b.

The right to direct how other vote holders vote to enable the investor to make decision about the
relevant activities.

Under the corporation Code of the Philippines an example of a contractual arrangement described
above is referred to as “proxy”

Example: (PFRS 10.B43 – B45)

Investors A holds 40% of the voting rights of an investee. The other 60% is held by 12 other investors,
each holding 5%. A shareholder agreement grants investor A the right to appoint, remove and set the
remuneration of management responsible for directing the relevant activities. To change the
agreement, a two-thirds vote of the shareholders is required.

Analysis:
Investor A has power over the investee because of his contractual right to appoint, remove and set the
remuneration of management.

Rights from other contractual arrangements

For example, the rights specified in a contractual arrangement in combination with voting rights may be
sufficient to give an investor the current ability to direct an investee’s manufacturing process or other
operating or financing activities the significantly affect the investee’s returns.

However, in the absence of any other rights, economic dependence of an investee on the investor (such
as relations of a supplier with its main customer) does not result to power.

The investors voting rights

An investor with less than a majority of the voting right has power when he has the practical ability to
direct the relevant activities unilaterally.

Example 1 (PFRS 10.B43 – B45)

Investor A holds 40% of the voting rights of an investee. The remaining interest is held by thousands of
shareholders, none individually holding more than 1%. None of the shareholders has any arrangements
to consult any of the other or make collective decisions.

Analysis:
Investor A has power over the investee because the other shareholdings are widely dispersed and are
not being exercised collectively.

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Example 2 (PFRS 10.B43 – B45)
Investor A holds 35% of the voting rights of investee. Three other shareholders each hold 5% of the
voting rights of the investee. The remaining voting rights are held by numerous other shareholders,
none individually holding more than 1% of the voting rights. None of the shareholders has arrangement
to consult any of the others or make collective decisions. Decisions about the relevant activities of the
investee require the approval of a majority of votes cast at relevant shareholders’ meetings – 75% of the
voting rights of the investee have been cast at recent relevant shareholders meetings.

Analysis:
Investors A has no power over the investee because he does not have the ability to unilaterally direct
the investee’s relevant activities. Decision require the active participation of the other shareholders (i.e.,
decision require majority.

Example 3
Investor A holds 45% of the voting rights of an investee. Two other investors each hold 26% of the voting
rights of the investee. The remaining voting rights are held by three other shareholders, each holding
1%. There are no other arrangements that affect decision making.

Analysis:
Investor A has no power over the investee because the two other investors have the ability to cooperate
and prevent Investor A from directing the relevant activities of the investee.

Example 4(PFRS 10.B43 – B45)

Investor A holds 45% of the voting rights of an investee. Eleven other shareholders each hold 5% of the
voting rights of the investee. None of the shareholders has contractual arrangements to consult any of
the others or make collective decisions.

Analysis:
Investor A’s 45% interest is not conclusive in determining whether he has a power over the investee.
Additional facts and circumstances that may provide evidence of the existence or absence of power shall
be considered.

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Potential voting rights
An investor with the current ability to direct the relevant activities has power even if its rights to direct
have yet to be exercised. This is true in the case of potential voting rights.

Accordingly, when assessing whether it controls an investee, a parent shall consider potential voting
rights that are currently exercisable, irrespective of management intention or financial ability to exercise
them.

Potential voting rights include share warrants, share call options, debt or equity instruments that are
convertible into ordinary shares, or other similar instruments that, if exercised, have the potential to
give the entity voting power or reduce another party’s voting power over an investee.

Potential voting rights are not currently exercisable if they cannot be exercised until a future date or
until the occurrence of a future event.

However, during consolidation, non-controlling interest are determined on the basis of present
ownership interest and do not reflect the effect of potential voting rights. Potential voting rights are
considered only for purposed of determining the existence of control, which in turn determines whether
an investee should be consolidated.

Example: (PFRS 10.B50)

Investor A and two other investors each hold one thirds of the voting rights of an investee. 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 (but not deeply out of the money).
If the debt were converted, investor A would hold 60% of the voting rights of the investee.

Analysis:
Investor A has power over the investee because it holds voting rights of the investee together with
substantive potential voting rights that give it the current ability to direct relevant activities.

Substantive removal and other rights held by other parties

Substantive removal and other rights held by other parties may affect the decision maker’s ability to
direct the relevant activities of an investee.

Removal rights are rights to deprive the decision maker of its decision-making authority.

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Such rights shall be considered when evaluating whether the decision maker is a principal or an agent
for other parties. An investor acting as an agent for other parties. An investor acting as an agent does
not control an investee.

For example, a decision maker that is required to obtain approval from a small number of other parties
for its actions is generally an agent.

Exposure or rights to variable returns

An investor is exposed, or has right, to variable returns if its returns from its involvement with the
investee have the potential to vary as a result of the investee performance.

Ability to use power to affect investor’s returns

The investor’s ability to use its power to affect the investor’s return from its involvement with the
investee provides the link between power and variable returns – only if this ability is present along with
power and exposure, or right, to variable returns does the investor obtain control over the investee.

Elements of Control

Ability to affect returns

Power Variable returns

Control

Accounting requirements

Uniform accounting policies

Consolidated financial statements shall be prepared using uniform accounting policies for like
transactions and other events in similar circumstances.

If a subsidiary uses accounting policies different from those adopted by the group, the subsidiary’s
financial statements shall be appropriately adjusted before consolidation.
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Example:
A British parent entity uses the revaluation model to measure its property, but a Philippine subsidiary
uses the cost model. The Philippine subsidiary’s directors find the revaluation model too costly to
implement.

Question: In the consolidated financial statements, is the group allowed to measure the Philippine
subsidiary’s property under the cost model?

Answer: No, the Philippine subsidiary’s property shall be adjusted to conform to the group’s accounting
policy of revaluation model.

Reporting date