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:
- the general guidance consisting of:
- the purpose and design of the instrument – including its terms and conditions, and the investor’s apparent expectations, motives and reasons for agreeing to them.
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 | ||||||
| ||||||
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