IFRS defines control as Select one:
a. having a majority of the ownership interests entitled to elect management.
b. the power to direct the activities that impact economic performance, the obligation to absorb expected losses, and the right to receive expected residual returns.
c. the power to govern the entity’s financial and operating policies as to obtain benefits from its activities.
d. the direct or indirect ability to determine the direction of management and policies through ownership, contract, or otherwise.
The correct answer and explanation is :
The correct answer is: c. the power to govern the entity’s financial and operating policies as to obtain benefits from its activities.
Explanation:
Under International Financial Reporting Standards (IFRS), particularly IFRS 10: Consolidated Financial Statements, the concept of control is central to determining when an entity (usually called a “parent”) must consolidate another entity (called a “subsidiary”) into its financial statements.
Control, as defined by IFRS 10, exists when an investor is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In simpler terms, it means the investor can govern the financial and operating policies of another entity to benefit from its activities.
This definition can be broken down into three critical elements:
- Power over the investee: The investor must have current ability to direct the relevant activities — the activities that significantly affect the investee’s returns.
- Exposure to variable returns: The investor must have rights to returns that can vary (they are not fixed) based on the performance of the investee.
- Ability to use power to affect returns: The investor must be able to use its power to influence the returns it receives.
Answer choice (c) captures this essence by stating that control involves “the power to govern the entity’s financial and operating policies as to obtain benefits from its activities.” This is precisely what IFRS 10 emphasizes — not just owning a majority stake, but having effective power and using it to derive benefits.
Why not the other options?
- (a) is too narrow because it only refers to majority ownership that elects management, which is typical in legal definitions but not IFRS.
- (b) resembles U.S. GAAP (specifically, the VIE model under ASC 810) more closely, not IFRS.
- (d) talks about the ability to influence management, but IFRS is more specific about needing actual power over financial and operating policies, not just influence.