Fund manager control assessment under IFRS 10
Meridian Capital manages the Greenfield Infrastructure Fund, a closed-end fund with committed capital of $800m. Meridian contributed $30m (3.75%) as seed capital; the remaining 96.25% is held by 40 unrelated pension funds, none above 4%. Meridian receives a 1.5% annual management fee and a 20% performance fee above an 8% hurdle. The fund's investment committee has seven members: three appointed by Meridian, four by investors. Meridian's three members chair the committee and set the agenda; the investors' four can remove Meridian as manager only with a 75% vote of all investors, which has never been achieved. Meridian also provides all deal sourcing and exit decisions. In 20X4 the fund's returns were 14%, and Meridian's performance fee was $9m. Meridian is preparing consolidated accounts and asks whether Greenfield is a subsidiary.
1. Assess whether Meridian controls Greenfield under IFRS 10. Address power, variable returns and the principal-versus-agent question.
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Conclusion: Meridian is likely to control Greenfield and should consolidate it.
IFRS 10 requires (i) power over relevant activities, (ii) exposure to variable returns, and (iii) ability to use power to affect returns. Relevant activities are investment selection and exit. Meridian supplies deal sourcing and exit decisions, chairs the investment committee and sets its agenda. Although it appoints only three of seven members, the four investor members are dispersed (40 holders, none above 4%) and removal requires 75% of all investors. That threshold is high and there is no evidence of collective action, so the kick-out right is not substantive in practice.
Meridian's returns are significant and variable: 1.5% management fee, 20% performance fee ($9m in 20X4) and $30m seed capital at risk. The performance fee is not a fixed service fee; it varies with fund performance. Meridian is not a pure agent because its decision-making authority is broad, its remuneration is not commensurate with an agency service, and it has capital at risk. The combination of power and variable returns supports principal status. Consolidate Greenfield as a subsidiary.
2. Assume control exists. Explain how the seed capital, the 96.25% investor interest and the 20X4 performance fee should be presented in Meridian's consolidated financial statements.
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On consolidation, Greenfield's assets and liabilities are combined line by line. The $30m seed capital is an intra-group investment in a subsidiary and is eliminated; it is not shown as a financial asset. The 96.25% held by the pension funds is non-controlling interest, presented within equity and as an allocation of profit in the statement of profit or loss.
The 1.5% management fee and the $9m performance fee are intra-group income and expense. They are eliminated on consolidation, so they cannot be recognised as consolidated revenue or expense. Greenfield's profit used to allocate NCI is therefore adjusted to add back the fees, because the group has not earned or incurred them. Any fee receivable/payable is also eliminated. The NCI share of Greenfield's adjusted profit is 96.25%; the group retains 3.75%.