Removal rights

Learning objectives

• Explain how substantive removal rights held by others limit the decision maker's power.L2, L3
• Assess whether the removal rights in a case can be exercised by a single party and without cause.L3

Normative references

• IFRS 10 §B60In determining whether it is an agent, the decision maker considers the overall relationship between itself, the investee being managed and other parties, in particular the scope of its decision-making authority, the rights held by other parties, its remuneration and its exposure to variability of returns from other interests it holds; these factors are weighted according to the facts and circumstances. Para. B61 removes the need for this overall assessment when a single party holds a substantive right to remove it without cause (B65).
• IFRS 10 §B65When a single party holds substantive removal rights and can remove the decision maker without cause, this, in isolation, is sufficient to conclude that the decision maker is an agent. If those rights are held by several parties and no individual party can act alone, they are not, in isolation, conclusive: the greater the number of parties required to act together, and the greater the magnitude and variability of the decision maker's other economic interests, the less weight those rights carry (an independent board of directors may, however, serve as a mechanism for collective action, B23(b)).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• Substantive removal rights that a single party can exercise without cause can be enough to conclude that the decision maker is an agent.L2
• Sextant SA manages the Zénith fund. One investor, Orme SA, can remove Sextant at any time, without having to give a reason and without the agreement of any other party. Case assumption: this right is substantive. What is the effect of this right in the principal / agent analysis of Sextant?L3