CASE STUDY: IFRS 10

Scenario
An investor holds 48 per cent of the equity (and related voting rights) of an investee. The remaining equity and 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. 70 per cent of the voting rights of the investee have been cast at recent relevant shareholder meetings, with the exception of one meeting when 78 per cent of the voting rights were cast. Decisions taken at that meeting included changing the financing arrangements entered into by the investee that could affect future dividend payments to shareholders. There are no other contractual arrangements that would affect the assessment of power.
Previous guidance:
Because IAS 27 provided only limited guidance regarding control without a majority of voting rights, we have observed inconsistent consolidation conclusions in this case. We understand that different jurisdictions drew different ‘bright lines’ regarding control without a majority of voting rights, often depending on previous GAAP requirements. In some jurisdictions, the investor would have been deemed to control the investee with 48 per cent of the voting rights, while in others, the investor would not. If the investor consolidated the investee, it would be required to make disclosures about the nature of its relationship with the investee. If the investor did not consolidate the investee, it would not be required to make any particular disclosures about that relationship.
IFRS 10 and IFRS 12
According to IFRS 10, given the level of shareholder participation and considering the size and dispersion of shareholdings, the investor with 48 per cent of the voting rights would conclude that it controls the investee; its rights are sufficient to give it power over the investee (ie it has the practical ability to direct the relevant activities of the investee unilaterally), it has exposure to variable returns and the ability to affect those variable returns through its voting rights. According to IFRS 12, there are a number of disclosures that the investor would be required to make to help users understand and evaluate the nature of its relationship with the investee. Those disclosures would include disclosures about signifi cant judgements it has made in determining that it has control of the investee and disclosures about non-controlling interests in the investee (eg summarised financial information about the investee).