Global Standards for the world economy

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IFRS IC discuss effect of protective rights on an assessment of control

 15 May 2013


IFRS IC tentatively decide not to take the effect of protective rights ion an assessment of control onto its agenda.

The Interpretations Committee received a request for clarification about IFRS 10. The query relates to protective rights and the effect of those rights on the power over the investee. More specifically, the submitter asked whether the control assessment should be reassessed when facts and circumstances change such that rights, previously determined to be protective, change (for example upon the breach of a covenant in a borrowing arrangement that causes the borrower to be in default) or whether, instead, such rights are never included in the reassessment of control upon a change in facts and circumstances.

The Interpretations Committee observed that paragraph 8 of IFRS 10 requires an investor to reassess all rights to establish whether it controls an investee whenever facts and circumstances change. The Interpretations Committee also observed that if the breach of a covenant resulted in the rights becoming exercisable, that did constitute such a change. It noted that the Standard does not include an exemption for any rights from this need for reassessment. The Interpretations Committee also discussed the IASB’s redeliberations of this topic during the development of IFRS 10 and concluded that the IASB’s intention was that protective rights should be included in a reassessment of control when facts and circumstances change. Accordingly, the Interpretations Committee noted that the conclusion about who controlled the investee would need to be reassessed after the breach occurred.

The Interpretations Committee also concluded that it did not expect significant diversity in practice to develop following the implementation of the Standard. Consequently, the Interpretations Committee [decided] not to add this issue to its agenda.


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