The power to govern the financial and operating policies of a company in order to obtain benefits from its activities is control, which determines whether the entity should be included in a company group for the purposes of consolidation.  The usual condition for the control of a company is majority ownership of its voting rights.  However, even when a majority of voting rights is not held by an investor, the investor’s control over another entity may be evidenced by power:

  • Over more than one half of the voting rights by virtue of an agreement with other investors;
  • To govern the financial and operating policies of the other entity under a statute or an agreement;
  • To appoint or remove the majority of the members of the entity’s board of directors; or
  • To cast the majority of votes at a meeting of the board of directors.
Consolidation – US GAAP vs. IFRS
US GAAP IFRS
Consolidation is based on the controlling financial interest of the reporting entity in nonvariable interest entities and variable interest entities (VIEs). Consolidation is based on the reporting entity’s “power-to-direct”, where the investor has rights to variable returns from the investee and the ability to affect those returns through its power over the investee.

A change of control occurs when the power to govern the financial and operating policies of a company is obtained by one or more other parties, which is generally evidenced by control of more than 50% of the company’s voting rights. Instead of being an event of default, a change of control may be deemed a “mandatory prepayment event”, requiring the loan to be repaid early.

A related party relationship is an individual having direct or indirect control, joint control or significant influence over a company, including key management personnel and their close family members.  Generally, there are no special recognition or measurement requirements for related party transactions.

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