State whether the following statements are true or false and justify your answer in each case: a) Control requires that three elements be present: Power. Returns and a Link between power and returns. b) The three elements of control are static in nature and need only be assessed by the investor when an investee is purchased. c) Power arises from rights. Such rights cannot be potentially exercisable but must be
State whether the following statements are true or false and justify your answer in each case:
a) Control requires that three elements be present: Power. Returns and a Link between power
and returns.
b) The three elements of control are static in nature and need only be assessed by the
investor when an investee is purchased.
c) Power arises from rights. Such rights cannot be potentially exercisable but must be
d) Power arises from voting rights when the investor holds a majority of such voting rights
and the relevant activities are directed by a vote or a majority of the members of the governing body that directs the relevant activities are appointed by a vote).
e) Voting rights are the most appropriate way to determine if the investor has power over the
investee when the investee's operating and financing activities are limited and substantial decision making with respect to such activities is rarely required.
f) Substantive rights, as explained in IFRS 10. essentially refer to rights that have economic
substance and possess monetary value. In order for rights to be substantive. the holder of the right must have the intention to exercise the right and such rights need to be exercisable when decisions about the direction of the investee's relevant activities are made.
g) A right that gives the holder the power to block the investee from raising debt levels to
such an extent that these would threaten the ability of the investee from paying off a loan owed to the holder is known as a 'restriction' right.
h) When determining if control exists, substantive potential voting rights held by the investor
are considered. Potential voting rights held by other parties are not considered irrespective of whether such potential voting rights are substantive.
i) Voting rights that are not currently exercisable (e.g. rights that are only exercisable in 5
years' time when shareholder meetings occur annually) would still grant the investor power over the investee.
j) When determining if potential voting rights are to become actual voting rights_ the
investor's intentions surrounding these rights are not considered but the intentions of other parties who hold such rights are considered.
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