The IFRS 10 Control Compass: How Understanding True Control Improves Financial Clarity
A private equity firm owned 49% of a company and relaxed—no control, no consolidation. Then auditors read the shareholders’ agreement. Suddenly, they were consolidating $200 million in debt they thought wasn’t theirs. Their leverage ratios exploded.
The Control Illusion
Forget percentages. IFRS 10 only cares about one thing: Do you control the investee? Control means:
- Power over investee ✓
- Exposure to variable returns ✓
- Ability to use power to affect returns ✓
The percentage trap: Own 51%? Not always control. Own 30%? Might be control. It’s about power, not percentages.
Disaster case: An investment fund owned 45% of a hotel chain. Other 55% split among 100 passive investors. The fund appointed the CEO, approved budgets, decided strategy. Auditor verdict: That’s control. Consolidate everything. Debt ratios ruined.
The De Facto Control Bomb
No contractual rights? Doesn’t matter. IFRS 10 recognizes “de facto control” when you have the practical ability to direct activities.
The patterns that kill:
- You own 38%, next largest is 5%
- You’ve appointed majority of board for years
- Other shareholders never vote against you
- You make all key decisions
Real pain: A manufacturer owned 40% of a supplier. No special rights. But they bought 90% of output, funded operations, and supplier couldn’t survive without them. De facto control = full consolidation.
The Variable Interest Disaster
Think SPVs and structured entities play by different rules? IFRS 10 says no. Control is control.
The structure that backfired: Bank creates SPV to hold loans. Owns 0% equity but:
- Earns fees tied to SPV performance
- Provides credit enhancement
- Makes all asset management decisions
Legal said: “Off balance sheet!” IFRS 10 said: “Consolidate it all!” $500 million in assets and liabilities suddenly on-balance sheet.
The Protective Rights Puzzle
Investor rights sound like control, but many are just protective:
- Veto on fundamental changes? Protective
- Budget approval? Might be control
- Appointing management? Usually control
- Blocking dividends? Could be either
The judgment nightmare: Two identical 50/50 joint ventures. One party has budget approval rights. In JV #1: Budgets are detailed operational decisions = control. In JV #2: Budgets are routine annual approvals = protective right. Same clause, opposite conclusions.
Your Takeaway as an Accountant
Read every shareholder agreement like a detective. List all rights, then classify: protective or substantive? Chart who makes which decisions in practice, not theory. Review control assessments when facts change—new investors, new agreements, new patterns.
Remember: IFRS 10 looks at power, not paper. The substance of who really calls the shots matters more than any percentage.
Unravel complex control assessments with ACCOUNTANT MINDSET—where we see the substance behind the structure.
