IFRS STANDARDS: An investor is exposed, or has rights, to variable returns from its involvement with the investee when the investors returns from its involvement have the potential to vary as a result of the investees performance (IFRS 10.15). Only one investor can control an investee, but it is possible for other parties, such as holders of non-controlling interests, to benefit from investees returns (IFRS 10.16). Power arises from rights that give the investor current ability to direct relevant activities of an investee. Power usually results from voting rights attached to shares, but can result also from other sources, such as contractual arrangements (IFRS 10.10-13). Holding majority of the voting rights is sufficient to give power over the investee in the following situations. IFRS 10 also includes a principal versus agent analysis as one of three criteria for having control over an investee in its consolidation model. A parent must have the ability to use its power to affect the returns from an investee. Entities acting as agents for other parties do not control an investee (IFRS 10.17-18). Conversely, an entity controls an investee if another party with decision-making rights acts as an agent for that entity. When assessing control, the investor treats the decision-making rights delegated to its agent as if they were held by the investor directly.

How does this situation below fit into the IFRS standards above?

JV, a corporation, was formed in 20X9 to design and manufacture electric cars. JV is 60 percent owned by AutoCo (a car manufacturer) and 40 percent owned by ElectricCo (a developer of electric car technology). The decision-making authority of JV is equally shared between AutoCo and ElectricCo: the JV board of directors is composed of two members appointed by AutoCo and two members appointed by ElectricCo. JVs board of directors (1) sets the annual budgets; (2) is responsible for the hiring, firing, and compensation of management; and (3) approves all material contracts. As part of the agreement, all cars produced by JV will bear AutoCos logo and will be sold at AutoCo- branded auto dealers.

AutoCo is an established car manufacturer that has been producing cars in the United States for the past century. To meet governmental mandates of lowering emissions and increasing the fuel economy of its fleet, AutoCo has been evaluating various ways to enter the electric vehicle market. AutoCo does not currently have viable technology for the production of electric cars.

ElectricCo was established by professors that developed cutting-edge battery technology for electric cars. Although ElectricCo has not produced electric cars in a mass market, the battery technology is tested and highly valued.

AutoCo and ElectricCo jointly formed JV to produce electric cars for the mass market. JV benefits from ElectricCos proprietary technology and AutoCos manufacturing expertise and access to credit markets and distribution channels.

JV is financed with 30 percent equity and 70 percent debt. When JV was formed, ElectricCo did not have access to sufficient cash at inception to fund its equity interest. To purchase its equity interest, ElectricCo received a loan from AutoCo. The debt financing was obtained in the form of a credit facility from a third-party bank. For the bank to provide debt to JV, it required that AutoCo guarantee the loan.