You Think You Know Who Controls That Company. The New Rules Might Disagree.
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Picture a client you have worked with for years. A family group. Dad owns 45% of the company operating. The remaining 55% is split across a dozen family trusts, three siblings, and two old business partners who barely show up to meetings anymore.
Under the old rules, the holding company did not consolidate the operating company. No majority. No consolidation. Simple.
Under the new rules? That answer might be wrong.
Section 9 of the IFRS for SMEs Standard has been significantly updated in the third edition. The definition of control has been rewritten. And for accountants working with groups of companies, this is one of the most practically impactful changes in the entire standard.
What Was Wrong With the Old Definition
The old definition of control was straightforward: the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
In practice, this meant one thing. Do you own more than 50% of the voting rights? Yes? Then you have control. Consolidate. No? Then you probably do not. Move on.
It was simple. It was also incomplete.
The old definition missed situations where one party was effectively running a company without holding the majority of votes. It could not deal properly with special purpose entities set up to keep assets or liabilities off a group balance sheet. It ignored arrangements where control was exercised through contracts rather than share ownership. And it paid no attention to whether the shareholder with majority votes could actually use that power in a meaningful way.
The new definition fixes all of that. It is aligned with IFRS 10, which full IFRS preparers have been using since 2013. SMEs are now catching up.
The New Three-Part Test for Control
Under the updated Section 9, control exists when an investor has all three of the following at the same time.
• Power over the investee. This means having existing rights that give you the ability to direct the activities that most significantly affect the investee's returns. Voting rights are the most common form of power, but contractual rights, decision-making authority, and even potential voting rights through convertible instruments can also count. The key word is "existing." Rights you might acquire in the future do not count. Rights you hold today do.
• Exposure to variable returns. You must be exposed to, or have rights to, returns that can vary based on how the investee performs. Returns can be positive (dividends, fees, increases in value) or negative (losses, guarantees you may have to honour, costs you bear if things go wrong). If your returns do not vary based on what the investee does, you are not really in control in any meaningful economic sense.
• Ability to use power to affect those returns. This is the link between the first two. You must be able to use your power to actually influence the returns you are exposed to. If someone else can override your decisions, or if your power exists only on paper while another party makes the real decisions, control may not exist even if you tick the first two boxes.
All three must be present. Miss one, and there is no control. No consolidation.
The practical benefit of this three-part test is that it focuses on economic substance rather than legal form. It asks not just who owns what, but who is actually running the show and who bears the consequences.
De Facto Control: The Change That Affects Most Family Groups
This is the one that will affect the most clients in a typical South African practice.
De facto control means control in practice, even without a majority of votes. It can exist when an investor holds a significant minority stake and the remaining shares are so widely spread that no one else can realistically organise an opposition.
Go back to the family group at the start of this article. Dad owns 45%. The rest is scattered across trusts, siblings, and passive shareholders who have not been to a meeting in years. Dad chairs every meeting. Dad makes every strategic decision. Dad's company has always dominated the outcome of every vote because everyone else is disorganised or disinterested.
That is de facto control. And under the new rules, it requires consolidation.
The indicators that de facto control may exist include the following.
• The investor holds a significant minority, typically 40% or more.
• The remaining shares are widely dispersed with no single holder coming close to the investor's stake.
• There is no organised group of other shareholders acting together to challenge decisions.
• The investor has a consistent history of dominating decisions at shareholder meetings.
• Other shareholders are largely passive and do not participate actively in governance.
If your client's group structure has any of these features, you need to look at it through the new lens before the end of 2026.
Special Purpose Entities: No More Off-Balance-Sheet Hiding
The second major area where the new control definition changes things is special purpose entities, sometimes called structured entities.
These are entities set up for a specific purpose, often to hold assets or liabilities that the parent would prefer not to show on its own balance sheet. Under the old rules, if the parent did not hold voting rights in the SPE, it was often not required to consolidate it.
Under the new rules, voting rights are not the only test. If a fund manager or parent company has the power to direct the activities of an SPE through contractual authority, is exposed to variable returns from the SPE's performance, and can use that power to affect those returns, then control exists and consolidation is required.
The practical consequence is that structures which were designed around the old voting-rights test may no longer achieve what they were intended to achieve. If your client has any kind of special purpose vehicle, trust, or ring-fenced entity that it effectively runs and benefits from, review the arrangement now.
Potential Voting Rights: When the Future Can Create Control Today
There is one more concept that the new Section 9 introduces: potential voting rights.
If your client holds convertible instruments, options, or warrants that would give it voting rights if exercised, those potential rights may need to be considered when assessing whether control exists. They do not count automatically. But they count if they are currently exercisable, if the client has the financial ability to exercise them, and if there is a genuine intention or commercial reason to do so.
This matters most in situations where a client is close to the control threshold. If it holds 42% of the voting rights today but holds options that would take it to 60%, and those options can be exercised right now, the assessment of control needs to include those potential rights.
What Was Deliberately Not Changed
It is worth noting what the IASB chose to keep from the old Section 9, because it reflects the deliberate simplifications that make this standard appropriate for SMEs.
The rebuttable presumption that majority voting rights equal control was retained. If your client owns more than 50% of the votes, you still do not need to work through the full three-part test. Control is presumed. That saves time and simplifies application for the vast majority of straightforward group structures.
The requirement for investment entities to measure their investments in subsidiaries at fair value through profit or loss was also retained, keeping alignment with IFRS 10 on that specific point.
Losing Control: A New Calculation Joins the Picture
The updated Section 9 also introduces specific guidance on what happens when a parent loses control of a subsidiary.
When control is lost, the parent must derecognise all of the subsidiary's assets and liabilities. If any interest in the former subsidiary is retained, that retained interest must be remeasured at fair value on the date control is lost. Any gain or loss arising from the disposal and from the remeasurement goes to profit or loss.
This is a change from the previous approach where the treatment of retained interests was less clearly defined. The practical impact is most visible when a client sells a controlling stake but keeps a minority interest. The minority interest is now treated as a brand new investment at fair value on the day the relationship changes, not as a continuation of the old carrying amount.
For clients in sectors like construction, property, and manufacturing where joint ventures, partial disposals, and restructuring are common, this change will affect the numbers at the point of transaction and the ongoing accounting for any retained interest.
What You Need to Do Before Year-End
The starting point is a review of every group structure in your client base. For each one, ask a simple question: does the entity that prepared consolidated financial statements before still clearly control its subsidiaries under the new three-part test?
For most clients with clean majority ownership, the answer will be yes and nothing changes. But for clients with minority stakes in operating companies, dispersed shareholder registers, SPEs or trust structures, or convertible instruments that could shift the voting balance, the answer may be different.
Those reviews need to happen in 2026, not in 2027. The comparative figures for the first set of third-edition financial statements will reflect 2026 transactions and structures. If the consolidation scope changes, the 2026 comparatives change too.
The definition of control has changed. The group structures that worked under the old definition need to be tested against the new one. That work starts now.
Control is no longer just about who owns the most shares. Make sure you know who really runs the show.
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