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 […]

Potential voting rights (2) Investor A and two other investors each hold a third of the voting rights of an investee. The investee”s business activity is closely related to investor A. In addition to its equity instruments, investor A also holds debt instruments that are convertible into ordinary shares of the investee at any time for a fixed price that is out of the money […]

Most of the debate on pension accounting is related to alternative recognition methods. Deferred recognition is the accounting model for pensions under pre-2011 IAS 19. The pre-2007 version of IAS 19 adopted an election of immediate recognition in income directly in equity, as opposed to net income. Pre-2011 IAS 19 uses a model that recognizes certain gains and losses in other comprehensive income but with […]