Whether the investor currently directs the activities – Having identified an investee’s relevant activities, the next step is to determine how those activities are directed. IFRS 10 breaks this down into the following two steps (although in practice these steps are normally combined with the identification of relevant activities):
- understanding the decisions about relevant activities, Whether the investor currently directs the activities
- identifying rights that confer ability to direct those decisions. Whether the investor currently directs the activities
Whether the investor currently directs the activities Whether the investor currently directs the activities
Decisions about relevant activities
Decisions about relevant activities include but are not limited to:
These decisions are broad-based and relate to high level direction of the investee. For traditional investees where the relevant activities comprise a wide range of financial and operating activities, direction is generally through these broad-based decisions. In other words there is usually no need to identify relevant activities at a specific or detailed level
In more complex situations where the relevant activities are identified at a more specific level direction might be through a more specific contractual right or process.
Ability to direct the decisions or rights
IFRS 10 envisages two types of rights that may confer ability to direct these decisions (i.e. power):
The steps – identification of the investee’s relevant activities and how they are directed – determine the applicable category. The control assessment will typically be more straightforward when power is conferred through voting rights. In most cases involving traditional operating entities and governance structures, power is conferred by voting rights. For investees that would have been considered special purpose entities or structured entities however, power arises from more specific contractual rights. Whether the investor currently directs the activities
The chart below illustrates how the direction of relevant activities differs for traditional and structured entities: Whether the investor currently directs the activities
For many investees, a range of operating and financing activities significantly affect their returns. Examples of relevant activities, and decisions about them, include, but are not limited to: [IFRS 10 B11-B12].
- Determining or changing operating and financing policies (which might include the items below) Whether the investor currently directs the activities
- Selling and purchasing goods and services Whether the investor currently directs the activities
- Managing financial assets during their life (and/or upon default) Whether the investor currently directs the activities
- Selecting, acquiring or disposing of assets Whether the investor currently directs the activities
- Researching and developing new products or processes Whether the investor currently directs the activities
- Determining a funding structure or obtaining funding
- Establishing operating and capital decisions of the investee, including budgets
- Appointing, remunerating or terminating the employment of an investee’s service providers or key management personnel.
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 both before and after a particular set of circumstances arises or event occurs 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].
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 of the activities most significantly affect the investee’s returns. For example, one activity might be directed by voting rights, which are held by one investor, whereas the other activity is directed through a contract by a different investor. This is illustrated in Example 7.3, which is from IFRS 10. [IFRS 10 B13, Example 1].
See also: The IFRS Foundation