Consolidations Your notes have an overview of basic consolidations When doing consolidation questions, pay attention to Dates – e.g., how many years ago was the subsidiary acquired, how many years ago was the equipment sold Direction of transactions to determine whether it affects NCI 1
A parent-subsidiary relationship exists when one entity controls another entity. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee [AASB 10.6]. AASB 10 defines control as requiring three elements: Power Exposure to variable returns The investor’s ability to use power to affects its amount of variable returns. Power is defined as “existing rights that give the current ability to direct the relevant activities. AASB 10.10 states that an investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities , i.e., the activities that significantly affect the investee’s returns. 2
Question 1 Consolidation Review Question PART A Required: For each of the following independent situations, determine which (if any) entity has control over XYZ. (a) ABC Ltd and DEF Ltd own 70% and 30% respectively of the ordinary shares that carry voting rights in XYZ Ltd. ABC sells 70% of its interest to HIJ Ltd, leaving ABC with a 49% interest in XYZ. At the same time, ABC purchases call options from HIJ that are exercisable at any time at a premium to the market price when issued. If ABC exercises the options, they require HIJ to sell its shares in XYZ back to ABC. The options are out of the money. However, because ABC can exercise its options now (they are currently exercisable), ABC has the ability to control more than half the voting shares of XYZ. Therefore, ABC controls XYZ. 3
(b) ABC Ltd, DEF Ltd and HIJ Ltd own 40%, 30% and 30% respectively of the voting shares of XYZ Ltd. ABC also owns call options acquired from DEF and HIJ that are exercisable at any time at the vair value of XYZ shares. If the options are exercised, ABC will acquire an extra 20% of the voting shares in XYZ, while the ownership interests of DEF and HIJ in XYZ will be reduced to 20% each. If the options are exercised, ABC will have control over more than half of the voting over XYZ. The existence of the potential voting rights means that ABC controls XYZ. 4
(c) ABC Ltd, DEF Ltd and HIJ Ltd each own 33.3% of the voting shares of XYZ Ltd. ABC, DEF and HIJ each have the right to appoint two directors to the board of XYZ. ABC also owns call options that are exercisable at any time at a fixed price. If exercised, the call options would give ABC all the voting rights in XYZ. The management of ABC does not intend to exercise the call options even if DEF and HIJ do not vote along the same lines as ABC.
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