When the control question actually matters
A mid-tier firm we know spent two years consolidating a 45%-owned entity as an associate, running the equity method, and filing group FS that way. In year three, an incoming manager looked at the board minutes and realised the parent had appointed four of five directors, held a call option on the remaining shares, and directed all pricing decisions. The entity was a subsidiary. Restating two years of group accounts is not a pleasant exercise. It happens because teams SALY the prior year classification without re-examining the underlying facts.
IFRS 10.6 requires an investor to determine whether it controls an investee by assessing three elements simultaneously: power over the investee, exposure or rights to variable returns, and the ability to use that power to affect those returns. All three must be present. Power under IFRS 10.10 arises from existing rights that give the investor the current ability to direct the relevant activities (the activities that most significantly affect the investee's returns). These rights are usually voting rights, but IFRS 10 .B38-B50 recognises that power can also arise from contractual arrangements or potential voting rights.
IFRS 10.8 requires the parent to reassess control whenever facts and circumstances indicate that one or more of the three elements have changed. This catches situations where voting agreements expire or put options lapse. On the audit side, ISA 600.25 requires the group engagement team to obtain an understanding of the group structure, including identifying which entities are subsidiaries and which are associates or joint ventures. Getting the classification wrong affects everything downstream: consolidation scope and intercompany eliminations, plus the completeness and accuracy of the group FS.
Key points
- Control exists when the parent holds power, has exposure to variable returns, and can link the two.
- A parent can control a subsidiary with less than 50% of voting rights if contractual arrangements or potential voting rights provide power.
- Every subsidiary must be consolidated from the date control is obtained until the date control is lost.
- Failing to identify a subsidiary results in off-balance-sheet liabilities and revenue that distort the group FS.
Worked example: Schäfer Elektrotechnik AG
Client: German electronics company, FY2025, revenue €310M, IFRS reporter. Schäfer owns 45% of the voting shares in a Romanian sensor manufacturer, SenzorTech S.R.L. (revenue €18M). The remaining 55% is held by four unrelated investors, none holding more than 15%. Schäfer also holds a call option (exercisable at any time) to acquire an additional 20% of the shares at a fixed price.
Step 1: assess power
Schäfer holds 45% of voting rights. At recent shareholder meetings, attendance by other investors has averaged 62% of total shares. Schäfer's 45% stake therefore represents roughly 73% of votes cast at any given meeting. IFRS 10 .B42 requires consideration of the relative size and dispersion of other shareholders' holdings. The four remaining holders are dispersed and uncoordinated. Schäfer has also appointed three of five board members. The call option, while not yet exercised, is a substantive potential voting right under IFRS 10 .B47 because it is exercisable on commercially reasonable terms.
Documentation note: record the shareholder register, the attendance analysis for the last four general meetings, the board composition, and the call option terms. Conclude on power under IFRS 10.10 -12 with reference to B42 and B47.
Step 2: assess exposure to variable returns
Schäfer receives dividends from SenzorTech (€1.4M in FY2025) and earns a management fee of €0.6M per year for procurement services. It also benefits from preferential pricing on sensor components used in Schäfer's own products. These represent variable returns under IFRS 10.15 because their magnitude fluctuates with SenzorTech's performance.
Documentation note: list each category of return (dividends, management fees, preferential pricing), quantify them, and confirm variability per IFRS 10 .B56-B57.
Step 3: assess the link between power and returns
Schäfer uses its board majority to direct SenzorTech's pricing strategy and capital expenditure programme. These are the relevant activities that most significantly affect SenzorTech's returns. Schäfer's power over these activities directly influences the variable returns it receives.
Documentation note: document which activities are "relevant activities" under IFRS 10.10 , how Schäfer directs them through the board, and the conclusion that power and returns are linked per IFRS 10.17 .
Step 4: conclude on control and consolidation
All three elements are present. SenzorTech is a subsidiary of Schäfer, consolidated from the date Schäfer obtained control. Schäfer eliminates the €0.6M management fee and any intragroup component sales on consolidation. The NCI of 55% is measured and presented separately in equity per IFRS 10.22 .
Documentation note: record the control conclusion, the consolidation effective date, the NCI measurement method (fair value or proportionate share of net assets per IFRS 3.19 ), and the list of intercompany balances and transactions eliminated.
SenzorTech qualifies as a subsidiary despite Schäfer holding only 45% of voting rights. The conclusion is defensible because power rests on a dominant minority stake in a dispersed shareholder base combined with board control and a substantive call option.
Why it matters in practice
At firms like ours, we've seen teams treat the 50% voting threshold as the sole determinant of control. IFRS 10 .B38-B50 explicitly addresses de facto control situations where an investor holds less than a majority of voting rights but still controls the investee through shareholder dispersion or contractual rights. Missing a de facto subsidiary leaves an entire entity outside the consolidation scope, which ISA 600.25 expects the group engagement team to identify. Nobody enjoys rebuilding a consolidation from scratch, but that is what happens when the scoping is wrong.
Reassessment of control is neglected after initial recognition on about half the group audits we've reviewed. IFRS 10.8 requires the investor to reassess control when facts and circumstances change. Practitioners who treat the control assessment as a one-time exercise at acquisition miss subsequent events (board composition changes, lapse of shareholder agreements, dilution through new share issues, or the expiry of contractual rights) that may alter the conclusion.
Subsidiary vs. associate comparison
| Dimension | Subsidiary ( IFRS 10 ) | Associate ( IAS 28 ) |
|---|---|---|
| Relationship | Control: power, variable returns, and the link between them | Significant influence: the ability to participate in (but not control) financial and operating policy decisions |
| Typical ownership | Often above 50%, but de facto control possible below that threshold | Usually 20%–50%, with a rebuttable presumption of significant influence at 20% |
| Accounting method | Full consolidation: all assets, liabilities, income, and expenses included line by line in the group statements | Equity method: single line in the balance sheet, share of profit in the income statement |
| NCI presentation | Non-controlling interest presented separately in consolidated equity and profit or loss | No NCI concept; only the investor's share is recognised |
| Audit scope | ISA 600 requires the group engagement team to determine audit work on the subsidiary's financial information | The auditor tests the equity-method calculation and evaluates the associate's financial information for impairment indicators |
The distinction matters when ownership sits between 40% and 60%. Classifying an entity as an associate when it is in fact a subsidiary removes its entire balance sheet from the group statements and replaces it with a one-line equity investment. For a group audit, this affects which component materiality levels apply and whether ISA 600 requires full-scope audit procedures or limited analytical procedures on that entity's financial information.
Related terms
Related tools
Related reading
Frequently asked questions
Does owning more than 50% of shares always mean control?
Not necessarily. IFRS 10.B23 acknowledges that an investor with a majority of voting rights may not have power if those rights are not substantive (for example, if regulatory approval is required to exercise them, or if a shareholders' agreement restricts the investor's ability to direct relevant activities). The auditor should verify that the voting rights translate into actual decision-making authority per IFRS 10.B22–B25.
How do I audit whether a subsidiary has been correctly identified?
Start with the group structure chart and the shareholder registers. ISA 600.25 requires the group engagement team to understand the group's structure and identify components. For each investee, assess the three IFRS 10 control elements. Pay particular attention to entities with ownership between 40% and 60% and to special purpose entities where control may arise through contractual terms rather than equity ownership.
Can a subsidiary be deconsolidated?
Yes. IFRS 10.25 requires the parent to deconsolidate a subsidiary from the date it loses control. Loss of control can result from selling shares, losing board seats, the expiry of contractual rights that previously provided power, or dilution through new share issues to third parties. The parent recognises any retained interest at fair value on the date control is lost per IFRS 10.25(b), and any resulting gain or loss is recognised in profit or loss.