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Under Ind AS 110, an asset manager has wide decision-making authority, receives 1% AUM + 20% profit-share above hurdle, holds 20% pro-rata equity, has NO obligation to fund losses, and investors can remove the manager by simple majority FOR CAUSE only. Under the principal-agent framework, the manager is:
AAn agent — performance-related remuneration always indicates agent status
BAn agent — 20% equity is below 50% control threshold
CJoint controller — board of directors should be considered for joint control
DA PRINCIPAL — the combination of remuneration + 20% equity creates exposure to variable returns of such significance that the manager controls the fund (removal-for-cause is protective)
Answer & Solution
Correct answer: D. A PRINCIPAL — the combination of remuneration + 20% equity creates exposure to variable returns of such significance that the manager controls the fund (removal-for-cause is protective)
Illustration 17(B) — 20% equity combined with the performance-based fee creates exposure to variability that is OF SUCH SIGNIFICANCE that the manager is principal. The removal rights are protective (only for cause = breach of contract). The greater the magnitude of economic interest, the more emphasis is placed on it. There is no 50% threshold — qualitative assessment of significance is what matters. A 2% pro-rata stake would point to agent (Illustration 17(A)).
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