the
entity’s exposure does not, in itself, determine whether an entity has power over the other entity.

AG24. When the factors set out in paragraph AG20 and the indicators set out in paragraphs AG21–AG23 are con-
sidered together with an entity’s rights, greater weight shall be given to the evidence of power described in
paragraph AG20.

Substantive Rights

AG25. An entity, in assessing whether it has power, considers only substantive rights relating to another entity (held
by the entity and others). For a right to be substantive, the holder must have the practical ability to exercise
that right.
AG26. Determining whether rights are substantive requires judgment, taking into account all facts and circum-
stances. Factors to consider in making that determination include but are not limited to:

(a) Whether there are any barriers (economic or otherwise) that prevent the holder (or holders) from
exercising the rights. Examples of such barriers include but are not limited to:

(i) Financial penalties and incentives that would prevent (or deter) the holder from exercising its
rights.

(ii) An exercise or conversion price that creates a financial barrier that would prevent (or deter) the
holder from exercising its rights.

(iii) Terms and conditions that make it unlikely that the rights would be exercised, for example,
conditions that narrowly limit the timing of their exercise.

(iv) The absence of an explicit, reasonable mechanism in the founding documents of another entity
or in applicable laws or regulations that would allow the holder to exercise its rights.

(v) The inability of the holder of the rights to obtain the information necessary to exercise its rights.

(vi) 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 specialized services or
provide the services and take on other interests held by the incumbent manager).

(vii) Legal or regulatory requirements that limit the manner in which rights may be exercised or that
prevent the holder from exercising its rights (e.g., where another entity has statutory powers
which permit it to operate independently of the government or where a foreign entity is prohibited
from exercising its rights).

(b) When the exercise of rights requires the agreement of more than one party, or when the rights are held
by more than one party, whether a mechanism is in place that provides those parties with the practical

1223 IPSAS 35 APPLICATION GUIDANCE

 CONSOLIDATED FINANCIAL STATEMENTS

ability to exercise their rights collectively if they choose to do so. The lack of such a mechanism is an
indicator that the rights may not be substantive. The more parties that are required to agree to exercise
the rights, the less likely it is that those rights are substantive. However, a board of directors (or other
governing body) whose members are independent of the decision maker may serve as a mechanism
for numerous entities (or other parties) to act collectively in exercising their rights. Therefore, removal
rights exercisable by an independent board of directors (or other governing body) are more likely to be
substantive than if the same rights were exercisable individually by a large number of entities (or other
parties).

(c) Whether the party or parties that hold the rights would benefit from the exercise of those rights. For
example, the holder of potential voting rights in another entity (see paragraphs AG49–AG52) shall
consider the exercise or conversion price of the instrument. The terms and conditions of potential voting
rights are more likely to be substantive when the instrument is in the money or the entity would benefit
for other reasons (e.g., by realizing synergies between the entity and the other entity) from the exercise
or conversion of the instrument.

AG27. To be substantive, rights also need to be exercisable when decisions about the direction of the relevant
activities need to be made. Usually, to be substantive, the rights need to be currently exercisable. However,
sometimes rights can be substantive, even though the rights are not currently exercisable.

AG28. Substantive rights exercisable by other parties can prevent an entity from controlling the entity being
assessed for control, to which those rights relate. Such substantive rights do not require the holders to have
the ability to initiate decisions. As long as the rights are not merely protective (see paragraphs AG29–AG31),
substantive rights held by other parties may prevent the entity from controlling the entity being assessed for
control even if the rights give the holders only the current ability to approve or block decisions that relate to
the relevant activities.

Protective Rights

AG29. In evaluating whether rights give an entity power over another entity, the entity shall assess whether its rights,
and rights held by others, are protective rights. Protective rights relate to fundamental changes to the
activities of another entity or apply in exceptional circumstances. However, not all rights that apply in
exceptional circumstances or are contingent on events are protective (see paragraphs AG15 and AG55).
AG30. Because protective rights are designed to protect the interests of their holder without giving that party power
over the entity to which those rights relate, an entity that holds only protective rights cannot have power or
prevent another party from having power over the entity to which those rights relate (see paragraph 29).

AG31. Examples of protective rights include but are not limited to:

(a) A lender’s right to restrict a borrower from undertaking activities that could significantly change the
credit risk of the borrower to the detriment of the lender.

(b) The right of a party holding a non-controlling interest in an entity to approve capital expenditure greater
than that required in the ordinary course of business, or to approve the issue of equity or debt
instruments.
(c) The right of a lender to seize the assets of a borrower if the borrower fails to meet specified loan
repayment conditions.

(d) The right of a regulator to curtail or close the operations of entities that are not complying with
regulations or other requirements. For example, a pollution control authority may be able to close down
activities of an entity that breaches environmental regulations.

IPSAS 35 APPLICATION GUIDANCE 1224

 CONSOLIDATED FINANCIAL STATEMENTS

(e) The right to remove members of the governing body of another entity under certain restricted circum-
stances. For example, a state government may be able to remove or suspend the chairman of a mu-
nicipality and appoint an administrator if the municipality is unable to make timely decisions about key
policies.
(f) The right of the government to remove tax deductibility for contributions to a not-for-profit entity if the
entity significantly changes its objectives or activities.

(g) The right of an entity providing resources to a charity to demand that, if the charity were to be liquidated,
the net assets of the charity would be distributed to an organization undertaking similar activities. (How-
ever, if the entity had the power to determine specifically to where the charity’s net assets would be
distributed upon liquidation, the entity would have substantive rights in relation to the charity).

Voting Rights
AG32. Where an entity has voting or similar rights in respect of another entity, an entity should consider whether
those rights give it the current ability to direct the relevant activities of the other entity. An entity considers the
requirements in this section (paragraphs AG33–AG52) in making that assessment.

Power with a Majority of the Voting Rights

AG33. An entity that holds more than half of the voting rights of another entity has power in the following situations,
unless paragraph AG34 or paragraph AG35 applies:

(a) The relevant activities are directed by a vote of the holder of the majority of the voting rights; or

(b) A majority of the members of the governing body that directs the relevant activities are appointed by a
vote of the holder of the majority of the voting rights.

Majority of the Voting Rights but no Power

AG34. For an entity that holds more than half of the voting rights of another entity, to have power over that other
entity, the entity’s voting rights must be substantive, in accordance with paragraphs AG25–AG28, and must
provide the entity with the current ability to direct the relevant activities, which often will be through
determining operating and financing policies. If another entity has existing rights that provide that entity with
the right to direct the relevant activities and that entity is not an agent of the entity making the assessment of
control, the entity making the assessment of control does not have power over the other entity.

AG35. An entity does not have power over another entity, even though the entity holds the majority of the voting
rights in the other entity, when those voting rights are not substantive. For example, an entity that has more
than half of the voting rights in another entity cannot have power if the relevant activities are subject to
direction by a government, court, administrator, receiver, liquidator or regulator.

Power without a Majority of the Voting Rights

AG36. An entity can have power even if it holds less than a majority of the voting rights of another entity. An entity
can have power with less than a majority of the voting rights of another entity, for example, through:

(a) The power to appoint or remove a majority of the members of the board of directors (or other governing
body), and control of the other entity is by that board or by that body (see paragraph AG38);

(b) A binding arrangement between the entity and other vote holders (see paragraph AG39);

(c) Rights arising from other binding arrangements (see paragraph AG40);
(d) The entity’s voting rights (see paragraphs AG37 and AG43–AG48);

(e) Potential voting rights (see paragraphs AG49–AG52); or

1225 IPSAS 35 APPLICATION GUIDANCE

 CONSOLIDATED FINANCIAL STATEMENTS

(f) A combination of (a)–(e).

Special Voting Rights Attaching to Ownership Interests (Golden Shares)

AG37. An entity may have the right of decisive vote, thus to veto all other voting rights of another entity. This type
of right is sometimes referred to as a “golden share”. Such special voting rights may give rise to power.
Usually these rights are documented in the founding documents of the other entity (such as articles of
association), and are designed to restrict the level of voting or other rights that may be held by certain parties.
They may also give an entity veto powers over any major change in the other entity, such as the sale of a
major asset or the sale of the other entity as a whole.

Control of the Board or Other Governing Body

AG38. An entity may have the power to appoint or remove a majority of the members of the board of directors (or
other governing body) as a result of binding arrangements (including existing legislation, executive authority,
regulation, contractual, or other arrangements).

Binding Arrangement with Other Vote Holders

AG39. A binding arrangement between an entity and other vote holders can give the entity the right to exercise
voting rights sufficient to give the entity power, even if the entity does not have voting rights sufficient to give
it power without the binding arrangement. However, a binding arrangement might ensure that the entity can
direct enough other vote holders on how to vote to enable the entity to make decisions about the relevant
activities.

Rights from Other Binding Arrangements

AG40. Other decision-making rights, in combination with voting rights, can give an entity the current ability to direct
the relevant activities. For example, the rights specified in a binding arrangement in combination with voting
rights may give an entity the current ability to direct the operating or financing policies or other key activities
of another entity that significantly affect the benefits received by the entity. However, an entity would not
control another entity if that other entity were able to determine its policy or program to a significant extent,
(for example, by failing to comply with the binding arrangement and accepting the consequences, or by
changing its constitution or dissolving itself).

Economic Dependence
AG41. Economic dependence, alone, does not give rise to power over an entity for the purposes of this Standard.
Economic dependence may occur when:

(a) An entity has a single major client and the loss of that client could affect the existence of the entity’s
operations; or

(b) An entity’s activities are predominantly funded by grants and donations and it receives the majority of
its funding from a single entity.
AG42. An entity may be able to influence the financial and operating policies of another entity that is dependent on
it for funding. However, a combination of factors will need to be considered to determine whether the
economic dependence is such that the economically dependent entity no longer has the ultimate power to
govern its own financial or operating policies. If an economically dependent entity retains discretion as to
whether it will take funding from an entity, or do business with an entity, the economically dependent entity
still has the ultimate power to govern its own financial or operating policies. For example, a private school
that accepts funding from a government but whose governing body has retained discretion with respect to
accepting funds or the manner in which those funds are to be used, would still have the ultimate power to
govern its own financial or operating policies. This may be so even if government grants provided to such an

IPSAS 35 APPLICATION GUIDANCE 1226

 CONSOLIDATED FINANCIAL STATEMENTS

entity requires it to comply with specified conditions. Although the entity might receive government grants for
the construction of capital assets and operating costs subject to specified service standards or restrictions
on user fees, its governing bodies may have ultimate discretion about how assets are used; the entity would
therefore control its financial and operating policies. It is also important to distinguish between the operations
of an entity and an entity itself. The loss of a major client might affect the viability of the operations of an
entity but not the existence of the entity itself.

The Entity’s Voting Rights

AG43. An entity with less than a majority of the voting rights has rights that are sufficient to give it power when the
entity has the practical ability to direct the relevant activities unilaterally.

AG44. When assessing whether an entity’s voting rights are sufficient to give it power, an entity considers all facts
and circumstances, including:
(a) The size of the entity’s holding of voting rights relative to the size and dispersion of holdings of the
other vote holders, noting that:

(i) The more voting rights an entity holds, the more likely the entity is to have existing rights that
give it the current ability to direct the relevant activities;

(ii) The more voting rights an entity holds relative to other vote holders, the more likely the entity is
to have existing rights that give it the current ability to direct the relevant activities;

(iii) The more parties that would need to act together to outvote the entity, the more likely the entity
is to have existing rights that give it the current ability to direct the relevant activities;

(b) Potential voting rights held by the entity, other vote holders or other parties (see paragraphs AG49–
AG52);

(c) Rights arising from other binding arrangements (see paragraph AG40); and

(d) Any additional facts and circumstances that indicate the entity has, or does not have, the current ability
to direct the relevant activities at the time that decisions need to be made, including voting patterns at
previous shareholders’ meetings.

AG45. When the direction of relevant activities is determined by majority vote and an entity holds significantly more
voting rights than any other vote holder or organized group of vote holders, and the other shareholdings are
widely dispersed, it may be clear, after considering the factors listed in paragraph AG44(a)–(c) alone, that
the entity has power over the other entity.

AG46. In other situations, it may be clear after considering the factors listed in paragraph AG44(a)–(c) alone that an
entity does not have power.

AG47. However, the factors listed in paragraph AG44(a)–(c) alone may not be conclusive. If an entity, having
considered those factors, is unclear whether it has power, it shall consider additional facts and circumstances,
such as whether other shareholders are passive in nature as demonstrated by voting patterns at previous
shareholders’ meetings. This includes the assessment of the factors set out in paragraph AG20 and the
indicators in paragraphs AG21–AG23. The fewer voting rights the entity holds, and the fewer parties that
would need to act together to outvote the entity, the more reliance would be placed on the additional facts
and circumstances to assess whether the entity’s rights are sufficient to give it power. When the facts and
circumstances in paragraphs AG20–AG23 are considered together with the entity’s rights, greater weight
shall be given to the evidence of power in paragraph AG20 than to the indicators of power in paragraphs
AG21–AG23.

1227 IPSAS 35 APPLICATION GUIDANCE

 CONSOLIDATED FINANCIAL STATEMENTS

AG48. If it is not clear, having considered the factors listed in paragraph AG44(a)–(d), that the entity has power, the
entity does not control the other entity.

Potential Voting Rights

AG49. When assessing control, an entity considers its potential voting rights as well as potential voting rights held
by other parties, to determine whether it has power. Potential voting rights are rights to obtain voting rights
of another entity, such as those arising from convertible instruments or options, including forward contracts.
Those potential voting rights are considered only if the rights are substantive (see paragraphs AG25–AG28).

AG50. When considering potential voting rights, an entity shall consider the purpose and design of the instrument,
as well as the purpose and design of any other involvement the entity has with the other entity. This includes
an assessment of the various terms and conditions of the instrument as well as the entity’s apparent
expectations, motives and reasons for agreeing to those terms and conditions.

AG51. If the entity also has voting or other decision-making rights relating to the other entity’s activities, the entity
assesses whether those rights, in combination with potential voting rights, give the entity power.

AG52. Substantive potential voting rights alone, or in combination with other rights, can give an entity the current
ability to direct the relevant activities. For example, this is likely to be the case when an entity holds 40 per
cent of the voting rights of another entity and, in accordance with paragraph AG26, holds substantive rights
arising from options to acquire a further 20 per cent of the voting rights.

Power when Voting or Similar Rights do not have a Significant Effect on Benefits
AG53. In assessing the purpose and design of another entity (see paragraphs AG5–AG8), an entity shall consider
the involvement and decisions made at the inception of the other entity as part of its design and evaluate
whether the transaction terms and features of the involvement provide the entity with rights that are sufficient
to give it power. Being involved in the design of another entity alone is not sufficient to give an entity control
of that other entity. However, involvement in the design of the other entity may indicate that the entity had
the opportunity to obtain rights that are sufficient to give it power over the other entity and hence the ability
to determine the purpose and design of an entity may give rise to power. In the case of an entity established
with most (or all) of its relevant activities predetermined at inception, having the ability to determine the
purpose and design of an entity may be more relevant to the control assessment than any on-going decision-
making rights.

AG54. In addition, an entity shall consider rights arising from binding arrangements such as call rights, put rights,
liquidation rights and rights arising from legislative or executive authority established at the inception of the
other entity. When binding arrangements involve activities that are closely related to the other entity, then
these activities are, in substance, an integral part of the other entity’s overall activities, even though they may
occur outside the legal boundaries of the other entity. Therefore, explicit or implicit decision-making rights
embedded in binding arrangements that are closely related to the other entity need to be considered as
relevant activities when determining power over the other entity.

AG55. For some other entities, relevant activities occur only when particular circumstances arise or events occur.
The other entity may be designed so that the direction of its activities and the benefits from those activities
are predetermined unless and until those particular circumstances arise or events occur. In this case, only
the decisions about the other entity’s activities when those circumstances or events occur can significantly
affect its benefits and thus be relevant activities. The circumstances or events need not have occurred for an
entity with the ability to make those decisions to have power. The fact that the right to make decisions is
contingent on circumstances arising or an event occurring does not, in itself, make those rights protective.

AG56. An entity may have an explicit or implicit commitment to ensure that another entity continues to operate as
designed. Such a commitment may increase the entity’s exposure to variability of benefits and thus increase

IPSAS 35 APPLICATION GUIDANCE 1228

 CONSOLIDATED FINANCIAL STATEMENTS

the incentive for the entity to obtain rights sufficient to give it power. Therefore a commitment to ensure that
another entity operates as designed may be an indicator that the entity has power, but does not, by itself,
give an entity power, nor does it prevent another party from having power.

Exposure, or Rights, to Variable Benefits from another Entity

AG57. When assessing whether an entity has control of another entity, the entity determines whether it is exposed,
or has rights, to variable benefits from its involvement with the other entity.

AG58. Variable benefits are benefits that are not fixed and have the potential to vary as a result of the performance
of another entity. Variable benefits can be only positive, only negative or both positive and negative (see
paragraph 30). An entity assesses whether benefits from another entity are variable and how variable those
benefits are on the basis of the substance of the arrangement and regardless of the legal form of the benefits.
For example:
(a) In the context of non-financial benefits an entity may receive benefits as a result of the activities of
another entity furthering its objectives. The benefits may be variable benefits for the purpose of this
Standard because they may expose the entity to the performance risk of the other entity. If the other
entity were unable to perform those activities then the entity might incur additional costs, either from
undertaking the activities itself or by providing additional funds or other forms of assistance to enable
the other entity to continue providing those activities.

(b) In the context of financial benefits an entity can hold a bond with fixed interest payments. The fixed
interest payments are variable benefits for the purpose of this Standard because they are subject to
default risk and they expose the entity to the credit risk of the issuer of the bond. The amount of
variability (i.e., how variable those benefits are) depends on the credit risk of the bond. Similarly, fixed
performance fees for managing another entity’s assets are variable benefits because they expose the
entity to the performance risk of the other entity. The amount of variability depends on the other entity’s
ability to generate sufficient revenue to pay the fee.

AG59. A liquidator would not normally have rights to variable benefits from its involvement with the entity being
liquidated.

Link between Power and Benefits

Delegated Power

AG60. It is common for public sector entities to be responsible for carrying out government policy. In some cases
they may have the authority to act in their own right, in other cases they may act as an agent for a Minister
or another entity. For example:

(a) A government department, which is authorized by a Minister to act on the Minister’s behalf, might act
solely as an agent of the responsible Minister in relation to another entity. In such cases the department
would not control the other entity and would not consolidate it.

(b) A government department may operate under a delegation of power from a Minister. The department
uses its own discretion in making decisions and taking actions and is not subject to direction from the
Minister. In such cases the department is acting in its own right and would need to apply the other
requirements of this Standard to determine whether it controlled another entity. The scope of the
department’s decision-making authority over another entity would be a significant factor in
distinguishing whether it is acting as an agent or as a principal.

(c) An entity may establish a trust to carry out specified activities and appoints the trustee. The trustee is
responsible for making decisions about the financing and operating activities of the trust in accordance
with the trust deed. If the entity can replace the trustee at its discretion, the entity would need to assess

1229 IPSAS 35 APPLICATION GUIDANCE

 CONSOLIDATED FINANCIAL STATEMENTS

whether it controls the trust given that, for example, it would be exposed, or have rights, to variable
benefits in terms of the extent to which its objectives are achieved or furthered through the activities of
the trust.

AG61. An entity may delegate its decision-making authority to an agent on some specific issues or on all relevant
activities. When assessing whether it controls another entity, the entity shall treat the decision-making rights
delegated to its agent as held by the entity directly. In situations where there is more than one principal, each
of the principals shall assess whether it has power over the other entity by considering the requirements in
paragraphs AG5–AG56. Paragraphs AG62–AG74 provide guidance on determining whether a decision
maker is an agent or a principal.

AG62. A decision maker shall consider the overall relationship between itself, the other entity being managed (and
assessed for control) and other parties involved with that entity. In particular, a decision maker shall consider
all the factors below, in determining whether it is an agent:

(a) The scope of its decision-making authority over the other entity (paragraphs AG64 and AG65);

(b) The rights held by other parties (paragraphs AG66–AG69);

(c) The remuneration to which it is entitled in accordance with the remuneration agreement(s) (paragraphs
AG70–AG72); and
(d) The decision maker’s exposure to variability of benefits from other interests that it holds in the other
entity (paragraphs AG73 and AG74).

Different weightings shall be applied to each of the factors on the basis of particular facts and circumstances.

AG63. Determining whether a decision maker is an agent requires an evaluation of all the factors listed in paragraph
AG62 unless a single party holds substantive rights to remove the decision maker (removal rights) and can
remove the decision maker without cause (see paragraph AG67).

The Scope of the Decision-Making Authority

AG64. The scope of a decision maker’s decision-making authority is evaluated by considering:

(a) The activities that are permitted according to the decision-making agreement(s) and specified by law,
and
(b) The discretion that the decision maker has when making decisions about those activities.

AG65. A decision maker shall consider the purpose and design of the other entity, the risks to which the other entity
was designed to be exposed, the risks it was designed to pass on to the parties involved and the level of
involvement the decision maker had in the design of another entity. For example, if a decision maker is
significantly involved in the design of the other entity (including in determining the scope of decision-making
authority), that involvement may indicate that the decision maker had the opportunity and incentive to obtain
rights that result in the decision maker having the ability to direct the relevant activities.

Rights held by Other Parties

AG66. Substantive rights held by other parties may affect the decision maker’s ability to direct the relevant activities
of another entity. Substantive removal or other rights may indicate that the decision maker is an agent.

AG67. When a single party holds substantive removal rights and can remove the decision maker without cause, this,
in isolation, is sufficient to conclude that the decision maker is an agent. If more than one party holds such rights
(and no individual party can remove the decision maker without the agreement of other parties) those rights are
not, in isolation, conclusive in determining that a decision maker acts primarily on behalf and for the benefit of
others. In addition, the greater the number of parties required to act together to exercise rights to remove a

IPSAS 35 APPLICATION GUIDANCE 1230

 CONSOLIDATED FINANCIAL STATEMENTS

decision maker and the greater the magnitude of, and variability associated with, the decision maker’s other
economic interests (i.e., remuneration and other interests), the less the weighting that shall be placed on this
factor.

AG68. Substantive rights held by other parties that restrict a decision maker’s discretion shall be considered in a
similar manner to removal rights when evaluating whether the decision maker is an agent. For example, a
decision maker that is required to obtain approval from a small number of other parties for its actions is
generally an agent. (See paragraphs AG25–AG28 for additional guidance on rights and whether they are
substantive).

AG69. Consideration of the rights held by other parties shall include an assessment of any rights exercisable by
another entity’s board of directors (or other governing body) and their effect on the decision-making authority
(see paragraph AG26(b)).

Remuneration
AG70. The greater the magnitude of, and variability associated with, the decision maker’s remuneration relative to
the benefits expected from the activities of the other entity, the more likely the decision maker is a principal.

AG71. In determining whether it is a principal or an agent the decision maker shall also consider whether the
remuneration agreement includes only terms, conditions or amounts that are customarily present in
arrangements for similar services and level of skills negotiated on an arm’s length basis.

AG72. A decision maker cannot be an agent unless the conditions set out in paragraph AG74(a) and (b) are present.
However, meeting those conditions in isolation is not sufficient to conclude that a decision maker is an agent.

Exposure to Variability of Benefits from Other Interests

AG73. A decision maker that holds other interests in another entity (e.g., investments in the other entity or provides
guarantees with respect to the performance of the other entity), shall consider its exposure to variability of
benefits from those interests in assessing whether it is an agent. Holding other interests in another entity
indicates that the decision maker may be a principal.

AG74. In evaluating its exposure to variability of benefits from other interests in the other entity a decision maker
shall consider the following:

(a) 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.

(b) Whether its exposure to variability of benefits is different from that of the other entities that receive
benefits from the entity being assessed for control 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, another entity.

The decision maker shall evaluate its exposure relative to the total variability of benefits of the other entity.
This evaluation is made primarily on the basis of benefits expected from the activities of the other entity but
shall not ignore the decision maker’s maximum exposure to variability of benefits of the other entity through
other interests that the decision maker holds.

Relationship with Other Parties

AG75. When assessing control, an entity shall consider the nature of its relationship with other parties and whether
those other parties are acting on the entity’s behalf (i.e., they are “de facto agents”). The determination of
whether other parties are acting as de facto agents requires judgment, considering not only the nature of the
relationship but also how those parties interact with each other and the entity.

1231 IPSAS 35 APPLICATION GUIDANCE

 CONSOLIDATED FINANCIAL STATEMENTS

AG76. Such a relationship need not involve a binding arrangement. Such relationships could also arise from legis-
lative or executive authority that does not meet the definition of a binding arrangement. A party is a de facto
agent when the entity has, or those that direct the activities of the entity have, the ability to direct that party
to act on the entity’s behalf. In these circumstances, the entity shall consider its de facto agent’s decision-
making rights and its indirect exposure, or rights, to variable benefits through the de facto agent together with
its own when assessing control of another entity.

AG77. The following are examples of such other parties that, by the nature of their relationship, might act as de facto
agents for the entity:

(a) The entity’s related parties.

(b) A party that received its interest in the other entity as a contribution or loan from the entity making the
assessment of control.

(c) A party that has agreed not to sell, transfer or encumber its interests in the other entity without the
entity’s prior approval (except for situations in which the entity and the other party have the right of
prior approval and the rights are based on mutually agreed terms by willing independent parties).

(d) A party that cannot finance its operations without subordinated financial support from the entity.

(e) Another entity for which the majority of the members of its governing body or for which its key
management personnel are the same as those of the entity.

(f) A party that has a close business relationship with the entity, such as the relationship between a
professional service provider and one of its significant clients.

Control of Specified Assets

AG78. An entity shall consider whether it treats a portion of another entity as a deemed separate entity and, if so,
whether it controls the deemed separate entity.

AG79. An entity shall treat a portion of another entity as a deemed separate entity if and only if the following condition
is satisfied:

Specified assets of the other entity (and related credit enhancements, if any) are the only source of payment
for specified liabilities of, or specified other interests in, the other entity. Parties other than those with the
specified liability do not have rights or obligations related to the specified assets or to residual cash flows
from those assets. In substance, none of the benefits from the specified assets can be used by the remaining
portion of the other entity and none of the liabilities of the deemed separate entity are payable from the assets
of the remainder of the other entity. Thus, in substance, all the assets, liabilities and equity instruments of
that deemed separate entity are ring-fenced from the overall other entity. Such a deemed separate entity is
often called a “silo”.
AG80. When the condition in paragraph AG79 is satisfied, an entity shall identify the activities that significantly affect
the benefits of the deemed separate entity and how those activities are directed in order to assess whether
it has power over that portion of the other entity. When assessing control of the deemed separate entity, the
entity shall also consider whether it has exposure or rights to variable benefits from its involvement with that
deemed separate entity and the ability to use its power over that portion of the other entity to affect the
amount of the benefits from that entity.

AG81. If the entity controls the deemed separate entity, the entity shall consolidate that portion of the other entity.
In that case, other parties exclude that portion of the other entity when assessing control of, and in
consolidating, the other entity.

IPSAS 35 APPLICATION GUIDANCE 1232

 CONSOLIDATED FINANCIAL STATEMENTS

Continuous Assessment
AG82. An entity shall reassess whether it controls another entity if facts and circumstances indicate that there are
changes to one or more of the three elements of control listed in paragraph 20.

AG83. If there is a change in how power over another entity can be exercised, that change must be reflected in how
an entity assesses its power over another entity. For example, changes to decision-making rights can mean
that the relevant activities are no longer directed through voting rights, but instead other agreements, such
as contracts, give another party or parties the current ability to direct the relevant activities.

AG84. An event can cause an entity to gain or lose power over another entity without the entity being involved in
that event. For example, an entity can gain power over another entity because decision-making rights held
by another party or parties that previously prevented the entity from controlling another entity have lapsed.

AG85. An entity also considers changes affecting its exposure, or rights, to variable benefits from its involvement
with another entity. For example, an entity that has power over another entity can lose control of that other
entity if the entity ceases to be entitled or have the ability to receive benefits or to be exposed to obligations,
because the entity would fail to satisfy paragraph 20(b) (e.g., if a contract to receive performance-related
fees is terminated).

AG86. An entity shall consider whether its assessment that it acts as an agent or a principal has changed. Changes
in the overall relationship between the entity and other parties can mean that an entity no longer acts as an
agent, even though it has previously acted as an agent, and vice versa. For example, if changes to the rights
of the entity, or of other parties, occur, the entity shall reconsider its status as a principal or an agent.

AG87. An entity’s initial assessment of control or its status as a principal or an agent would not change simply
because of a change in market conditions (e.g., a change in the other entity’s benefits driven by market
conditions), unless the change in market conditions changes one or more of the three elements of control
listed in paragraph 20 or changes the overall relationship between a principal and an agent.

Determining Whether an Entity is an Investment Entity

AG88. An entity shall consider all facts and circumstances when assessing whether it is an investment entity,
including its purpose and design. Paragraphs AG89–AG106 describe aspects of the definition of an
investment entity in more detail.

Number of Investors
AG89. The definition of an investment entity requires that the entity have one or more investors. An investment entity
may have several investors who pool their funds to gain access to investment management services and
investment opportunities that they might not have had access to individually. Having several investors would
make it less likely that the entity, or other members of the economic entity containing the entity, would obtain
benefits other than capital appreciation or investment revenue.

AG90. However, in the public sector it is also common for an investment entity to be formed by, or for, a single controlling
entity that represents or supports the interests of a wider group of investors (e.g., a pension fund, government
investment fund or trust).

Ownership Interests
AG91. An investment entity is typically, but is not required to be, a separate legal entity. The investors in an
investment entity will often, but not always, have ownership interests in the form of equity or similar interests
(e.g., partnership interests), to which proportionate shares of the net assets of the investment entity are
attributed. The definition of an investment entity does not specify that all investors must have the same rights.
Having different classes of investors, some of which have rights only to a specific investment or groups of

1233 IPSAS 35 APPLICATION GUIDANCE

 CONSOLIDATED FINANCIAL STATEMENTS

investments or which have different proportionate shares of the net assets, does not preclude an entity from
being an investment entity.

AG92. The definition of an investment entity does not specify that the investors must have an ownership interest
that meets the definition of net assets/equity in accordance with other applicable IPSAS. An entity that has
significant ownership interests in the form of debt that does not meet the definition of net assets/equity may
still qualify as an investment entity, provided that the debt holders are exposed to variable returns from
changes in the fair value of the entity’s net assets.

Purpose
AG93. The definition of an investment entity requires that the purpose of the entity is to invest solely for returns from
capital appreciation, investment revenue (such as dividends or similar distributions, interest or rental
revenue), or both. Documents that indicate what the entity’s investment objectives are, such as the entity’s
mandate, constitution, offering memorandum, publications distributed by the entity and other corporate or
partnership documents, will typically provide evidence of an investment entity’s purpose. Further evidence
may include the manner in which the entity presents itself to other parties; for example, an entity may present
its objective as providing medium-term investment for capital appreciation.

AG94. An entity that has additional objectives that are inconsistent with the purpose of an investment entity would
not meet the definition of an investment entity. Examples of when this may occur are as follows:

(a) An investor whose objective is to jointly develop, produce or market products with its investees. The
entity will earn returns from the development, production or marketing activity as well as from its
investments;
(b) An investor whose objectives require it to be aligned with the economic, social or environmental policies
of another entity. For example, if an entity is required to align its investment policies with other
objectives such as owning certain businesses or improving employment outcomes in a jurisdiction; and

(c) An investor whose individual investment decisions have to be ratified or approved by a controlling entity
or which is required to follow the direction of a controlling entity. Such ratifications, approvals or
decisions are likely to be inconsistent with the purpose of an investment entity.

AG95. An entity’s purpose may change over time. In assessing whether it continues to meet the definition of an
investment entity, an entity would need to have regard to any changes in the environment in which it operates
and the impact of such changes on its investment strategy.

Demonstrating Purpose through Holding More than One Investment

AG96. An investment entity may have a number of ways in which it can demonstrate that its purpose is to invest
funds for capital appreciation, investment revenue or both. One way is by holding several investments to
diversify its risk and maximize its returns. An entity may hold a portfolio of investments directly or indirectly,
for example by holding a single investment in another investment entity that itself holds several investments.

AG97. There may be times when the entity holds a single investment. However, holding a single investment does
not necessarily prevent an entity from meeting the definition of an investment entity. For example, an
investment entity may hold only a single investment when the entity:

(a) Is in its start-up period and has not yet identified suitable investments and, therefore, has not yet
executed its investment plan to acquire several investments;
(b) Has not yet made other investments to replace those it has disposed of;

IPSAS 35 APPLICATION GUIDANCE 1234

 CONSOLIDATED FINANCIAL STATEMENTS

(c) Is established to pool investors’ funds to invest in a single investment when that investment is
unobtainable by individual investors (e.g., when the required minimum investment is too high for an
individual investor); or

(d) Is in the process of being disestablished.

Investment-Related Services and Activities

AG98. An investment entity may provide investment-related services (e.g., investment advisory services, investment
management, investment support and administrative services), either directly or through a controlled entity,
to third parties as well as to its controlling entity or other investors, even if those activities are substantial to
the entity, subject to the entity continuing to meet the definition of an investment entity.

AG99. An investment entity may also participate in the following investment-related activities, either directly or
through a controlled entity, if these activities are undertaken to maximize the investment return (capital
appreciation or investment revenue) from its investees and do not represent a separate substantial activity
or a separate substantial source of revenue to the investment entity:

(a) Providing management services and strategic advice to an investee; and

(b) Providing financial support to an investee, such as a loan, capital commitment or guarantee.

AG100. If an investment entity has a controlled entity that is not itself an investment entity and whose main purpose
and activities are providing investment-related services or activities that relate to the investment entity’s
investment activities, such as those described in paragraphs AG98–AG99, to the entity or other parties, it
shall consolidate that controlled entity in accordance with paragraph 57. If the controlled entity that provides
the investment-related services or activities is itself an investment entity, the controlling investment entity
shall measure that controlled entity at fair value through surplus or deficit in accordance with paragraph 56.

Exit Strategies
AG101. An entity’s investment plans also provide evidence of its purpose. One feature that differentiates an
investment entity from other entities is that an investment entity does not plan to hold its investments
indefinitely; it holds them for a limited period. Because equity investments and non-financial asset
investments have the potential to be held indefinitely, an investment entity shall have an exit strategy
documenting how the entity plans to realize capital appreciation from substantially all of its equity investments
and non-financial asset investments. An investment entity shall also have an exit strategy for any debt
instruments that have the potential to be held indefinitely, for example perpetual debt investments. The entity
need not document specific exit strategies for each individual investment but shall identify different potential
strategies for different types or portfolios of investments, including a substantive time frame for exiting the
investments. Exit mechanisms that are only put in place for default events, such as a breach of contract or
non-performance, are not considered exit strategies for the purpose of this assessment.

AG102. Exit strategies can vary by type of investment. For investments in private equity securities, examples of exit
strategies include an initial public offering, a private placement, a trade sale of a business, distributions (to
investors) of ownership interests in investees and sales of assets (including the sale of an investee’s assets
followed by a liquidation of the investee). For equity investments that are traded in a public market, examples
of exit strategies include selling the investment in a private placement or in a public market. For real estate
investments, an example of an exit strategy includes the sale of the real estate through specialized property
dealers or the open market.

AG103. An investment entity may have an investment in another investment entity that is formed in connection with
the entity for legal, regulatory, tax or similar business reasons. In this case, the investment entity investor
need not have an exit strategy for that investment, provided that the investment entity investee has appropri-
ate exit strategies for its investments.
1235 IPSAS 35 APPLICATION GUIDANCE
 CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurement

AG104. An essential element of the definition of an investment entity is that it measures and evaluates the
performance of substantially all of its investments on a fair value basis, because using fair value results in
more relevant information than, for example, consolidating its controlled entities or using the equity method
for its interests in associates or joint ventures. In order to demonstrate that it meets this element of the
definition, an investment entity:

(a) Provides investors with fair value information and measures substantially all of its investments at fair
value in its financial statements whenever fair value is required or permitted in accordance with IPSAS;
and

(b) Reports fair value information internally to the entity’s key management personnel (as defined in IPSAS
20, Related Party Disclosures), who use fair value as the primary measurement attribute to evaluate
the performance of substantially all of its investments and to make investment decisions.

AG105. In order to meet the requirement in AG104(a), an investment entity would:

(a) Elect to account for any investment property using the fair value model in IPSAS 16, Investment
Property;

(b) Elect the exemption from applying the equity method in IPSAS 36 for its investments in associates and joint
ventures; and

(c) Measure its financial assets at fair value using the requirements in IPSAS 41.

AG106. An investment entity may have some non-investment assets, such as a head office property and related
equipment, and may also have financial liabilities. The fair value measurement element of the definition of
an investment entity applies to an investment entity’s investments. Accordingly, an investment entity need
not measure its non-investment assets or its liabilities at fair value.

IPSAS 35 APPLICATION GUIDANCE 1236

 CONSOLIDATED FINANCIAL STATEMENTS

Appendix B
Amendments to Other IPSAS
[Deleted]

1237 IPSAS 35 APPENDIX B

 CONSOLIDATED FINANCIAL STATEMENTS

Basis for Conclusions

This Basis for Conclusions accompanies, but is not part of, IPSAS 35.

Objective

BC1. This Basis for Conclusions summarizes the IPSASB‘s considerations in reaching the conclusions in
IPSAS 35. As this Standard is based on IFRS 10, Consolidated Financial Statements (issued in 2011,
including amendments up to December 31, 2014) issued by the IASB, the Basis for Conclusions outlines
only those areas where IPSAS 35 departs from the main requirements of IFRS 10, or where the IPSASB
considered such departures.

Overview

BC2. In 2012 the IPSASB commenced work on a project to update those IPSAS that dealt with accounting for
interests in controlled entities, associates and joint ventures. In October 2013 the IPSASB issued Exposure
Drafts (EDs) 48 to 52 which were collectively referred to as Interests in Other Entities. ED 49 Consolidated
Financial Statements was based on IFRS 10 Consolidated Financial Statements, having regard to the
relevant public sector modifications in IPSAS 6, Consolidated and Separate Financial Statements. In
January 2015 the IPSASB issued five new IPSAS, including IPSAS 35. These new IPSAS supersede IPSAS
6, IPSAS 7, Investments in Associates and IPSAS 8, Interests in Joint Ventures.

Process
BC3. In developing the Standard the IPSASB had regard to those aspects of IPSAS 6 that had been developed
specially to address public sector issues or circumstances that are more prevalent in the public sector than
in other sectors. The IPSASB focused on addressing these issues in the Standard. The IPSASB also had
regard to the guidance on assessing whether an entity is controlled for the purposes of the Government
Finance Statistics Manual 2014 (GFSM 2014) with the aim of avoiding unnecessary differences. In
developing additional examples that illustrated the public sector environment the IPSASB also considered
guidance developed by national standard setters or by bodies with oversight responsibilities for sectors of
government.

Alignment with Government Finance Statistics

BC4. Both at the time of developing ED 49, and as part of the process of finalizing the Standard, the IPSASB
considered an analysis of similarities and differences between the definition of control, together with the
associated indicators and guidance in GFSM 2014 (and the 2008 System of National Accounts (2008 SNA)
with which the GFSM 2014 is harmonized) and the proposed Standard. The IPSASB noted that some of the
differences between GFSM and financial reporting are due to their nature and differing objectives. For
example, the classification of institutional units into sectors based on their economic nature of being
government units will continue to be a significant difference between macroeconomic statistical reporting and
accounting and financial reporting. Furthermore, the distinction between market producers and nonmarket
producers in macroeconomic statistics would continue to result in a difference in terms of classification to
either the general government sector or the public corporations sector, and therefore the overall classification
to the public sector, even if there was exactly the same principle and conceptual guidance on the notion of
control.

BC5. During the development of the Standard the IPSASB made a number of efforts to align more closely with
guidance in GFSM 2014 or to explain more clearly the nature of differences. Issues in respect of which the
IPSASB specifically considered GFSM requirements included:

(a) Whether to require the consolidation of all controlled entities, as opposed to reporting by sectors of
government;
IPSAS 35 BASIS FOR CONCLUSIONS 1238
 CONSOLIDATED FINANCIAL STATEMENTS

(b) The similarity between the concept of control in the Standard and the approach taken in GFSM 2014,
including consideration of the indicators of control of nonprofit institutions and corporations in 2008
SNA;

(c) The differences between regulatory control and control for financial reporting purposes; and;
(d) The rights associated with golden shares.

Some of these matters are discussed in more detail in later sections of this Basis for Conclusions.

Scope (paragraphs 3–11)

Wholly-Owned and Partly-Owned Controlling Entities

BC6. The IPSASB agreed that, consistent with the requirements in IPSAS 6 and IFRS 10, wholly-owned or partly-
owned controlling entities that meet certain conditions, and post-employment or other long-term employee
benefit plans should not be required to present consolidated financial statements. The IPSASB decided that
a controlling entity which itself is a controlled entity should not be required to present consolidated financial
statements only if “users of such financial statements are unlikely to exist or their information needs are met
by the controlling entity’s consolidated financial statements”. This limitation is intended to protect users where
such controlling entities represent key sectors or activities of a government and there are users that need
consolidated financial statements for accountability or decision making purposes.

Application of the Consolidation Requirements to all Controlled Entities

BC7. The IPSASB noted the general principle in both IFRS 10 and IPSAS 6 that a controlling entity should
consolidate, on a line by line basis, all of its controlled entities. The IPSASB noted that over recent years the
potential scale and complexity of a public sector entity’s involvement with other entities (particularly the
relationships between a government and other entities) had increased. Government interventions had been
a contributing factor to governments (and other public sector entities) having a broad range of interests in
other entities, some of which could give rise to control as defined in this Standard. The implications of
consolidation when a government has a large number of controlled entities, controlled entities carrying out
activities that were formerly regarded as solely private sector activities, and controlled entities where control
is intended to be temporary, had led some to query whether consolidation of all controlled entities was
justified, having regard to the costs and benefits of doing so.

BC8. The IPSASB deliberated extensively on the issue of whether all controlled entities should be consolidated,
having regard to users’ needs. The IPSASB focused on the information provided by consolidated financial
statements, whilst noting that users’ information needs may also be met through other statements and reports
such as (i) separate financial statements of both controlling and controlled entities; (ii) performance reports;
and (iii) statistical reports. Although some of the IPSASB’s discussions were relevant to any type of public
sector entity that is a controlling entity, many of the matters considered were more pertinent at the whole of
government level. The IPSASB considered views on the usefulness of consolidation in relation to the
following types of controlled entities (whilst noting that these broad categories would not be universally
applicable):

(a) Departments and ministries;

(b) Government agencies;

(c) [Government Business Enterprises (GBE)] (the term in square brackets is no longer used following the
issue of The Applicability of IPSAS in April 2016);

(d) Financial institutions (excluding government sponsored enterprises); and

1239 IPSAS 35 BASIS FOR CONCLUSIONS

 CONSOLIDATED FINANCIAL STATEMENTS

(e) Other investments (including intentional investments, incidental investments and investment entities).
The term “incidental investments” was used to refer to interests acquired in the course of meeting
another objective, such as preventing the collapse of a private sector entity.

BC9. The IPSASB noted that, although there was general agreement that consolidation of controlled departments
and ministries and government agencies is appropriate, some members were less certain that the cost of
preparing consolidated financial information was justified for other categories of controlled entities.

BC10. The IPSASB noted arguments in support of requiring consolidation of all controlled entities of a government,
including the following:

(a) Consolidated financial statements provide a panoramic view of a government’s activities and current
financial position. This panoramic view ensures that users do not lose sight of the risks associated with
certain sectors. It shows the performance of the government as a whole.

(b) Identifying categories of entities which should not be consolidated could be difficult. Such attempts
could lead to rules-based standards. For example, there could be difficulties in separately identifying
entities rescued from financial distress on a consistent basis across jurisdictions and over time. Similar
issues could arise in respect of any separate proposals for GBEs. Although the term GBE was a
defined term within IPSAS when this Standard was issued, the IPSASB noted that there were
differences in the way this definition is being applied in practice in different jurisdictions. In addition to
the issue of clearly identifying any group of entities for which different accounting requirements would
be appropriate, the IPSASB noted that similar activities can be conducted by a variety of entity types
both within and across jurisdictions. So, although proposals for different accounting treatments might
lead to consistent treatment for a group of entities within a jurisdiction, it might not result in comparable
accounting for similar activities.
(c) Consolidation of all controlled entities is an example of like items being accounted for in like ways.
Exceptions to consolidation reduce the coherence of the financial statements. Given that there could
be a number of entities that could potentially be regarded as warranting separate treatment or
disclosure, this could adversely affect the coherence of consolidated financial statements.

(d) Whole of government financial statements have a different perspective from separate financial
statements. Separate financial statements provide information on the activities of the core government.

BC11. The IPSASB also noted arguments that have been raised in opposition to consolidation of certain controlled
entities of a government, including the following:

(a) The consolidation of entities that have activities that differ from the activities of the core government
could obscure the presentation of the results and the condition of the government itself. This argument
was raised in relation to a variety of controlled entities including manufacturing activities, large financial
institutions, temporarily controlled entities and entities with financial objectives as opposed to social
objectives.

(b) Some consider that equity accounting for certain categories of controlled entities provides appropriate
information on financial performance subsequent to acquisition without incurring high costs or
obscuring information about the core government.

(c) Some consider that it is inappropriate to consolidate entities that have been rescued from financial
distress because they do not represent core government activities and are not intended to be long-
term investments.

(d) Where governments have high numbers of controlled entities the costs of the consolidation process
are high and may be perceived to outweigh the benefits of consolidating those entities on a line by line
basis.

IPSAS 35 BASIS FOR CONCLUSIONS 1240

 CONSOLIDATED FINANCIAL STATEMENTS

BC12. Reflecting on these arguments for and against requiring consolidation of all controlled entities the IPSASB
had regard to:

(a) The objectives of financial reporting, as outlined in The Conceptual Framework for General Purpose
Financial Reporting by Public Sector Entities (Conceptual Framework);
(b) The limited availability of evidence on user needs and usefulness of consolidated financial information
(particularly on the usefulness of consolidated financial information in respect of specific types of
controlled entities);
(c) The context within which whole of government consolidated financial statements are prepared;

(d) The interaction between the definition of control and the consolidation requirements in the proposed
Standard; and
(e) The IPSASB’s role as an international accounting standard setter.

BC13. With regard to the objectives of financial reporting, the IPSASB noted that Chapter 2 of the Conceptual
Framework identifies the objectives of financial reporting as being to provide information that is useful for
accountability purposes and for decision-making purposes. Because of the importance of the budget in the
public sector (and the importance of demonstrating compliance with the budget) the IPSASB considered an
argument that consolidated financial statements should consolidate only those entities that comprise a
government’s budget entity. However, the IPSASB agreed that a budget entity approach would not be
appropriate for general purpose financial reporting because:

(a) Decisions about which entities are included in a government’s budget may be based on factors other
than the degree of autonomy of the entity and the extent to which it provides market goods or makes
a commercial return.

(b) Decisions about which entities are included in a government’s budget are often related to whether the
entity’s activity is intended to be self-funding. The exclusion of self-funding entities from a government’s
budget, essentially allows the offsetting of revenue and expenses for those activities and means that
budget sector information does not reflect the substance of all transactions controlled by a government.

(c) The budget boundary for a jurisdiction is determined within a jurisdiction. If financial reporting were
based on budget sectors there would not be standardized and comparable financial reporting by
governments in an international context.

BC14. IPSAS 6 required the consolidation of all controlled entities apart from controlled entities where there was
evidence that (a) control was intended to be temporary because the controlled entity was held exclusively
with a view to its disposal within twelve months from acquisition and (b) management was actively seeking a
buyer. Such temporarily controlled entities were required to be accounted for as financial instruments. The
IPSASB considered whether this treatment of temporarily controlled entities should also be required in the
proposed Standard. The IPSASB noted a number of concerns regarding the requirements in IPSAS 6. These
included:

(a) The difficulty of identifying temporarily controlled entities;

(b) The difficulty of justifying a different accounting treatment for controlled entities that are held for more
than a couple of years (which can occur with some entities that are initially considered to be temporarily
controlled);

(c) The difficulty of disposing of an investment in its current form. A public sector entity may need to retain
responsibility for certain risks in order to dispose of its investment in a temporarily controlled entity.
Accounting for such entities as financial instruments provides only a partial representation of the risks
associated with the investment;

1241 IPSAS 35 BASIS FOR CONCLUSIONS

 CONSOLIDATED FINANCIAL STATEMENTS

(d) If a public sector entity is exposed to risks from an investment in a “temporarily” controlled entity, these
risks should be reported consistently with the risk exposures from other controlled entities; and

(e) The provision of additional explanations by the reporting entity can address some of the issues that
arise when large temporarily controlled entities are consolidated.
BC15. The IPSASB therefore decided not to require a different accounting treatment for temporarily controlled
entities. Respondents to ED 49 generally agreed with this proposal, for similar reasons to the IPSASB. In
discussing respondents’ comments the IPSASB acknowledged the arguments made by those that
considered there should be an exemption from consolidation for temporarily controlled entities, particularly
those acquired by a government to protect the interests of citizens. However, the IPSASB also noted the
experience of various jurisdictions in accounting for such situations and that consolidation of such entities
had occurred in some jurisdictions. The IPSASB also considered the weight of the support for the removal of
the exemption. Respondents noted that such investments can ultimately be held for longer periods than
originally envisaged. Some respondents encouraged the IPSASB to consider requiring additional disclosures
in respect of entities acquired with a view to disposal. The IPSASB agreed to require disclosure of interests
in other entities held for sale in IPSAS 38, Disclosure of Interests in Other Entities.

BC16. In considering the existence of research regarding the usefulness of consolidated financial statements
in meeting user needs, the IPSASB noted that although an increasing number of governments are
applying the accrual basis of accounting, this has been a relatively recent trend and consolidation is
often implemented in stages, with core government activities being consolidated first, followed by the
consolidation of other categories of entities as time and resources permit. As a result, there are few
jurisdictions that currently present consolidated whole of government financial statements, and empirical
research on the usefulness of consolidated whole of government financial statements has been limited.
Research to date has tended to focus on who uses consolidated financial statements and the overall
benefits of consolidated financial statements, as opposed to the usefulness of consolidating certain types
of controlled entities or accounting for them in an alternative way. As part of its deliberations the IPSASB
did consider alternative ways of accounting for and presenting information on subsets of controlled
entities such as temporarily controlled entities. The IPSASB noted the difficulties of consistently
identifying categories of controlled entities that might be accounted for differently or subject to additional
disclosures.

BC17. The IPSASB noted that in developing its requirements for investment entities the IASB focused on user
needs. Matters considered by the IPSASB in relation to investment entities are discussed later in this Basis
for Conclusions.

BC18. The IPSASB noted that many governments prepared statistical reports which present consolidated financial
information in a sectoral approach, breaking down between the general government sectors and public
corporation sectors (Non-Financial and Financial). This information is compiled in accordance with statistical
guidance in the 2008 SNA, which, in turn, is consistent with guidance in the GFSM 2014 and the European
System of Accounts (ESA 2010). The IPSASB considered whether such a statistical approach could be
considered as an alternative to the compilation of whole of government accounts based on the IPSAS
approach. The IPSASB noted that IPSAS 22, Disclosure of Financial Information about the General
Government Sector provides guidance on the presentation of such statistical information in consolidated
financial statements. However, IPSAS 22 neither requires the provision of such information in consolidated
financial statements, nor permits the presentation of such information as an alternative to consolidation of all
controlled entities. Although the IPSASB noted that statistical reporting serves an important role and provides
information that is comparable across countries, the IPSASB agreed that such information had a different
objective and did not fulfill the role of consolidated financial statements in giving an overview of all government
activity. The IPSASB also noted that mandating the provision of statistical sector information by governments

IPSAS 35 BASIS FOR CONCLUSIONS 1242

 CONSOLIDATED FINANCIAL STATEMENTS

other than national governments could be difficult. The IPSASB therefore agreed that any changes to
IPSAS 22 should not form part of its project to update IPSAS 6 to 8. Although the IPSASB decided not to
provide guidance in this Standard on the presentation of information on statistical sectors, it noted that
governments may present consolidated financial statements that are disaggregated by statistical sector.
BC19. ED 49 therefore proposed the consolidation of all controlled entities, other than the exception(s) from
consolidation relating to investment entities (discussed separately in this Basis for Conclusions). The IPSASB
sought the views of constituents as to whether there are any categories of entities that should not be
consolidated, with any proposals for non-consolidation being justified having regard to user needs.
Respondents were generally supportive of this proposal, although a number of respondents highlighted
implementation difficulties (for example, the costs associated with consolidating a large number of controlled
entities). Some respondents also commented on the existence of reporting entities established through legal
or administrative means and noted that they may differ from the reporting entity identified in accordance with
the proposed Standard. The IPSASB agreed to acknowledge, in the Standard, the existence of reporting
entities established through legal or administrative means.

Investment Entities

BC20. In October 2012 the IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27). As a
result of these amendments IFRS 10 requires that a controlling entity that is an investment entity account for
most of its investments at fair value through profit or loss, as opposed to consolidating them. The IPSASB
considered the appropriateness of the requirements in IFRS 10 for similar entities in the public sector. The
IPSASB first considered which entities might be affected by such requirements. Entities that might meet the
definition of an investment entity include some sovereign wealth funds, some pension funds and some funds
holding controlling interests in public-private partnership projects (PPP) or private finance initiatives (PFI).
The IPSASB noted that any requirements applicable only to investment entities might apply to a relatively
small number of public sector entities (having regard to the types of entities that might be investment entities
and the fact that these entities might be required to report in accordance with a range of accounting
standards, including domestic standards).

BC21. The IPSASB noted the comments made by respondents to the IASB in relation to the IASB’s investment
entity proposals and considered that similar arguments would apply in the public sector. Indeed, the IPSASB
noted that some types of entities specifically identified by the IASB as potential investment entities (for
example, sovereign wealth funds) could be public sector entities applying IPSAS. The IPSASB noted the
IASB’s focus on user needs in the IASB’s deliberations on investment entities. The IPSASB noted that,
depending on the reporting framework of the jurisdiction in which they operate, a public sector investment
entity might be required to report in accordance with IPSAS, IFRS, or domestic standards. The IPSASB
agreed that the IFRS 10 requirement for an investment entity to account for its investments at fair value
appeared to be appropriate in the public sector. The IPSASB also noted that consistent requirements in
IPSAS and IFRS would reduce any opportunity for accounting arbitrage when determining which accounting
standards an investment entity should be required to apply.
BC22. The IPSASB considered whether the definition of an investment entity in IFRS 10 was appropriate in the
public sector. The IPSASB agreed that the definition was largely appropriate although it noted that an
investment entity will frequently have an external mandate that establishes its purpose (as opposed to the
entity asserting its purpose to investors) and amended the definition accordingly. The IPSASB considered
that it would be helpful to give additional public sector examples of scenarios in which an entity would not be
an investment entity by virtue of having additional objectives.
BC23. The IPSASB considered whether the typical characteristics of an investment entity were appropriate for
application in the public sector. The IPSASB noted that IFRS 10 allows for the possibility that an entity may
be an investment entity, despite not meeting all the typical characteristics. In such cases the entity is required
1243 IPSAS 35 BASIS FOR CONCLUSIONS
 CONSOLIDATED FINANCIAL STATEMENTS

to explain why it is an investment entity, despite not having all of the typical characteristics of an investment
entity. The IPSASB considered that the typical characteristics identified in IFRS 10 were not likely to be
typical characteristics in the public sector context. For example, a sovereign wealth fund might:

(a) Have a single investor (being a Minister or a public sector entity). The fund could argue that it is
investing funds on behalf of, or for the benefit of, citizens. IFRS 10, paragraph BC259, explicitly refers
to government-owned investment funds and funds wholly owned by pension plans and endowments
when explaining why the IASB decided to make this a typical characteristic rather than an essential
part of the definition of an investment entity.

(b) Have investors that are related parties. A fund with a related party investor could nevertheless be acting
on behalf of many unrelated beneficiary investors.

(c) Have ownership interests in a form other than equity or similar interests. The IPSASB noted both that
the form of ownership interests in sovereign wealth funds could vary, and that IFRS 10, paragraph
BC264, specifically refers to pension funds and sovereign wealth funds when explaining why the IASB
decided to make this a typical characteristic rather than an essential part of the definition. IFRS 10,
paragraph BC264, states “For example, a pension fund or sovereign wealth fund with a single direct
investor may have beneficiaries that are entitled to the net assets of the investment fund, but do not
have ownership units.

BC24. Because of the differences between the private and public sector, the IPSASB decided not to identify typical
characteristics separately from the definition of an investment entity. The IPSASB noted that much of the
discussion in IFRS 10 regarding the typical characteristics of investment entities described ways in which an
entity could demonstrate that it met the definition of an investment entity. The IPSASB therefore decided to
retain such guidance, but to locate it together with other guidance on the definition of an investment entity.
The IPSASB agreed that the characteristic in IFRS 10 that “The individuals or entities that have provided
funds to the entity are not related parties of the entity” did not reflect the public sector context and agreed to
omit the guidance on that characteristic.
BC25. Although the IPSASB decided not to identify typical characteristics separately from the definition of an
investment entity, the IPSASB considered that most public sector entities classifying themselves as
investment entities should be required to disclose information about the judgments and assumptions made.
The IPSASB considered that disclosure of these judgments and assumptions would be important for
transparency and encourage appropriate use of the investment entity accounting requirements.

BC26. The IPSASB noted that in comparison with private sector entities which tend to have clear financial
objectives, public sector entities can have a broader range of objectives, and these objectives can change
over time. A public sector entity’s objectives may also change as a result of changes in government policy
and changes could lead to an entity that had formerly met the definition of an investment entity ceasing to do
so. Having regard to the possibility of changing objectives the IPSASB therefore agreed to highlight the need
for an entity to reassess its status on a regular basis.

BC27. The IPSASB noted that the IFRS 10 investment entity requirements apply to the financial statements of an
investment entity itself – they cannot be applied by the controlling entity of any investment entity. IFRS 10
requires that a controlling entity that is not itself an investment entity shall present consolidated financial
statements in which all controlled entities are consolidated on a line by line basis. The IPSASB considered
whether the public sector context would lead it to place more or less weight on arguments considered by the
IASB in relation to this matter, and whether there were any public sector characteristics that would support a
differing accounting treatment by the controlling entity of an investment entity.

BC28. The IPSASB noted that the IASB had concerns that if a non-investment controlling entity were required to
retain the fair value treatment used by its controlled investment entities, it could achieve different accounting

IPSAS 35 BASIS FOR CONCLUSIONS 1244

 CONSOLIDATED FINANCIAL STATEMENTS

outcomes by holding controlled entities directly or indirectly through a controlled investment entity. The
IPSASB considered that this issue was of less concern in the public sector context. In particular the IPSASB
noted that ownership interests through shares or other equity instruments are less common in the public
sector. As a consequence, it is less likely that entities within an economic entity in the public sector would
hold an ownership investment in the ultimate controlling entity and less likely that they would have ownership
investments in other entities within the economic entity.

BC29. The IPSASB considered what type of information users would find most useful about a controlled investment
entity. The IPSASB considered that users would find it most useful if the accounting for investments applied
in a controlled investment entity’s financial statements were extended to its controlling entity’s financial
statements. The IPSASB therefore proposed that a controlling entity with a controlled investment entity
should be required to present consolidated financial statements in which it (i) measures the investments of
the controlled investment entity at fair value through surplus or deficit in accordance with IPSAS 41 and (ii)
consolidates the other assets and liabilities and revenue and expenses of the controlled investment entity in
accordance with the usual consolidation accounting policies required by the Standard. The IPSASB
considered that its proposals reflect the fact that a controlling entity does not manage an investment entity
itself on a fair value basis. Rather, it manages the investments of the investment entity on a fair value basis.
This approach is also consistent with the accounting by an investment entity for its investments in other
entities.

BC30. At the time that IPSAS 35 was being developed the IASB proposed to clarify aspects of the application of the
investment entity requirements. The IASB issued Investment Entities: Applying the Consolidation Exception
(Amendments to IFRS 10, IFRS 12 and IAS 28) in December 2014. The IPSASB considered that these
clarifications were helpful in addressing implementation issues identified by early adopters of the IASB’s
investment entity requirements and incorporated those aspects of the amendments that were relevant to this
Standard.

Control (paragraphs 18–37)

BC31. The IPSASB agreed that the three requirements for control outlined in IFRS 10 are generally appropriate for
the public sector. The IPSASB noted that the IFRS 10 requirements to have power, returns and a link between
power and returns is similar to the approach previously taken by the IPSASB in IPSAS 6, although IPSAS 6
required that both power and benefits be present. Consistent with the terminology used in IPSAS 6 the
IPSASB decided that the term “benefits” was generally more appropriate than “returns” in the public sector
context (as discussed under the subheading “Terminology” below). However, the term “returns” continued to
be used in the context of investment entities.

BC32. The IPSASB took note of the approach taken in Government Finance Statistics in relation to control over an
entity. The 2008 SNA, paragraph 4.80, includes eight indicators of control of corporations and five indicators
of control of nonprofit institutions and explains that “Although a single indicator could be sufficient to establish
control, in other cases a number of indicators may collectively indicate control”. Overall, the direction of the
statistical indicators is on the same lines as the approach in this Standard and therefore the practical results
of the respective analyses will likely largely coincide. Some of the indicators in GFS are mentioned in the
following paragraphs.

Power (paragraphs 23–29)

BC33. The IPSASB decided to modify IFRS 10 to:

(a) Highlight the range of relevant activities that could occur in the public sector and stress that control of
financial and operating policies can demonstrate power over relevant activities;

1245 IPSAS 35 BASIS FOR CONCLUSIONS

 CONSOLIDATED FINANCIAL STATEMENTS

(b) Clarify that regulatory control and economic dependence do not give rise to power for the purposes of the
Standard; and

(c) Discuss specific powers that could give rise to control in the public sector, including golden shares, a
right to appoint the majority of the board of another entity, and powers obtained through legislation or
enabling documents.

Regulatory Control
BC34. The IPSASB agreed that the previous guidance on regulatory control in IPSAS 6 should be incorporated in
the Standard. The IPSASB noted that IFRS 10 had been developed for application by profit-oriented entities,
few of whom have powers to create or enforce legislation or regulations. By contrast, the nature of
government means that regulatory power occurs frequently in the public sector.

BC35. In considering how to incorporate guidance on regulatory control in the Standard the IPSASB noted that (i)
the discussion of power in IFRS 10 focuses on the ability to influence the “relevant activities” of the investee,
and (ii) power is only one of the three elements that are required for control to exist. The IPSASB decided to
place the discussion of regulatory control alongside the discussion of power and relevant activities.
BC36. The IPSASB noted that the discussion of regulation and control in the 2008 SNA is similar to that previously
in IPSAS 6. The 2008 SNA states:
Regulation and control. The borderline between regulation that applies to all entities within a class or
industry group and the control of an individual corporation can be difficult to judge. There are many examples
of government involvement through regulation, particularly in areas such as monopolies and privatized
utilities. It is possible for regulatory involvement to exist in important areas, such as in price setting, without
the entity ceding control of its general corporate policy. Choosing to enter into or continue to operate in a
highly regulated environment suggests that the entity is not subject to control. When regulation is so tight as
to effectively dictate how the entity performs its business, then it could be a form of control. If an entity retains
unilateral discretion as to whether it will take funding from, interact commercially with, or otherwise deal with
a public sector entity, the entity has the ultimate ability to determine its own corporate policy and is not
controlled by the public sector entity.

BC37. The IPSASB noted that the 2008 SNA discusses control by a dominant customer. It states:
“In general, if there is clear evidence that the corporation could not choose to deal with non-public sector
clients because of public sector influence, then public control is implied.”

Economic Dependence

BC38. IFRS 10 paragraph B40 states that “…in the absence of any other rights, economic dependence of an
investee on the investor (such as relations of a supplier with its main customer) does not lead to the investor
having power over the investee.” Although the IPSASB agreed that economic dependence, on its own, does
not give rise to control, the IPSASB noted that, in the public sector, economic dependence may occur in
conjunction with other rights. These other rights need to be assessed to determine if they give rise to control.

BC39. Because of the prevalence of economic dependence in the public sector the IPSASB decided that it was
appropriate to discuss ways in which economic dependence can arise and include examples of economic
dependence.

Special Voting Rights Attaching to Ownership Interests (Golden Shares)

BC40. The IPSASB agreed that the Standard should acknowledge that special voting rights attaching to ownership
interests (often referred to as “golden shares”) will influence assessments of control. The IPSASB noted that
such rights are also acknowledged in the GFSM 2014.

Substantive Rights
BC41. Statutory independence is common in the public sector. The IPSASB agreed to illustrate the ways in which
statutory independence may influence an investor’s assessments of rights. The Standard notes that the
IPSAS 35 BASIS FOR CONCLUSIONS 1246
 CONSOLIDATED FINANCIAL STATEMENTS

existence of statutory independence of an investee could be seen as a barrier to the investor exercising its
rights (paragraph AG26). It also notes that the existence of statutory powers to operate independently does
not, of itself, preclude an entity from being controlled by another entity (paragraph 25).

Terminology
BC42. In addition to making changes to reflect the standard terminology in IPSAS, the IPSASB agreed that a number
of other changes to the terminology in IFRS 10 were appropriate. Unless noted otherwise in an IPSAS, this
discussion of terminology is relevant to IPSAS 34 to 38.

Investor/Investee

BC43. IFRS 10 uses the terms “investor” and “investee” to denote (i) the potential controlling entity, being the entity
that is applying the Standard to assess whether control exists and (ii) the potential controlled entity. The
IPSASB considered that these terms were inappropriate in most parts of this Standard because they could
be read as implying the existence of a financial instrument representing an ownership interest. Most
assessments of control in the public sector do not involve such financial instruments.
BC44. The IPSASB considered other terms that could be used to describe investors and investees, in the context of the
Standard. One option was to refer to an investor as a “potential controlling entity” and an investee as a “potential
controlled entity”. The IPSASB considered that these phrases, whilst clear in meaning, would be cumbersome to
use throughout the Standard. The IPSASB noted that IPSAS generally refer to the entity applying the Standard
as “the entity”. In the case of this Standard, the entity applying the Standard is the entity that is assessing whether
or not it controls another entity (referred to as the investor in IFRS 10). The entity applying the Standard is doing
so in order to determine whether it controls another entity. The IPSASB therefore decided that, depending on the
context, it would refer to the investor as “the entity” and the investee as “another entity”, “other entity”, or “entity
being assessed for control”.

BC45. The IPSASB agreed to retain use of the term “investors” where the Standard is referring to a specific
investment and the term is used in accordance with its usual meaning. This was particularly relevant in the
parts of the Standard dealing with investment entities.
BC46. The IPSASB also agreed that the terms “investor” and “investee” are appropriate when referring to interests
in joint ventures and associates.

Binding Arrangements
BC47. The IPSASB agreed to replace most references to “contractual arrangements” in IFRS 10 with references to
the term “binding arrangements”. This change acknowledges that in some jurisdictions, entities applying
IPSAS may not have the power to enter into contracts but nevertheless may have the authority to enter into
binding arrangements. In addition, the IPSASB agreed that binding arrangements, for the purpose of this
Standard, should encompass rights that arise from legislative or executive authority. The definition of binding
arrangements used in this Standard is intentionally broader than that used in the financial instruments
standards, where it is used in relation to rights that are similar to contracts and in respect of willing parties.

Benefits

BC48. The IPSASB agreed that the term “benefits” is more appropriate than the term “returns” in the public sector,
particularly given the existence of control relationships in the absence of a financial investment in the
controlled entity. The IPSASB considered that the term “returns” could be regarded as giving an inappropriate
emphasis to financial returns, whereas, in the public sector, benefits are more likely to be non-financial than
financial. The term “returns” was retained in the context of investment entities.

BC49. The IPSASB decided to modify IFRS 10 to:

1247 IPSAS 35 BASIS FOR CONCLUSIONS

 CONSOLIDATED FINANCIAL STATEMENTS

(a) Highlight that many assessments of control in the public sector involve assessments of non-financial
benefits;

(b) Note that benefits can have positive or negative aspects; and

(c) Include examples of benefits in a public sector context.

BC50. The IPSASB agreed to locate the examples of benefits in the body of the Standard as it considered that the
examples would be particularly useful for an entity making an initial assessment of whether it might control
other entities.
BC51. The definition of control in IPSAS 35 refers to “variable benefits” and this concept is referred to throughout
the Standard. The IPSASB considered how the Standard would apply to benefits that appeared to be fixed
or constant. The IPSASB noted that the IASB had explicitly considered this issue and had provided examples
to show that benefits that appear to be fixed could in fact be variable, because they exposed the entity to
performance risk. The IPSASB noted that the IASB examples related to financial benefits and agreed to
incorporate an example of a non-financial benefit in paragraph AG58.

Uniform Reporting Dates

BC52. The IPSASB considered whether to impose a time limit on the difference between the end of the reporting
period of the controlling entity and its controlled entities. The IPSASB noted that IFRS 10 requires that the
financial statements used in preparing consolidated financial statements have the same reporting date, or
where this is impracticable, requires that adjustments be made to the most recent financial statements of the
controlled entities. In addition, IFRS 10 limits the difference in dates to three months. The IPSASB noted that
there may be instances in the public sector where entities have different reporting dates and it may not be
possible to change those dates. The IPSASB agreed not to impose a three month limit on the difference in
dates.

Implementation Issues

BC53. A number of respondents commented on the difficulty of preparing consolidated financial statements,
particularly when there are a large number of controlled entities, as in the case of whole of government
financial statements. The IPSASB acknowledged these practical difficulties, whilst noting that most
jurisdictions presenting consolidated financial statements have faced similar difficulties. In these jurisdictions
the consolidating entities used simplifying strategies to cope with the complexity and the consolidation
difficulties. Such strategies include:

(a) Assessing the existence of control for various categories of entities in phases, with an initial focus on
entities that are likely to be material.

(b) Not consolidating (or deferring the consolidation of) controlled entities that are likely to be immaterial.

(c) Identifying the cost-effective ways of obtaining information about inter-entity balances and transactions.

(d) Not eliminating immaterial inter-entity transactions and balances.

(e) Considering whether all disclosures must be made in respect of all entities.

BC54. The IPSASB considered whether to provide specific guidance on the application of materiality when preparing
consolidated financial statements but concluded that this would not be appropriate in a financial reporting
standard.

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

BC55. At the time that IPSAS 35 was being developed, the IASB was in the process of seeking feedback on
proposals to amend IFRS 10 and IAS 28 so that the requirements for the recognition of a partial gain or loss

IPSAS 35 BASIS FOR CONCLUSIONS 1248

 CONSOLIDATED FINANCIAL STATEMENTS

for transactions between an investor and its associate or joint venture would apply only to the gain or loss
resulting from the sale or contribution of assets that do not constitute a business, as defined in IFRS 3,
Business Combinations. The IASB issued Sale or Contribution of Assets between an Investor and its
Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) in September 2014. The IPSASB agreed
not to incorporate the requirements introduced by these amendments in IPSAS 35 and IPSAS 36,
Investments in Associates and Joint Ventures, on the grounds that it would be more appropriate to consider
the recognition of full or partial gains and losses in the context of drafting standards-level requirements for
public sector combinations.

BC56. At the time the IPSASB developed ED 60, Public Sector Combinations, it reconsidered whether to include
guidance on how to account for the loss of control of a former controlled entity to an investor’s associate or
joint venture. The IPSASB reviewed the guidance issued by the IASB in Sale or Contribution of Assets
between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28). The effect of
the IASB’s amendments if adopted in IPSAS 35 would be that a partial gain or loss for transactions between
an investor and its associate or joint venture would apply only to the gain or loss resulting from the loss of
control of a former controlled entity that does not contain an operation. The IPSASB did not identify any public
sector reason to depart from the IASB’s approach. Consequently, the IPSASB agreed to include this
guidance (amended to fit the terminology and definitions in ED 60) in IPSAS 35.

BC57. In December 2015, the IASB deferred the implementation of the guidance in Sale or Contribution of Assets
between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28). This was
because the IASB was undertaking further research in this area as part of its project on equity accounting,
and it did not want to require entities to change their accounting twice in a short period. In deferring the
effective date, the IASB continued to allow early application of the guidance as it did not wish to prohibit the
application of better financial reporting. The IPSASB reviewed the decision of the IASB to defer the
implementation of this guidance. The IPSASB did not identify any public sector reason to depart from the
IASB’s approach. Consequently, the IPSASB agreed to include this guidance (amended to fit the terminology
and definitions in IPSAS 40) in IPSAS 35, to be applied from a date to be determined by the IPSASB.

Revision of IPSAS 35 as a result of the IPSASB’s The Applicability of IPSAS, issued in April 2016

BC58. The IPSASB issued The Applicability of IPSAS in April 2016. This pronouncement amends references in all
IPSAS as follows:

(a) Removes the standard paragraphs about The Applicability of IPSAS to “public sector entities other
than GBEs” from the scope section of each Standard;
(b) Replaces the term “GBE” with the term “commercial public sector entities”, where appropriate; and

(c) Amends paragraph 10 of the Preface to International Public Sector Accounting Standards by providing
a positive description of public sector entities for which IPSAS are designed.
The reasons for these changes are set out in the Basis for Conclusions to IPSAS 1.

1249 IPSAS 35 BASIS FOR CONCLUSIONS

 CONSOLIDATED FINANCIAL STATEMENTS

Implementation Guidance
This guidance accompanies, but is not part of, IPSAS 35.

Nature of Relationship with Another Entity

IG1. The diagram below summarizes the accounting for various types of involvement with another entity.
Flowchart 1: Forms of Involvement with Other Parties

IPSAS 35 IMPLEMENTATION GUIDANCE 1250

 CONSOLIDATED FINANCIAL STATEMENTS

Illustrative Examples
These examples accompany, but are not part of, IPSAS 35.
IE1. The examples in this appendix portray hypothetical situations. Although some aspects of the examples may
be present in actual fact patterns, all facts and circumstances of a particular fact pattern would need to be
evaluated when applying IPSAS 35.

Power (paragraphs AG9–AG56)

IE2. The following example illustrates an assessment of whether power exists for the purposes of this Standard.

Example 1
A state government partially funds the activities of a local government. Some of this funding is required to
be spent on specified activities. The local government has a council that is elected every four years by the
local community. The council decides how to use the local government’s resources for the benefit of the
local community. The activities of the local government are diverse and include library services, provision
of leisure facilities, management of refuse and wastewater, and enforcement of building and health and
safety regulations. These activities are the relevant activities of the local government. Many of these
activities also coincide with the interests of the state government.
Despite its partial funding of the local government’s activities, the state government does not have the
power to direct the relevant activities of the local government. The rights of the local government over the
relevant activities preclude the state government from having control.

Regulatory Control (paragraph AG12)

IE3. The following examples illustrate various forms of regulatory control. None of these forms of regulatory control
give rise to power over the relevant activities for the purposes of this Standard. However, those examples do
not rule out that there may be instances where power over the relevant activities for the purposes of this
Standard may derive from regulatory control.

Example 2
A pollution control authority has the power to close down the operations of entities that are not complying
with environmental regulations.
The existence of this power does not constitute power over the relevant activities.

Example 3
A city has the power to pass zoning laws to limit the location of fast food outlets or to ban them altogether.

The existence of this power does not constitute power over the relevant activities of the fast food
outlets.

1251 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Example 4
A central government has the power to impose regulatory control on monopolies. A wholly owned
government agency has the power to regulate monopolies that are subject to such regulatory control and
has established price ceilings for entities that distribute electricity. The central government does not have
an ownership interest in the electricity distributors and does not receive financial benefits from the
electricity distributors. Neither the central government, nor the government agency, has control as a result
of the power to impose regulatory control. Any other powers would need to be separately assessed.

Example 5
A gaming control board (GCB) is a government agency that regulates casinos and other types of gaming
in a state, and enforces state gaming legislation. The GCB is responsible for promulgating rules and
regulations that govern the conduct of gaming activities in the state. The rules and regulations stem from
legislation. The legislation was passed by the legislature and sets forth the broad policy of the state with
regard to gaming; while the rules and regulations provide detailed requirements that must be satisfied
by a gaming establishment, its owners, employees, and vendors. The rules and regulations cover a
broad range of activity, including licensing, accounting systems, rules of casino games, and auditing.

The GCB also has authority to grant or deny licenses to gaming establishments, their ownership,
employees, and vendors. In order to obtain a license, an applicant must demonstrate that they possess
good character, honesty and integrity. License application forms typically require detailed personal
information. Based upon the type of license being sought, an applicant may also be required to disclose
details regarding previous business relationships, employment history, criminal records, and financial
stability.

Although the rules and regulations have an impact on how gaming establishments operate, the GCB
does not have power over the relevant activities (as defined in this Standard) of the gaming
establishments. The regulations apply to all gaming establishments and each establishment has a
choice as to whether it wishes to engage in gaming or not. The purpose of the gaming legislation and
regulations is to protect the public, rather than to establish a controlling interest in the gaming
establishments.

Relevant Activities and Direction of Relevant Activities (paragraphs AG13–AG15)

IE4. The following examples illustrate assessments of whether an entity has the power to direct the relevant
activities of another entity for the purposes of this Standard.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1252

 CONSOLIDATED FINANCIAL STATEMENTS

Example 6
Entities A and B, form another entity, entity C, to develop and market a medical product. Entity A is responsible for
developing and obtaining regulatory approval of the medical product—that responsibility includes having the
unilateral ability to make all decisions relating to the development of the product and to obtaining regulatory approval.
Once the regulator has approved the product, entity B will manufacture and market it—entity B has the unilateral
ability to make all decisions about the manufacture and marketing of the product. If all the activities—developing and
obtaining regulatory approval as well as manufacturing and marketing of the medical product—are relevant activities,
entity A and entity B each needs to determine whether they are able to direct the activities that most significantly
affect the benefits from entity C. Accordingly, entity A and B each need to consider whether developing and obtaining
regulatory approval or the manufacturing and marketing of the medical product is the activity that most significantly
affects the benefits from entity C and whether they are able to direct that activity. In determining which entity has
power, entities A and B would consider:
(a) The purpose and design of entity C;

(b) The factors that determine the surplus, revenue and value of entity C as well as the value of the medical
product;

(c) The effect of their decision-making authority on entity C’s performance with respect to the factors in (b); and

(d) Their exposure to variability of benefits from entity C.

In this particular example, the entities would also consider:

(a) The uncertainty of, and effort required in, obtaining regulatory approval (considering their record of successfully
developing and obtaining regulatory approval of medical products); and

(b) Which entity controls the medical product once the development phase is successful.

1253 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Example 7
An investment vehicle is created and financed with a debt instrument held by an entity (the debt investor)
and equity instruments held by a number of other investors. The equity tranche is designed to absorb the
first losses and to receive any residual benefit from the investment vehicle. One of the equity investors
who holds 30 per cent of the equity instruments is also the asset manager. The investment vehicle uses
its proceeds to purchase a portfolio of financial assets, exposing the investment vehicle to the credit risk
associated with the possible default of principal and interest payments of the assets. The transaction is
marketed to the debt investor as an investment with minimal exposure to the credit risk associated with
the possible default of the assets in the portfolio because of the nature of these assets and because the
equity tranche is designed to absorb the first losses of the investment vehicle. The benefits from the
investment vehicle are significantly affected by the management of the investment vehicle’s asset
portfolio, which includes decisions about the selection, acquisition and disposal of the assets within
portfolio guidelines and the management upon default of any portfolio assets. All those activities are
managed by the asset manager until defaults reach a specified proportion of the portfolio value (i.e., when
the value of the portfolio is such that the equity tranche of the investment vehicle has been consumed).
From that time, a third-party trustee manages the assets according to the instructions of the debt investor.
Managing the investment vehicle’s asset portfolio is the relevant activity of the investment vehicle. The
asset manager has the ability to direct the relevant activities until defaulted assets reach the specified
proportion of the portfolio value; the debt investor has the ability to direct the relevant activities when the
value of defaulted assets surpasses that specified proportion of the portfolio value. The asset manager
and the debt investor each need to determine whether they are able to direct the activities that most
significantly affect the benefits from the investment vehicle, including considering the purpose and design
of the investment vehicle as well as each party’s exposure to variability of benefits.

Rights that Give an Entity Power over another Entity (paragraphs AG16–AG28)

IE5. The following examples illustrate assessments of whether an entity has the power to direct the relevant
activities of another entity for the purposes of this Standard.

Example 8

A government housing agency establishes a community housing program that provides low-cost housing.
The program is operated under an agreement with an incorporated association. The association’s only
activity is to manage the community housing facility. The association has no ownership instruments.

The relevant activities of the association comprise:

• Reviewing and selecting applicants for housing;

• The day-to-day operation of the housing program;

• Maintaining the houses and common facilities; and

• Improving and extending the housing facilities.

The board of governors of the association has 16 members, with eight appointed by (and subject to
removal by) the government housing agency. The chair is appointed by the board from amongst the
appointees of the government housing agency, and has a casting vote that is rarely exercised. The board
meets regularly and reviews reports received from the association’s management. Based on these reports,
the board may confirm or override management decisions. In addition, the board makes decisions on
major issues such as significant maintenance and investing further capital to build additional housing, after
reviewing vacancy levels and the demand for housing.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1254

 CONSOLIDATED FINANCIAL STATEMENTS

The government housing agency owns the land on which the housing facilities stand and has contributed
capital and operating funds to the association since it was established. The association owns the housing
facilities.
The association retains any surplus resulting from the operation of the facilities and under its constitution
is unable to provide a direct financial return to the government housing agency. The above fact pattern
applies to examples 8A and 8B described below. Each example is considered in isolation.

Example 8A
Based on the facts and circumstances outlined above, the government housing agency controls the
association.

The government housing agency has rights that give it the current ability to direct the relevant activities of
the association, regardless of whether it chooses to exercise those rights.

The government housing agency appoints eight members of the board of governors, one of whom will
become the chair, who has a casting vote. As a result, the government housing agency has power over
the association through substantive rights that give it the current ability to direct the relevant activities of
the association, regardless of whether the government housing agency chooses to exercise those
substantive rights.

The government housing agency also has exposure or rights to variable benefits from its involvement with
the association. The government housing agency obtains non-financial benefits through the association
furthering its social objective of meeting the need for low-cost community housing. Although not able to
receive direct financial benefits, the government housing agency obtains indirect benefits through its ability
to direct how the financial returns are to be employed in the community housing program.

The government housing agency also satisfies the final control criterion. Through its appointees on the
board, the government housing agency has the ability to use its power to affect the nature or amount of
its benefits from the association.

The government housing agency satisfies all three criteria for control and therefore the government
housing agency controls the association.

Example 8B

In this example, the facts of Example 8A apply, except that:

(a) The association’s board of governors is elected through a public nomination and voting process that
does not give rights to the government housing agency to appoint board members; and

(b) Decisions made by the association’s board are reviewed by the government housing agency, which
may offer advice to the association.

Based on the revised facts and circumstances outlined above, the government housing agency does not
have substantive rights relating to the association and therefore does not have power over the association.
The government housing agency’s social objectives in relation to low-cost community housing are still
being achieved and therefore it will still obtain direct non-financial benefits. However, congruence of
objectives alone is insufficient to conclude that one entity controls another entity (refer paragraph 36).
The government housing agency does not have power and consequently does not have the ability to use

1255 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

power to affect the nature or amount of the agency’s benefits. The government housing agency is unable
to satisfy two of the three control criteria and therefore the government housing agency does not control
the association.

Example 9
A government has the right to appoint and remove the majority of members of a statutory body. This power
has been used by previous governments. The current government has not done so because it does not
wish, for political reasons, to be regarded as interfering in the activities of the statutory body. In this case
the government still has substantive rights, even though it has chosen not to use them.

Example 10
A local government has a policy that, where it holds land that is surplus to its requirements, consideration
should be given to making the land available for affordable housing. The local government establishes
terms and conditions to ensure that the housing provided remains affordable and available to meet local
housing needs.

In accordance with this policy, the local government sold part of a site to a housing association for CU1 to
provide 20 affordable homes. The remainder of the site was sold at open market value to a private
developer.

The contract between the local government and the housing association specifies what the land can be
used for, the quality of housing developments, ongoing reporting and performance management
requirements, the process for return of unused land and dispute resolution. The land must be used in a
manner consistent with the local government’s policy for affordable housing.
The agreement also has requirements regarding the housing association’s quality assurance and financial
management processes. The housing association must demonstrate that it has the capacity and authority
to undertake the development. It must also demonstrate the added value that can be achieved by joining
the local government’s resources with that of the housing association to address a need within a particular
client group in a sustainable way.

The Board of the housing association is appointed by the members of the housing association. The local
government does not have a representative on the Board.

Based on the facts and circumstances outlined above, the government housing agency does not hold
sufficient power over the association to direct its relevant activities and therefore does not control the
association. The local government may receive indirect, non-financial benefits from the association in that
the local government’s social objectives in relation to low-cost community housing are being furthered by
the activities of the housing association. However, congruence of objectives alone is insufficient to
conclude that one entity controls another (see paragraph 36). In order to have power over the housing
association the local government would need to have the ability to direct the housing association to work
with the local government to further the local governments’ objectives.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1256

 CONSOLIDATED FINANCIAL STATEMENTS

Example 11
An entity being assessed for control has annual shareholder meetings at which decisions to direct the
relevant activities are made. The next scheduled shareholders’ meeting is in eight months. However,
shareholders that individually or collectively hold at least 5 per cent of the voting rights can call a special
meeting to change the existing policies over the relevant activities, but a requirement to give notice to the
other shareholders means that such a meeting cannot be held for at least 30 days. Policies over the relevant
activities can be changed only at special or scheduled shareholders’ meetings. This includes the approval
of material sales of assets as well as the making or disposing of significant investments.

The above fact pattern applies to examples 11A–11D described below. Each example is considered in
isolation.

Example 11A
An entity holds a majority of the voting rights in the other entity. The entity’s voting rights are substantive
because the entity is able to make decisions about the direction of the relevant activities when they need to
be made. The fact that it takes 30 days before the entity can exercise its voting rights does not stop the entity
from having the current ability to direct the relevant activities from the moment the entity acquires the
shareholding.

Example 11B
An entity is party to a forward contract to acquire the majority of shares in the other entity. The forward
contract’s settlement date is in 25 days. The existing shareholders are unable to change the existing policies
over the relevant activities because a special meeting cannot be held for at least 30 days, at which point the
forward contract will have been settled. Thus, the entity has rights that are essentially equivalent to the
majority shareholder in example 11A above (i.e., the entity holding the forward contract can make decisions
about the direction of the relevant activities when they need to be made). The entity’s forward contract is a
substantive right that gives the entity the current ability to direct the relevant activities even before the forward
contract is settled.

Example 11C
An entity holds a substantive option to acquire the majority of shares in the other entity that is exercisable in
25 days and is deeply in the money. The same conclusion would be reached as in example 11B.

Example 11D

An entity is party to a forward contract to acquire the majority of shares in the other entity, with no other
related rights over the other entity. The forward contract’s settlement date is in six months. In contrast to the
examples above, the entity does not have the current ability to direct the relevant activities. The existing
shareholders have the current ability to direct the relevant activities because they can change the existing
policies over the relevant activities before the forward contract is settled.

1257 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Power without a Majority of the Voting Rights and Special Voting Rights Attaching to Ownership Interests (paragraphs
AG36–AG37)

IE6. The following examples illustrate assessments of whether special voting rights attaching to ownership
interests in another entity give rise to power for the purposes of this Standard.

Example 12
A central government has privatized a company and, in order to protect its national interests, it has used a
“golden share” mechanism. The “golden share” does not have any value or give any percentage rights to
the capital of the company. The golden share states that control of the company, or a 24 percent stake in
the company cannot be sold without the permission of the central government.

The central government has protective rights, not substantive rights.

Example 13
A central government sold all of its shares in a company, but kept a golden share (with a nominal value of
one currency unit). The golden share granted the Secretary of State (as the holder of the share) a 15
percent shareholding in the company, and consequently the ability to block any potential takeover of the
business. It also required that the chairman of the board and the chief executive be citizens of the country.
The rationale for the golden share was to protect the company from an overseas acquisition, principally on
the grounds of national security.
The central government has protective rights, not substantive rights.

Example 14
A central government does not own any shares in defense companies. However it has passed legislation
which specifies that, with respect to companies carrying out strategic activities for the defense and national
security system, in the event that fundamental interests of national defense or security could be materially
affected, the government may:

(a) Impose specific conditions on the purchase of an interest in any such company – by any person –
relating to the security of procurement and of information, the transfer of technologies and export
controls;

(b) Veto the purchase by any person – other than the state (whether directly or indirectly, individually or
jointly) – of an interest in the voting share capital in any such company that, given its size, may
jeopardize defense or national security; and
(c) Veto the adoption of resolutions by the shareholders or the board of directors of any such company
relating to certain extraordinary transactions (such as mergers, de-mergers, assets disposals,
winding up, and bylaws amendments concerning the corporate purpose or equity ownership caps in
certain state-controlled companies).

The central government has protective rights, not substantive rights, in respect of these companies.

Control of the Board or Other Governing Body (paragraph AG38)

IE7. The following example illustrates assessments of whether an entity has control of the board or governing
body of another entity for the purposes of this Standard. The existence of such control may provide evidence
that an entity has sufficient rights to have power over another entity.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1258

 CONSOLIDATED FINANCIAL STATEMENTS

Example 15
A national museum is governed by a board of trustees who are chosen by the government department
responsible for funding the museum. The trustees have freedom to make decisions about the operation of
the museum.

The department has the power to appoint the majority of the museum’s trustees. The department has the
potential to exercise power over the museum.

Economic Dependence (paragraphs AG41–AG42)

IE8. The following examples illustrate assessments of whether dependence on funding from another entity gives
rise to power in the context of this Standard.

Example 16
A research institution is one of many institutions that receive the majority of their funding from a central
government. The institutions submit proposals and the funding is allocated through a tendering process.
The research institution retains the right to accept or decline funding.
The central government does not control the research institution because the research institution can
choose to decline funding from the government, seek alternative sources of funding or cease to operate.

Example 17

A catering entity has a binding arrangement to supply food to a government-owned school. The
arrangement is between the company and the school. The school contracts generate the majority of the
revenue of the catering entity. There are general requirements, set out in regulations, which are applicable
to all such arrangements including nutritional standards and policies on procurement. For example, the
arrangements specify how much produce must be purchased locally.

Current arrangements are for a period of five years. At the end of this period, if the catering entity wishes
to continue supplying school meals it is required to go through a tendering process and compete with other
entities for the business.

The school does not control the catering entity because the catering entity can choose to stop supplying
school meals, seek other work, or cease to operate.

Example 18

An international donor funds a project in a developing country. The donor uses a small, local agency in
the country to run the project. The local agency has its own management board but is highly dependent
on the donor for funding. The agency retains the power to turn down funding from the donor.

The international donor does not control the local agency because the agency can choose not to accept
funding from the donor and seek alternative sources of funding, or cease to operate.

Voting Rights (paragraphs AG43–AG48)

IE9. The following examples illustrate assessments of whether an entity with less than a majority of the voting
rights in another entity has the practical ability to direct the relevant activities unilaterally, and whether its
rights are sufficient to give it power over that other entity for the purposes of this Standard.

1259 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Example 19
An entity acquires 48 per cent of the voting rights of another entity. The remaining voting rights are held
by thousands of shareholders, none individually holding more than 1 per cent of the voting rights. None
of the shareholders have any arrangements to consult any of the others or make collective decisions.
When assessing the proportion of voting rights to acquire, on the basis of the relative size of the other
shareholdings, the entity determined that a 48 per cent interest would be sufficient to give it control. In
this case, on the basis of the absolute size of its holding and the relative size of the other shareholdings,
the entity concludes that it has a sufficiently dominant voting interest to meet the power criterion without
the need to consider any other evidence of power.

Example 20
Entity A holds 40 per cent of the voting rights of another entity and twelve other investors each hold 5 per
cent of the voting rights of the other entity. A shareholder agreement grants Entity A the right to appoint,
remove and set the remuneration of management responsible for directing the relevant activities. To
change the agreement, a two-thirds majority vote of the shareholders is required. In this case, Entity A
concludes that the absolute size of its holding and the relative size of the other shareholdings alone are
not conclusive in determining whether it has rights sufficient to give it power. However, Entity A determines
that its contractual right to appoint, remove and set the remuneration of management is sufficient to
conclude that it has power over the other entity. The fact that Entity A might not have exercised this right
or the likelihood of Entity A exercising its right to select, appoint or remove management shall not be
considered when assessing whether Entity A has power.

Example 21
Entity A holds 45 per cent of the voting rights of another entity. Two other investors each hold 26 per cent
of the voting rights of the other entity. The remaining voting rights are held by three other shareholders,
each holding 1 per cent. There are no other arrangements that affect decision-making. In this case, the
size of Entity A’s voting interest and its size relative to the other shareholdings are sufficient to conclude
that Entity A does not have power. Only two other investors would need to co-operate to be able to prevent
Entity A from directing the relevant activities of the other entity.

Example 22
An entity holds 35 per cent of the voting rights of another entity. Three other shareholders each hold 5
per cent of the voting rights of the other entity. The remaining voting rights are held by numerous other
shareholders, none individually holding more than 1 per cent of the voting rights. None of the shareholders
has arrangements to consult any of the others or make collective decisions. Decisions about the relevant
activities of the other entity require the approval of a majority of votes cast at relevant shareholders’
meetings—75 per cent of the voting rights of the other entity have been cast at recent relevant
shareholders’ meetings. In this case, the active participation of the other shareholders at recent
shareholders’ meetings indicates that the entity would not have the practical ability to direct the relevant
activities unilaterally, regardless of whether the entity has directed the relevant activities because a
sufficient number of other shareholders voted in the same way as the entity.

Potential Voting Rights (paragraphs AG49–AG52)

IE10. The following examples illustrate assessments of whether potential voting rights are substantive for the pur-
poses of this Standard.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1260

 CONSOLIDATED FINANCIAL STATEMENTS

Example 23
Entity A holds 70 per cent of the voting rights of another entity. Entity B has 30 per cent of the voting rights
of the other entity as well as an option to acquire half of Entity A’s voting rights. The option is exercisable
for the next two years at a fixed price that is deeply out of the money (and is expected to remain so for that
two-year period). Entity A has been exercising its votes and is actively directing the relevant activities of the
other entity. In such a case, Entity A is likely to meet the power criterion because it appears to have the
current ability to direct the relevant activities. Although Entity B has currently exercisable options to purchase
additional voting rights (that, if exercised, would give it a majority of the voting rights in the other entity), the
terms and conditions associated with those options are such that the options are not considered substantive.

Example 24
Entity A and two other investors each hold a third of the voting rights of another entity. The other entity’s
business activity is closely related to Entity A. In addition to its equity instruments, Entity A also holds debt
instruments that are convertible into ordinary shares of the other entity at any time for a fixed price that is
out of the money (but not deeply out of the money). If the debt were converted, Entity A would hold 60 per
cent of the voting rights of the other entity. Entity A would benefit from realizing synergies if the debt
instruments were converted into ordinary shares. Entity A has power over the other entity because it holds
voting rights of the other entity together with substantive potential voting rights that give it the current ability
to direct the relevant activities.

Power when Voting or Similar Rights do not have a Significant Effect on Benefits (paragraphs AG53–AG56)

IE11. The following examples illustrate assessments of whether an entity has power in the absence of voting rights
or similar rights for the purposes of this Standard.

Example 25

A central government has legislation that governs the establishment of cultural and heritage boards. These
boards have a separate legal status and have limited liability. The powers and objectives of the boards,
along with their reporting requirements are specified by legislation. The main function of each board is to
administer the board’s assets, mainly property, for the general benefit of beneficiaries. Boards are
permitted to spend money on the promotion of health, education, vocational training, and the social and
economic welfare of the beneficiaries. They have limited authority to spend money unless it is for a purpose
specifically mentioned in the legislation. Each board must deliver an annual financial report to the
government. The beneficiaries (as defined by each board and comprising people from a specified area)
elect the members of the board. Trustees are appointed for a three-year term by way of voting by
beneficiaries at the annual general meeting. Each board determines its own operating and financial
policies and strategy. The activities that have the biggest impact on the achievement of the boards’
objectives are the management of property and the distribution of funds to the beneficiaries.

The central government does not control the boards. The government was involved in establishing the
legislation that governs the activities of the boards, but does not have rights over the relevant activities of
the boards.

Example 26
Five local authorities create a separate company to deliver shared services to participating authorities.
The company operates under contract to these local authorities. The company’s major objective is the
provision of services to these local authorities.

The company is owned by all of the participating local authorities with each owning one share and allowed

1261 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

one vote. The chief executive of each local government is permitted to be a board member of the company.
The board of the company is responsible for strategic direction, approval of business cases and monitoring
of performance.
For each shared activity there is an advisory group that is responsible for operational management and
decision-making in relation to that activity. Each advisory group consists of one representative from each
local government.

The benefits of the shared services arrangement are:

• Improved levels and quality of service;

• A co-ordinated and consistent approach to the provision of services;

• Reductions in the cost of support and administrative services;

• Opportunities to develop new initiatives; and

• Economies of scale resulting from a single entity representing many councils in procurement.

If further shared service activities are established that lead to the need for further capital, the company will
either issue a new class of equity instrument or will form a controlled entity to hold the interest in the new
assets.

The company covers its costs in two ways. It retains a percentage of savings from its bulk purchasing
activities and it charges an administrative transaction cost of services provided to the local authorities.
None of the local authorities individually controls the company. In deciding how to account for its interest
in the company each local authority would also need to consider whether it is a party to a joint arrangement
as defined in IPSAS 37, Joint Arrangements.

Example 27

A leisure trust was established as a charity, limited by guarantee, to operate and manage sport and leisure
facilities on behalf of a local government. Under the terms of the agreement with the local government,
the leisure trust is responsible for the operational management, delivery and development of the city’s
sports and leisure facilities. The trust is required to operate the existing leisure facilities of the local
government. The level of service required, including hours of operation and staffing levels, are specified
by the local government. The leisure trust’s activities must be consistent with the long-term plan of the
local government and a significant portion of the trusts activities are funded by the local government. The
leisure trust may not create new facilities nor may it engage in any other activities without the approval of
the local government.

If the leisure trust ceases to operate the proceeds must be distributed to another charity with similar
purposes. The local government is not responsible for the debts of the leisure trust (its liability is limited to
one currency unit).

The local government controls the leisure trust. By specifying in detail the way in which the leisure trust
must operate the local government has predetermined the leisure trust’s activities and the nature of
benefits to the local government.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1262

 CONSOLIDATED FINANCIAL STATEMENTS

Example 28
A local government transfers its leisure centers, libraries and theatres into a charitable trust.

In creating the trust the local government expects to benefit from cost savings, increased use of facilities
by the public, a more favorable taxation treatment, and better access to funding restricted to charities. The
trust can decide the nature and extent of facilities to be provided and can engage in any other charitable
purpose. The board of the trust is elected by the community. The local government is entitled to have one
representative on the board. The trust is required to retain any surplus and use it for the objectives of the
trust.

The local government benefits from the trust’s activities but it does not control the trust. The local
government cannot direct how the trust uses its resources.

1263 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Example 29
Trust A promotes, supports and undertakes programs, actions and initiatives to beautify City A. It receives funding
from the local government for various services, including graffiti removal, beautification projects and running
environmental events. It reports back to the local government on its performance in delivering these services. If the
trust did not exist the local government would need to find some other way to deliver these services. The trust also
receives assistance through donations and volunteer work by the local community including local businesses,
schools, community groups and individuals.

The trust was originally established by an elected official of the local government.

The governing body of the local government appoints all the trustees (having regard to certain requirements such as
balance in gender and location of trustees). There are between five and 12 trustees. The trustees appoint the officers.

Changes to the trust deed must be approved by the trustees and the governing body of the local authority.

If the trust is wound up, surplus assets must be transferred to a similar charitable body in the same geographical
area. This transfer of assets is subject to the approval of the local government.

The local government has a mix of rights over the trust including rights to:

(a) Appoint, reassign or remove members of the trust’s key management personnel who have the ability to direct
the relevant activities;

(b) Approve or veto operating and capital budgets relating to the relevant activities of the trust; and

(c) Veto key changes to the trust, such as the sale of a major asset or of the trust as a whole.
The local government is able to direct the relevant activities (the services) of the trust through its arrangements in
such a way that it is able to affect the costs and quality of the services being provided. The local government is
exposed to variable returns (both the economic effects of the service and the quality of the service). As it uses its
power to affect these returns, the local government controls the trust.

Example 30
Entity A is a public sector body that promotes the construction of new houses, the repair and modernization of existing
houses, and the improvement of housing and living conditions. It also facilitates access to housing finance and
promotes competition and efficiency in the provision of housing finance.

Entity A established a separate trust which has narrowly defined objectives. The trust’s functions are to acquire
interests in eligible housing loans and issue mortgage bonds. Entity A guarantees the bonds issued by the trust but
does not provide ongoing funding – the trust finances its activities through the revenue from its investments. If the
trust is wound up the trust’s assets are to be distributed to one or more charitable organizations. Entity A does not
have on-going decision-making rights over the trust’s activities.

Entity A has power over the relevant activities of the trust because it determined the relevant activities of the trust
when it established the trust. Entity A is also exposed to variable benefits both through its exposure to the guaranteed
bonds and because the trust’s activities, determined by Entity A in establishing the trust, help Entity A to achieve its
objectives.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1264

 CONSOLIDATED FINANCIAL STATEMENTS

Example 31
A funding agency was established by legislation. It is owned by ten local authorities and the central
government. It operates on a for-profit basis. The funding agency will raise debt funding and provide that
funding to the participating local authorities. Its primary purpose is to provide more efficient funding costs and
diversified funding sources for the local authorities. It may undertake any other activities considered by the
board to be reasonably related or incidental to, or in connection with, that business.

The main benefits to the participating local authorities are the reduced borrowing costs. The board of the
funding agency may decide to pay dividends but dividend payments are expected to be low.

The board is responsible for the strategic direction and control of the funding agency’s activities. The board
will comprise between four and seven directors with a majority of independent directors.
There is also a shareholders’ council which is made up of ten appointees of the shareholders (including an
appointee from the central government). The role of the shareholders’ council is to:

• Review the performance of the funding agency and the Board, and report to shareholders on that
performance;

• Make recommendations to shareholders as to the appointment, removal, replacement and

remuneration of directors; and

• Coordinate shareholders’ governance decisions.

The funding agency purchases debt securities in accordance with its lending and/or investment policies, as
approved by the board and/or shareholders.

To participate in the funding agency as a principal shareholding authority, each local government made an
initial capital investment of CU100,000, provided security against future property taxes and agreed to borrow
a set portion of its borrowing needs from the funding agency for a period of three years.
Neither the central government nor the participating local authorities control the funding agency. In deciding
how to account for their interest in the funding agency the central government and participating local
authorities would also need to consider whether they are parties to a joint arrangement as defined in
IPSAS 37.

1265 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Example 32
Entity A’s only business activity, as specified in its founding documents, is to purchase receivables and service
them on a day-to-day basis for Entity B. The servicing on a day-to-day basis includes the collection and passing
on of principal and interest payments as they fall due. Upon default of a receivable Entity A automatically puts
the receivable to Entity B as agreed separately in a put agreement between Entity A and Entity B. The only
relevant activity is managing the receivables upon default because it is the only activity that can significantly
affect Entity A’s financial performance. Managing the receivables before default is not a relevant activity because
it does not require substantive decisions to be made that could significantly affect Entity A’s financial
performance—the activities before default are predetermined and amount only to collecting cash flows as they
fall due and passing them on to Entity B. Therefore, only Entity B’s right to manage the assets upon default
should be considered when assessing the overall activities of Entity A that significantly affect Entity A’s financial
performance. In this example, the design of Entity A ensures that Entity B has decision-making authority over
the activities that significantly affect the financial performance at the only time that such decision-making authority
is required. The terms of the put agreement are integral to the overall transaction and the establishment of Entity
A. Therefore, the terms of the put agreement together with the founding documents of Entity A lead to the
conclusion that Entity B has power over Entity A even though Entity B takes ownership of the receivables only
upon default and manages the defaulted receivables outside the legal boundaries of Entity A.

Exposure, or Rights, to Variable Benefits from another Entity (paragraph AG57)

IE12. The following examples illustrate assessments of whether an entity receives variable benefits from another
entity for the purposes of this Standard.

Example 33
Research has shown that family friendly policies at universities, which include the provision of quality early
childhood education services, are critical in attracting and retaining students and staff. This is particularly
important for attracting high-level staff and post-graduate students, which in turn help uphold the reputation of
the University and its ability to obtain research funding.
The above background information is relevant to examples 33A and 33B described below. Each example is
considered in isolation.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1266

 CONSOLIDATED FINANCIAL STATEMENTS

Example 33A
University A has established seven childcare centers (although University A receives government funding
for its educational programs, the childcare centers have been established by the university, not by the
government). The centers operate in University owned buildings. Each center has its own manager, staff
and budget. The centers are able to be used by university staff and students only. The University is the
licensed provider of childcare services. The University has the right to close centers or relocate them to other
properties. Because the childcare center is on university property the staff and parents are required to comply
with University health and safety policies. The management team of the childcare center has the ability to
determine all other operating policies.

University A receives non-financial benefits from having childcare services available on campus. Although
University A is not involved in the day-to-day running of the centers, it has the ability to close the centers or
change their hours of operation.

University A controls the childcare centers.

Example 33B
University B has made a building available free of charge for the provision of childcare services on the
grounds of the University. The childcare services are provided by an incorporated society. All parents using
the childcare center are members of the society. The members appoint the Board of the incorporated society
and are in charge of the childcare center’s operating and financial policies. The childcare center is able to
be used by staff, students and the general public, with students having priority. Because the childcare center
is on University property the staff and parents are required to comply with University health and safety
policies. The incorporated society is the licensed provider of childcare services. If the incorporated society
ceases to operate, its resources must be distributed to a similar non-profit organization. The incorporated
society could choose not to use the University’s buildings in providing its services.

Although the University receives non-financial benefits from having childcare services available on campus
it does not have power to direct the relevant activities of the incorporated society. The members of the
incorporated society, being the parents of the children, have the power to direct the relevant activities of the
incorporated society. The University does not control the incorporated society.

Link between Power and Benefits

Delegated Power (paragraphs AG60–AG63)

IE13. The following examples illustrate assessments of whether an entity is acting as a principal or an agent for
the purposes of this Standard.

Example 34
A government department may be responsible for monitoring the performance of another public sector entity.
The role of the monitoring department is to make sure the other entity’s approach is consistent with the
government’s goals, provide Ministers with quality assurance about delivery and results and assess and
notify the Minister of any risks. The department has an explicit agreement with the Minister which sets out
its monitoring responsibilities. The department has the authority to request information from the other entity
and provides advice to the Minister on any funding requests from that entity. The department also advises
the Minister as to whether the other entity should be permitted to undertake certain activities. The department
is acting as an agent of the Minister.

1267 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Example 35
A provincial government establishes a trust to co-ordinate fundraising efforts for the benefit of health programs
and other health initiatives in the region. The trust also invests and manages designated endowment funds. The
funds raised are applied to the government-owned hospitals and aged care facilities in the region.

The provincial government appoints all the trustees on the board of the trust and funds the trust’s operating
costs. The trust is a registered charity and is exempt from income tax.

Based on the following analysis, the provincial government controls the trust:

(a) The provincial government can give directions to the trustees, and the trustees have the current ability to
direct the relevant activities of the trust. The trustees have power over the trust and the provincial
government can replace the trustees at its discretion. The trustees’ fiduciary obligation to act in the best
interest of the beneficiaries does not prevent the provincial government from having power over the trust;

(b) The provincial government has exposure and rights to variable benefits from involvement with the trust;

(c) The provincial government can use its power over the trust to affect the nature or amount of the trust’s
benefits; and
(d) The activities of the trust are complementary to the activities of the provincial government.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1268

 CONSOLIDATED FINANCIAL STATEMENTS

Example 36
A statutory body is established under legislation to deliver services to the community. The statutory body has a
governing council that oversees the body’s operations and is responsible for its day-to-day operations. The Minister
of Health for the provincial government appoints the statutory body’s governing council and, subject to the Minister’s
approval, the statutory body’s governing council appoints the chief executive of the body.

The provincial government’s Health Department acts as the “system manager” for the provincial public health
system. This role includes:

(a) Strategic leadership, such as the development of provincial-wide health service plans;
(b) Directions for the delivery of health services, such as entering into service agreements, capital works
approval and management of provincial-wide industrial relations, including employment terms and
conditions for the statutory body’s employees; and
(c) Monitoring of performance (e.g., quality of health services and financial data) of the authority and taking
remedial action when performance does not meet specified performance measures.

The Minister’s approval is specifically required for the following major decisions:

(a) Entering into service agreements with the body;

(b) Issuing binding health service directives;

(c) Finalization of health service plans and capital works planning; and

(d) Employment and remuneration of the statutory body’s executive staff.

The Health Department receives all its operating and capital funding from the provincial government.
Based on the facts and circumstances outlined above, the Health Department generally acts as an agent of the
Minister in relation to the statutory body. This is evident from the restricted decision-making authority held by the
Department. The Health Department does not control the statutory body.

As the Minister appoints the statutory body’s governing council and approves the major decisions affecting the
body’s activities, the Minister has the power to direct the relevant activities of the body. Assuming that the other
control criteria (variable returns and link between power and benefits) are satisfied, as would be expected, then
the Minister would control the statutory body. As a result, the statutory body would be consolidated in the
provincial government’s whole of government general purpose financial statements.

1269 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Example 37
(a) The facts are the same as in Example 36 except that:

(b) The Minister has delegated the power to appoint members of the statutory body’s governing council to the
Health Department’s head;

(c) The appointment of the statutory body’s chief executive by the governing council does not require the
Minister’s approval;

(d) The Minister has delegated the power to approve the major decisions to the Health Department’s head;
and
(e) Assessments of the Health Department’s performance encompass the performance of the statutory body.

The Minister could still exercise the powers that have been delegated to the Health Department’s head, but in
practice, is unlikely to do so.
In this example, the scope of the decision-making authority held by the Health Department has increased significantly
as a result of the delegations by the Minister to the Health Department head. As the Health Department acts as a
principal under the delegations, the Department has the current ability to direct the relevant activities of the statutory
body so as to achieve the health service objectives of the Health Department. As the Health Department also has the
ability to use its power over the authority to affect the nature or amount of the Department’s benefits, the Department
controls the statutory body.

Example 38
The head of the government department related to finance and taxation (the Treasury) is designated by law as
the managing trustee for a number of investment funds. The investment funds are funded by designated taxes
and are used to deliver federal welfare programs. The Treasury collects most of the designated tax revenue that
relates to these funds. Other agencies also collect some of the revenues and forward these to the Treasury.

The Treasury is delegated the responsibility for administering the funds. For each of the funds, the Treasury
immediately invests all receipts credited to the fund, and maintains the invested assets in a designated trust fund
until money is needed by the relevant agency.

When the relevant agencies determine that monies are needed, the Treasury redeems securities from the funds’
investment balances, and transfers the cash proceeds, including interest earned on the investments, to the
program accounts for disbursement by the agency. The Treasury provides monthly and other periodic reporting
to each agency. The Treasury charges a management fee for its services.

The Treasury does not control the funds.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1270

 CONSOLIDATED FINANCIAL STATEMENTS

Example 39
A local government administers ten funds, each relating to a specific district. The funds hold specified assets
(such as land, property and investments) that belonged to districts that previously had their own local government
but which have since been amalgamated with other districts. The funds receive the revenue associated with the
assets and certain taxes such as the property taxes for that district. The rights of the funds to hold these specified
assets and receive the specified revenue are set out in legislation. The assets and revenue of the fund may be
applied solely for the benefit of the inhabitants of the former districts.

The local government has wide discretion over spending by the funds. Funds must be applied for the benefit of
the community in such a manner as using reasonable judgment the local government thinks proper and having
regard to the interests of the inhabitants of the former district. The local government may apply the fund to
spending which is not covered by council taxation. Expenditure charged to the fund must be for purposes
permitted by law.

The funds are controlled by the local government.

Example 40
A sovereign wealth fund (the fund) is a constitutionally established permanent fund, managed by a government
corporation. Legislation specifies that the fund is entitled to receive at least 25% of proceeds from oil sales. The
fund sets aside a certain share of these revenues to benefit current and future generations of citizens.
The corporation manages the assets of both the fund and certain other state investments and is remunerated
for doing so. The corporation may not spend the fund revenue. Decisions on spending fund revenue are made
by the Parliament. Each year, the fund’s revenue is split between operating expenses and an annual payment
to residents that meet certain criteria specified in legislation.

The corporation does not control the sovereign wealth fund. It acts solely as an agent.

1271 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Example 41
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. The fund manager has made a 10 per cent pro rata investment in the fund and receives a market-based
fee for its services equal to 1 per cent of the net asset value of the fund. The fees are commensurate with the
services provided. The fund manager does not have any obligation to fund losses beyond its 10 per cent
investment. The fund is not required to establish, and has not established, an independent board of directors.
The investors do not hold any substantive rights that would affect the decision-making authority of the fund
manager, but can redeem their interests within particular limits set by the fund.

Although operating within the parameters set out in the investment mandate and in accordance with the
regulatory requirements, the fund manager has decision-making rights that give it the current ability to direct the
relevant activities of the fund—the investors do not hold substantive rights that could affect the fund manager’s
decision-making authority. The fund manager receives a market-based fee for its services that is commensurate
with the services provided and has also made a pro rata investment in the fund. The remuneration and its
investment expose the fund manager to variability of benefits from the activities of the fund without creating
exposure that is of such significance that it indicates that the fund manager is a principal.
In this example, consideration of the fund manager’s exposure to variability of benefits from the fund together
with its decision-making authority within restricted parameters indicates that the fund manager is an agent. Thus,
the fund manager concludes that it does not control the fund.

Example 42
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. The fund manager receives a market-based fee for its services equal to 1 per cent of assets under
management and 20 per cent of all the fund’s surplus if a specified level of surplus is achieved. The fees are
commensurate with the services provided.

Although it must make decisions in the best interests of all investors, the fund manager has extensive decision-
making authority to direct the relevant activities of the fund. The fund manager is paid fixed and performance-
related fees that are commensurate with the services provided. In addition, the remuneration aligns the interests
of the fund manager with those of the other investors to increase the value of the fund, without creating exposure
to variability of benefits from the activities of the fund that is of such significance that the remuneration, when
considered in isolation, indicates that the fund manager is a principal.
The above fact pattern and analysis applies to examples 42A-42C described below. Each example is considered
in isolation.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1272

 CONSOLIDATED FINANCIAL STATEMENTS

Example 42A
The fund manager also has a 2 per cent investment in the fund that aligns its interests with those of the other
investors. The fund manager does not have any obligation to fund losses beyond its 2 per cent investment. The
investors can remove the fund manager by a simple majority vote, but only for breach of contract.

The fund manager’s 2 per cent investment increases its exposure to variability of benefits from the activities of
the fund without creating exposure that is of such significance that it indicates that the fund manager is a principal.
The other investors’ rights to remove the fund manager are considered to be protective rights because they are
exercisable only for breach of contract. In this example, although the fund manager has extensive decision-
making authority and is exposed to variability of benefits from its interest and remuneration, the fund manager’s
exposure indicates that the fund manager is an agent. Thus, the fund manager concludes that it does not control
the fund.

1273 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Example 42B
The fund manager has a more substantial pro rata investment in the fund, but does not have any obligation to
fund losses beyond that investment. The investors can remove the fund manager by a simple majority vote, but
only for breach of contract.

In this example, the other investors’ rights to remove the fund manager are considered to be protective rights
because they are exercisable only for breach of contract. Although the fund manager is paid fixed and
performance-related fees that are commensurate with the services provided, the combination of the fund
manager’s investment together with its remuneration could create exposure to variability of benefits from the
activities of the fund that is of such significance that it indicates that the fund manager is a principal. The greater
the magnitude of, and variability associated with, the fund manager’s economic interests (considering its
remuneration and other interests in aggregate), the more emphasis the fund manager would place on those
economic interests in the analysis, and the more likely the fund manager is a principal.
For example, having considered its remuneration and the other factors, the fund manager might consider a 20
per cent investment to be sufficient to conclude that it controls the fund. However, in different circumstances (i.e.,
if the remuneration or other factors are different), control may arise when the level of investment is different.

Example 42C
The fund manager has a 20 per cent pro rata investment in the fund, but does not have any obligation to fund
losses beyond its 20 per cent investment. The fund has a board of directors, all of whose members are
independent of the fund manager and are appointed by the other investors. The board appoints the fund manager
annually. If the board decided not to renew the fund manager’s contract, the services performed by the fund
manager could be performed by other managers in the industry.

Although the fund manager is paid fixed and performance-related fees that are commensurate with the services
provided, the combination of the fund manager’s 20 per cent investment together with its remuneration creates
exposure to variability of benefits from the activities of the fund that is of such significance that it indicates that
the fund manager is a principal. However, the investors have substantive rights to remove the fund manager—
the board of directors provides a mechanism to ensure that the investors can remove the fund manager if they
decide to do so.

In this example, the fund manager places greater emphasis on the substantive removal rights in the analysis.
Thus, although the fund manager has extensive decision-making authority and is exposed to variability of
benefits of the fund from its remuneration and investment, the substantive rights held by the other investors
indicate that the fund manager is an agent. Thus, the fund manager concludes that it does not control the fund.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1274

 CONSOLIDATED FINANCIAL STATEMENTS

Example 43
Entity A is created to purchase a portfolio of fixed rate asset-backed securities, funded by fixed rate debt
instruments and equity instruments. The equity instruments are designed to provide first loss protection to the
debt investors and receive any residual benefits from Entity A. The transaction was marketed to potential debt
investors as an investment in a portfolio of asset-backed securities with exposure to the credit risk associated
with the possible default of the issuers of the asset-backed securities in the portfolio and to the interest rate risk
associated with the management of the portfolio. On formation, the equity instruments represent 10 per cent of
the value of the assets purchased. A decision maker (the asset manager) manages the active asset portfolio by
making investment decisions within the parameters set out in Entity A’s prospectus. For those services, the asset
manager receives a market-based fixed fee (i.e., 1 per cent of assets under management) and performance-
related fees (i.e., 10 per cent of surplus) if Entity A’s surpluses exceed a specified level. The fees are
commensurate with the services provided. The asset manager holds 35 per cent of the equity instruments of
Entity A. The remaining 65 per cent of the equity instruments, and all the debt instruments of Entity A, are held
by a large number of widely dispersed unrelated third party investors. The asset manager can be removed,
without cause, by a simple majority decision of the other investors.

The asset manager is paid fixed and performance-related fees that are commensurate with the services
provided. The remuneration aligns the interests of the fund manager with those of the other investors to increase
the value of the fund. The asset manager has exposure to variability of returns from the activities of the fund
because it holds 35 per cent of the equity instruments and from its remuneration.

Although operating within the parameters set out in Entity A’s prospectus, the asset manager has the current
ability to make investment decisions that significantly affect Entity A’s benefits in the form of returns—the removal
rights held by the other investors receive little weighting in the analysis because those rights are held by a large
number of widely dispersed investors. In this example, the asset manager places greater emphasis on its
exposure to variability of returns of the fund from its net asset/equity interest, which is subordinate to the debt
instruments. Holding 35 per cent of the equity instruments creates subordinated exposure to losses and rights
to returns of Entity A, which are of such significance that it indicates that the asset manager is a principal. Thus,
the asset manager concludes that it controls Entity A.

1275 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

Example 44
A decision maker (the sponsor) sponsors a multi-seller conduit, which issues short-term debt instruments to
unrelated third party investors. The transaction was marketed to potential investors as an investment in a
portfolio of highly rated medium-term assets with minimal exposure to the credit risk associated with the
possible default by the issuers of the assets in the portfolio. Various transferors sell high quality medium-
term asset portfolios to the conduit. Each transferor services the portfolio of assets that it sells to the conduit
and manages receivables on default for a market-based servicing fee. Each transferor also provides first
loss protection against credit losses from its asset portfolio through over-collateralization of the assets
transferred to the conduit. The sponsor establishes the terms of the conduit and manages the operations of
the conduit for a market-based fee. The fee is commensurate with the services provided. The sponsor
approves the sellers permitted to sell to the conduit, approves the assets to be purchased by the conduit and
makes decisions about the funding of the conduit. The sponsor must act in the best interests of all investors.

The sponsor is entitled to any residual benefit from the conduit and also provides credit enhancement and
liquidity facilities to the conduit. The credit enhancement provided by the sponsor absorbs losses of up to 5
per cent of all of the conduit’s assets, after losses are absorbed by the transferors. The liquidity facilities are
not advanced against defaulted assets. The investors do not hold substantive rights that could affect the
decision-making authority of the sponsor.

Even though the sponsor is paid a market-based fee for its services that is commensurate with the services
provided, the sponsor has exposure to variability of benefits from the activities of the conduit because of its
rights to any residual benefits from the conduit and the provision of credit enhancement and liquidity facilities
(i.e., the conduit is exposed to liquidity risk by using short-term debt instruments to fund medium-term
assets). Even though each of the transferors has decision-making rights that affect the value of the assets
of the conduit, the sponsor has extensive decision-making authority that gives it the current ability to direct
the activities that most significantly affect the benefits from the conduit (i.e., the sponsor established the
terms of the conduit, has the right to make decisions about the assets (approving the assets purchased and
the transferors of those assets) and the funding of the conduit (for which new investment must be found on
a regular basis)). The right to residual benefits from the conduit and the provision of credit enhancement and
liquidity facilities expose the sponsor to variability of benefits from the activities of the conduit that is different
from that of the other investors. Accordingly, that exposure indicates that the sponsor is a principal and thus
the sponsor concludes that it controls the conduit. The sponsor’s obligation to act in the best interest of all
investors does not prevent the sponsor from being a principal.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1276

 CONSOLIDATED FINANCIAL STATEMENTS

Accounting requirements: loss of control (paragraphs 52–55A)

IE13A. The following example illustrates the treatment of a sale of an interest in a controlled entity that does not
contain an operation.

Example 44A
A controlling entity has a 100 per cent interest in a controlled entity that does not contain an operation.
The controlling entity sells 70 per cent of its interest in the controlled entity to an associate in which it has
a 20 per cent interest. As a consequence of this transaction, the controlling entity loses control of the
controlled entity. The carrying amount of the net assets of the subsidiary is CU100 and the carrying amount
of the interest sold is CU70 (CU70 = CU100 × 70%). The fair value of the consideration received is CU210,
which is also the fair value of the interest sold. The investment retained in the former controlled entity is
an associate accounted for using the equity method and its fair value is CU90. The gain determined in
accordance with paragraphs 54–55, before the elimination required by paragraph 55A, is CU200 (CU200
= CU210 + CU90 – CU100). This gain comprises two parts:

(a) The gain (CU140) resulting from the sale of the 70 per cent interest in the controlled entity to the
associate. This gain is the difference between the fair value of the consideration received (CU210)
and the carrying amount of the interest sold (CU70). According to paragraph 55A, the controlling
entity recognizes in its surplus or deficit the amount of the gain attributable to the unrelated investors’
interests in the existing associate. This is 80 per cent of this gain, that is CU112 (CU112 = CU140
× 80%). The remaining 20 per cent of the gain (CU28 = CU140 × 20%) is eliminated against the
carrying amount of the investment in the existing associate.

(b) The gain (CU60) resulting from the remeasurement at fair value of the investment directly retained
in the former controlled entity. This gain is the difference between the fair value of the investment
retained in the former controlled entity (CU90) and 30 per cent of the carrying amount of the net
assets of the controlled entity (CU30 = CU100 × 30%). According to paragraph 55A, the controlling
entity recognizes in its surplus or deficit the amount of the gain attributable to the unrelated investors’
interests in the new associate. This is 56 per cent (70% × 80%) of the gain, that is CU34 (CU34 =
CU60 × 56%). The remaining 44 per cent of the gain CU26 (CU26 = CU60 × 44%) is eliminated
against the carrying amount of the investment retained in the former controlled entity.

Investment Entities (paragraphs AG88–AG106)

IE14. The following examples illustrate assessments of whether an entity is an investment entity for the purposes
of this Standard.

Example 45

An entity, Limited Partnership, is formed in 20X1 as a limited partnership with a 10-year life. The offering
memorandum states that Limited Partnership’s purpose is to invest in entities with rapid growth potential,
with the objective of realizing capital appreciation over their life. Entity GP (the general partner of Limited
Partnership) provides 1 per cent of the capital to Limited Partnership and has the responsibility of
identifying suitable investments for the partnership. Approximately 75 limited partners, who are unrelated
to Entity GP, provide 99 per cent of the capital to the partnership.

Limited Partnership begins its investment activities in 20X1. However, no suitable investments are
identified by the end of 20X1. In 20X2 Limited Partnership acquires a controlling interest in one entity,
ABC Corporation. Limited Partnership is unable to close another investment transaction until 20X3, at
which time it acquires equity interests in five additional operating companies. Other than acquiring these

1277 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

equity interests, Limited Partnership conducts no other activities. Limited Partnership measures and
evaluates its investments on a fair value basis and this information is provided to Entity GP and the external
investors.

Limited Partnership has plans to dispose of its interests in each of its investees during the 10 year stated
life of the partnership. Such disposals include the outright sale for cash, the distribution of marketable
equity securities to investors following the successful public offering of the investees’ securities and the
disposal of investments to the public or other unrelated entities.

From the information provided, Limited Partnership meets the definition of an investment entity from
formation in 20X1 to 31 December 20X3 because the following conditions exist:

(a) Limited Partnership has obtained funds from the limited partners and is providing those limited
partners with investment management services;

(b) Limited Partnership’s only activity is acquiring equity interests in operating companies with the
purpose of realizing capital appreciation over the life of the investments. Limited Partnership has
identified and documented exit strategies for its investments, all of which are equity investments;
and

(c) Limited Partnership measures and evaluates its investments on a fair value basis and reports this
financial information to its investors.

In addition, Limited Partnership displays the following characteristics that are relevant in assessing
whether it meets the definition of an investment entity:

(d) Limited Partnership is funded by many investors; and

(e) Ownership in Limited Partnership is represented by units of partnership interests acquired through
a capital contribution.

Limited Partnership does not hold more than one investment throughout the period. However, this is
because it was still in its start-up period and had not identified suitable investment opportunities.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1278

 CONSOLIDATED FINANCIAL STATEMENTS

Example 46
High Technology Fund was formed by Technology Corporation to invest in technology start-up companies
for capital appreciation. Technology Corporation holds a 70 per cent interest in High Technology Fund and
controls High Technology Fund; the other 30 per cent ownership interest in High Technology Fund is owned
by 10 investors. Technology Corporation holds options to acquire investments held by High Technology
Fund, at their fair value, which would be exercised if the technology developed by the investees would benefit
the operations of Technology Corporation. No plans for exiting the investments have been identified by High
Technology Fund. High Technology Fund is managed by an investment adviser that acts as agent for the
investors in High Technology Fund.

Even though High Technology Fund’s purpose is investing for capital appreciation and it provides investment
management services to its investors, High Technology Fund is not an investment entity because of the
following arrangements and circumstances:

(a) Technology Corporation, the controlling entity of High Technology Fund, holds options to acquire
investments in investments held by High Technology Fund if the assets developed by those entities
would benefit the operations of Technology Corporation. This provides a benefit in addition to capital
appreciation or investment revenue; and

(b) The investment plans of High Technology Fund do not include exit strategies for its investments, which
are equity investments. The options held by Technology Corporation are not controlled by High
Technology Fund and do not constitute an exit strategy.

Example 47
Real Estate Entity was formed to develop, own and operate retail, office and other commercial properties.
Real Estate Entity typically holds its property in separate wholly-owned controlled entities, which have no
other substantial assets or liabilities other than borrowings used to finance the related investment property.
Real Estate Entity and each of its controlled entities report their investment properties at fair value in
accordance with IPSAS 16, Investment Property. Real Estate Entity does not have a set time frame for
disposing of its property investments, but uses fair value to help identify the optimal time for disposal.
Although fair value is one performance indicator, Real Estate Entity and its investors use other measures,
including information about expected cash flows, rental revenues and expenses, to assess performance and
to make investment decisions. The key management personnel of Real Estate Entity do not consider fair
value information to be the primary measurement attribute to evaluate the performance of its investments
but rather a part of a group of equally relevant key performance indicators.

Real Estate Entity undertakes extensive property and asset management activities, including property
maintenance, capital expenditure, redevelopment, marketing and tenant selection, some of which it
outsources to third parties. This includes the selection of properties for refurbishment, development and the
negotiation with suppliers for the design and construction work to be done to develop such properties. This
development activity forms a separate substantial part of Real Estate Entity’s activities.

Real Estate Entity does not meet the definition of an investment entity because:
(a) Real Estate Entity has a separate substantial activity that involves the active management of its
property portfolio, including lease negotiations, refurbishments and development activities, and
marketing of properties to provide benefits other than capital appreciation, investment revenue, or both;
(b) The investment plans of Real Estate Entity do not include specified exit strategies for its investments.

1279 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

As a result, Real Estate Entity plans to hold those property investments indefinitely; and
(c) Although Real Estate Entity reports its investment properties at fair value in accordance with IPSAS
16, fair value is not the primary measurement attribute used by management to evaluate the
performance of its investments. Other performance indicators are used to evaluate performance and
make investment decisions.

Example 48
An entity, Master Fund, is formed in 20X1 with a 10-year life. The equity of Master Fund is held by two related
feeder funds. The feeder funds are established in connection with each other to meet legal, regulatory, tax
or similar requirements. The feeder funds are capitalized with a 1 per cent investment from the general
partner and 99 per cent from equity investors that are unrelated to the general partner (with no party holding
a controlling financial interest).

The purpose of Master Fund is to hold a portfolio of investments in order to generate capital appreciation
and investment revenue (such as dividends, interest or rental revenue). The investment objective
communicated to investors is that the sole purpose of the Master-Feeder structure is to provide investment
opportunities for investors in separate market niches to invest in a large pool of assets. Master Fund has
identified and documented exit strategies for the equity and non-financial investments that it holds. Master
Fund holds a portfolio of short and medium term debt investments, some of which will be held until maturity
and some of which will be traded but Master Fund has not specifically identified which investments will be
held and which will be traded. Master Fund measures and evaluates substantially all of its investments,
including its debt investments, on a fair value basis. In addition, investors receive periodic financial
information, on a fair value basis, from the feeder funds. Ownership in both Master Fund and the feeder
funds is represented through units of equity.

IPSAS 35 ILLUSTRATIVE EXAMPLES 1280

 CONSOLIDATED FINANCIAL STATEMENTS

Master Fund and the feeder funds each meet the definition of an investment entity. The following conditions
exist:

(a) Both Master Fund and the feeder funds have obtained funds for the purpose of providing investors
with investment management services;

(b) The Master-Feeder structure’s purpose, which was communicated directly to investors of the feeder
funds, is investing solely for capital appreciation and investment revenue and Master Fund has
identified and documented potential exit strategies for its equity and non-financial investments;

(c) Although the feeder funds do not have an exit strategy for their interests in Master Fund, the feeder
funds can nevertheless be considered to have an exit strategy for their investments because Master
Fund was formed in connection with the feeder funds and holds investments on behalf of the feeder
funds; and
(d) The investments held by Master Fund are measured and evaluated on a fair value basis and
information about the investments made by Master Fund is provided to investors on a fair value basis
through the feeder funds.

Master Fund and the feeder funds were formed in connection with each other for legal, regulatory, tax or
similar requirements. When considered together, they display the following characteristics:
(a) The feeder funds indirectly hold more than one investment because Master Fund holds a portfolio of
investments;

(b) Although Master Fund is wholly capitalized by the feeder funds, the feeder funds are funded by many
investors who are unrelated to the feeder funds (and to the general partner); and

(c) Ownership in the feeder funds is represented by units of equity interests acquired through a capital
contribution.

Example 49
Government Corporation A was established with the principal activity of providing equity finance to both
existing and new enterprises. Its investment objective is to seek capital appreciation and returns. All
acquisitions are made on that basis. The strategy of the Corporation is to increase the fair value of
investments in order to realize a gain on disposal. Management assesses and monitors fair value of the
investments on a regular basis. The Corporation regularly disposes of investments when they reach a certain
stage of maturity so as to provide funds for ongoing investment opportunities. Any surplus is distributed to
the government in the form of dividends.

The Corporation also provides investment related services to the government regarding the government’s
policies for assisting entities in financial distress. It acts as an agent in managing and implementing some of
the government’s business incentive schemes. The Corporation is not exposed to any losses or risks as a
result of its involvement with these schemes.
The Corporation is an investment entity. It meets all three aspects of the definition of an investment entity.

1281 IPSAS 35 ILLUSTRATIVE EXAMPLES

 CONSOLIDATED FINANCIAL STATEMENTS

COMPARISON WITH IFRS 10

IPSAS 35, Consolidated Financial Statements is drawn primarily from IFRS 10, Consolidated Financial Statements
(issued in 2011, including amendments up to December 31, 2014). At the time of initially issuing this Standard, the
IPSASB had not considered the applicability to public sector entities of certain IFRS referred to in IFRS 10. These
standards include:

• IFRS 5, Non-current Assets Held for Sale and Discontinued Operations; and

• IFRS 9, Financial Instruments.

The IPSASB has subsequently issued IPSAS 44, Non-current Assets Held for Sale and Discontinued Operations in May
2022.

The main differences between IPSAS 35 and IFRS 10 are as follows:

• IPSAS 35 uses different terminology, in certain instances, from IFRS 10. The most significant examples are the
use of the terms “economic entity,” “controlling entity,” and “controlled entity”. The equivalent terms in IFRS 10 are
“group,” “parent,” and “subsidiary.” In many cases the terms “investor” and “investee” used in IFRS 10 are replaced
by references to “an entity”, “another entity” or “an entity being assessed for control”. The terms “investor” and
“investee” have been retained in the application guidance on investment entities as they are appropriate in that
context.

• IPSAS 35 defines the term “binding arrangement”. This term is broader than the term “contractual arrangement”,
which is used in IFRS 10.

• IFRS 10 identifies typical characteristics of an investment entity separately from the definition of an investment entity.
IPSAS 35 does not identify such typical characteristics. However, it does discuss some of these characteristics in
the context of the definition of an investment entity.

• IPSAS 35 contains more guidance on non-financial benefits.

• IPSAS 35 does not require that a controlling entity, that is not itself an investment entity, shall consolidate all
controlled entities. Instead it requires that such a controlling entity shall present consolidated financial statements
in which it (i) measures the investments of the controlled investment entity at fair value through surplus or deficit in
accordance with IPSAS 29 and (ii) consolidates the other assets and liabilities and revenue and expenses of the
controlled investment entity in accordance with IPSAS 35.

• IPSAS 35 contains additional illustrative examples that reflect the public sector context.

IPSAS 35 COMPARISON WITH IFRS 10 1282