Potential voting rights

An investor may hold instruments that (if exercised or converted), give the investor power to direct the relevant activities. These are called ‘potential voting rights’ and may be held through ownership of the following types of instrument:

  • share options and warrants
  • convertible bonds
  • convertible preference shares.

Potential voting rights can contribute to control of an investee in combination with current voting rights, or even confer control on their own. However, IFRS 10 requires an assessment to determine whether potential voting rights are substantive. IFRS 10 has no bright lines and so judgment will be required.

IFRS 10’s ‘substantive’ assessment takes into account both:

Some of the factors referred to above are normally more relevant than others, although any could be relevant in some situations. The following flowchart summarises the factors that are most commonly of practical relevance:

Investor’s current voting rights

+

Investor’s potential voting rights under criteria=Investor’s voting rights for assessing control/power

assessed against

Criteria to determine whether potential voting rights contribute to control

are

  • Exercise price – not at a level that prevent or deters exercise
  • Timing of exercisability – exercisable in time to affect key decisions
  • Intent to exercise – apparent expectations, motives and reasons are part of the assessment
  • Financial ability – relevant to evaluation of investor’s practical ability to exercise
  • Operational barriers or incentives – relevant if investor does not have practical ability to exercise, for example, due to specialist knowledge or expertise of current owner(s)

Potential voting rights can contribute to control of an investee in combination with current voting rights, or even confer control on their own. However, IFRS 10 requires an assessment to

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