At balance date, Company A has 40% of the voting rights in Company B. In addition Company A holds potential voting rights in Company B amounting to 6% that are currently exercisable, and a further 9% of voting rights in Company B that can be exercised in two years’ time. Which of the following statements is correct?

Question

At balance date, Company A has 40% of the voting rights in Company B. In addition Company A holds potential voting rights in Company B amounting to 6% that are currently exercisable, and a further 9% of voting rights in Company B that can be exercised in two years’ time.  Which of the following statements is correct?

BlackTom AI · Accepted Answer

To start, let's lay out the key facts that affect control and consolidation requirements. Company A has 40% of the voting rights in Company B, which by itself does not establish control. In addition, Company A holds potential voting rights that are currently exercisable amounting to 6%, and a further 9% that could be exercised in two years’ time. The critical question is whether Company A has control over Company B to necessitate consolidation.

First, assess current control: Under IFRS 10, control is achieved when an investor has power over the investee, exposure or rights to variable returns, and the ability to use power to affect those returns. Voting rights that are currently exercisable contribute to power, but they must collectively amount to more than 50% (or otherwise give the investor power to govern the financial and operating policies of the investee). Here, the present voting rights are 40%, and an additional 6% from currently exercisable potential rights brings this to 46%. This is still below the 50% threshold, so Company A does not yet have control based on current rights.

Next, consider the potential voting rights that could be exercised in the future: the 9% that can be exercised in two years’ time is not presently exercisable. IFRS 10 requires consideration of potential voting rights that are currently exercisable or otherwise give the investor power now. Since this 9% is not exercisable today, it does not contribute to current control. Even when it becomes exercisable in two years, the question at balance sheet date is whether Company A has control now; it does not, given the present structure.

Therefore, consolidation of Company A and Company B is not necessary for the current year, because Company A does not meet the control criteria at balance date. The statement that consolidated financial statements need not be prepared for the current year is consistent with the current assessment of control.

If there were alternative answer choices, common pitfalls to watch for would include assuming control due to any level of influence, conflating significant influence with control, or counting all potential voting rights irrespective of current exercisability. The key distinction is whether the rights are currently exercisable and sufficient in aggregate to grant power to direct relevant activities at the reporting date.

In summary, based on current exercisable voting rights (40% + 6% = 46%), Company A does not control Company B, and therefore consolidated financial statements are not required for the current year.

22754 Corporate Accounting - Autumn 2025 Online Self-study Quiz (Module 2A)

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