Need to Know: IFRS 10 - Consolidated Financial ... - BDO Canada

24 IFRS 10 Consolidated Financial StatementsOption for B to acquire 65% of S shares from AEntity AEntity B80%20%Entity SFigure 3: Potential voting rightsPotential voting rights need, as with all other rights, to be substantive. They are regarded as substantive when aninvestor has the practical ability to exercise its right when decisions about relevant activities are made. The followingfacts or circumstances would mean that the entity does not have the practical ability and hence the potential votingrights would not be regarded as substantive:––Options are deeply out-of-the-money––Legal barrier to exercising options––Barriers to entry (e.g. an investor has no resources to actually manage the business where the current managementis reluctant to cooperate with the investor holding the potential voting rights).It should be noted that options that are simply out of the money (rather than being deeply out of the money) maybe taken into account. For example, options that are out of the money might enable an investor to acquire a majoritystake (which could attract a control premium), or the exercise might enable costs savings and synergies to beobtained. IFRS 10 does not contain any ‘bright line’ guidance and so all relevant facts and circumstances need to beconsidered. The requirement in IFRS 10 for continuous reassessment also means that the conclusion reached aboutwhether potential voting rights should, or should not, be taken into account may change.The approach in IFRS 10 to potential voting rights represents a significant change to the previous guidanceincorporated in IAS 27(2008). Under IAS 27(2008), potential voting rights had to be currently exercisable at areporting date and, if so, would only be disregarded if the exercise price was so deeply out of the money that theycould never economically be exercised in any possible scenario, whereas under IFRS 10 they have to be substantive.This could result in different control assessment under IFRS 10:––Options that are not currently exercisable but exercisable when the relevant decisions are made would require aninvestor to consolidate the investee under IFRS 10 (the investee would not be consolidated under IAS 27(2008))––An option deeply out of the money will not be considered to be substantive and an investor would not consolidatethe investee under IFRS 10 (the investee would be consolidated under IAS 27(2008)).In addition, IAS 27(2008) did not take any account of whether the exercise of potential voting rights was economic.IFRS 10 requires consideration of all relevant facts and circumstances when reaching a conclusion as to whetherpotential voting rights are required to be taken into account.