1. CONCEPT OF CONTROL – POWER & RIGHTS UNDER INDAS
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CONCEPT OF CONTROL – POWER & RIGHTS UNDER INDAS

2. Key Learning Points Definitions of Control Key Terms in Control
Analysis of Control - Power
Power & Rights
Relevant activities
Key Clauses in Shareholder agreements
Relation between Power & Return
Exposure to Variable Return
Defacto Agent

3. Not Covered In Session Consolidation Methods Consolidation Procedures
Joint Arrangement & Joint Control
Consolidation procedures for Investment Entities
Disclosures

4. DEFINITION OF CONTROL A. “Control” under Accounting Standards
AS-21 Consolidated Financial Statements
AS-23 Accounting for Investments in Associates in CFS
Common Definition
Control :
1. Ownership – Direct or Indirect through subsidiaries
2. More than 50% voting power OR
1. Control composition of BOD or governing body
2. To obtain economic benefits

5. Definition of “CONTROL”
B. “Control” under Companies Act 2013
Section 2(27) defines it
Definition
Control :
1. Right to appoint majority of directors or
2. Control the management or policy decisions exercisable either individually or in concert with other,
directly or indirectly,
This control can be derived from shareholding rights or management
rights or shareholder agreements or voting agreements or in any other
manner

6. Definition of “CONTROL”
C. “Control” under INDAS Regime
Ind AS 24 Related Party Disclosures
Ind AS 27 Consolidated & Separate Financial Statements
Control :
1. Power to govern financial & operating policies of entity
2. To obtain benefits
Control as per Ind AS 110 Consloidated Financial Statements
1. Investor controls an investee when it is exposed or
2. Has rights to variable returns from its involvement with investee and
3. Ability to affect those returns though its power over investee

7. KEY TERMS IN CONTROL Power Rights
Policy decisions – Financial; Operating & Overall Management
Variable Returns
Ability to affect returns
Exposure to risks

8. Analysis of term “ Power” & its related matters
Power : Current ability to direct relevant activities
Source : It arises from rights
Type of Rights : 1) Substantive 2) Protective
Relevant activities
Activities that significantly affect investee’s returns

9. Indicator of Power - Rights
Voting Rights ( equity instruments)
Potential voting rights ( viz put & call option; convertible clauses)
Right to appoint KMPs
Decision making rights
Removal rights
Rights of Defacto agents & related parties

10. Source of Rights Contractual arrangements Shareholder agreements
Legal requirements
Nature of transaction

11. Type of Rights – Protective Rights
Protective Rights : Rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate
Power does not arise from protective rights
Protective rights are typically held to prohibit fundamental changes in the activities of an investee that the holder does not agree with and usually apply only in exceptional circumstances ( i.e contingent event)

12. Illustrations of Protective Rights
Approve an investee capital expenditure
Seizure of assets in event of default in loan agreements
Approve an investee’s issuance of equity or debt instruments
Veto transactions between the investee and a related party
Restrict an investee from undertaking activities that could significantly change the credit risk of investee to detriment of investor

13. Relevant Activity
A. Relevant activities are the activities of the investee that significantly affect investee’s returns
B. Examples of relevant activities include:
a) selling and purchasing of goods or services;
(b) managing financial assets during their life (including upon default);
(c) selecting, acquiring or disposing of assets;
(d) researching and developing new products or processes; and
(e) determining a funding structure or obtaining funding

14. Two or more Investors direct Relevant Activity
Which Investor has Power ??
Identify which is very more significant effect on investees return OR
On relevant activities

15. Two or more Investors direct Relevant Activity--Contd ....
Two or more investors have the current ability to direct relevant activities and those, activities occur at different times
The investors shall determine which investor is able to direct the activities
That most significantly affect those returns consistently with the treatment of concurrent decision making rights .
The investors shall reconsider this assessment over time if relevant facts or circumstances change

16. Challenge In Determining - Substantive / Protective Rights
Fine line of demarcation
Evaluation changes based on every facts & circumstances
Ability to sell assets of the investee if an investee defaults on a loan, when default is considered an exceptional circumstance
In case the investee defaults on a loan, the investor holding that right would need to re-assess whether that right has become a substantive right (rather than a protective right)
When breach of a covenant in a borrowing arrangement causes the borrower to be in default.
Veto right over annual budget – Protective or not ???

17. Analysis of Veto Rights - Substantive
If the veto rights relate to changes to operating & financial policies that significantly affect investor returns, veto rights may not be merely protective.
For Instance : Approving the annual operating budget of an investee is the relevant activity.
Investor control the activity through veto right

18. Analysis of Veto Rights - Protective
A. It rarely affect investee returns
B. Veto rights over changes to
Amendments to articles of incorporation
Location of investee headquarters
Name of investee
Auditors
Accounting principles for separate reporting of investee operations Co

19. Extracts from Shareholder agreements : Restrictions on the Powers of the Board and Company
Notwithstanding any other provision of this Agreement or any power conferred upon the Board by this Agreement, the Act or the Articles, the Parties shall ensure that the Company shall obtain the written consent of the Investors in any of the matters specified herein below till such time the Company successfully completes an IPO, unless such matters shall have been approved by an affirmative vote of a majority of the Board which shall include the affirmative vote of the Investors Directors.
Modifications to the capital structure

20. Extracts from Shareholder agreements : Restrictions on the Powers of the Board and Company ... Contd
 Any amendment to the privileges, powers or rights granted to the Investors;
The incurrence of any debt by the Company in excess of Rs ,00,000/-;
Any Change in Control in the Company whether by the acquisition of shares or voting rights;
The business plan and annual budget of the Company for any financial year and any amendment thereto;
Any change in accounting/tax policies of the Company;
Any changes to the rights of the Shareholders

21. Exposure to Variable Returns
Returns that are not fixed and vary as per performance of investee
Returns can be positive, negative or both  
Exposures to variable returns is an indicator of Control
Caution : Magnitude of Exposures to variable returns does not determine whether investor holds power
Generally, the focus is on the returns that are generated by the investee. However, depending on the purpose and design of the arrangements and the investee, when the investor receives returns that are not generated by the investee, but stem from involvement with the investee, these returns are also considered.

22. Exposure to Variable Returns - Illustrations
An investor can hold a bond with fixed interest payments.
The fixed interest payments are variable returns for the purpose of this Ind AS because they are subject to default risk and
They expose the investor to the credit risk of the issuer of the bond.
The amount of variability (ie how variable those returns are) depends on the credit risk of the bond.
Fees and exposure to loss from providing credit or liquidity support
Dividend
Remuneration for servicing an investee’s assets or liabilities

23. Relation between Power & Return
 Decision making rights & its Delegation
The terms and conditions of the arrangement are considered to assess whether an entity is an agent or a principal.
The determination of whether a decision-maker is an agent or a principal is made based on the following:
a) Scope of decision-making authority
b) Rights held by other parties (e.g., existence of removal rights)
c) Remuneration of the decision-maker
d) Exposure to variability of returns through other interests

24. Defacto Agent Supplier-customer relationship
Normally, a typical supplier-customer relationship is not expected to result in one party being a de facto agent of the other.
This is because in a typical supplier-customer relationship, one party cannot direct the other party to act on its behalf, because the activities of each are directed by their respective shareholders, Board of Directors and management.
However, a party with a close business relationship is an example of a de facto agent.
Accordingly, where a close business relationship exists between a customer and a supplier, consideration needs to be given to whether the supplier is a de facto agent of the customer.
The customer and supplier have common management or common shareholders
The customer has the ability to direct product design, sales, etc.
The supplier is a service provider (e.g., investment banker, attorney) that assists in structuring a transaction

25. Defacto Agent – Game Changer
Example :
A has a 40% interest in Z, whose relevant activities are directed by voting shares that entitle the holder to a pro rata share of returns of Z.
Based on the facts and circumstances, A concludes that, by itself, its 40% interest does not give A control over Z.
B holds a 15% interest in Z.
A evaluates the facts and circumstances and concludes that B is a de facto agent of A.

26. Defacto Agent – Game Changer
Example Contd.....
Based on the combined interest, A concludes that it controls Z, because it can direct B how to vote by virtue of being a de facto agent. Accordingly, A consolidates Z in its CFS .

27. Assessments
Control Assessment is a continuous Process

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