(A)

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. An entity controls another entity if and only if the entity has all the following:

• Power over the other entity:
  Control is the ability of an entity to exert power to direct the relevant activities of the other entity. The relevant activities are those activities that significantly affect the nature or amount of the benefits the entity receives 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.

Assessing power is straightforward in some cases, especially in the private sector, 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, in the public sector, entities often obtain power over another entity from rights other than voting rights. They may also obtain power without having an equity instrument providing evidence of a financial investment. For the purposes of consolidation, an entity may have power when:

• Rights are conferred on it 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.
• It is conferred by legislation. Legislation may give statutory bodies or statutory officers powers to carry out their functions independently of government. However, the existence of statutory powers to operate independently does not preclude an entity from having the ability to direct the operating and financial policies of another entity with statutory powers to obtain benefits. For example, the independence of the Central Bank of Accra in relation to monetary policy does not preclude the possibility of it being a controlled entity.
• An entity has the current ability to direct the relevant activities, even if its rights to direct have yet to be exercised.

Note that an entity that holds only protective rights does not have power over another entity and consequently does not control it. 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 regulatory control or economic dependence.

• Exposure, or rights, to variable benefits from its involvement with the other entity:
  Having power over another entity is not sufficient to establish control. The entity must also have exposure, or have rights, to variable benefits from its involvement with the other entity. An entity is exposed, or has rights, to variable benefits when the benefits 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. The benefits derived can be financial, non-financial, or both.

Financial benefits may include:

• Dividends, variable interest on debt securities, other distributions of economic benefits.
• Exposure to increases or decreases in the value of an investment in another entity.
• Exposure to loss from agreements to provide financial support.
• Cost savings from economies of scale or synergies.
• Residual interests in the other entity’s assets and liabilities on liquidation.

Non-financial benefits occur when the activities of another entity are aligned with the objectives of the entity and support it in achieving its objectives. Examples include:

• The ability to benefit from the specialized knowledge of another entity.
• The value of the other entity undertaking activities that assist the entity in achieving its objectives.
• Improved outcomes, more efficient delivery of outcomes, or higher service quality.
• The ability to use its power over the other entity to affect the nature or amount of the benefits:
  An entity controls another entity if it not only has power over the entity and exposure to variable benefits but also has the ability to use its power to affect the nature or amount of the benefits from its involvement with the entity. The entity must have the ability to direct the other entity to work with it to further its objectives. An entity with decision-making rights determines whether it is a principal or an agent. An agent acts on behalf of a principal and does not control the other entity when exercising its decision-making authority.

(B)

IPSAS 35: Consolidated Financial Statements mandates that a controlling entity, meaning an entity that controls another entity, prepares consolidated financial statements, with some exceptions when the controlling entity is itself controlled by another entity. IPSAS 35 also does not require an investment entity to prepare and present consolidated financial statements. An investment entity is an entity that:

• Obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services.
• Has the purpose of investing funds solely for returns from capital appreciation, investment revenue, or both; and
• Measures and evaluates the performance of substantially all of its investments on a fair value basis.

An investment entity includes some sovereign wealth funds, some pension funds, and some funds holding controlling interests in public-private partnership projects (PPP) or private finance initiatives (PFI). Because these entities exist for the purpose of generating returns, the needs of the users of their financial statements are best met by reporting all of their investments at fair value.