What is de facto control under IFRS 10 and when does it apply?

Under IFRS 10, an investor can control an investee — and must consolidate it — even without holding a majority of voting rights. Control exists when an investor has power over the investee, exposure to variable returns, and the ability to use that power to affect those returns (IFRS 10.7). De facto control satisfies the power element through practical dominance rather than formal majority ownership. Because IFRS 10 defines control by substance over form, a 40% or 45% stake can still trigger full consolidation if the remaining shareholding is sufficiently fragmented. - Power without majority ownership: An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement and has the ability to affect those returns through its power over the investee (IFRS 10.6). De facto control addresses situations where that power exists in practice, not just on paper. An investor has power when it holds existing rights giving it the current ability to direct the relevant activities — the activities that significantly affect the investee's returns (IFRS 10.10). - Assessing practical power: IFRS 10.8 requires an investor to consider all facts and circumstances when assessing whether it controls an investee. For de facto control, the critical question is whether the investor can unilaterally direct relevant activities given the actual behaviour and distribution of other shareholders. Indicators include the relative size of the investor's stake, the degree of dispersion among remaining holders, whether other shareholders are passive or organised, and historical voting patterns at general meetings. - The role of other investors: Two or more investors collectively controlling an investee do not individually control it — because no single investor can direct activities without the co-operation of the others (IFRS 10.9). De facto control analysis must therefore examine whether any realistic coalition of other shareholders could override the investor's direction in practice, not merely in theory.

How do you calculate goodwill and non-controlling interests when de facto control is achieved through a step acquisition under IFRS 3 and IFRS 10?

- Power even without active exercise: An investor with the current ability to direct relevant activities has power even if it has not yet exercised that ability (IFRS 10.12). This is particularly relevant to de facto control: the absence of opposition at past general meetings supports — but does not automatically confirm — that the investor holds practical power. - Potential voting rights: Potential voting rights, such as options over shares or convertible instruments, must be considered alongside actual holdings when assessing power (IFRS 10.11). If such rights are substantive rather than merely protective, they may tip the balance toward a de facto control conclusion even where the headline ownership percentage is modest. - Continuous reassessment: The de facto control conclusion is not static. IFRS 10.8 requires the investor to reassess whether it controls the investee whenever facts and circumstances indicate changes to one or more of the three elements of control. A new shareholder acquiring a significant stake, or existing shareholders organising to vote collectively, could eliminate de facto control overnight. - Assuming majority ownership is required. IFRS 10 defines control through power and returns, not through a 50%-plus threshold. Preparers who default to a mechanical ownership test will miss de facto control situations entirely.

What specific voting pattern evidence and documentation should management prepare to support or rebut a de facto control conclusion for audit purposes?

- Ignoring shareholder behaviour. Ownership dispersion is necessary but not sufficient. If other shareholders have historically organised and successfully opposed the investor, de facto control is unlikely despite fragmentation on paper. - Treating the assessment as a one-time exercise. Because IFRS 10.8 mandates reassessment when relevant facts change, entities must monitor ownership structure and voting dynamics on an ongoing basis — not just at initial recognition. - Conflating significant influence with de facto control. Another entity holding significant influence does not prevent an investor from having power; an investor that holds only protective rights, however, does not have power over the investee (IFRS 10.14). - Overlooking the link between power and returns. Even where practical power exists, control requires the ability to use that power to affect the investor's returns (IFRS 10.17). Identifying power alone is not enough.

How does de facto control analysis change when potential voting rights such as call options over shares are held by the investor — and what makes those rights substantive under IFRS 10.B47?

- IFRS 10.6 — Defines control as the combination of power over the investee, exposure to variable returns, and the ability to affect those returns; the foundation for any de facto control analysis. - IFRS 10.7 — Sets out the three cumulative elements an investor must have to control an investee: power, exposure to variable returns, and the link between them. - IFRS 10.8 — Requires consideration of all facts and circumstances, and mandates ongoing reassessment whenever relevant changes occur. - IFRS 10.10 — Defines power as existing rights giving the current ability to direct relevant activities, establishing the substantive threshold de facto control must meet. - IFRS 10.12 — Confirms that power exists even where decision-making rights have not yet been exercised, supporting de facto control conclusions based on practical dominance. - IFRS 10.14 — Clarifies that another party's significant influence does not preclude an investor from having power, and distinguishes power from mere protective rights.

IFRS 10 De Facto Control

IFRS 10 De Facto Control — Core Rule

Under IFRS 10, an investor can control an investee — and must consolidate it — even without holding a majority of voting rights. Control exists when an investor has power over the investee, exposure to variable returns, and the ability to use that power to affect those returns (IFRS 10.7). De facto control satisfies the power element through practical dominance rather than formal majority ownership. Because IFRS 10 defines control by substance over form, a 40% or 45% stake can still trigger full consolidation if the remaining shareholding is sufficiently fragmented.

How IFRS 10 De Facto Control Works

Power without majority ownership: An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement and has the ability to affect those returns through its power over the investee (IFRS 10.6). De facto control addresses situations where that power exists in practice, not just on paper. An investor has power when it holds existing rights giving it the current ability to direct the relevant activities — the activities that significantly affect the investee's returns (IFRS 10.10).

Assessing practical power: IFRS 10.8 requires an investor to consider all facts and circumstances when assessing whether it controls an investee. For de facto control, the critical question is whether the investor can unilaterally direct relevant activities given the actual behaviour and distribution of other shareholders. Indicators include the relative size of the investor's stake, the degree of dispersion among remaining holders, whether other shareholders are passive or organised, and historical voting patterns at general meetings.

The role of other investors: Two or more investors collectively controlling an investee do not individually control it — because no single investor can direct activities without the co-operation of the others (IFRS 10.9). De facto control analysis must therefore examine whether any realistic coalition of other shareholders could override the investor's direction in practice, not merely in theory.

Power even without active exercise: An investor with the current ability to direct relevant activities has power even if it has not yet exercised that ability (IFRS 10.12). This is particularly relevant to de facto control: the absence of opposition at past general meetings supports — but does not automatically confirm — that the investor holds practical power.

Potential voting rights: Potential voting rights, such as options over shares or convertible instruments, must be considered alongside actual holdings when assessing power (IFRS 10.11). If such rights are substantive rather than merely protective, they may tip the balance toward a de facto control conclusion even where the headline ownership percentage is modest.

Continuous reassessment: The de facto control conclusion is not static. IFRS 10.8 requires the investor to reassess whether it controls the investee whenever facts and circumstances indicate changes to one or more of the three elements of control. A new shareholder acquiring a significant stake, or existing shareholders organising to vote collectively, could eliminate de facto control overnight.

IFRS 10 De Facto Control — Common Pitfalls

Assuming majority ownership is required. IFRS 10 defines control through power and returns, not through a 50%-plus threshold. Preparers who default to a mechanical ownership test will miss de facto control situations entirely.

Ignoring shareholder behaviour. Ownership dispersion is necessary but not sufficient. If other shareholders have historically organised and successfully opposed the investor, de facto control is unlikely despite fragmentation on paper.

Treating the assessment as a one-time exercise. Because IFRS 10.8 mandates reassessment when relevant facts change, entities must monitor ownership structure and voting dynamics on an ongoing basis — not just at initial recognition.

Conflating significant influence with de facto control. Another entity holding significant influence does not prevent an investor from having power; an investor that holds only protective rights, however, does not have power over the investee (IFRS 10.14).

Overlooking the link between power and returns. Even where practical power exists, control requires the ability to use that power to affect the investor's returns (IFRS 10.17). Identifying power alone is not enough.

IFRS 10 De Facto Control — Key Paragraphs

IFRS 10.6 — Defines control as the combination of power over the investee, exposure to variable returns, and the ability to affect those returns; the foundation for any de facto control analysis.
IFRS 10.7 — Sets out the three cumulative elements an investor must have to control an investee: power, exposure to variable returns, and the link between them.
IFRS 10.8 — Requires consideration of all facts and circumstances, and mandates ongoing reassessment whenever relevant changes occur.
IFRS 10.10 — Defines power as existing rights giving the current ability to direct relevant activities, establishing the substantive threshold de facto control must meet.
IFRS 10.12 — Confirms that power exists even where decision-making rights have not yet been exercised, supporting de facto control conclusions based on practical dominance.
IFRS 10.14 — Clarifies that another party's significant influence does not preclude an investor from having power, and distinguishes power from mere protective rights.