Consolidation: Assess control over an investment

In many cases, when decision-making is controlled by voting rights, and those voting rights entitle an entity to returns (e.g., voting shares), it is clear that whoever holds a majority of those voting rights controls the investee. However, in other cases (such as for structured entities, or when there are potential voting rights, or less than a majority of voting rights), it may not be so clear. In those instances, further analysis is needed and the factors in the definition of control (IFRS 10.7 Control) need to be evaluated in more detail to determine which investor controls an investee (if any).
Identifying relevant activities

Where it is not clear that control is through voting rights, a crucial step in assessing control is to identify the relevant activities. Examples of relevant activities are shown on the left.

Understanding the purpose and design of an investee is also necessary when identifying who has control, and helps to determine:

  • What risks was the investee designed to be exposed to, and what risks was it designed to pass on to the parties involved with it?
  • What are the relevant activities?
  • How are decisions about the relevant activities made?
  • Who has the ability to direct the relevant activities?
  • Which parties receive returns from the investee?

Evaluating power

IFRS 10 also includes application guidance on evaluating whether various types of rights (such as the rights described on the left) give an investor power over an investee.

Where management concludes that an entity does not have control, the requirements of IFRS 11 (Joint operations and Joint ventures) and IAS 28 (Associates and Joint ventures) must still be considered to determine whether an investor has joint control or significant influence over an investee.

Assessing returnsTo control an investee, an investor must be exposed, or have rights, to variable returns from its involvement with the investee. Returns can be positive, negative or both.

Examples of returns include:

  • Dividends, other distributions of economic benefits (e.g., interest on debt securities) and changes in the value of the investment in the investee;
  • Remuneration for servicing an investee’s assets or liabilities, fees and exposure to loss from providing credit or liquidity support, residual interests in the investee’s assets and liabilities on liquidation of that investee, tax benefits, and access to liquidity that an investor has from its involvement with an investee;
  • Returns that are not available to other interest holders (e.g., economies of scale, cost savings, scarce products, proprietary knowledge, or synergies).

Link between power and returns

Returns are often an indicator of control. This is because the greater an investor’s exposure to the variability of returns from its involvement with an investee, the greater the incentive for the investor to obtain rights that give the investor power. However, the magnitude of the returns is not determinative of whether the investor holds power.

The link between power over an investee and returns is essential to having control. An investor that has power over an investee, but cannot benefit from that power, does not control that investee. An investor that receives a return from an investee, but cannot use its power to direct the activities that significantly affect the returns of that investee, does not control that investee.

Potential voting rights

When assessing who has control over an investee, an investor considers the voting rights and potential voting rights that it holds, as well as the rights and potential voting rights held by others. Common examples of potential voting rights include rights that result from the exercise of an option or conversion feature of a convertible instrument.

Potential voting rights are only considered if they are substantive (i.e., the holder has the practical ability to exercise the right). Whether potential rights are substantive depends on facts and circumstances, for example, whether the option to acquire additional voting rights is ‘in the money’ or ‘out of the money’, or whether an investor would benefit for other reasons (e.g., by realising synergies between the investor and investee). Barriers to exercising the option, such as financial penalties, narrow exercise periods, or terms that mean that the option is not exercisable as of a given date, would also be considered. IFRS 10 states that, usually, to be substantive, the potential voting rights need to be currently exercisable. Management’s judgement is often heavily required in these complicated cases.

Less than a majority of voting rights (-de facto control)

An investor might have control over an investee even when it has less than a majority of the voting rights of that investee (sometimes referred to as de facto control). In assessing whether de facto control exists, the following should be considered:

  • Size of the investor’s holding of voting rights relative to the size and dispersion of other vote holders – specifically, it is more likely that the investor has power over the investee:
    • The more voting rights an investor holds
    • The more voting rights an investor holds relative to other vote holders
    • The more parties that would need to act together to outvote the investor (i.e., the more widely dispersed the other parties are)
    • Voting patterns at the in vestee’s previous shareholders’ meetings (e.g., the percentage of voters who turned up at past meetings, and whether that pattern is expected to be indicative of current voting behaviour).

In some cases, an investor might not have de facto control on its own. However, in assessing whether an investor has power, all facts and circumstances must be considered, including whether the investor has power through any (or a combination) of the following:

  • A contractual arrangement (i.e., the investor can direct others how to vote)
  • Rights arising from other contractual arrangements (e.g., the ability to direct some of the manufacturing processes of an investee or to direct other operating or financing activities of an investee that significantly affect the investee’s returns)
  • Potential voting rights (e.g., option or conversion feature of a convertible instrument), as described above


Because there are no bright lines, applying this concept requires significant judgement of the facts and circumstances. For example, how large does an investor’s interest need to be relative to others? How widely dispersed do the other investors need to be? An investor could find itself in control of an investee simply because of circumstances that exist at a point in time, rather than because of deliberate action. In addition, while it may be easy to use hindsight to determine whether an investee has control, it might be difficult to apply this principle on a real-time basis. External assistance might be needed to gather and analyse relevant information, so that management can reach a timely conclusion.

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