IFRS 10 Power

Power by definition in IFRS 10 – Existing rights that give the current ability to direct the relevant activities of an other company/investment. It is of importance in the assessment of control over an investee by an investor, leading to the question to consolidate the investee into the consolidated accounts of the investor.


“Power” is defined as the investor having such rights that (s)he can direct the activities that affect the investee’s returns. In the simplest cases, such power arises from the voting rights granted by shares. A parent company exerts power when it owns directly or through intermediate subsidiaries more than half of the voting power of the investee. Its vote allows it to direct the investee’s activities and appoint key members of its governing body.

Assessment of control

But the assessment of control can be more complex in practice1:

  • Even when power is exercised through shares, it may be difficult for third parties to identify controlling entities. Most globally operating corporations have a very diversified and international shareholder base; ownership can change rapidly over time (though arguably less for large blocks of capital); it is difficult to trace shares because they can be held through different group entities; subsidiaries whose shares are unlisted may not be subject to the requirements to disclose the identity of significant owners of their voting securities, contrary to what is generally requested from listed entities2.
  • Power can also result from other means than voting shares, for instance contractual arrangements. This may allow for the control of entities without ownership of shares, for instance in the case of special purpose entities (such as securitisation/structured vehicles, which played an important role during the Great Financial Crisis of 2007–09).
  • Conversely, an investor with more than half of the voting rights would not control the investee if its relevant activities are directed by other entities (for instance, if the direction is set by a government).

The application of the business accounting approach may require the assessment of a variety of factors3. In particular, rights that give an investor power may be evidenced by rights to appoint or remove members of the investee’s key management personnel, rights to direct the investee to enter into transactions, etc.

In addition, power may be exercised due to other contractual arrangements, or even if there is no contractual right (ie if there is evidence that the power is de facto exerted). Power can also be exercised by an investor having a special relationship which suggests that he has more than a passive interest in the entity.

This wide range of possibilities to define power relates to the fact that business accounting standards have been adapted in recent years to make more transparent the risks to which investors are exposed through their involvement with controlled entities and to better consolidate those exposures that used to be “off balance sheet” before.

Yet another complexity is that the rights have to be substantive to provide control, ie the holder must have the practical ability to exercise these rights. In contrast, protective rights only relate to fundamental changes to the activities of an investee or apply in exceptional circumstances. They are designed to protect the interests of their holder without giving that party power over the investee: as a result, an investor that holds only protective rights cannot have power [IFRS 10 11, IFRS 10 14]. IFRS recognises that determining whether rights are substantive requires judgement as several factors have to be considered for this purpose.

In summary:

Power

What is power in IFRS 10?

Rights that give power

An investor has power over an investee if it has existing rights that give it the current ability to direct the relevant activities. Only substantive rights (see substantive rights) are considered, with protective rights (see protective rights) being disregarded. (IFRS 10.10 and IFRS 10.B9). The distinction between substantive and protective rights can be significant in the analysis of which investor (if any) has the unilateral power to control an investee.

The fact that an investor directs relevant activities is an indicator that the investor has power, but it is not conclusive. For example, another party might have power over an investee but choose, for whatever reason, not to make use of it (IFRS 10.12).

Current ability to direct

An investor only needs to have the ability to control relevant activities, and it is not relevant whether the investor actually exercises this ability. IFRS 10 clarifies that power exists when an investor has the ability to direct the relevant activities of an investee, even if those relevant activities occur only when particular circumstances arise or specific events occur (IFRS 10.B53).

Protective rights

Protective rights are defined as (IFRS 10 Definitions):

‘Rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate.’

Because of the way in which ‘power’ is analysed in accordance with IFRS 10, the distinction between substantive and protective rights (the latter being a new term introduced by IFRS 10 that requires explicit consideration) is important. An investor that only holds protective rights, which meet this definition, has no power over an investee and consequently does not control the investee. The standard follows the logic that protective rights are designed to protect interests of the holder without giving it power over the investee and cannot prevent another party from having power over an investee (IFRS 10.B27).

Protective rights relate to fundamental changes to the activities of an investee or apply in exceptional circumstances. The fact that a right only arises in exceptional circumstances however is not in itself conclusive that it is a protective right (IFRS 10.B26).

Examples of protective rights in the standard are (IFRS 10.B28):

  • A lender’s right to restrict borrower’s activities (if these could change credit risk significantly to the detriment of the lender)
  • Capital expenditure greater than that required in the ordinary course of business requiring approval by non-controlling interest holders
  • Issue of debt or equity instruments requiring approval by non-controlling interest holders
  • A lender’s right to seize assets of a borrower in the event of default.

IFRS interpretations excerpt:

At its September 2013 meeting, the IFRS Interpretation Committee (the Committee) issued an agenda decision in respect of a question concerning whether an assessment of control should be reassessed when facts and circumstances change, where rights that were previously determined to be protective, change. This may occur, for example, upon a breach of covenant in a borrowing arrangement that causes a borrower to default, triggering the ability to exercise rights by the investor that had previously been determined as protective in nature.

The Committee concluded that IFRS 10, paragraph 8 requires an investor to reassess whether it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control (i.e. power, exposure to variable returns and linkage between power and returns), which would include an assessment of the rights of the investor.


Substantive rights

Only substantive rights are considered when power is assessed. In order for a right to be substantive, the holder must have the practical ability to exercise the right. The standard requires that substantive rights held both by the investor and by others are assessed (IFRS 10.B22).

IFRS 10 acknowledges the assessment of whether rights are substantive requires judgment. It provides examples of factors that need to be considered, split into the headings ‘barriers to exercise’, ‘agreement of other parties required’ and ‘exercise benefits right holder’ (IFRS 10.B23).

Barriers to exercise
The existence of any barriers (economic or otherwise) that prevent the holder from exercising the rights are required to be considered. Examples of such barriers include but are not limited to (IFRS 10.B23):

  • Financial penalties and incentives
  • An exercise or conversion price that creates a financial barrier (for example, the exercise price of options that would give the holder sufficient voting rights to obtain control of an entity may be deeply out of the money and therefore uneconomic to exercise – see section Potential voting rights)
  • Terms and conditions that make it unlikely that the right is exercised (e.g. a condition that sets a very narrow limit to the timing of exercise)
  • The absence of an explicit, reasonable mechanism to allow the holder to exercise its rights (this might link to the founding documents of an investee, or applicable laws and regulations)
  • An inability for the holder to obtain the information necessary to exercise its rights
  • Operational barriers or incentives (e.g. in circumstances where there is a manager of an entity, the absence of other managers willing or able to provide specialised services or provide the services and take on other interests held by the incumbent manager)
  • Legal or regulatory requirements (e.g. where a foreign investor is prohibited from exercising its rights).

Agreement of other parties required
When exercising a right requires the agreement of more than one party, the following factors should be considered:

  • Whether a mechanism is in place that provides the parties with the practical ability to exercise the right. The absence of such a mechanism would indicate that the rights may not be substantive
  • The number of parties that have to agree on the exercise of the rights. The more parties that are required to agree to the exercise of the rights, the less likely it is that those rights are substantive
    Removal rights exercisable by an independent board of directors are more likely to be substantive than if the same rights were exercisable individually by a large number of investors.
Something else -   Structured entity

Exercise benefits right holder
There is a further question of whether the party holding the right would benefit from its exercise. For example, for potential voting rights, the terms and conditions are more likely to be substantive when the instrument is in the money, or the holder would benefit in other ways (for example, from realising synergies).

To be substantive, rights also need to be exercisable when decisions about the relevant activities are made. This will always be the case when rights are currently exercisable. However, a right can also be substantive if it is not currently exercisable but is exercisable when the relevant activities are made. The example 1 below illustrates how the ‘exercisable’ criteria is applied.

Example 1 Exercisable substantive rights [IFRS 10.B24 Application Example 2]
Company A (the investee) is controlled through equity share voting rights. It has annual shareholder meetings at which decisions to direct the relevant activities are made. The next shareholders’ meeting is scheduled in eight months.

However, shareholders that individually or collectively hold at least 5% of the voting rights can call a special meeting to change the existing policies over the relevant activities, but a requirement to give notice to the other shareholders means that such a meeting cannot be held for at least 30 days.

Policies over the relevant activities can be changed only at special or scheduled shareholders’ meetings. This includes the approval of material sales of assets as well as the making or disposing of significant investments.

Scenario 1
An investor (Company X) holds a majority of the voting rights in Company A.

Company X’s voting rights are substantive because X is able to make decisions about the direction of the relevant activities when they need to be made.

The fact that it takes 30 days before Company X can exercise its voting rights does not stop it having power. Company X has both the practical ability to exercise its rights and those are exercisable when decision about the direction of relevant activated need to be made.

Scenario 2
An investor (Company Y) holds an option to acquire the majority of shares in Company A. The option is exercisable in Power in IFRS-perspective Power in IFRS-perspective Power in IFRS-perspective Power in IFRS-perspective25 days and is deeply in the money. Company Y has rights that are essentially equivalent to the majority shareholder (Company X) in Scenario 1.

Company Y can make decisions about the direction of the relevant activities when they need to be made as the option is exercisable within 25 days which is before a meeting could be convened (30 days). So the existing shareholders are unable to change the existing policies over the relevant activities. This and the fact that the option is deeply in the money means it is substantive. It gives Company Y the current ability to direct the relevant activities even before the option is exercised.

Scenario 3
An investor (Company Z) is party to a forward contract to acquire the majority of shares in Company A. The forward contract’s settlement date is in six months time.

Company Z does not have a substantive right at the moment as it does not have the current ability to direct the relevant activities. The existing shareholders have the current ability to direct the relevant activities because they can change the existing policies over the in six months’ time.

However, Company Z may conclude that is has control once it gets within 30 days of the settlement date. End of example


Substantive rights that are exercisable by other parties can prevent an investor from having control. This is the case even if other investors cannot initiate decisions. It is sufficient for another investor to have the ability to approve or block decisions about relevant activities. These rights are however not considered if they are merely protective (IFRS 10.B25).

Some investees are designed so that the direction of their activities and returns is predetermined until a particular circumstance arises or an event occurs. This means that only those activities that relate to that event will significantly affect returns and thus are relevant. The fact that the circumstances or events have not happened does not mean that the rights are only protective (IFRS 10.B53).

Relevant activities that are subject to direction by others (e.g. government, court or administrator) are not considered in the control assessment even if the investor holds a majority of voting rights. This is because the investor’s rights are not considered substantive (IFRS 10.B37). However, this does not automatically mean that an entity that is subject to direction by a government, court or administrator cannot be controlled by an investor. Instead, it is necessary to establish whether that direction results in the government, court or administrator having power over the most significant relevant activities. Consequently, although the guidance in IFRS 10 might initially appear conclusive, judgement is still required.

Voting rights

An investor concludes that it has control over an investee if it owns the majority of shares of its investee that have equal voting rights attached, and those shares have a proportionate entitlement to a share of the returns of the investee. However, this is subject to whether another party holds potential voting rights which, if acquired, would result in that other party having control (see section Protective voting rights).

IFRS 10 also provides guidance for cases where an investor does not hold the majority of voting rights.

Majority held

An investor is required to consolidate an investee if it holds more than 50% of the voting rights through shares – which is the most common consolidation scenario. This assumes that decisions about relevant activities are determined by majority vote; the threshold could be different if, for example, a 75% majority is required. The rights either need to entitle the holder to vote on the relevant activities or to select the majority of the board that directs the relevant activities (IFRS 10.B35).

This scenario will apply to almost all subsidiaries that are held by means of ordinary share that have voting rights attached.

Majority not held

IFRS 10 notes that an investor can have power even if it holds less than the majority of voting rights. The standard provides specific guidance for the following scenarios (IFRS 10.B38):

  • Contractual agreements with other vote holders
  • Rights from other contractual arrangements (economic dependencies)
  • De-facto control
  • Potential voting rights
  • A combination of the above.

Contractual agreements with other vote holders (IFRS 10.B39)
A contractual arrangement between an investor and other vote holders can give the investor the right to exercise voting rights sufficient to give power.

An example of this would be the scenario where a contract enables an investor to require enough other vote holders to vote in that investor’s favour when decisions about relevant activities are made.

Another common scenario is where an entity is controlled by its board of directors, and the make-up of the board of directors contractually determined by one specified investor.

Rights from other contractual arrangements (IFRS 10.B40)
Other decision-making rights, in combination with voting rights, can give an investor the current ability to direct thePowerinvestee’s relevant activities. For example, rights in a contractual arrangement, when combined with voting rights, may allow an investor to direct operating activities of an investee that significantly affect the investee’s returns.

However, an economic dependency of an investee on an investor (e.g. a relationship between a supplier and its main customer) in the absence of any other rights is not sufficient for an investor to have power over an investee.

De-facto control
IFRS 10 explicitly includes the concept of ‘de facto’ control, where an investor with less than a majority of voting rights has power over an investee.

The primary focus of the analysis under IFRS 10 remains on whether an investor has sufficient voting rights to give that investor the practical ability to direct the relevant activities. This involves an assessment of the size of its holding of voting rights relative to the size and dispersion of holdings of the other vote holders.

An investor therefore considers the following indicators:

  • The more voting rights an investor holds, the more likely the investor is to have existing rights that give it the current ability to direct the relevant activities
  • The more voting rights an investor holds relative to other vote holders, the more likely the investor is to have existing rights that give it the current ability to direct the relevant activities
  • The more parties that would need to act together to outvote the investor, the more likely the investor is to have existing rights that give it the current ability to direct the relevant activities(IFRS 10.B42)
  • Whether the investor, other investors or other parties hold potential voting rights
  • The effect of any contractual arrangements
  • All other facts and circumstances, including voting patterns at previous shareholders’ meetings.

Also, the lower the quorum required at the shareholder meeting, the more likely it is that an investor with a significant (but still a minority) shareholding will have rights that give it the current ability to direct the relevant activities.

There is an important distinction to be drawn about voting patterns. IFRS 10 makes it clear that the focus is on the number of vote holders that have participated in the past and the absolute proportion of voting rights that have historically been exercised. It is not on whether other vote holders have voted in the same way as the investor.

If the criteria set out below are met, it may be clear that that the investor has power over the investee, and no further analysis is needed (also see Example below, which is example 4 in the standard):

  • Direction of relevant activities is determined by majority vote
  • The investor holds significantly more voting rights than any other vote holder or organised group of vote holders
  • Other shareholdings are widely dispersed (IFRS 10.B43/B44).
Something else -   Investment valued at cost

Other circumstances may require further judgement, and IFRS 10 includes a number of application examples to illustrate the analysis that is required

Example 2– De-facto control: Large minority shareholding with other numerous and widely dispersed investors
An investor acquires 48% of the voting rights of an investee. The remaining voting rights are held by thousands of shareholders, none individually holding more than 1% of the voting rights. None of the shareholders has any arrangements to consult any of the others or make collective decisions. When assessing the proportion of voting rights to acquire, on the basis of the relative size of the other shareholdings, the investor determined that a 48% interest would be sufficient to give it control.

In this case, on the basis of the absolute size of its holding and the relative size of the other shareholdings, the investor concludes that it has a sufficiently dominant voting interest to meet the power criterion without the need to consider any other evidence of power. END of example


In other situations, the guidance above is not conclusive and further analysis of additional facts and circumstances is required. The fewer voting rights the investor holds, and the fewer parties that would need to act together to outvote the investor, the more reliance is placed on additional facts and circumstances to assess whether the investor’s rights are sufficient to give it power (IFRS 10.B45). An Investor has no power if additional facts and circumstances still do not provide a clear answer (IFRS 10.B46).

Additional facts and circumstances to be analysed include indicators of a special relationship with the investee, which suggest more than a passive interest and voting patterns. As noted above, when voting patterns of previous shareholders meetings are analysed, the standard requires only the number of other shareholders that attended (to calculate the majority of votes required to unilaterally make decision) to be considered, but not their voting patterns (i.e. it is not relevant for the analysis if other shareholders voted in the same way as the investor).

Examples 3 to 8 (examples 5 to 8 from the standard) illustrate how additional rights, and voting patterns, are taken into consideration.

Example 3 – De-facto control: Large minority shareholding with modest number of other investors
Investor A holds 40 per cent of the voting rights of an investee and twelve other investors each hold 5 per cent of the voting rights of the investee. A shareholder agreement grants investor A the right to appoint, remove and set the remuneration of management responsible for directing the relevant activities. To change the agreement, a two-thirds majority vote of the shareholders is required. In this case, investor A concludes that the absolute size of the investor’s
holding and the relative size of the other shareholdings alone are not conclusive in determining whether the investor has rights sufficient to give it power.

However, investor A determines that its contractual right to appoint, remove and set the remuneration of management is sufficient to conclude that it has power over the investee. The fact that investor A might not have exercised this right or the likelihood of investor A exercising its right to select, appoint or remove management shall not be considered when assessing whether investor A has power.

Example 4 – De-facto control: Large minority shareholding with only two other investors
Investor A holds 45 per cent of the voting rights of an investee. Two other investors each hold 26 per cent of the voting rights of the investee. The remaining voting rights are held by three other shareholders, each holding 1 per cent. There are no other arrangements that affect decision making. In this case, the size of investor A’s voting interest and its size relative to the other shareholdings are sufficient to conclude that investor A does not have power. Only two other investors would need to co-operate to be able to prevent investor A from directing the relevant activities of the investee.

Example 5 – De-facto control: Large minority shareholding with eleven other equal shareholders
An investor holds 45 per cent of the voting rights of an investee. Eleven other shareholders each hold 5 per cent of the voting rights of the investee. None of the shareholders has contractual arrangements to consult any of the others or make collective decisions. In this case, the absolute size of the investor’s holding and the relative size of the other shareholdings alone are not conclusive in determining whether the investor has rights sufficient to give it power over the investee. Additional facts and circumstances that may provide evidence that the investor has, or does not have, power shall be considered.

Example 6 – De-facto control: Moderate minority shareholding with several other minor investors and remaining investors being numerous and widely dispersed
An investor holds 35 per cent of an investee. Three other shareholders each hold 5 per cent of the voting rights of the investee. The remaining voting rights are held by numerous other shareholders, none individually holding more than 1 per cent of the voting rights. None of the shareholders has arrangements to consult any of the others or make collective decisions.

Decisions about the relevant activities of the investee require the approval of a majority of votes cast at relevant shareholders’ meetings – 75 per cent of the voting rights of the investee have been cast at recent relevant shareholders’ meetings. In this case, the active participation of the other shareholders at recent shareholders’ meetings indicates that the investor would not have the practical ability to direct the relevant activities unilaterally, regardless of whether the investor has directed the relevant activities because a sufficient number of other shareholders voted in the same way as the investor.

Potential voting rights

Potential voting rights are rights to obtain voting rights of an investee (e.g. convertible instruments, options and forward contracts). Potential voting rights always affect at least two parties, and could result in one investor (that currently holds less than the majority of voting rights and would otherwise conclude that it does not control the investee) consolidating the investee and another investor (that currently holds the majority of voting rights and would otherwise conclude that it does control the investee) not consolidating the investee (IFRS 10.B47).

IFRS 10 also requires an investor to consider the purpose and design of the instrument, as well as the purpose and design of any other involvement the investor has with the investee. This includes an assessment of the various terms and conditions of the instrument as well as the investor’s apparent expectations, motives and reasons for agreeing to those terms and conditions (IFRS 10.B48).

Substantive potential voting rights alone, or in combination with other rights, can give an investor the current ability to direct the relevant activities (IFRS 10.B50). The figure below shows a basic scenario where entity B has power over entity S as a result of its potential voting rights.

Power

Potential voting rights need, as with all other rights, to be substantive. They are regarded as substantive when an investor has the practical ability to exercise its right when decisions about relevant activities are made.

The following facts or circumstances would mean that the entity does not have the practical ability and hence the potential voting rights would not be regarded as substantive:

  • Options are deeply out-of-the-money
  • Legal barrier to exercising options
  • Barriers to entry (e.g. an investor has no resources to actually manage the business where the current management is reluctant to cooperate with the investor holding the potential voting rights).

It should be noted that options that are simply out of the money (rather than being deeply out of the money) may be taken into account. For example, options that are out of the money might enable an investor to acquire a majority stake (which could attract a control premium), or the exercise might enable costs savings and synergies to be obtained. IFRS 10 does not contain any ‘bright line’ guidance and so all relevant facts and circumstances need to be considered. The requirement in IFRS 10 for continuous reassessment also means that the conclusion reached about whether potential voting rights should, or should not, be taken into account may change.

It is necessary to consider all relevant facts and circumstances when reaching a conclusion as to whether potential voting rights are required to be taken into account.

Example 7: Potential voting rights
Parent A holds stakes in subsidiaries S1 and S2 which both operate in the same industry sector. Parent A holds a controlling interest in S1 and a 35% interest in in S2. The remaining 65 % interest in S2 is held by Parent B.

S1 is much larger than S2 in terms of market share. Its products account for a market share of 40% whereas S2 only accounts for 15%.

Parent A also holds options to acquire a further 40% interest in S2 from Parent B. The options are in the money but the competition authority has stated that it would only permit A to acquire the additional 40% share in S2 if A disposes of its controlling interest in S1.

Power

In this example parent B is likely to have control over S2.

If Parent A exercises its options (potential voting rights) it would be required to sell its wholly owned subsidiary S1. This would result in a significant negative economic effect. The fact that S1’s (that would be required to be disposed of) turnover is nearly treble S2’s turnover is a significant economic barrier to overcome. In the absence of other facts or circumstances Parent A’s options are considered to be non-substantive. It would be too disadvantageous for A to exercise its options.

Something else -   Operating cash flows under IAS 7

In practice all facts and circumstance are required to be assessed and judgement will be required to assess whether barriers to exercise potential voting rights are substantive.

Other rights
Power will usually arise from voting rights granted by equity instruments. However, for the purposes of IFRS 10 the focus is on rights that give an investor the current ability to direct the relevant activities.

Other rights that, either individually or in combination, can give an investor power include but are not limited to (IFRS 10.B15):

  • Rights to appoint, reassign or remove members of an investee’s key management who have the ability to direct the relevant activities
  • Rights to appoint or remove another entity that directs the relevant activities
  • Rights to direct the investee to enter into, or veto any changes to, transactions
  • Decision-making rights specified in a management contract.

These rights link to decisions that need to be taken on an investee’s operating and financing activities on an ongoing basis, and it is those rights in combination with voting rights that are likely to give an investor power.

In some cases, voting rights will not have a significant effect on an investee’s returns. This can arise when voting rights relate to administrative tasks only and contractual arrangements determine the direction of the relevant activities. In those cases, the investor needs to assess other rights that could give power to direct the investee’s relevant activities.

IFRS 10 acknowledges that in some cases, it may be difficult to determine whether an investor’s rights are sufficient to give it power. In those cases, it is necessary to consider additional evidence to determine whether it has the practical ability unilaterally to direct the investee’s relevant activities.

Practical ability to direct (IFRS 10.B18)
Consideration is given, but is not limited, to the following indicators together with the existence of any special relationships (see below) and the extent of the investor’s exposure to variability of returns from the investee:

  • The investor can, without having the contractual right to do so, appoint or approve the investee’s key management personnel who have the ability to direct the relevant activities
  • The investor can, without having the contractual right to do so, direct the investee to enter into, or can veto any changes to, significant transactions for the benefit of the investor
  • The investor can dominate either the nominations process for electing members of the investee’s governing body or the obtaining of proxies from other holders of voting rights
  • The investee’s key management personnel are related parties of the investor (for example, the chief executive officer of the investee and the chief executive officer of the investor are the same person)
  • The majority of the members of the investee’s governing body are related parties of the investor.

Special relationships (IFRS 10.B19)
In some cases there will be indications of a special relationship between an investor and an investee that suggests the investor has more than a passive interest in the investee. This relationship, either by itself or in combination with other rights, could result in the investor being judged to have sufficient rights to have power over the investee. Although a special relationship is not necessarily conclusive that the criterion is met, the following are indicators that the investor may have power:

  • The investee’s key management personnel who have the ability to direct the relevant activities are current or previous employees of the investor
  • The investee’s operations are dependent on the investor, such as in the following situations:
    • The investee depends on the investor to fund a significant portion of its operations
    •  The investor guarantees a significant portion of the investee’s obligations
    • The investee depends on the investor for critical services, technology, supplies or raw materials
    • The investor controls assets such as licenses or trademarks that are critical to the investee’s operations
    • The investee depends on the investor for key management personnel, such as when the investor’s personnel have specialised knowledge of the investee’s operations.
  • A significant portion of the investee’s activities either involve or are conducted on behalf of the investor (IFRS 10.B19).

Exposure to return
Having a large exposure to variability of returns is an indicator that the investor has power. This is because, the greater an investor’s exposure, or rights, to variability of returns from its involvement with an investee, the greater is the incentive for the investor to obtain rights sufficient to give it power. However, while a large exposure indicates that the investor may have power, the extent of the investor’s exposure on their own is not conclusive (IFRS 10.B20).

The same analysis applies in cases where the investor’s exposure, or rights, to returns from its involvement with the investee is disproportionately greater than its voting or other similar rights. For example, in some cases an investor that holds less than half of the voting rights of an investee could be entitled, or exposed, to more than half of the returns of the investee. This might be the case where an investor has both an equity interest and a substantial holding of debt instruments in an investee (IFRS 10.B19).

Purpose and design of the investee
In assessing the purpose and design of an investee, an investor is required to consider the involvement and decisions made at the investee’s inception as part of its design and evaluate whether the transaction terms and features of the involvement provide the investor with rights that are sufficient to give it power.

It is important to note that an investor’s involvement in the design of an investee alone is not sufficient to give an investor control. However, involvement in the design may indicate that the investor had the opportunity to obtain rights that are sufficient to give it power over the investee (IFRS 10.B51).

IFRS 10.B8 notes that some investees are designed in a way that means voting rights are not the most relevant factor in deciding who controls the investee. This may be the case when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. These types of arrangement are likely to relate to structured entities as defined in IFRS 12 Disclosure of Interests in Other Entities.

In cases where it is determined that voting rights are not the most relevant factor in determining control, an investor is required to give consideration to the purpose and design of the investee and to analyse 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.

Consideration of the risks includes both downside and upside risk. (IFRS 10.B8).

Contractual arrangements
An investor is required to consider contractual arrangements such as call, put and liquidation rights established at the investee’s inception. When these contractual arrangements involve activities that are closely related to the investee, then these activities are considered to be, in substance, an integral part of the investee’s overall activities. This applies, even though they may occur outside the legal boundaries of the investee.

As a result, explicit or implicit decision-making rights embedded in contractual arrangements that are closely related to the investee need to be considered as relevant activities when determining whether an investor has power over an investee (IFRS 10.B52).

Particular circumstances
For some investees, relevant activities occur only when particular circumstances arise or events occur. The investee may be designed so that its activities and returns are predetermined unless and until those particular circumstances arise or events occur.

In those cases, only the decisions about the investee’s activities when those circumstances or events occur can significantly affect its returns and thus be relevant activities. The circumstances or events need not have occurred for an investor with the ability to make those decisions to have power. The fact that the right to make decisions is contingent on circumstances arising or an event occurring does not, in itself, make those rights protective. For an example, see can a structured entity have no relevant activities?.

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Something else -   The relevant activities of an investee

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