Control: power, returns and the link between them

Whether an investor controls another entity decides whether it is consolidated line by line or shown as a single investment. The answer is not always 50% of the votes. This guide explains the three elements of control and works through de facto control, potential voting rights, fund managers and structured entities.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

Control under IFRS 10 requires three elements together: power over the investee, meaning existing rights that give the current ability to direct its relevant activities; exposure, or rights, to variable returns from involvement with it; and the ability to use that power to affect the investor's returns, which an agent acting for others does not have. Majority voting rights usually give control, but a large minority holding, potential voting rights or contractual rights can also give power.

At a glance

Element 1
Power over relevant activities
Element 2
Exposure to variable returns
Element 3
Ability to use power to affect returns
Majority of votes
Usually control
Large minority
May be de facto control
Agent
Does not control
Control: power, returns and the link between themElement 1: Power over relevant activities; Element 2: Exposure to variable returns; Element 3: Ability to use power to affect returns; Majority of votes: Usually control; Large minority: May be de facto control; Agent: Does not control.KEY FACTS AT A GLANCEControl: power, returns and the link between themElement 1Power over relevantactivitiesElement 2Exposure to variablereturnsElement 3Ability to use power toaffect returnsMajority of votesUsually controlLarge minorityMay be de facto controlAgentDoes not controlTax BakersControl: power, returns and the link between themElement 1: Power over relevant activities; Element 2: Exposure to variable returns; Element 3: Ability to use power to affect returns; Majority of votes: Usually control; Large minority: May be de facto control; Agent: Does not control.KEY FACTS AT A GLANCEControl: power, returns and thelink between themElement 1Power over relevant activitiesElement 2Exposure to variable returnsElement 3Ability to use power to affect returnsMajority of votesUsually controlLarge minorityMay be de facto controlAgentDoes not controlTax Bakers
Key facts at a glance, as set out in this guide.

How is control under IFRS 10 assessed?

Does the investor control the investee?Does the investor control the investee?Does it have power over therelevant activities?NoNo control: considerIFRS 11, IAS 28YesIs it exposed to variablereturns from the investee?NoNo controlYesCan it use its power to affectits returns (not an agent)?NoAgent: no controlYesControl: consolidate the investee
All three elements must be present.
  • Power: rights that give the current ability to direct the relevant activities, those that most significantly affect the investee's returns, such as selling products, managing assets, or approving budgets and funding. Only substantive rights count; protective rights, such as a lender's veto over major asset sales, do not give power.
  • Variable returns: dividends, changes in the value of the investment, fees, tax benefits or synergies that can vary with performance.
  • Link: the investor uses its power for its own benefit, as a principal, not on behalf of others as an agent.

Control examples

SituationControl?Why
Holds 60% of the votes; decisions by simple majorityYesMajority voting power
Holds 45%; the remaining 55% is spread among thousands of small shareholders who rarely vote togetherLikely yes: de facto controlIts holding is large relative to the others and dispersed holders are unlikely to outvote it
Holds 40% plus currently exercisable, in-the-money options to buy another 15%Likely yesSubstantive potential voting rights count
Holds 70% but the investee is in liquidation run by a court-appointed liquidatorNoThe liquidator directs the relevant activities
A fund manager holds 2% of a fund, earns a market-rate fee and can be removed by investors without causeNo: agentSmall exposure and substantive removal rights point to an agent

How does de facto control work?

An investor without a majority of votes can still have power if its rights are sufficient to direct the relevant activities unilaterally in practice. IFRS 10 considers the size of its holding relative to others, how dispersed the other holdings are, potential voting rights, contractual arrangements, and voting patterns at previous shareholder meetings. The judgement is disclosed under IFRS 12. US GAAP does not recognise de facto control under its voting interest model; see ASC 810.

What are structured entities?

Entities designed so that voting rights are not the dominant factor in deciding who controls them, such as securitisation vehicles or some investment funds, where activities are directed by contracts. US GAAP calls similar entities variable interest entities. Control is assessed by looking at the purpose and design of the entity, who directs the activities that remain, and who is exposed to the returns, including through guarantees or subordinated interests.

Does a franchisor control its franchisees?

Usually not, even for a large franchise network. A franchisor's rights to protect its brand, such as setting standards and inspecting outlets, are protective rights designed to protect the brand rather than to direct the franchisee's relevant activities, such as setting prices, hiring staff and financing the business. Unless the franchisor has other rights or exposure, the franchisee is not consolidated.

When is control reassessed?

Whenever facts and circumstances indicate that one or more of the three elements has changed: a change in shareholdings, the expiry of options, new contracts, or a change in how decisions are made. Control can be gained or lost without any change in the investor's own shareholding, for example when another holder sells down.

What if there is no control?

Joint control is accounted for under IFRS 11, significant influence (usually 20% to 50% of votes) under IAS 28 using the equity method, and smaller holdings as financial assets under IFRS 9. See IFRS 10 explained and a consolidation example.

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Questions people ask

What are the three elements of control under IFRS 10?

Power over the investee, exposure or rights to variable returns, and the ability to use power to affect those returns.

Can an investor control an entity with less than 50% of the votes?

Yes, through de facto control, substantive potential voting rights or contractual arrangements.

What are relevant activities?

The activities of the investee that most significantly affect its returns, such as operating, investing and financing decisions.

Does a fund manager control the funds it manages?

Usually not if it is an agent: small exposure to returns and substantive rights for investors to remove it point to agency.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 10 Consolidated Financial Statements

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 10IFRS 10 consolidation explainedIFRS 10A consolidation example from start to finishIFRS 10Intragroup transactions and eliminations

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This guide is general information. It is not tax or legal advice for your situation.