IFRS 10 — Effect of protective rights on an assessment of control

Date recorded:


In August 2012, the Committee received a request for clarification about IFRS 10 Consolidated Financial Statements. The submission related to protective rights and the effect of those rights on the power over the investee, more specifically in situations when those protective rights are exercised.

The details of the example submitted were:

  • The shares of an operating entity are all owned by one entity, the investor.
  • The operating entity enters into a loan arrangement with a bank that contains several covenants. If a covenant is breached, the bank has the right to veto major business decisions (considered to be the relevant activities of the operating entity) and to call in the loan. The bank’s rights are considered to be protective. The investor continues to consolidate the operating entity.
  • The entity breaches a covenant. What are the consolidation implications for the investor entity and for the bank? Who now controls the investee—the original investor or the bank?

The Staff noted that the submitter highlighted two interpretations could arise under IFRS 10:

View A: when protective rights become exercisable, there is a change in facts and circumstances and the control assessment should be reassessed in accordance with paragraph 8 of the Standard. The staff noted that they viewed this is the interpretation that the IASB intended.

View B: Protective rights can never affect an assessment of control.  The Staff noted that IFRS 10 states that; (I) protective rights are designed to protect the interests of the holder without giving power and (ii) protective rights are defined in the Standard as not conferring power.  This is the view that the submitter favoured and proposed.

The Staff noted that the submitter in view B argued that protective rights should never be assessed as part of the control assessment. The Staff noted that they did not support the view proposed by the submitter and did not think that this reflected the IASB’s intention in IFRS 10 and indeed contradicted key principles in the standard. The Staff argued against the submitter on three grounds:

  1. the need for continuous assessment ;
  2. discussion of control and power in the standard; and
  3. the IASB’s intention.

The Staff asked the Interpretations Committee whether they agreed with their recommendation not to add the topic to the Interpretation Committee’s agenda.

After a detailed discussion, the Chairman summarised the issues.  He noted that the assessment should be continuous.  He noted that when a “trigger” occurred then this would change the basis upon which one would either include or exclude rights from the continuous assessment.  He noted that this may mean that certain rights may now be included in the assessment of control that may not have previously been considered.  He noted that this should be the principle that underpins the future agenda decision. He noted also that a protective right could change over time and should be considered in the reassessment of control.

No vote was held and no decisions were taken in this Committee meeting.

May 2013 meeting

The Staff provided a draft agenda notice, based on the discussions held during the previous meeting.

The Committee approved the agenda decision (as modified by drafting comments).

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