usually arise from some form of legal contract, e.g., the rights held by the owner of an ordinary share may include voting rights and rights to dividends. Rights in relation to purely administrative tasks are not rights that affect power. Examples of rights that affect who has power are listed in AASB 10.B15: (a) rights in the form of voting rights (or potential voting rights) of an investee; (b) rights to appoint, reassign or remove members of an investee’s key management personnel who have the ability to direct the relevant activities; (c) rights to appoint or remove another entity that directs the relevant activities; (d) rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the investor; and (e) other rights (such as decision-making rights specified in a management contract) The rights must be substantive rights, i.e., the holders must have the practical ability to exercise the rights (no barriers to the holders exercising the rights [AASB 10.B22]. Para B23 gives examples of factors to consider when determining whether rights are substantive rights. If the rights are purely protective rights, the holder does not have power [AASB 10.14]. Examples of protective rights include [AASB 10.B28]: (a) a lender’s right to restrict a borrower from undertaking activities that could significantly change the credit risk of the borrower to the detriment of the lender. (b) the right of a party holding a non-controlling interest in an investee to approve capital expenditure greater than that required in the ordinary course of business, or to approve the issue of equity or debt instruments. (c) the right of a lender to seize the assets of a borrower if the borrower fails to meet specified loan repayment conditions. The focus is on the capacity to exercise power than actually exercising the power. This is reflected in AASB 10.12, which states that an investor with the current ability to direct the relevant activities has power even if its rights to direct have yet to be exercised. Evidence that the investor has been directing relevant activities can help determine whether the investor has power, but such evidence is not, in itself, conclusive in determining whether the investor has power over an investee. An investor controls an investee if the investor not only has power over the investee and exposure or rights to variable returns from its involvement with the investee, but also has the ability to use its power to affect the investor’s returns from its involvement with the investee [AASB 10.17]. The ability to direct must be current. An investor that is an agent does not control an investee when it exercises decision-making rights delegated to it [AASB 10.18]. See paragraphs B58–B72 for detail on agents.
ACCT 2542 Summary of Consolidations and Equity Accounting 3 AASB 10 addresses a number of situations that could lead to control, these being: • Where a majority of voting rights are held by the investor.
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