The factors of the principal / agent analysis

Learning objectives

• Identify the factors in the principal / agent analysis (scope of decision-making authority, rights held by other parties, remuneration, exposure from other interests).L2, L3
• Analyse these factors together, without treating any single one as determinative.L3

Normative references

• IFRS 10 §B60In determining whether it is an agent, the decision maker considers the overall relationship between itself, the investee being managed and other parties, in particular the scope of its decision-making authority, the rights held by other parties, its remuneration and its exposure to variability of returns from other interests it holds; these factors are weighted according to the facts and circumstances. Para. B61 removes the need for this overall assessment when a single party holds a substantive right to remove it without cause (B65).
• IFRS 10 §B62The scope of the decision maker's decision-making authority is evaluated by considering the activities permitted by the decision-making agreements and specified by law, and the discretion it has when making decisions about those activities.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

4 questions

• What does a decision maker take into account to determine whether it is an agent? More than one answer is possible.L2
• Sextant SA manages the Aurore fund with wide decision-making authority. Investors hold removal rights whose exercise terms are under discussion, Sextant's remuneration is commensurate with the services provided, and Sextant holds a small interest in the fund (case data). Write a short note concluding on whether Sextant is an agent by weighing the factors together, distinguishing case facts, rule and professional judgement.L3
• A colleague concludes: "The manager's exposure to the fund's returns is below the percentage set by the standard; it is therefore an agent." What is wrong with this reasoning?L3
• Sextant SA manages a fund for a fee commensurate with the services provided, which includes only terms customary for such services. Sextant also holds a small interest in the fund (case data). What can be concluded?L3