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Consolidation (including SPEs)

Date recorded:

Definition of control

The Board discussed the concept of control as a basis for consolidation. They considered if the definition of control should require satisfaction of the following three tests:

  • i. the ability to direct financing and operating policy (the 'power criterion'); and
  • ii. the ability to access benefits (the 'benefit criterion'); and
  • iii. the ability to use such power so as to increase those benefits.

The Board agreed that the test should follow the three steps (i), (ii), (iii). The staff stated that the control notion is used to recognise assets. The Board agreed that the control notion should be used to determine whether an entity is a subsidiary. The Staff noted that the concepts used are either control or ownership and that each needs to be coupled with other criteria which are set out above (i), (ii), (iii).

It was also noted that the concept of benefit also needs to exist in order to decide whether or not control exists.

One Board member noted that the notion of control and the notion of risks and rewards benefits should not be dissociated.

The Board agreed to continue with the definition stated in (i) above but to add the concept of strategic control.

The Board agreed that control is not linked to ownership of an entity and can arise where there is either a minority interest or no ownership. It was noted that the case of a consolidation of a 49% holding where the remaining shares are widely held can occur.

The Board agreed that the ability to control and not the actual exercise of control should be considered to determine whether or not the entity should consolidate.

It was noted that situations of economic dependency such as research and development, franchises, and single source suppliers need to be considered in the deliberations. The staff will consider this in a next paper.

The Board agreed that concept of being able to access benefits should be widely interpreted and that they do not have to flow directly from the controlled entity. However, some Board members expressed some concerns as to the implications of this statement and how widely it should be interpreted.

The staff recommended that no minimum benefit should be required in order to consolidate. Some Board members expressed concern as to this issue. However, they did not believe a minimum should be specified (specific percentage or number). It was noted that the time element (cash flows) should be added as the benefits could come in 10 years.

Regarding (iii), it was noted that the controller must have the ability to protect benefits flowing from the group and to improve the benefits flowing in from outside the group. It was agreed to add some illustrations to clarify this issue.

Application of the control definition

Effective control

The Board considered whether parties with current effective control (being those who are able to dominate decision making in practice, in the absence of legal control, such as a holder of a significant voting interest when the balance of voting interests are widely dispersed and disorganised) should be required to consolidate.

There was a general support for the Staff proposal. However, some concerns were expressed as to flip flopping of consolidation and how this statement will affect the assessment of joint venture situations.

One Board member noted that the power to direct was more important that the notion of actual and unexercised effective control. However, the Board agreed that both actual and unexercised effective control should be a sufficient basis for consolidation.

The Board agreed that guidance should be added on effective control, in particular the following:

  • i. that the holder of the majority of votes usually cast, be explicitly included as a form of control;
  • ii. that it be stated that it is possible for the holder of less than 50 percent of voting rights to be a controller; and
  • iii. that there be further discussion of factors that may indicate that a minority owner is able to exercise control such as the size of the ownership interest relative to others, the level of organisation of other holders, the previous holding of a controlling interest by the minority owner, evidence of the ability to appoint board members and evidence of the ability to control the proxy process.


The Board discussed whether the holdings of certain other parties be considered in assessing whether an entity controls another (being the holdings of so-called 'strawmen'). This will include consideration of whether there should be a rebuttable presumption that the holdings of certain parties such as related parties as defined in IAS 24, Related Party Transactions, parties that receive their interests in an entity as a contribution or loan from a potential controller and parties that are unable to sell, transfer or encumber their interests in a potential subsidiary without the prior approval of a potential controller, be included in assessing an entity's control.

The Board generally agreed that the holdings of others should be considered in assessing control. These would include the holdings of related parties, parties that receive their interests in an entity as a contribution or loan from a potential controller and parties that are unable to sell, transfer or encumber their interests in a potential subsidiary without the prior approval of a potential controller.

These would be divided into those that would always be included, such as subsidiaries, and those that should be considered.

Latent control

The Board discussed whether latent control (being the holding of potential voting rights such as presently exerciseable but unexercised options over voting shares or convertible notes) is relevant in assessing current control of an entity on the basis that such a holder has the ability to dominate policy determination.

Regarding this matter, the Board did not disagree with the concept but were concerned as to its application and implications and pointed that it might result to differences between its application on shares and individual assets. (e.g. Scenario 1: Entity A holds a presently exerciseable call option over a block of land owned by Entity B. Scenario 2: Entity A holds a presently exerciseable call option over 100 percent of the shares in Entity C which holds a single block of land. Entity B holds 100 percent of the shares in Entity C).

The staff will consider this comment and will come back with a new paper.

Control as the basis for consolidation - other issues

The Board discussed in what circumstances veto rights may be sufficient to negate apparent control. The staff proposed that in order to negate apparent control those veto rights:

  • i. may be limited to the ability to block actions;
  • ii. must relate to decisions in relation to operating and financing policies;
  • iii. must not be limited to vetoing fundamental changes in the organisation but relate to decisions in the ordinary course of business.

The Board agreed with the principle but expressed concern as to the application and wording. The staff will come back with a new paper, which might include a flowchart.

The Board agreed with the following:

  • there should be no exemption from consolidation on the basis that an investee's operations are dissimilar; and
  • there should be no exemption from consolidation on the basis that the investee has a measurement model that is inconsistent with those of the controller.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.