Protective rights

Learning objectives

• Distinguish protective rights from rights that give power.L1, L2
• Explain why protective rights alone do not enable an investor to control the investee but may require a reassessment when they become exercisable.L2

Normative references

• IFRS 10 §B26In assessing whether rights give power, the investor considers whether its rights, and the rights held by others, are protective rights. These relate to fundamental changes to the investee's activities or apply only in exceptional circumstances; however, not every right that is contingent or applies in exceptional circumstances is protective (cross-reference to B13 and B53). Para. B27 specifies that an investor that holds only protective rights cannot have power or prevent another party from having power.

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

3 questions

• What is the function of a protective right held by an investor in an entity?L1
• A colleague writes: "The protective rights of Sigma SA's bank do not give it power; the fact that a breach makes them exercisable therefore calls for no reassessment of control of Sigma." What is wrong with this reasoning?L2
• Which statements about protective rights are correct? More than one answer is possible.L2