Control of an investee

Control of an investee starts with a definition:

An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. (IFRS 10 6)


Power over the investee

Control of an investee

Exposure, or rights, to variable returns from its involvement with investee

Control of an investee

The ability to use its power over the investee to affect the returns

For an investor to have control it must (not only) have power over the investee

Control of an investee

For an investor to have control it must (not only) have exposure, or rights, to variable returns from the investee.

Control of an investee

For an investor to have control it must (not only) have the ability to use power to affect returns.

Power arises from rights

Rights confer power when they are sufficient to give the investor the current ability to direct the ‘relevant activities’ (see below) unilaterally. In this context ‘current ability’ does not necessarily require the rights to be exercisable immediately.

Instead, the key factor is whether the rights can be exercised before decisions about relevant activities need to be taken.

(see also below ‘Directing relevant activities‘)

Control of an investee

Variable returns

Variable returns are returns that are not fixed and have the potential to vary as a result of the performance of an investee.

Variable returns can be only positive, only negative or both positive and negative.

Variable returns are defined very broadly and extend well beyond the ownership benefits obtained through equity shares.

Control of an investee

Use of power

An investor is able to use its power to affect its returns (sometimes referred to as ‘linkage’).

This linkage depends on whether the investor has the current ability to direct the relevant activities (decision-making rights):

  • on its own account (in other words, as a principal); or
  • on behalf of other investors that have delegated their power to it (in other words, as an agent).


Substantive and protective rights [IFRS 10 B22-B28]

In assessing whether it has power, an investor does not consider rights that it holds, or rights held by others, if those rights are:
– not ‘substantive’; or
– purely ‘protective’.

For a right to be substantive, the holder must have the practical ability to exercise that right.

Therefore, an investor cannot have control if its only rights are non-substantive or protective.

Likewise, rights held by other parties cannot prevent an investor from having control if they are non-substantive or protective.

Control of an investee


IFRS 10 explains that returns that are ‘fixed’ in contractual terms are nonetheless regarded as variable for the purposes of the control assessment. For example:

  • a bond with fixed interest payments still exposes its holder to default risk and credit risk
  • fixed performance fees for managing an investee’s assets are variable returns because they expose the investor to the performance risk of the investee. [IFRS 10 B56]
Control of an investee


This link between power and returns clearly exists in a normal parent-subsidiary relationship based on majority share ownership. Accordingly, in such cases a detailed analysis is not needed.

However, this element of control is important when an investor holds decision-making rights as a result of a management contract or similar arrangement – such as a fund or asset manager.

If an investor has some or all of its decision-making rights in the capacity of agent, those rights do not count towards the assessment of whether it controls the investee. Conversely, if the investor has delegated some or all of its decision-making rights to an agent, those rights are treated as the investor’s rights for IFRS 10 purposes.

Straightforward situations of power assessment

Assessing power is straightforward for conventional investees where voting rights (normally conferred by share ownership) are the key factor [IFRS 10 11].

In such cases, ownership of a majority of the voting rights confers power and control (in the absence of other relevant factors) [IFRS 10 B6].

Relevant activities

Relevant activities are activities of the investee that significantly affect the returns of the investee.

IFRS 10 provides some non-exhaustive examples of possible relevant activities:

  • selling and purchasing of goods or services
  • managing financial assets during their life (including upon default)
  • selecting, acquiring or disposing of assets
  • researching and developing new products or processes
  • determining a funding structure or obtaining funding [IFRS 10 B11].
Control of an investee

Control of an investee

Control of an investee


de facto’ agent

IFRS 10 also includes the concept of a ‘de facto’ agent, ie an entity that acts on the investor’s behalf even though there is no contractual arrangement that obliges it to do so.

The guidance on de facto agents is not intended to imply that certain parties would always act for the investor. The assessment requires judgement, including careful consideration of the nature of the relationship and the way that the parties interact with each other.

To some extent this guidance appears to be designed as an ‘anti-abuse’ provision, intended to ensure that control cannot be disguised by the informal delegation of power to other parties.

Questions sometimes arise as to whether an investee whose activities are largely pre-determined (such as some special purpose and structured entities) really has any relevant activities. However, in general it is very rare (although not impossible) that an investee has no relevant activities at all.

Assessing relevant activities is critical when an investor has the current ability to direct only some of an investee’s activities (and decisions about other activities are taken by other parties, or through shared decision-making).

If two or more investors have rights to direct different relevant activities, the investor with current ability to direct the activities that most significantly affect the returns has power. [IFRS 10 13]

More complex situations of power assessment

A more specific and detailed analysis of relevant activities is required in less straightforward situations. This will often be the case for special purpose or structured entities.

Some investees are structured such that two or more investors have the current ability to direct relevant activities but those activities occur at different times. In this situation the investors again determine which investor is able to direct the activities that most significantly affect the returns. This assessment is re-evaluated if relevant facts or circumstances change.

Directing relevant activities

Having identified an investee’s relevant activities, the next step is to determine how those activities are directed.

IFRS 10 breaks this down into the following two steps (although in practice these steps are normally combined with the identification of relevant activities):

  • understanding the decisions about relevant activities [IFRS 10 B12]
  • identifying rights that confer ability to direct those decisions [IFRS 10 B14-B17].

Directing relevant activities is about making decisions in relevant activities including but not limited to:

  • establishing operating and capital decisions of the investee, including budgets
  • appointing and remunerating an investee’s key management personnel or service providers and terminating their services or employment [IFRS 10 B12].

These decisions are broad-based and relate to high level direction of the investee. For conventional investees where the relevant activities comprise a wide range of financial and operating activities, direction is generally through these broad-based decisions. In other words there is usually no need to identify relevant activities at a specific or detailed level.

In more complex situations where the relevant activities are identified at a more specific level, such as the preceding example above, direction might be through a more specific contractual right or process.

IFRS 10 envisages two types of rights that may confer ability to direct these decisions (ie power):

  • voting rights granted by equity instruments for example, ordinary shares
  • contractual rights [IFRS 10 B16-B17].

The control assessment will typically be more straightforward when power is conferred through voting rights. In most cases involving conventional operating entities and governance structures, power is conferred by voting rights.

For investees that would have been considered special purpose entities or structured entities however, power arises from more specific contractual rights.

In some cases voting rights might exist but, in practice, confer an ability to direct only administrative-type tasks with little or no effect on returns.

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Purpose and design of investee

IFRS 10 refers to assessing the ‘purpose and design’


an investee in several different contexts.

Assessing purpose and design [IFRS 10 B5-B8, IFRS 10 B48, IFRS 10 B51, IFRS 10 B63]

The assessment of the investee’s ‘purpose and design’ is carried out in order to identify:Control of an investee

  • the relevant activities
  • how decisions about the relevant activities are made
  • who has the current ability to direct those activities
  • who receives returns from those activities.

In addition purpose and design is considered in assessing:

  • whether potential voting rights are substantive [IFRS 10 B48]
  • control when voting rights are not the dominant factor including consideration of:
    • the risks to which the investee was designed to be exposed, the risks it was designed to pass on to the parties involved with the investee and whether the investor is exposed to some or all of those risks [IFRS 10 B8]
    • the involvement and decisions made at the investee’s inception as part of its design and evaluation of whether the transaction terms and features of the involvement provide the investor with rights that are sufficient to give it power [IFRS 10 B51]
  • whether an investor is a principal or an agent [IFRS 10 B63].

This definition caused a lot of trouble in the investment (management) industry – are investment managers required to prepare consolidated financial statements that include all the special purpose vehicles they have set-up and manage on behalf of investors?

An investment manager is required to determine whether it is a principal or an agent.Control of an investee

This step in the control assessment considers the interaction between the first two elements of the control definition and requires an investment manager to determine whether it acts as a principal or as an agent. A significant element of judgement will sometimes be required in making this assessment.

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An agent is a party primarily engaged to act on behalf and for the benefit of another party or parties (the principal(s)). An agent does not control an investee when it exercises decision-making rights delegated to it.

The investment manager is an agent if there is a single party that holds substantive rights to remove it without cause. In the absence of this, the investment manager has to consider the following factors in determining whether it is an agent or a principal:

  1. The scope of its decision-making authority over the investee; Control of an investee
  2. The rights held by other parties (including the investee’s board of directors (or other governing body));
  3. The remuneration to which it is entitled; and Control of an investee
  4. Its exposure to variability of returns from other interests that it holds in the investee.

In October 2012 IASB introduced an amendment to IFRS 10 called Investment entities.

The Amendment defines an investment entity and introduces an exception to the principle that all subsidiaries shall be consolidated. The Amendment requires a parent that meets the definition of an investment entity to measure its investments in particular subsidiaries at fair value through profit or loss. A parent that does not meet the definition of an investment entity would however be required to consolidate all of its subsidiaries, even if those subsidiaries meet the definition of an investment entity. The Amendment is effective for annual periods beginning on or after 1 January 2014, with earlier application being permitted.

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