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

ENGIE SA – Annual report – 31 December 2020

Industry: utilities

1.3 Use of estimates and judgments (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 IFRS Standards and IFRIC Interpretations in force do not specifically deal with the related accounting issues.

In particular, the Group exercised its judgment in:

  • assessing the type of control (see Notes 2 and 3);
  • identifying the performance obligations of sales contracts (see Note 7);
  • determining how revenues are recognized for distribution or transmission services invoiced to customers (see Note 7);
  • identifying “own use contracts” as defined by IFRS 9 within non-financial purchase and sale contracts (electricity, gas, etc.) (see Note 16);
  • determining whether arrangements are or contain a lease (see Notes 15 and 16);
  • grouping operating segments together for the presentation of reportable segments (see Note 6).

In the context of the COVID-19 crisis, the Group also exercised its judgment in assessing:

  • the existence of a trigger event potentially leading to the impairment of goodwill, property, plant and equipment and/or intangible assets (see Notes 9, 13, 14 and 15);
  • expected credit losses, mainly in order to update probabilities of default and other inputs in an uncertain context (see Note 17);
  • the impacts on risks related to financial instruments, mainly liquidity risk and trends in interest rate, commodities and exchange rate markets (see Note 17);
  • the consequences of hedging, particularly with regard to maintaining the highly probable nature of the hedged item (see Note 17);
  • the application of enforceable rights and obligations associated with customer contracts, mainly with regard to future payment receipt probabilities and the measurement of the revenue recognized using the percentage of completion method (see Note 7).

NOTE 2 MAIN SUBSIDIARIES AT DECEMBER 31, 2020 (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;
  • the nature of substantive or protective rights granted to shareholders, relating to the entity’s relevant activities;
  • deadlock resolution mechanisms;
  • 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

GRTgaz (France Infrastructures): 74.6%

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 24.8% 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 (Code de l’énergie – Energy Code) on 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 the choice of investments. The Group considers that it exercises control over GRTgaz and its subsidiaries (including Elengy) 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 the 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;
  • 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 excluding Infrastructures): 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. 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 the company with a 40.4% stake, the free float representing around 59% of the share capital. The Group holds the majority of the seats on the Board of Directors and 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. The Group therefore considers that it exercises de facto control over GTT, based on an IFRS 10 criteria.

NOTE 3 INVESTMENTS IN EQUITY METHOD ENTITIES (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;
  • the nature of substantive or protective rights granted to shareholders, relating 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 rights’ analysis relates to the relevant residual activities of the entity (those that significantly affect the variable returns of the entity);

  • deadlock resolution mechanisms;
  • 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 these contracts are entered into, their duration as well as the management of 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 related to 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 exercises 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

The Group exercised significant influence over SUEZ Group until October 6, 2020, when the Group sold a 29.9% stake in SUEZ (see Note 4.1 “Disposals carried out in 2020”).

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 the preparation of the budget and amendments to major contracts, etc., require the unanimous consent of the parties sharing control.

Transportadora Associada de Gás S.A. (“TAG” – Latin America): 65.0% holding interest (directly and indirectly) representing a net interest in of 54.8%

The Group exercises joint control over TAG since the decisions about its relevant activities, including for example the preparation of the budget and medium-term plan, investments, operations and maintenance, etc., are taken a majority vote requiring the agreement of ENGIE and CDPQ. Consequently, this investment is accounted for using the equity method.

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, 2020.