When does one company control another under Ind AS 110?
One company controls another under Ind AS 110 when it has power over the investee, exposure or rights to variable returns from that involvement, and the ability to use the power to affect those returns. All three are required. A shareholding above one half is not, by itself, the test.
What are the three elements?
Power is existing rights that give the current ability to direct the relevant activities, which are the activities that significantly affect the investee’s returns. Variable returns are returns that are not fixed, and they can be positive or negative. The third element is the link: the investor can use its power to affect the amount of those returns. An investor that has power but cannot affect the returns, or that has exposure to returns but no power, does not control the investee.
Does control need a majority of votes?
No. Voting rights are the usual evidence of power, and more than half of them often give power. Power can also come from a contractual right, or from a holding of less than half where the other holdings are dispersed and the investor’s votes are enough in practice to direct the relevant activities. The older Accounting Standard’s pair of tests, more than half the equity or the power to compose the board, is not the Ind AS 110 test.
Can two parents consolidate the same company?
No. Only one investor controls an investee. Two investors do not each consolidate the same company because one holds the shares and the other appoints directors. If the facts change, control is reassessed, and the investor that meets the three elements is the parent.
What follows once control exists?
The parent consolidates the subsidiary. The line-by-line combination, the elimination of intragroup balances, and the cases in which a parent does not present consolidated statements are on the consolidated-statements page. Obtaining control of a business is a business combination under Ind AS 103.
Frequently asked questions
Four questions cover a majority of shares, the older test, reassessment, and a silo.
Is more than half the shares always control?
No. Voting rights are evidence of power. Power can exist without a majority, and a majority can fail the test if the investor cannot use it to affect the returns.
Is the old board-composition test enough?
No. The earlier Accounting Standard treated control as more than half the votes or control of the board. Ind AS 110 uses the three elements together.
Must control be reassessed?
Yes. The investor reassesses when facts and circumstances indicate that one of the three elements has changed.
Does control of one silo consolidate the whole company?
No. Where specified assets are ring-fenced so that only some investors have rights to them, the silo is assessed on its own. Control of the silo is not control of every asset of the legal entity.
Sources
Ind AS 110 defines control. What the consolidated statements then include is a separate question.