Chapter 1

Nguyễn Thị Thu Hiền

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Learning objectives
 Explain economic motivations for entering inter-entity
arrangements
 Explain advantages and disadvantages of reporting
schemes
 Explain different level of power of investors over
investees
 Classify investments

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Nội dung
1. Khuyến khích mở rộng ranh giới kinh tế
2. Thông tin tài chính & - Hệ thống báo cáo
3. Phân loại đầu tư vào công cụ vốn Video 1: P1-1
3.1. Khái quát đầu tư vào CCV
3.2. Kiểm soát
(1) Quyền lực
(2) Năng lực sử dụng quyền lực
(3) Thu nhập
3.3. Ảnh hưởng đáng kể
3.4. Đồng kiểm soát Video 2: P1-2

4. Các phương pháp hạch toán & IFRS

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1. Incentives to extend economic boundaries

Capitalizing
on slack debt Increased
or operating market shares
capacity

Tapping on Economies
growth of scale
opportunities and scope
Reduced
risk through
diversification

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2. Financial information - Reporting schemes
• A primary issue that underpins financial reporting is the
identification of the reporting entity.

Financial information may be reported at three levels

Financial
information

Disaggregated
Separate financial Aggregated
reporting for business
statements for the reporting for the
units within a legal or
legal entity economic entity
economic entity

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 Reporting schemes

Operating Separate
segment financial Group reporting
reporting statements

The need for operating segment reporting

•Determine risk profile of individual segments
•Strength and weaknesses of specific operation and
geographical

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 Reporting schemes
Operating Separate
segment financial Group reporting
reporting statements

The need for separate financial statements

•Legal and taxation purposes
•Dividend assessment
•Financial performance and position of stand-alone entity

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 Reporting schemes

Operating Separate
Group
segment financial
reporting
reporting statements

The need for consolidated financial statements by the reporting entity

•If separate financial statements are the only source of information
o FS users will not be able to properly assess extent of the size,
profitability, cash flows and risks of the larger economic entity
o May not be able to obtain a clear picture of group performance
as a whole (i.e. not seeing the forest for the trees)
•Consolidation FS allows investors to asses the risk-return profile of
the combined entity
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3. Types of investment
Nguồn: https://www.cpdbox.com

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 4. The Concept of Control
An investor controls an investee if
and only if the investor has all of Power
the following:
 Power over the investee
 Exposure, or rights to variable
returns from its involvement Ability Control
with the investee, and
 The ability to use its power over
the investee to affect the amount
of the investor’s returns Returns

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The Attributes of Control: Power
P+A+R
 Sources of power: voting rights
 The most common and the most persuasive source of power
 Consider evidence beyond absolute voting rights, e.g. relative voting rights,
dispersion of voting rights, the number and likelihood of parties that may act
together to outvote the investor, potential voting rights and voting patterns

Illustration 2.1 relative voting rights

Three investors have each more than 5% ownership interests. The remaining 43% are
dispersed over 100 investors, each not owning more than 0.5% interest. The AGM is
attended by investors A, B and C and about a third of other investors.
Voting rights Voting at AGM Relative voting rights
Investor A 40% 40% 57%
Investor B 10% 10% 14%
Investor C 7% 7% 10%
Other investors 43% 13% 19%
100% 70% 100%

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 The Attributes of Control: Power
P+A+R
 Sources of power: potential voting rights
 Rights to obtain voting rights from potential ordinary shares, e.g. options, convertible
instruments and forward or future contracts
 Consider the purpose and design, the terms and conditions, the motives for the issue and
the intent to vest control of these instruments
Illustration 2.2 potential voting rights
Investor A, the founding investor, invited Investor B and Investor C to purchase shares in
Entity X. B is a strategic investor who has knowledge of Entity X’s business. A is a
financial investor. C is a related party of A. B was issued options that would allow B to be
issued with 40,000 ordinary shares.
Consider: (a) The options are exercisable at current date? (b) exercisable in Year 3?

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 The Attributes of Control: Power
P+A+R
 Sources of power: potential voting rights
 Rights to obtain voting rights from potential ordinary shares, e.g. options, convertible
instruments and forward or future contracts
 Consider the purpose and design, the terms and conditions, the motives for the issue and
the intent to vest control of these instruments
Illustration 2.2 potential voting rights
Investor A, the founding investor, invited Investor B and Investor C to purchase shares in
Entity X. B is a strategic investor who has knowledge of Entity X’s business. A is a
financial investor. C is a related party of A. B was issued options that would allow B to be
issued with 40,000 ordinary shares.
Consider: (a) The options are exercisable at current date? (b) exercisable in Year 3?

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 The Attributes of Control: Power

P+A+R

 Sources of power: power over key management personnel

 Control arises when an entity is able to make decisions on the activities that are
most significantly impact returns, and these decisions are made by key
management personnel
 The entity that is able to appoint, remove and remunerate these personnel
effectively has the power over these personnel.
 Key management personnel: persons having authority and responsibility for
planning, directing and controlling the activities of the entity, directly or
indirectly, including any director (whether executive or otherwise) of that
entity. (IAS 24)
 Key management personnel may include “shadow directors” or people who
control key management personnel of that entity.

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 The Attributes of Control: Power

P+A+R
 Sources of power: control over another entity that directs relevant activities
 Control may be direct (e.g. voting right) or indirect (e.g. management contracts and
other arrangements)
 E.g. Investor A controls Entity X. Entity X has 20% interest in Entity Y, but it is able to
direct the relevant activities of Y because Y is dependent on X for its technical know-
how. Through X, Investor A has control of Y.

 Sources of power: Statutory and contractual provisions, rights to veto or enter into
transactions
 Rights: must be “substantive rights” and not “protective rights”
 E.g. if a franchising contract allows the franchisor to intervene to protect the franchise
brand name, the power is protective and is not a sufficient basis to give rise to power to
direct most relevant activities of the entity.

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 The Attributes of Control: Power

P+A+R
 Sources of power: special relationship
 consider all sources of power including interpersonal and operational links
between an investor and the investee
 May arise from the following situations:
 The key management personnel of the investee are current or previous
employees of the investor;
 The investee’s operations are dependent on the investor (for example,
provision of critical services or specialized knowledge);
 A significant portion of the investee’s activities are conducted on behalf or
involve the investor; or
 The investor’s exposure or rights to returns is proportionately higher than its
ownership interests in the investee.

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 The Attributes of Control: Ability

P+A+R

 In IFRS 10, an investor must demonstrate the ability to use the

power to affect the returns to the investor from its involvement with
the investee.

Substantive rights
 Substantive rights relate to rights to make decisions on the most
significant activity (activities) that affect an entity’s returns.
 Consider whether there are barriers that prevent the use of the
right, e.g. financial barriers, operational barriers or legal and
regulatory barriers

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The Attributes of Control: Ability
P+A+R
Illustration 2.2 potential voting rights (modified)
Investor A, the founding investor, invited Investor B and Investor C to purchase shares in
Entity X. B is a strategic investor who has knowledge of Entity X’s business. A is a financial
investor. C is a related party of A. B was issued options that would allow B to be issued with
40,000 ordinary shares.

Assuming the options are immediately exercisable, consider

a)The options are profitable (in the money).
b)The options are clearly not profitable (deeply out of the money).
c)The options are out of the money but not deeply so.

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 The Attributes of Control: Ability
P+A+R
Protective rights
 Rights must be substantive and not merely protective.
 Protective rights are decision making rights on fundamental changes to an
investee’s activities and are often relating to exceptional events, e.g. the right
of a lender to restrict the payment of dividends by the borrower when lending
covenants are breached

Unilateral ability
 When an investor is able to exercise power on another entity without
restrictions from other parties
 Control is therefore different from joint control which requires unanimous
consent from parties.

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 The Attributes of Control: Ability

P+A+R
 Currently exercisable
 In the situations with potential ordinary shares, the rights must be
exercisable in a timely manner to enable the holder to direct
relevant activities to make returns.

Illustration 2.3 Decision making rights over different activities

Investor A and Investor B own 50% interest each in Entity X. Through contractual
agreement, Investor A has power to make decisions on strategic policies relating
to research and development while Investor B has power to make decisions on
strategic policies relating to marketing.
Discuss different scenarios.

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 The Attributes of Control: Ability
P+A+R

 Delegated Power: the decision maker is an agent or a principle?

 The scope of the decision-making authority
 Is the decision maker significantly involved in the design of the investee?
 Rights held by other parties
 The relative power of the investor who controls the decision maker and the other
investors?
 Remuneration
 Is the remuneration commensurate with the services provided?
 Are the terms, conditions or amounts in line with those customarily provided for in a
similar contract negotiated on an arms-length basis?
 Exposure to variability in returns from other interests
 What is the magnitude and variability of the aggregate returns, e.g. from ownership
interests, guarantees and other arrangements?

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The Attributes of Control: Returns

 An investor has to consider total variable returns that it is exposed or have a right to as
a result of its involvement with an investee.
 Variable returns: not fixed any may be only positive (e.g. option holder), only
negative (option writer) or both positive and negative (e.g. holding ordinary shares)

 Return includes: dividends, changes in fair value, remuneration, synergies, operational

advantages to the investor and etc.

***********************************************************************
*******
IFRS 10 is dynamic. Continually re-assess control when facts and circumstances change
with respect to power, ability and returns.
Power may be gained or lost through events that do not involve the investor.

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Direct and Indirect Control

• For the test of control, IFRS 10 requires consideration of control from rights held
directly or indirectly through subsidiaries
• Control must be demonstrated at each intermediate level before the ultimate holding
company is said to have control over the lowest-level company
Affiliation structures

X Co. Situation 1: X Co. Situation 2:

X Co. controls X Co. controls
Y Co. and A Co. Y Co., B Co. and
100% Even though X.Co. 60% Z Co.
indirectly owns 75% Does not own A
Break in control at Co. (<51%)
Y Co. B and hence no Y Co.
control over Z Co.
50% 50% 60% 55% 60% 50%

B Co. Z Co. A Co. B Co. Z Co. A Co.

50% 40%

Situation 1 Situation 2
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5. The Concept of Significant Influence
Significant influence
Power to participate in the financial and operating policy decisions of the investee
but is less than control and is not equivalent to joint control over those policies (IAS
28:2)

Default assumption:
An investor has ownership of 20% or more of the voting power and equal to or less
than 50% of the voting power in an investee, including “potential voting rights”

Other evidences (IAS 28:7)

Number of directors
Participation in Operational
representing investors on
policy-making processes interdependencies
board
Investor must disclose reasons for not complying with default assumption

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Direct and Indirect Significant Influence

Multi-level structures

P Situation 1: P Situation 2:
P has significant P has significant
influence over: influence over:
80% 50% i)Y (50% direct 40% 50% i)A (40% direct
interest) interest)
ii)Z (65% indirect ii)C (50% direct
X Y interest) – P has no A C interest)
control over Y iii)B (42% indirect
50% 50% 80% 20% interest)

Z B

Situation 1 Situation 2

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 Example 1
X Ltd is operated on an joint arrangement between K
international Ltd and M Ltd. K Ltd accounts for 30%. The
residual portion belong to M Ltd. X Ltd’s regulation says:
The Board has 6 member, of those 2 are from M Ltd, 4 are from
K
The Board is reelected in every 2 years
The Board’s decisions are made when at least 2/3 of the Board’s
member support

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 Example 2
There are 3 parties relating to ABC Ltd. The share of A Ltd, B
Ltd, C Ltd in ABC are 40%, 40%, 20%. Upon agreement:
(2a) Strategic decision is made when all the members support
(2b) Strategic decision is made when 80% the members
support
(2c) Strategic decision is made when majority of the members
support

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 Example 3
X Ltd has some investment
(1) X Ltd invested in A Ltd, accounting for 50% of A Ltd’s share. There are
two other investors collectively obtain 50% of X’s net asset. X cannot make
decision in A when other investors do not agree.
(2) X Ltd acquired B Ltd’s share. Upon agreement, X is in charge of financial
operation, other investors decides on administrative issues.
(3) X’s investment in C Ltd accounts for 40% of voting right in C. X also have
40% of voting right in R Ltd which has 40% of voting right in C.
(4) X hold class A share in D Ltd. Class B has 3000 share hold by a financial
entity. Class A and class B share have the same rate of dividend, whilst only
A has the right to vote.
(5) X hold 25% of E Ltd’s share. 75% was hold by Y Ltd. According to E’s
regulation. A decision is made when more than 75% of votes.
(6) X hold 48% of voting right in F Ltd, which is a public company. There is
no other parties hold more than 10% of share, and no agreement in term of
voting exists.
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 M

30%
60% 90%
30%
A B C (GTHL) D
M có thành viên là M giữ C để bán
chủ tịch HĐQT và trong ngắn hạn
40%
có quyền bỏ đa số
phiếu
70% 30% 40%
70% 30%

N O P Q R
60% B có quyền
đồng kiểm
29 X soát
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 End

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