How are potential voting rights assessed for control and influence?

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AcadiFi · Accepted Answer

Under IFRS 10 for control and IAS 28 for influence, potential voting rights are considered only if they are substantive — meaning the holder has the practical ability to exercise them. Three substantiveness tests: (1) are the rights currently exercisable (or will become exercisable in time for key decisions)?; (2) is there a financial or business barrier preventing exercise (deep out-of-the-money, onerous penalties)?; (3) does the holder have the economic incentive to exercise given the benefits? For Halcyon's warrants: if they are exercisable within 30 days at a strike price of $45 while Pinnacle's shares trade at $72, they are deeply in-the-money and substantive — Halcyon effectively has 58% voting power and therefore control today. Halcyon must consolidate Pinnacle, not equity-method it. If instead the warrants become exercisable in 5 years contingent on Pinnacle achieving $500M revenue (currently $180M), they are not substantive today, and Halcyon's 45% stake governs classification. A subtle point: when consolidating based on substantive potential rights, the parent's share of net assets is still based on current ownership (45%), not potential (58%). So NCI on the balance sheet reflects 55%. The potential rights affect the control assessment only, not the proportion of profit attribution. This nuance trips up many candidates — substantive rights drive the consolidation decision, but current economic ownership drives the profit split.

How are potential voting rights assessed for control and influence?

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