(b) rights arising from other contractual arrangements (see 4.3.6 below);
(c) the investor’s voting rights being sufficient (see 4.3.3 below);
(d) potential voting rights (see 4.3.4 below); or
(e) a combination of (a)-(d). [IFRS 10.B38].
If the relevant activities of an investee are directed through voting rights, an investor
needs to consider the requirements of IFRS 10 in relation to such matters as discussed
at 4.3.1 to 4.3.6 below. [IFRS 10.B34].
See 4.4 below for a discussion of cases when voting rights are not the right that gives
power over an investee.
4.3.1
Power with a majority of the voting rights
In many cases, the legal environment or corporate structure dictate that the relevant
activities are directed by the agreement of shareholders who hold more than half of the
voting rights of the investee. Alternatively, a governing body, e.g. a Board of Directors,
might make decisions regarding the investee and that Board might be appointed by
whoever has the majority of the voting rights to direct an investee’s relevant activities.
In both cases, when one investor has more than half the voting rights, it has power,
assuming that no other facts and circumstances are relevant. [IFRS 10.B35].
Consolidated financial statements 393
However, there may be other facts and circumstances that are relevant, as discussed
at 4.3.2 below. In addition, any potential voting rights need to be considered
(see 4.3.4 below).
4.3.2
A majority of voting rights without power
In some cases, voting rights do not provide the holder the power to direct the relevant
activities. This might be the case, when:
• relevant activities are directed by another party with existing rights under a
contract, and that party is not an agent of the investor (see 4.4 below); [IFRS 10.B36]
• voting rights are not substantive (see 4.2.1 above). For example, if the relevant
activities are directed by government, judiciary, administrator, receiver, liquidator,
or regulator (see 4.3.2.A below); [IFRS 10.B37]
• voting rights have been delegated to a decision-maker, which then holds the voting
rights as an agent (see 6 below); or
• voting rights are held as a de facto agent of another investor (see 7 below).
4.3.2.A Evaluating
voting
rights during bankruptcy
Many jurisdictions have laws that offer protection from creditors when an entity is in
financial difficulty. For example, an investee in such a position might be placed in the
hands of liquidators, receivers or court-appointed managers under a reorganisation
plan. Evaluating whether an investor holding the majority of voting rights still has power
over an investee in such situations requires the exercise of judgement based on the facts
and circumstances. It also requires assessing whether the holder of the voting rights
continues to have the current ability to direct the activities that most significantly affect
the investee’s returns.
In this evaluation, it should be determined whether the shareholders (who hold
voting rights) can still direct the operating and financial policies of the investee
(assuming that this is the relevant activity), once the investee enters into
bankruptcy proceedings. Alternatively, the bankruptcy court (or trustee, or
administrator) may direct operating and financial policies. Consideration should
be given to the following:
• Who appoints management during the bankruptcy period?
• Who directs management (e.g. the shareholders, or a trustee for the creditors)?
• Does management have to seek approval from parties besides the shareholders
(e.g. for significant and/or unusual transactions)?
• Who negotiates the plan of reorganisation?
Even if it appears that the shareholders retain power once the investee enters
bankruptcy (i.e. they retain the current ability to direct the relevant activities), this does
not mean that a majority shareholder automatically controls the investee. This is
because the shareholder may not have any exposure to variable returns (see 5 below),
or the ability to affect its returns through its power (see 6 below), which are the other
two criteria for having control. Depending on the facts and circumstances, a shareholder
might lose power (or control) when the investee files for bankruptcy protection, or
when the investee exits from bankruptcy. Determining the appropriate method of
394 Chapter
6
accounting for the interest in the investee upon loss of power (or control) requires
careful consideration of the nature of the rights and interests, such as whether the
shareholder has significant influence over the investee, in which case it would apply the
equity method under IAS 28 – see Chapter 11. Alternatively, if the investor does not
have significant influence, it would likely account for its investment in the investee as a
financial instrument under IFRS 9.
When an investee files for bankruptcy, parties holding other rights with respect to
that investee might also have to consider whether the control assessment has
changed. For example, a right that was previously deemed protective (such as the
right to appoint an administrator in the event of a bankruptcy – a right that is
frequently held by creditors), may be considered to be a right that now gives power.
Alternatively, the trustee itself might have power, through its ability to direct the
activities of the investee in bankruptcy.
4.3.3
Power without a majority of voting rights (de facto control)
An investor might have control over an investee even when it has less than a majority
of the voting rights of that investee if its rights are sufficient to give it power when the
investor has the practical ability to direct the relevant activities unilaterally (a concept
known as ‘de facto control’). [IFRS 10.B41].
When assessing whether an investor’s voting rights are sufficient to give it power, an
investor considers all facts and circumstances, including:
(a) the size of the investor’s holding of voting rights relative to the size and dispersion
of holdings of the other vote holders, noting that:
(i) 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;
(ii) 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; and
(iii) 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;
(b) potential voting rights held by the investor, other vote holders or other parties;
(c) rights arising from other contractual arrangements; and
(d) any additional facts and circumstances that indicate the investor has, or does not
have, the current ability to direct the relevant activities at the time that decisions
need to be made, including voting patterns at previous shareholders’ meetings.
[IFRS 10.B42].
In addition, IFRS 10 states that if it is not clear that the investor has power, having
considered the factors above, then the investor does not control the investee.
[IFRS 10.B46].
Consolidated financial statements 395
Whether an investor should include voting rights held by related parties not controlled
by the investor (e.g. shareholdings held by its parent, sister companies, associates or
shareholdings held by key management personnel or other individuals who are related
parties) would depend on the specific facts and circumstances (i.e. whether the related
parties are de facto agents of the investor). See 7 below.
Potential voting rights and rights arising from other contractual arrangements are
discussed at 4.3.4 to 4.3.6 below, respectively. De facto control is discussed in more
detail below.
IFRS 10 includes several examples illustrating the assessment of power when an
investor has less than a majority of voting rights. Some of these are summarised in
Examples 6.9 to 6.12 below. Our variation on the examples provided in IFRS 10 is
introduced in Example 6.13 below. In each of the examples, it is assumed that, after
understanding the purpose and design of the investee:
• voting rights give an investor the ability to direct activities that most significantly
affect the investee’s returns (i.e. voting rights give power);
• none of the shareholders has arrangements to consult any of the other
shareholders or make collective decisions;
• decisions require the approval of a majority of votes cast at the shareholders’
meeting; and
• no other facts or circumstances are relevant.
When the direction of relevant activities is determined by majority vote and an
investor holds significantly more voting rights than any other party, and the other
shareholdings are widely dispersed, it may be clear, after considering the factors
listed in (a)-(c) above alone, that the investor has power over the investee.
[IFRS 10.B43]. This is illustrated in Example 6.9 below (although factors (b) and (c) are
not applicable).
Example 6.9:
Less than a majority of voting rights (1)
A holds 48% of the voting rights of B; the remaining 52% of B is widely held by thousands of shareholders
(none of whom holds more than 1% of the voting rights).
52% widely dispersed
A
B
48%
A has power over B, because A has a dominant voting interest (based on the absolute size of its holding, and
relative to other shareholders), and a large number of shareholders would have to agree to outvote A.
[IFRS 10.B43 Example 4].
396 Chapter
6
In other situations, it may be clear after considering the factors listed in (a)-(c) above
alone that an investor does not have power. [IFRS 10.B44]. This is illustrated in
Example 6.10 below (although factors (b) and (c) are not applicable).
Example 6.10: Less than a majority of voting rights (2)
C holds 45% of the voting rights in D. Two other investors each hold 26% of the voting rights (total 52%),
with the remaining 3% held by three other shareholders, each holding 1%.
1%
1%
1%
26%
26%
C
D
45%
C does not have power over D, because the two remaining significant shareholders (i.e. a relatively small
number) could easily cooperate to outvote C. The size of C’s holding, and size of that holding relative to other
shareholders, would not give it power. [IFRS 10.B44 Example 6].
However, the factors listed in (a)-(c) above alone may not be conclusive. If an investor,
having considered those factors, is unclear whether it has power, it considers additional
facts and circumstances, such as whether other shareholders are passive in nature as
demonstrated by voting patterns at previous shareholders’ meetings.
When evaluating past voting patterns, significant judgement will be required to
determine how far back to review. Judgement will also be required to determine
whether past voting patterns may have been influenced by conditions that existed at a
point in time, such as how well the entity was operating during the periods reviewed.
For example, if an entity was profitable and operating smoothly, other shareholders may
have been less motivated to exercise their voting rights. The fewer voting rights the
investor holds, and the fewer parties that would need to act together to outvote the
investor, the more reliance would be placed on the additional facts and circumstances
to assess whether the investor’s rights are sufficient to give it power. [IFRS 10.B45].
Consideration of additional facts and circumstances, referred to in paragraph B45 of the
standard, includes the assessment of the factors that provide evidence of the practical
ability to direct the relevant activities of the investee (paragraph B18), and the indicators
that the investor may have power as a result of any special relationship with the investee
(paragraph B19) or due to the extent of its exposure to variability of returns (paragraph
B20), which are discussed at 4.5 below. When the facts and circumstances in paragraphs
B18-B20 are considered together with the investor’s rights, greater weight shall be given
to the evidence of power in paragraph B18 than to the indicators of power in paragraphs
B19 and B20. [IFRS 10.B45].
Example 6.11 below illustrates a situation where the factors in (a)-(c) above alone are not
conclusive, and therefore facts and circumstances would need to be considered.
Consolidated financial statements 397
Example 6.11: Less than a majority of voting rights (3)
E holds 45% of the voting rights in F. The rest of F is dispersed among 11 investors, who each hold 5%.
11 investors at 5% each
E
F
45%
The size of E’s holding and the dispersion of the other shareholders are not conclusive in determining whether
E has power over F. Other relevant facts and circumstances (such as those discussed at 4.5 below) would be
considered to determine whether E has power over F. [IFRS 10.B45 Example 7].
Comparing Examples 6.10 and 6.11 above illustrates the judgement that will need to be
applied in determining whether an investor has power. The IASB considers that it may
be easy for two other shareholders to act together to outvote an investor (as in
Example 6.10 above), but that it may be more difficult for 11 other shareholders to act
together to outvote an investor (as in Example 6.11 above). Where is the line between
these two situations?
Example 6.12 below illustrates a situation where additional facts and circumstances
need to be considered. For example, this may include whether other shareholders are
passive in nature as demonstrated by voting patterns at previous shareholders’ meetings.
Example 6.12: Less than a majority of voting rights (4)
G holds 35% of the voting rights in H. Three other shareholders each hold 5% of the voting rights of H. The
remaining 50% of the voting rights are held by numerous other shareholders, none individually holding more
than 1% of the voting rights. At recent shareholders’ meetings, 75% of the voting rig
hts have been represented
(including G).
50% widely
dispersed, half turn
up at Annual
5%
5%
5%
General Meeting
G
H
35%
G does not have power over H because the size of G’s holding relative to other shareholders, when considering
their active participation at recent shareholders’ meetings, does not give G the current ability to direct the
activities of H. This would be the case regardless of whether there is evidence that G directed H in the past,
or whether other shareholders voted in the same way as G. [IFRS 10.B45 Example 8].
398 Chapter
6
In Example 6.12 above, G cannot have power because it does not have, at a
minimum, more than half the votes of shareholders that have turned up at recent
meetings. That is, since 75% have turned up at recent meetings, G would need a
minimum of 37.5% to have power. A variation of the above scenario is shown in
Example 6.13 below.
Example 6.13: Less than a majority of voting rights (5)
J holds 38% of the voting rights of K. Three other shareholders each hold 4% of the voting rights of K.
Numerous other shareholders hold the remaining 50% of the voting rights, although none individually
holds more than 1%. At recent shareholders’ meetings, 75% of the voting rights have been represented,
including J.
50% widely
dispersed, half turn
up at Annual
4%
4%
4%
General Meeting
J
K
38%
There are diverse views regarding the conclusion on this fact pattern, and
judgement will need to be applied in practice. Some believe that J has power,
because it has more than half the voting rights of those who have turned up at
recent shareholder meetings. (J has more than half the voting rights, because J holds
38%, which is more than 37.5%, or half of 75%). Others believe that it is inconclusive
whether J has power, because, while J has more than half the voting rights of those
who have turned up at recent shareholder meetings, this is just barely the case.
Contrast this fact pattern with Example 6.9 above, where IFRS 10 concludes that,
after all relevant facts and circumstances have been considered, holding 48% in
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 79