that two or more investors collectively can control an investee. To control an investee
collectively, investors must act together to direct the relevant activities (see 4.1 below).
In such cases, because no investor can direct the activities without the co-operation of
the others, no investor individually controls the investee. Each investor would account
for its interest in the investee in accordance with the relevant IFRSs, such as IFRS 11,
IAS 28 or IFRS 9 – Financial Instruments. [IFRS 10.9].
3.1 Assessing
control
Detailed application guidance is provided by IFRS 10 with respect to the assessment of
whether an investor has control over an investee. To determine whether it controls an
investee, an investor assesses whether it has all three elements of control described
at 3 above. [IFRS 10.B2].
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Each of the three control criteria are explored in more detail at 4, 5 and 6 below, respectively.
IFRS 10 notes that consideration of the following factors may assist in making that
determination:
(a) the purpose and design of the investee (see 3.2 below);
(b) what the relevant activities are and how decisions about those activities are made
(see 4.1 below);
(c) whether the rights of the investor give it the current ability to direct the relevant
activities (see 4.2 to 4.6 below);
(d) whether the investor is exposed, or has rights, to variable returns from its
involvement with the investee (see 5 below); and
(e) whether the investor has the ability to use its power over the investee to affect the
amount of the investor’s returns (see 6 below). [IFRS 10.B3].
In addition, when assessing control of an investee, an investor considers the nature of
its relationship with other parties (see 7 below). [IFRS 10.B4].
In many cases, when decision-making is controlled by voting rights that also give the
holder exposure to variable returns, it is clear that whichever investor holds a majority
of those voting rights controls the investee. [IFRS 10.B6]. However, in other cases (such as
when there are potential voting rights, or an investor holds less than a majority of the
voting rights), it may not be so clear. In those instances, further analysis is needed and
the criteria need to be evaluated based on all facts and circumstances (considering the
factors listed above), to determine which investor, if any, controls an investee. [IFRS 10.8].
The diagram below illustrates this assessment.
The control principle outlined above applies to all investees, including structured
entities. A structured entity is defined in IFRS 12 as ‘an entity that has been
designed so that voting or similar rights are not the dominant factor in deciding
who controls the entity, such as when any voting rights relate to administrative
tasks only and the relevant activities are directed by means of contractual
arrangements’. [IFRS 12 Appendix A].
There are no bright lines to determine whether an investor has an exposure, or
has rights, to variable returns from its involvement with a structured entity, or
whether it has the ability to affect the returns of the structured entity through its
power over the structured entity. Rather, as with all investees, all facts and
circumstances are considered when assessing whether the investor has control
over an investee that is a structured entity. That is, the process outlined in the
diagram below is used for structured entities, although the relevant facts and
circumstances may differ from when voting rights are a more important factor in
determining control.
Consolidated financial statements 379
Figure 6.3:
Assessing control
Power
Returns
Linkage
Determine which party, if any, has
Assess whether the investor is
Evaluate whether the investor has
power, that is, the current ability to
exposed, or has rights, to variable
the ability to use its power to affect
direct the relevant activities. Power
returns from its involvement with
the investor’s returns from its
arises from the rights which may
the investee. Returns can be
involvement with the investee. If
include:
positive, negative, or both.
applicable, determine whether the
Examples of returns include:
investor is a principal or an agent,
• Voting rights
considering:
er • Potential voting rights (e.g.
• Dividends
ow
options or convertible instruments)
eturns • Remuneration
• Scope of its authority
linkage
• Rights to appoint key management
ss r • Economies of scale, cost savings,
• Rights held by other parties
entify p
personnel
sse
scarce products, proprietary
• Remuneration
Id
A
• Decision making rights within a
knowledge, synergies, or other
Evaluate • Exposure to variability from other
management contract
returns that are not available to
interests
other interest holders
• Removal or ‘kick-out’ rights
However, power does not arise from
protective rights.
Understand purpose and design of investee
When management concludes that an entity does not have control, the requirements
of IFRS 11 and IAS 28 must be considered to determine whether it has joint control
or significant influence, respectively, over the investee, as shown in the diagram
at 1.1 above.
3.2
Purpose and design of an investee
When assessing control of an investee, an investor considers the purpose and design of
the investee in order to identify the relevant activities, how decisions about the relevant
activities are made, who has the current ability to direct those activities and who
receives returns from those activities. [IFRS 10.B5]. Understanding the purpose and design
of an investee is therefore critical when identifying who has control.
When an investee’s purpose and design are considered, it may be clear that an investee
is controlled by means of equity instruments that give the holder proportionate voting
rights, such as ordinary shares in the investee. In this case, in the absence of any
additional arrangements that alter decision-making, the assessment of control focuses
on which party, if any, is able to exercise voting rights (see 4.3 below) sufficient to
determine the investee’s operating and financing policies. In the most straightforward
case, the investor that holds a majority of those voting rights, in the absence of any other
factors, controls the investee. [IFRS 10.B6].
To determine whether an investor controls an investee in more complex cases, it
may be necessary to consider some or all of the other factors listed at 3.1 above.
[IFRS 10.B7].
IFRS 10 notes that an investee may be designed so that voting rights are not the
dominant factor in deciding who control
s the investee, such as when any voting rights
relate to administrative tasks only and the relevant activities are directed by means of
contractual arrangements (this is the same wording that IFRS 12 uses in defining a
structured entity – see 3.1 above). In such cases, an investor’s consideration of the
purpose and design of the investee shall also include consideration of the risks to which
380 Chapter
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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 not only the downside risk, but also the
potential for upside. [IFRS 10.B8].
Understanding the purpose and design of the investee helps to determine:
• to what risks was the investee designed to be exposed, and what are the risks it
was designed to pass on to the parties with which it is involved?
• what are the relevant activities?
• how are decisions about the relevant activities made?
• who has the ability to direct the relevant activities?
• which parties have exposure to variable returns from the investee?
• how do the relevant activities affect returns?
• do the parties that have power, and have exposure to variable returns have the
ability to use that power to affect returns?
In short, understanding the purpose and design of the investee helps to understand the
goal of each investor; that is, why they are involved with the investee, and what that
involvement is.
4
POWER OVER AN INVESTEE
The first criterion to have control relates to power. An investor has power when it
has existing rights that give it the current ability to direct the relevant activities.
[IFRS 10.10, B9]. Therefore, when assessing whether an investor has power, there are
two critical concepts:
• relevant activities; and
• existing rights.
These concepts are discussed at 4.1 and 4.2 below, respectively. Power may be
achieved through voting rights (see 4.3 below) or through rights arising from
contractual arrangements (see 4.4 below). We also discuss other evidence of power
(see 4.5 below) and determining whether sponsoring (designing) a structured entity
gives power (see 4.6 below).
An investor can have power over an investee even if other entities have existing rights
that give them the current ability to participate in the direction of the relevant activities.
This may occur when another entity has significant influence, [IFRS 10.14], i.e. the power
to participate in the financial and operating policy decisions of the investee but not
control or joint control over those policies. [IAS 28.3].
4.1 Relevant
activities
In many cases, it is clear that control of an investee is held through voting rights.
However, when it is not clear that control of an investee is held through voting
rights, a crucial step in assessing control is identifying the relevant activities of the
investee, and the way decisions about such activities are made. [IFRS 10.B10].
Consolidated financial statements 381
Relevant activities are the activities of the investee that significantly affect the
investee’s returns. [IFRS 10.10].
For many investees, a range of activities significantly affect their returns. Examples of
relevant activities, and decisions about them, include, but are not limited to:
• determining or changing operating and financing policies (which might include the
items below);
• selling and purchasing goods and/or services;
• managing financial assets during their life (and/or upon default);
• selecting, acquiring or disposing of assets;
• researching and developing new products or processes;
• determining a funding structure or obtaining funding;
• establishing operating and capital decisions of the investee, including budgets; and
• appointing, remunerating or terminating the employment of an investee’s service
providers or key management personnel. [IFRS 10.B11-B12].
4.1.1
More than one relevant activity
In many cases, more than one activity will significantly affect an investee’s returns.
Under IFRS 10, if two or more unrelated investors each have existing rights that give
them the unilateral ability to direct different relevant activities, the investor that has the
current ability to direct the activities that most significantly affect the returns of the
investee has power over the investee. [IFRS 10.13].
In some situations, activities that occur both before and after a particular set of
circumstances or events may be relevant activities. When two or more investors have
the current ability to direct relevant activities and those activities occur at different
times, the investors determine which investor is able to direct the activities that most
significantly affect those returns consistently with the treatment of concurrent decision-
making rights. The investors reconsider this assessment over time if relevant facts or
circumstances change. [IFRS 10.B13].
Therefore, when there is more than one activity that significantly affects an investee’s
returns, and these activities are directed by different investors, it is important to
determine which activities most significantly affect the investee’s returns. This is
illustrated in Example 6.4 below, which is from IFRS 10. [IFRS 10.B13 Example 1].
Example 6.4:
Identifying relevant activities in life sciences arrangements
Two investors form an investee to develop and market a medical product. One investor is responsible
for developing and obtaining regulatory approval of the medical product – that responsibility includes
having the unilateral ability to make all decisions relating to the development of the product and to
obtaining regulatory approval. Once the regulator has approved the product, the other investor will
manufacture and market it – this investor has the unilateral ability to make all decisions about the
manufacture and marketing of the project. If all the activities – developing and obtaining regulatory
approval as well as manufacturing and marketing of the medical product – are relevant activities, each
investor needs to determine whether it is able to direct the activities that most significantly affect the
investee’s returns. Accordingly, each investor needs to consider whether developing and obtaining
regulatory approval or the manufacturing and marketing of the medical product is the activity that most
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significantly affects the investee’s returns and whether it is able to direct that activity. In determining
which investor has power, the investors would consider:
(a) the purpose and design of the investee;
(b) the factors that determine the profit margin, revenue and value of the investee as well as the value of the
medical product;
(c) the effect on the investee’s returns resulting from each investor’s decision-making authority with respect
to the factors in (b); and
(d) the investors’ exposure to variability of returns.
In this particular example, the investors would also consider:<
br />
(e) the uncertainty of, and effort required in, obtaining regulatory approval (considering the investor’s
record of successfully developing and obtaining regulatory approval of medical products); and
(f) which investor controls the medical product once the development phase is successful.
In this example, IFRS 10 does not conclude which of the activities is the most relevant
activity (i.e. the activity that most significantly affects the investee’s returns). If it were
concluded that the most relevant activity is:
• developing and obtaining regulatory approval of the medical product – then the
investor that has the power to direct that activity would have power from the date
of entering into the arrangement; or
• manufacturing and marketing the medical product – then the investor that has
the power to direct that activity would have power from the date of entering
into the arrangement.
To determine whether either investor controls the arrangement, the investors would
also need to assess whether they have exposure to variable returns from their
involvement with the investee (see 5 below) and the ability to use their power over the
investee to affect the amount of the investor’s returns (see 6 below). [IFRS 10.7, B2]. The
investors are required to reconsider this assessment over time if relevant facts or
circumstances change. [IFRS 10.8].
Example 6.4 above illustrates a situation when two different activities that significantly
affect an investee’s returns are directed by different investors. Thus, it is important to
identify the activity that most significantly affects returns, as part of assessing which
investor, if any, has power. This differs from joint control, defined as the contractually
agreed sharing of control of an arrangement, which exists only when decisions about
the relevant activities require the unanimous consent of the parties sharing control.
[IFRS 11 Appendix A]. Joint control is discussed in more detail in Chapter 12 at 4.
Another example provided by IFRS
10, [IFRS 10.B13 Example 2], is reproduced in
Example 6.5 below.
Example 6.5:
Identifying relevant activities in an investment vehicle
An investment vehicle (the investee) is created and financed with a debt instrument held by an investor (the
debt investor) and equity instruments held by a number of other investors. The equity tranche is designed to
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