Assessing Control for Consolidation Under Ind AS 110

1. Question

Alpha Private Limited hereinafter referred to as “Alpha” is engaged in the business of supply of automotive components. The company plans for backward integration and hence acquires 40% of equity shares in “Beta Private Limited” hereinafter referred to as “Beta”. The remaining 60% of shares are widely held by other investors but none of these investors hold more than 5% of shares individually.

Beta is engaged in the manufacturing of specialized raw materials primarily used by Alpha. As per the terms of acquisition, the Alpha has a right to appoint four out of six directors on Beta’s Board. During the year, beta experienced some financial stress and hence applied for loan in IBIBI bank. With respect to this loan, Alpha has given corporate guarantee to the bank. Furthermore, 60% of Beta sales are made to Alpha and also major financial decision of Beta requires Alpha’s approval.

At the end of Financial Year (FY), the management of Alpha is of opinion that it is not required to consolidate Beta as its holding in Beta is less than 50%.

Whether the management view of not consolidating Beta due to its holding being less than 50% is correct, if not under what ground of Ind AS 110, Consolidated Financial Statementsconsolidation shall be done?

2. Relevant Provision

Ind AS 110 – “Consolidated Financial Statements“

Para 7 of Ind AS 110

An investor controls an investee if and only if the investor has all the following:

(a) power over the investee

(b) exposure, or rights, to variable returns from its involvement with the investee

(c) the ability to use its power over the investee to affect the amount of the investor’s returns

De Facto Control under Ind AS 110

An investor might have control over an investee even when it has less than a majority of the voting rights of that investee. This concept is known as “de facto control”. When assessing whether an investor’s voting right are sufficient to give it power, an investor considers the following facts and circumstances:

(a) The size of the investor’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders

(b) Potential voting rights held by the investor, other vote holders or other parties

(c) Rights arising from other contractual arrangements

(d) Any additional facts and circumstances that indicate the investor has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholder’s meetings.

Para 10 of Ind AS 110

An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, ie the activities that significantly affect the investee’s returns.

Para 17 of Ind AS 110

An investor controls an investee if the investor not only has power over the investee and exposure or rights to variable returns from its involvement with the investee, but also has the ability to use its power to affect the investor’s returns from its involvement with the investee.

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