Control: three cumulative elements

Learning objectives

• Identify the three elements of control (power, variable returns, the link between the two) and the fact that all of them must be present.L1, L2
• Determine, from the facts of a case, whether an investor controls an investee.L2

Normative references

• IFRS 10 §6An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
• IFRS 10 §7Control has three elements, all of which must be present: power over the investee (cross-reference to paras. 10 to 14), exposure, or rights, to variable returns (paras. 15 and 16) and the ability to use power to affect the amount of the returns (paras. 17 and 18).

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

10 questions

• For an investor to control an investee, three elements must all be present: power over the investee, exposure or rights to variable returns, and the ability to use its power to affect the amount of those returns.L1
• A colleague writes: "Cèdre SA receives dividends that vary with the profit of Lierre SA; it is therefore exposed to variable returns and controls Lierre SA." What is wrong with this reasoning?L2
• Érable SA holds existing rights that give it the current ability to direct the relevant activities of Saule SA (case assumption). It receives dividends whose amount varies with Saule's profit, and it can use its rights to decide the level of those dividends (case data). What is concluded?L2
• What does the power of an investor over an investee rest on?L1
• Saule SA holds 15% of the capital of Tilleul SA. It receives a dividend whose amount depends on Tilleul's profit, and it would suffer a loss on its holding if Tilleul recorded losses (case data). What can be said about Saule's returns in Tilleul?L2
• Gamma SA holds the power to decide the relevant activities of Zeta SA and owns 12% of its equity; the balance of the returns goes to external investors. Write a short note concluding on whether there is a link between Gamma's power and its own returns, distinguishing case facts, rule and professional judgement.L2
• Cèdre SA acquires the majority of the voting rights of a business (within the meaning of IFRS 3). Case convention: the three elements of control under IFRS 10 are present. How do the two standards fit together in accounting for this acquisition?L2
• A colleague writes: "Orme SA controls Hêtre SA alone, but other shareholders also hold voting rights; Orme therefore applies IFRS 11 and treats Hêtre as joint control." Case convention: Orme meets the three elements of control. What is the error?L3
• Which disclosures related to control fall under IFRS 12? More than one answer is possible.L3
• Borealis SA has power over Zeta SAS (case data). However, it is not exposed to, and has no rights to, any variable returns from Zeta: it receives no remuneration or dividend and has no other economic link with Zeta (case facts). Does Borealis control Zeta under IFRS 10?L2