The decision maker's remuneration and exposure

Learning objectives

• Explain the role of remuneration and of exposure to returns from other interests in the principal / agent analysis.L2, L3
• Analyse, from case data, whether the manager's exposure is sufficient for it to act as a principal, without applying a fixed threshold.L3

Normative references

• IFRS 10 §B68The greater the magnitude of, and variability associated with, the decision maker's remuneration relative to the returns expected from the investee's activities, the more likely it is that the decision maker is a principal.
• IFRS 10 §B69In determining whether it is a principal or an agent, the decision maker also considers whether its remuneration is commensurate with the services provided and whether the remuneration agreement includes only terms, conditions or amounts customarily present in arrangements for similar services and level of skills negotiated on an arm's length basis; under B70, it cannot be an agent unless both conditions are met, although meeting them is not, in isolation, sufficient to conclude that it is an agent.
• IFRS 10 §B72In evaluating its exposure to variability of returns from other interests, the decision maker considers the magnitude and variability of its aggregate economic interests, remuneration and other interests (the greater they are, the more likely it is to be a principal), and whether its exposure is different from that of the other investors in a way that might influence its actions (for example, subordinated interests or credit enhancement). No numerical exposure threshold is set; the application examples 13 to 16 that follow illustrate the judgement.

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

3 questions

• 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
• Aurora Gestion exercises decision-making rights delegated to it over a fund. Its remuneration is commensurate with the services provided and the remuneration agreement includes only terms, conditions and amounts customarily present for similar services negotiated on an arm's length basis (case facts). What can be concluded under IFRS 10?L3