At the June 2004 meeting the Board considered how the control definition might be applied if a fiduciary such as a fund manager has power over another entity (the investee) by virtue of a dual role in relation to that investee; that is:

• as a fund manager acting in a fiduciary capacity with power over a fund that has a holding in the investee, but which holding on its own does not give the fund manager power over the investee; and
• as a direct investor (principal) in the investee, but which holding on its own does not give the fund manager power over the investee.

The Board tentatively concluded that there should be a rebuttable presumption that control is assessed in such circumstances by considering the fund manager's two positions collectively. The Board asked the staff to develop possible criteria for when the presumption would be rebutted.

Staff indicated that they had found it difficult to establish criteria for rebutting the presumption. After some discussion, the Board decided not to proceed with the presumption as it is not operable. The Board requested that constituents be asked to comment specifically on this issue in order to establish whether such circumstances exist.

Options over an asset versus options over an entity

The Board had tentatively concluded that an investor's unexercised but presently exercisable holdings of options or convertible securities that give the holder the right to obtain other instruments that enable them to direct the investee's strategic financing and operating policies (potential voting rights) are relevant in assessing whether the investor controls the investee.

For example, if Entity A has a 100% ownership interest in Entity B, but Entity C holds currently exercisable options over all of the equity instruments in B, then C rather than A would, in the absence of other factors, control B.

A consequence of this tentative decision is what some might characterise as an anomaly in the timing of recognition of assets when options are held over an asset compared with when options are held over an entity that holds an asset.

The issue is most clearly illustrated by considering the following extreme scenarios:

• Scenario 1: Entity B's only asset is a parcel of land. Entity A holds a currently exercisable call option over that parcel of land.
• Scenario 2: Entity B's only asset is a parcel of land. Entity A holds a currently exercisable call option over 100 per cent of the shares in Entity B.

In other words, if potential voting rights are considered in assessing control, the resulting asset recognition criteria might be inconsistent with the recognition of holdings of similar rights directly over assets. The Board asked the staff to consider this apparent inconsistency further.

After some discussion, the Board requested the Staff to develop examples for consideration by in the future, setting out the debit and credit entries taking into account Business Combinations Phase II decisions taken already. The Staff will consider FASB examples developed on this issue as well as explore whether consolidation of the entity should be undertaken on the assumption that the options are exercised or not.