Providing seed money for a fund A fund manager provides all of the seed money for a new fund upon inception. Until such times as other investors invest in that fund, the fund manager would likely control that fund. This is because the fund manager has the power to direct the relevant activities of that fund, exposure to variable returns from its involvement with the […]

Identifying relevant activities in life sciences arrangements Two investors form an investee to develop and market a medical product. One investor is responsible for developing and obtaining regulatory approval of the medical product that responsibility includes having the unilateral ability to make all decisions relating to the development of the product and to obtaining regulatory approval. Once the regulator has approved the product, the other […]

Value of option changes from ‘in-the-money to ‘out-of-the-money A holds 40% of the voting rights of B, and holds a currently exercisable in-the-money option to acquire a further 20% of the voting rights of B. Assuming that voting rights give power over B, the option is substantive and no other facts and circumstances are relevant, A would have likely power over B, because A could […]

Identifying relevant activities in an investment vehicle An investment vehicle (the investee) is created and financed with a debt instrument held by an investor (the debt investor) and equity instruments held by a number of other investors. The equity tranche is designed to absorb the first losses and to receive any residual return from the investee. One of the equity investors who holds 30 per […]

Structured entity re-assessments There are two investors in a structured entity; one holds the debt, and the other holds the equity. In the initial assessment, the investors concluded that the equity holder had control because it had the power to direct the relevant activities, exposure to variable returns through its equity interests, and the ability to use its power over the structured entity to affect […]

Identifying relevant activities in a structured entity A structured entity buys dollar-denominated assets, issues euro-denominated notes, and hedges the cash flow differences through currency and interest rate swaps. The activities that affect the structured entity”s returns include: sourcing the assets from the market; determining the types of assets that are purchased; deciding how the structure is hedged; and managing the assets in the event of […]

Investee loses money due to change in market conditions C holds 100% of the voting rights of D, which is a profitable entity. In its initial assessment, C concludes that it controls D. Due to a change in the market conditions, D begins to lose money and is no longer profitable (e.g. due to a decrease in demand for its products). This would probably not […]

Rights exercisable when decisions need to be made An investee has annual shareholder meetings at which decisions to direct the relevant activities are made. The next scheduled shareholders” meeting is in eight months. However, shareholders that individually or collectively hold at least 5 per cent of the voting rights can call a special meeting to change the existing policies over the relevant activities, but a […]

Bankruptcy filing A made a loan to B. Because of A”s position as a senior creditor, if B defaults on the loan, A has the right to direct B to sell certain assets to repay the loan to A. In its initial assessment of control, A concluded that this right was a protective right, because it concluded that defaulting on the loan would be an […]

Rights held by franchisor A franchisor has certain rights that are designed to protect its brand when it is being licensed by a franchisee. Activities that significantly affect the franchisee”s returns include: determining or changing its operating policies; setting its prices for selling goods; selecting suppliers; purchasing goods and services; selecting, acquiring or disposing of equipment; appointing, remunerating or terminating the employment of key management […]