Power arises from existing rights

Learning objectives

• Explain that power arises from existing rights that give the current ability to direct the relevant activities.L1, L2
• Identify, in a given situation, the rights that give power.L1, L2

Normative references

• IFRS 10 §10Power exists when the investor has existing rights that give it the current ability to direct the relevant activities, i.e. the activities that significantly affect the investee's returns. Para. 14 establishes that an investor that holds only protective rights does not have power.
• IFRS 10Appendix A (defined terms): consolidated financial statements (the group presented as a single economic entity), control of an investee, decision maker (principal or agent), group, investment entity, non-controlling interest, parent, power, protective rights, relevant activities (those that significantly affect returns), removal rights and subsidiary; some terms (associate, joint venture, significant influence, related party) are taken from other Standards.

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

3 questions

• The intention of management to steer the investee is enough to give the investor power, even where there are no existing rights.L1
• What does the power of an investor over an investee rest on?L1
• Under a shareholders' agreement, Orme SA holds the currently exercisable right to appoint the majority of the directors of Hêtre SA, who decide the relevant activities. Frêne SA, a minority shareholder, steers the discussions of the meetings in practice thanks to the strong personality of its chief executive, without holding any particular right. Case convention: Orme's rights are exercisable in practice. Which of the two companies holds power over Hêtre?L2