THE ISSUE OF

CONTROL…
Edwards, a public limited company, acquires 40% of the voting
rights of Hope. The remaining investors each hold 5% of the
voting rights of Hope. A shareholder agreement grants
Edwards the right to appoint, remove and set the remuneration
of management responsible for key business decisions of Hope.
To change this agreement, a two thirds majority vote of the
shareholders is required.

Required
Discuss, using the MFRS 10 definition of control, whether
Edwards controls Hope.
Power over the investee to direct relevant activities
The absolute size of Edwards' shareholding in Hope (40%) and the
relative size of the other shareholdings alone are not conclusive in
determining whether Edwards has rights sufficient to give them
power.
However, the shareholder agreement which grants Edwards the right
to appoint, remove and set the remuneration of management
responsible for the key business decisions of Hope gives Edwards
power to the direct relevant activities of Hope.

This is supported by the fact that a two-thirds majority is required to

change the shareholder agreement and as Edwards owns more than
one third of the voting rights, the other shareholders will be unable to
change the agreement whilst Edwards owns 40%.
Exposure or rights to variable returns of the investee
As Edwards owns a 40% shareholding in Hope, they will be entitled
to receive a dividend. The amount of this dividend will vary
according to Hope's performance and Hope's dividend policy.
Therefore, Edwards has exposure to the variable returns of Hope.

Ability to use power over the investee

The fact that Edwards might not exercise the right to appoint, remove
and set the remuneration of Hope's management should not be
considered when determining whether Edwards has power over
Hope. It is just the ability to use the power which is required and this
ability comes from the shareholder agreement.
Conclusion
The MFRS 10 definition of control has been met.
Edwards controls Hope and therefore, Edward
should consolidate Hope as a subsidiary in its group
financial statements.