IFRS 12 paras 7-9, significant judgements regarding control, significant influence and joint control

ENGIE SA – Annual report – 31 December 2017

Industry: utilities

1.3 Use of estimates and judgment (extract)

1.3.2 Judgment

As well as relying on estimates, Group management also makes judgments to define the appropriate accounting policies to apply to certain activities and transactions, particularly when the effective IFRS Standards and IFRIC Interpretations do not specifically deal with the related accounting issues.

In particular, the Group exercised its judgment in determining the nature of control, the classification of arrangements which contain a lease, the recognition of acquisitions of non-controlling interests prior to January 1, 2010 and the identification of “own use” contracts, as defined by IAS 39, within non-financial purchase and sale contracts (electricity, gas, etc.).

Entities for which judgment on the nature of control has been exercised are listed in Note 2 “Main subsidiaries at December 31, 2017” and Note 3 “Investments in entities accounted for using the equity method”.

In accordance with IAS 1, the Group’s current and non-current assets and liabilities are shown separately on the consolidated statement of financial position. For most of the Group’s activities, the breakdown into current and non-current items is based on when assets are expected to be realized, or liabilities extinguished. Assets expected to be realized or liabilities extinguished within 12 months of the reporting date are classified as current, while all other items are classified as non-current.

NOTE 2 MAIN SUBSIDIARIES AT DECEMBER 31, 2017 (extract)

2.2 Significant judgments exercised when assessing control

The Group primarily considers the following information and criteria when determining whether it has control over an entity:

  • governance arrangements: voting rights and whether the Group is represented in the governing bodies, majority rules and veto rights;
  • whether substantive or protective rights are granted to shareholders, particularly in relation to the entity’s relevant activities;
  • the consequences of a “deadlock” clause;
  • whether the Group is exposed, or has rights, to variable returns from its involvement with the entity.

The Group exercised its judgment regarding the entities and sub-groups described below. 

Entities in which the Group has the majority of the voting rights

This category mainly comprises the ENGIE E&P International (70%) and GRTgaz (74.8%) sub-groups.

ENGIE E&P International (E&P): 70% 

On October 31, 2011, ENGIE and China Investment Corporation (CIC) signed a partnership agreement for the acquisition by CIC of a 30% stake in the Group’s exploration-production activities (ENGIE E&P International). The shareholder agreement provides that certain investment decisions relating to major development projects require a unanimous decision from the two shareholders, after a consultation period.

ENGIE considered that it continued to control ENGIE E&P International, as the rights granted to CIC represent minority protective rights, regarding in particular the risks to which all shareholders are exposed when undertaking exploration-production activities.

On February 15, 2018, the Group ceased to exert its control over ENGIE E&P International pursuant to the closing of the sale of its 70% interest, which simultaneously puts an end to the shareholders agreement with CIC (see Note 27 “Post closing events”).

GRTgaz (Infrastructures Europe): 74.8%

In addition to the analysis of the shareholder agreement with Société d’Infrastructures Gazières, a subsidiary of Caisse des Dépôts et Consignations (CDC), which owns 24.9% of the share capital of GRTgaz, the Group also assessed the rights granted to the French Energy Regulatory Commission (Commission de régulation de l’énergie – CRE). As a regulated activity, GRTgaz has a dominant position on the gas transportation market in France. Accordingly, since the transposition of the Third European Directive of July 13, 2009 into French law (Energy Code of May 9, 2011), GRTgaz has been subject to independence rules as concerns its directors and senior management team. The French Energy Code confers certain powers on the CRE in the context of its duties to control the proper functioning of the gas markets in France, including verifying the independence of the members of the Board of Directors and senior management and assessing its choice of investments. The Group considers that it exercises control over GRTgaz and its subsidiaries in view of its current ability to appoint the majority of the members of the Board of Directors and take decisions about the relevant activities, especially in terms of the level of investment and planned financing.

Entities in which the Group does not have the majority of the voting rights

In the entities in which the Group does not have a majority of the voting rights, judgment is exercised with regard to the following items, in order to assess whether there is a situation of de facto control:

  • dispersion of shareholding structure: number of voting rights held by the Group relative to the number of rights held respectively by the other vote holders and their dispersion;
  • voting patterns at shareholders’ meetings: the percentages of voting rights exercised by the Group at shareholders’ meetings in recent years;
  • governance arrangements: representation in the governing body with strategic and operational decision-making power over the relevant activities, as well as the rules for appointing key management personnel;
  • contractual relationships and material transactions.

The main fully consolidated entities in which the Group does not have the majority of the voting rights are Compagnie Nationale du Rhône (49.98%) and Gaztransport & Technigaz (40.4%).

Compagnie Nationale du Rhône (“CNR” – France): 49.98%

The Group holds 49.98% of the share capital of CNR, with CDC holding 33.2%, and the balance (16.82%) being dispersed among around 200 local authorities. In view of the current provisions of the French “Murcef” law, under which a majority of CNR’s share capital must remain under public ownership, the Group is unable to hold more than 50% of the share capital of CNR. However, the Group considers that it exercises de facto control as it holds the majority of the voting rights exercised at shareholders’ meetings due to the widely dispersed shareholding structure and the absence of evidence of the minority shareholders acting in concert.

Gaztransport & Technigaz (“GTT” – Others): 40.4%

Since GTT’s initial public offering in February 2014, ENGIE has been the largest shareholder in that company with a 40.4% stake, the free float representing around 49% of the share capital. The Group holds the majority of the voting rights exercised at shareholders’ meetings in view of the widely dispersed shareholding structure and the absence of evidence of minority shareholders acting in concert. ENGIE also holds the majority of the seats on the Board of Directors. The Group considers that it exercises de facto control over GTT, based on an IFRS 10 criteria analysis.

NOTE 3 INVESTMENTS IN ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD (extract)

Significant judgments

The Group primarily considers the following information and criteria in determining whether it has joint control or significant influence over an entity:

  • governance arrangements: whether the Group is represented in the governing bodies, majority rules and veto rights;
  • whether substantive or protective rights are granted to shareholders, particularly in relation to the entity’s relevant activities.

This can be difficult to determine in the case of “project management” or “one-asset” entities, as certain decisions concerning the relevant activities are made upon the creation of the joint arrangement and remain valid throughout the project. Accordingly, the decision-making analysis concerns the relevant residual activities of the entity (those that significantly affect the returns of the entity);

  • the consequences of a “deadlock” clause;
  • whether the Group is exposed, or has rights, to variable returns from its involvement with the entity.

This can also involve analyzing the Group’s contractual relations with the entity, in particular the conditions in which contracts are entered into, the duration of contracts and the management of any conflicts of interest that may arise when the entity’s governing body casts votes.

The Group exercised its judgment regarding the following entities and sub-groups:

Project management entities in the Middle East

The significant judgments made in determining the consolidation method to be applied to these project management entities concerned the risks and rewards relating to contracts between ENGIE and the entity concerned, as well as an analysis of the residual relevant activities over which the entity retains control after its creation. The Group considers that it has significant influence or joint control over these entities, since the decisions taken throughout the term of the project about the relevant activities such as refinancing, or the renewal or amendment of significant contracts (sales, purchases, operating and maintenance services) require, depending on the case, the unanimous consent of two or more parties sharing control. 

SUEZ Group (31.96%)

With effect from July 22, 2013, the date on which the SUEZ shareholders’ agreement expired, ENGIE no longer controls SUEZ but exercises significant influence over the company. In particular, this is because: (i) the Group does not have a majority of members on SUEZ’s Board of Directors, (ii) at Shareholders’ Meetings, although SUEZ’s shareholder base is fragmented and ENGIE holds a large interest, past voting shows that ENGIE alone did not have the majority at Ordinary and Extraordinary Shareholders’ Meetings between 2010 and 2017 and (iii) the operational transition agreements (essentially relating to a framework agreement governing purchases and IT) were entered into on an arm’s length basis.

Associates in which the Group holds an interest of less than 20%

Cameron Holding LNG LLC (16.6%)

ENGIE entered into a partnership agreement with Sempra (50.2%), Mitsubishi (16.6%) and Mitsui (16.6%) to develop the Cameron LNG project in the United States. Pursuant to these agreements, ENGIE has held a 16.6% stake in the project management entity Cameron Holding LNG LLC since October 1, 2014 and will have a long-term liquefaction capacity of 4 million tons per annum (mtpa). Construction work has begun on the project and the facility should be operational for commercial purposes as from 2018.

The agreement grants all shareholders the right to participate in all decisions about the relevant activities, on the basis of qualified majorities. Accordingly, ENGIE has significant influence over this entity, which it has accounted for as an associate.

Joint ventures in which the Group holds an interest of more than 50%

Tihama (60%)

ENGIE holds a 60% stake in the Tihama cogeneration plant in Saudi Arabia and its partner Saudi Oger holds 40%. The Group considers that it has joint control over Tihama since the decisions about its relevant activities, including for example preparation of the budget and amendments to major contracts, require the unanimous consent of the parties sharing control.

Joint control – difference between joint ventures and joint operations

Classifying a joint arrangement requires the Group to use its judgment to determine whether the entity in question is a joint venture or a joint operation. IFRS 11 requires an analysis of “other facts and circumstances” when determining the classification of jointly controlled entities.

The IFRS Interpretations Committee (IFRS IC) (November 2014) decided that for an entity to be classified as a joint operation, other facts and circumstances must give rise to direct enforceable rights to the assets, and obligations for the liabilities, of the joint arrangement.

In view of this position and its application to our analyses, the Group has no material joint operations at December 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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