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two parties enter into an agreement for the production and sale of a pharmaceutical 611798

More than one activity affects returns of an arrangement

Two parties enter into an agreement for the production and sale of a pharmaceutical product. Three activities significantly affect the returns of the arrangement:

  • production of the pharmaceutical product one party is responsible for this activity;
  • marketing and selling activities the other party is responsible for these activities; and
  • both parties must approve all financial policies regarding production, marketing and selling activities (e.g. approval of budgets, and any significant amendments and deviations from the approved budgets require unanimous consent).

For the first two activities, operating decisions by either party for their responsible area do not require unanimous consent, if the party is operating within the constraints of the budgets. That is, the agreement gives the parties freedom to perform their respective responsibilities.

In this example, the parties would have to determine which activity most significantly affects the returns of the arrangement.

The facts and circumstances might be that either of the first two activities could be the activity that most significantly affects the returns of the arrangement. If that were the case, then the party responsible for that activity would have power (and possibly control) over the arrangement, because it has the ability to direct that activity without the other party.

However, the facts and circumstances might be that the relevant activity is the direction of the financial policies. If that were the case, since unanimous consent is required to direct those financial policies, joint control would exist. This assumes that both parties have an exposure to variable returns from the arrangement. Having exposure to variable returns, and the ability to affect that exposure through having power, are requirements of control in IFRS 10, on which IFRS 11 is based.

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