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,
- identifying rights that confer ability to direct those decisions.
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