Significant judgement is often required in determining whether control exists An investor controls an investee when Ø The investor is exposed, or has right, to Ø Variable returns from its involvement with the investee and Ø has the ability to affect those returns through its power over the investee the following three elements are required in order for an investor to have control 1. power over the investee 2. exposure, or rights , to variable returns from its involvement with the investee 3. the ability to use its power over the investee to affect the amount of the investor’s returns. Power, existing rights that give the current ability to direct the relevant activities Power arises from rights. l Most rights arise from a legal contract. l Rights must be substantive – the holder must have the practical ability to exercise the rights. l Judgment is required in determining whether rights are substantive. l Factors to consider per AASB 10 are: Ø Whether the party that holds the rights would benefit from exercising the rights – e.g. potential voting rights; Ø Whether there are any barriers that prevent a holder from exercising rights. Ø Where multiple parties are involved, whether there is a mechanism in place to enable those parties to practically exercise the rights. l If a right is purely protective , then the holder does not have power . n Protective rights are designed to protect the interest of the party holding those rights without giving the party power over the entity to which the rights relate. l Example of protective rights include the following: n A lenders right to restrict a borrower from undertaking certain activities n The right of a party holding a non-controlling interest to approve various transactions n The rights of a lender to seize the assets of a borrower in the event of default. Power is the ability to direct – rather than actually directing. The ability to direct must be current.
E.g. consider the impact of an investor that holds call options It must be relevant activities that are being directed That is activities of the investee that significantly affect the investee’s returns. Level of share ownership l Share ownership normally provides voting rights n Power is presumed to exist where an investor owns more than 50% of the voting rights of an entity unless there is evidence to the contrary l Voting rights of less than 50% can result in an investor having power over an investee – consider the following factors: n Dispersion of other shareholders – probability of shareholders attending meeting lessened by location and by size of share parcels n Attendance at AGMs – e.g. if only 60% of eligible votes attend meeting, 31% can control meeting n Existence of contracts – power by agreement with other investors n Level of disorganization or apathy of other shareholders Agents An Agent cannot be a parent Where a controlling decision maker is an agent, it is the principal that is considered to be the parent The consolidation processes
You've reached the end of your free preview.
Want to read all 53 pages?
- Three '11
- Balance Sheet, Dr Goodwill Cr BCVR