Page 465 - SBR Integrated Workbook STUDENT S18-J19

Answers

Example 3

Control

According to IFRS 10 Consolidated Financial Statements, an entity exercises
control when it has:

 power over the investee

 rights or exposure to variable returns from the investee

 the ability to use its power over the investee to affect its returns.

Power comes from rights, such as share ownership or the power to appoint or
remove key management personnel. These rights must be substantive,
meaning that the holder must have the practical ability to exercise them.

To have power, the investor must be able to use their rights to direct the
activities that affect returns. Activities that affect returns include the selling or
purchasing of goods, financial assets or other assets; as well as researching
and developing new products and processes.

Slade has less than 50% of the ordinary shares, and so does not have a
majority holding of the voting rights. That said the other shareholdings are
dispersed making it unlikely that enough shareholders would oppose Slade’s
position. Moreover, it is likely that attendance at the annual general meeting is
not high enough for Slade’s position to be successfully opposed.

However, even though Slade is likely to control the vote at the annual general
meeting, it does not exercise power over Cloud. This is because the key
activities that affect Cloud’s returns are the buying and selling of investments.
These decisions are made by the board of directors, not at the annual general
meeting. Slade only has one director on the board of Cloud, and is prohibited
from controlling the board, so is not currently able to direct these key activities.

As such, the directors are correct in their assessment that Slade does not
control Cloud.

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