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Under Ind AS 110, an investee is funded primarily by short-term debt to third parties, secured by medium-term assets. The SPONSOR has wide decision-making authority over which assets to purchase, provides credit enhancement absorbing up to 5% of losses (after first-loss transferor protection), and is entitled to RESIDUAL RETURNS. Investors have no substantive rights. The sponsor:
AHas joint control with the lending investors who provide the bulk of capital
BIs an agent — sponsor receives only a market-based fee for services
CIs a PRINCIPAL — the right to residual returns + credit enhancement creates exposure to variable returns different from other investors, indicating significant exposure consistent with principal status
DIs neither — the transferors of the assets bear first losses and direct the assets
Answer & Solution
Correct answer: C. Is a PRINCIPAL — the right to residual returns + credit enhancement creates exposure to variable returns different from other investors, indicating significant exposure consistent with principal status
Illustration 19 — the sponsor's RIGHT TO RESIDUAL RETURNS + the credit enhancement creates exposure to variability of returns DIFFERENT FROM OTHER investors. The sponsor has extensive decision authority (chooses transferors and assets) + meaningfully different exposure. Substantive removal rights are absent. Even though each transferor manages its own portion, the sponsor's combined exposure to upside (residual) and downside (credit enhancement) makes it principal. Acting in the best interest of all investors does NOT prevent principal status.
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