What is Control (IFRS 10 Definition)?
IFRS 10.7 defines control through three cumulative elements. The investor must have power over the investee (the current ability to direct its relevant activities). It must have exposure, or rights, to variable returns from its involvement. And it must have the ability to use its power to affect the amount of those returns. All three must coexist; power without variable returns is not control, and variable returns without power is not control either.
Power comes from existing rights that give the investor the current ability to direct the investee's relevant activities (IFRS 10.10). Relevant activities are those that most significantly affect the investee's returns. Voting rights are the most common source, but IFRS 10.B14–B54 covers situations where power arises from contractual arrangements, potential voting rights, or structured entity design. The standard does not set a bright-line ownership threshold. An investor holding 35% of voting rights can have power if the remaining 65% is widely dispersed and no other holder acts in concert (IFRS 10.B42).
For the auditor, the control assessment sits within ISA 540 territory whenever significant judgment is involved. ISA 600.A38 also requires the group engagement team to understand the group structure and identify which entities the parent controls, which ties directly to the IFRS 10 analysis.
Key Points
- Control requires all three elements simultaneously: power, variable returns, and a link between the two.
- An investor can hold control with less than 50% of the voting rights if other shareholders are dispersed or passive.
- Losing control of a subsidiary triggers derecognition and a gain or loss measured at fair value under IFRS 10.B97–B99.
- The control assessment must be reassessed whenever facts and circumstances change, not only at acquisition date.
Worked example: Schafer Elektrotechnik AG
Client: German electronics group, FY2025, revenue EUR 310M, IFRS reporter. Schafer holds 42% of the voting shares in Varga Elektronika Kft., a Hungarian circuit-board manufacturer with revenue of EUR 18M. The remaining 58% is held by approximately 1,200 retail investors, none exceeding 1.5%. Varga's board of directors makes all operating and financial decisions (pricing, capital expenditure, supplier selection). Schafer appoints four of six board members under the shareholder agreement.
Step 1 — Identify relevant activities
Varga's returns are most significantly affected by pricing decisions, capital expenditure on production lines, and supplier negotiations. These are all directed by the board per the entity's articles of association.
Documentation note: record the relevant activities analysis under IFRS 10.10–14. Identify the governance mechanism that directs those activities (board of directors) and the evidence supporting the conclusion (articles of association, board minutes).
Step 2 — Assess power
Schafer appoints four of six board members and therefore controls the composition of the body directing relevant activities. The 42% voting share alone would not guarantee power at a general meeting, but IFRS 10.B42 requires consideration of the relative size and dispersion of other holdings. With 1,200 holders none exceeding 1.5%, the probability of a coordinated block vote against Schafer is negligible. Schafer has power.
Documentation note: record the voting analysis, the shareholder register extract showing dispersion, the board appointment rights under the shareholder agreement, and the conclusion that Schafer has the current ability to direct relevant activities per IFRS 10.B38–B46.
Step 3 — Assess variable returns
Schafer receives dividends from its 42% shareholding and earns a management fee of EUR 400,000 annually for technical services provided to Varga. Schafer also sources 22% of its circuit-board inputs from Varga at intercompany prices. These exposures are all variable returns under IFRS 10.15.
Documentation note: record each source of variable returns (dividends, management fee, intercompany purchasing benefit), quantify them where possible, and reference IFRS 10.B56–B58.
Step 4 — Assess the link between power and returns
Schafer's board appointees direct the activities that generate the returns Schafer receives. The ability to set intercompany pricing and approve dividend distributions connects power to returns directly. All three elements of IFRS 10.7 are present.
Documentation note: document the linkage analysis per IFRS 10.17. Conclude that Schafer controls Varga and must consolidate it from the date on which all three elements coexisted. Cross-reference to the non-controlling interest calculation for the 58% not held by Schafer.
Conclusion: Schafer must consolidate Varga despite holding only 42% of voting rights, and the conclusion is defensible because the power analysis rests on board appointment rights combined with shareholder dispersion data, with variable returns quantified from three separate sources.
Why it matters in practice
Teams frequently conclude on control based solely on the percentage of voting rights held, without analysing the dispersion of remaining holdings or the existence of contractual power. IFRS 10.B41–B46 requires consideration of the relative size of the investor's holding compared to other shareholdings and their dispersion pattern. ISA 600.A38 requires the group engagement team to identify which entities are controlled. Accepting a below-50% holding as "no control" without the dispersion analysis risks excluding a subsidiary from the consolidation.
The reassessment requirement is often overlooked. IFRS 10.B80–B85 requires an investor to reassess control whenever facts and circumstances indicate that one or more of the three elements have changed. Auditors who verify the control conclusion only in the acquisition year and carry it forward without challenge leave a gap that inspection teams target, particularly where board composition or shareholder structures have shifted between periods.
Control vs. significant influence
| Dimension | Control (IFRS 10) | Significant influence (IAS 28) |
|---|---|---|
| Threshold indicator | No bright line, but often above 40–50% with power over relevant activities | Rebuttable presumption at 20–50% of voting power per IAS 28.5 |
| Accounting treatment | Full consolidation of the investee's assets, liabilities, income, and expenses | Equity method: single-line recognition of the investor's share of net assets and profit or loss |
| Key test | Three elements: power, variable returns, link between them (IFRS 10.7) | Ability to participate in financial and operating policy decisions without control or joint control (IAS 28.3) |
| Board representation | Typically controls the board or directs relevant activities through contractual rights | Board representation is one indicator but is neither necessary nor sufficient |
| Loss of status | Triggers derecognition and a gain or loss at fair value (IFRS 10.B97) | Triggers remeasurement of any retained interest at fair value (IAS 28.22A) |
The distinction matters when an investor sits near the boundary. A 38% holding with board appointment rights may constitute control under IFRS 10 rather than significant influence under IAS 28. Misclassifying the relationship understates the group's reported assets and liabilities if the investee should be consolidated, or overstates them if equity-method accounting would be appropriate. ISA 600.14 requires the group engagement team to understand the group structure, which starts with getting the IFRS 10 control assessment right for every investee.
Related terms
Frequently asked questions
How do I document the control assessment in the audit file?
Record the three-element analysis separately: identify relevant activities and who directs them, list all sources of variable returns with quantification, and document the linkage between power and returns. IFRS 10.B3–B85 provides the application guidance for each element. The working paper should reference the shareholder register, the articles of association, board minutes, and any contractual arrangements that confer rights.
Does IFRS 10 control apply to structured entities?
Yes. IFRS 10.B2 states that the standard applies to all investees, including structured entities (formerly called special purpose entities). For structured entities, power may arise from contractual arrangements rather than voting rights. The investor must assess whether it designed the entity in a way that predetermines its relevant activities, and whether its economic exposure constitutes variable returns under IFRS 10.B51–B54.
When does an investor lose control of a subsidiary?
An investor loses control when it no longer meets one or more of the three elements in IFRS 10.7. This can result from disposing of shares, losing board appointment rights, or a change in contractual terms. IFRS 10.B97 requires the parent to derecognise the subsidiary's assets and liabilities at their carrying amounts, recognise any retained interest at fair value, and record the resulting gain or loss in profit or loss.