SILO – “An accounting concept” – Ind-As/ IFRS

CA Anuj Agarwal

Silo” is relatively new term for many of us. Dictionary meaning of the same is “something which is in isolation”. As the meaning suggest, there are many instances where an entity is operating in a way where its certain/ specified assets & liabilities are being controlled by some other entity in-spite  of running overall separate legal entity.

Under current accounting system there is nothing specific which talks about the separation/ consolidation of that specified Assets & liabilities which are being controlled by some other entity. However after the applicability of Ind-As/ IFRS this concept will prevail to all such structures and accordingly accounting will be done as per the relevant provisions.

Let’s first mention the all relevant references related to SILO under Ind-As/ IFRS –

As mentioned in Ind-As 110 – “Consolidated Financial Statements”

Para B76–  An investor shall consider whether it treats a portion of an investee as a deemed separate

entity and, if so, whether it controls the deemed separate entity.

Para B77– An investor shall treat a portion of an investee as a deemed separate entity if and only if the following condition is satisfied:

Specified assets of the investee (and related credit enhancements, if any) are the only source of payment for specified liabilities of, or specified other interests in, the investee. 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 returns from the specified assets can be used by the remaining investee and none of the liabilities of the deemed separate entity are payable from the assets of the remaining investee. Thus, in substance, all the assets, liabilities and equity of that deemed separate entity are ring-fenced from the overall investee. Such a deemed separate entity is often called a ‘silo’.

Para B78 -When the condition in paragraph B77 is satisfied, an investor shall identify the activities that significantly affect the returns of the deemed separate entity and how those activities are directed in order to assess whether it has power over that portion of the investee. When assessing control of the deemed separate entity, the investor shall also consider whether it has exposure or rights to variable returns from its involvement with that deemed separate entity and the ability to use its power over that portion of the investee to affect the amount of the investor’s returns.

Para B79- If the investor controls the deemed separate entity, the investor shall consolidate that portion of the investee. In that case, other parties exclude that portion of the investee when assessing control of, and in consolidating, the investee.

Now,

Let’s have an idea about the significance of this concept. There would be some situations where an entity has a control (control as defined under Ind-As 110) over some part (assets & related liabilities) of a legal entity, then as per this new requirement this portion needs to get consolidated into the entity who has control over it unlike in current practice where nothing specific guidance on this matter available and it remains unconsolidated commonly. Reader would appreciate to note that a silo will not be in a form of a separate identical entity and will be solely evaluated based on the control over it by an investor.

Let us have some pointers to understand the concept of SILO and its usefulness as per the objectives of the standard-

1. Standard highlights the word specific assets which will be used to pay its liability meaning the SILO should work in isolation comparing to its overall legal entity. In other words, it would be like ring- fenced activity which operates separately in substance.

Example– There is a large investment fund where it has several other small fund houses. Some of such funds where all their liabilities will be paid only by the assets lying with this fund and nothing will be paid through its large investment fund (main fund). It essentially means that the fund will be required to pay off all its liabilities from its assets which has even defined contractually.

2. Now, this concept of SILO will be from the point of view of an Investor which requires to evaluate it , if it has a control over this SILO (specified assets/ liabilities) and if answer is yes then the investor has to consolidate the SILO within its financial statements as per the requirement of Ind-As- 110– “Consolidated financial statements”,

3. There are some instances where it is a practice to distribute certain admin. Exp. by a legal entity to its isolated group (i.e. identified SILO) then one can argue that IF this will still be construed as separate entity despite the fact that main legal entity is using some of its assets by allocating admin charges, the answer will be yes , because just allocating some of the expenses will not fail this SILO test and still that portion can be considered for being SILO if this SILO is being controlled by an Investor,

4. Other important thing to note that the SILO activities should be established via contractually agreed document where it has mentioned that there will not be any risk which will be shared by this SILO with its main legal entity. Hence it will be an established fact that the creditor of main legal entity will not have any right over the assets of this SILO,

5. Control assessment will be done based on the guidance given in Ind-As 110 which basically talks about the power to control/ influence those activities which impact entity’s (i.e. SILO in our case) profitability/ variable return or in very casual term one can understand that control will be judged by a power to influence profitability of the other entity,

6. There would be a situation where it has mentioned in a contractually agreed document that in case of some contingent event (e.g. specified losses etc) the assets of the SILO can be used to pay off the liabilities of main legal entity then SILO will not be recognized, Even the contingent event to happen is remote then also SILO will not be considered ,however if these kind of contingent events has never triggered then SILO can be identified,

7. Investor has to make these kind of assessment whether any SILO is there in which control exists, if yes then it is a responsibility of the investor to document the same and consolidate the SILO as per Ind-As- 110,

One can easily visualize that this would be an interesting area to identify and document  such type of activities where an Investor can establish power over the SILO (specified assets & liabilities) and if the investor direct/ influence the relevant activities (relevant activities means all such activities which generate/ causes to generate profits/ returns unlike pure administrative roles which do not generate any returns for any entity) then he has to go for consolidation of that part of assets and liabilities (a SILO). These kind of SILO are common in Insurance companies, banking companies where a complete set of activities are being outsourced to another legal entity but eventually the control is being conferred by Investor only and these activities are being documented where restriction to use assets only to pay off liabilities of that portion of business only.

Readers will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.

One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.

(Author of this article is an experienced chartered accountant who has specialization on various GAAP conversions assignments covering different industries around different part of the world including acting as IFRS advisor & corporate trainer. He can be reached via email at anujagarwalsin@gmail.com or whatsapp +91-9634706933)