Week 4 Consolidation - Control

Question 1

What are the three parts of power?

Answer 1

• existing right
• current ability
• relevant activities

Question 2

What are some examples of existing rights?

Answer 2

Voting rights
Rights to appoint/ reassign mgmt personnel
Rights to appoint and remove other entities that participate in mgmt decision making
Rights over contracts

Question 3

What are examples potential voting rights?

Answer 3

Call options and convertible notes

Question 4

When are potential rights substantive?

Answer 4

When holder has practical ability to exercise.

Question 5

What are some examples of barriers to potential voting rights?

Answer 5

Not enough $$
Financial penalties
Exercise and conversion price
Would the party benefit from exercising option

Question 6

What are protective rights?

Answer 6

Rights to protect interests of holder with out giving power to holder

Question 7

What are some examples of protective rights?

Answer 7

Lender can restrict borrower from certain activities
Non controlling shareholder to approve large cap expenditure
Rights that lender can seize borrowers assets if they default

Question 8

What three factors should be mentions when discussing existing rights under power?

Answer 8

Source of rights
Are rights substantive
Are they protective

Question 9

What are the 2 important factors to remember in regards to ability to direct?

Answer 9

Ability must be current

Ability may or may not be exercised

Question 10

What are examples of relevant activities?

Answer 10

• selling and purchasing goods
• managing fin assets
• determining funding structure
• mgmt personnel decisions

Question 11

What do you do when there are multiple investors in charge of different activities?

Answer 11

Determine which investor is able to direct activities that most significantly affect returns

Question 12

Is it possible to have >50% and no power? Why?

Answer 12

Yes, usually above 50% means power is presumed. However rights must be substantive. If another entity has existing rights to direct shareholder will not have power. Ie gov, liquidator, administrator or as a result of a contract

Question 13

Is it possible to have

Answer 13

Yes depends on size and dispersion of other shareholders
Attendance to AGM and voting patterns
Existence of contracts (power by agreement with other investors)

Question 14

What are examples of exposure/rights to variable returns? (5)

Answer 14

Dividends 
Use of assets
Sourcing scarce products 
Cost savings/economies of scale
Denying access to subs assets

Question 15

How do you decide if person is principle or agent?

Answer 15

Principle have control

• scope of decision making authority
• rights held by other parties (ability to dismiss decision maker)
• remuneration (market based)
• decision makers exposure to returns from other interests (ie guarantees on investee’s performance)

Question 16

What are the two exceptional situations?

Answer 16

• investment entities are exempt from consolidation

- guidance for not-for-profit

Question 17

What’s an investment entity?

Answer 17

Provides professional investment mgmt services
Invests solely for returns from cap gains, investment income or both.
Measures and evaluates substantially all investments on fair value basis

Question 18

What are the 3 elements of control?

Answer 18

• power over invested
• rights/exposure to variable returns
• ability to us power to affect returns

All three are needed