SLS 5 - AC3102 Risk Reporting&Analysis SLS#5 Seminar...

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AC3102 Risk Reporting & Analysis SLS#5 Seminar Presentation Blven, Cheng Kang, Chuan Kai, Leon, Shay Ting 1
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Agenda 1. Going through Q1 - Q7 2. Short Quiz (with prizes!!) 2
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1 Question 1 3
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Case Facts Z Ltd was incorporated in January 20x1 with 100 million ordinary shares. X Ltd holds 60 million, and Y Ltd holds 40 million of Z Ltd.'s shares. On 1/1/20x2, Z Ltd issued $ 100 million convertible bonds to Y Ltd. These bonds are convertible into 100 million ordinary shares from 1/1/20x4. However, Y Ltd does not intend to convert before 20x5 as it is not financially beneficial to Y Ltd to do so. Y Ltd actually converts the convertible bonds into shares on 1/1/20x5. Question 1 (Case Facts) 4
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For each of the year ended 31 December 20x1 through 20x5, which company (X or Y), has control over Z Ltd and therefore has to present consolidated financial statements under FRS 110 ? Question 1a 5
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20x1 X Ltd holds 60 million shares ; Y Ltd holds 40 million shares Total number of Z Ltd’s shares: 100 million Percentage Shareholding: X Ltd ( 60% ) : Y Ltd ( 40% ) X will need to prepare CFS for the year ending December 20x1 as it has control. Y only has “significant influence”, but no control, and will not have to prepare CFS. Question 1a 6
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Beyond 20x1 On 1/1/20x2, Z Ltd issued $100 million convertible bonds to Y Ltd. These bonds are convertible to 100 million ordinary shares from 1/1/20x4. FRS 28 (7): In deciding whether investor has the 20% voting power to treat the investee as an associate, these potential voting rights should be taken into consideration as soon as they are exercisable or convertible. FRS 28 (8): Regardless of intention and ability of investor to exercise or convert . Question 1a 7
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But.. FRS 110: Potential voting rights must be substantive before they are taken into account in deciding the 20% rule. Convertible bonds are not exercisable yet, i.e. Y has no substantive rights Will not be considered even though they are issued in 20x2 Question 1a 8
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20x2 and 20x3 Percentage Shareholding: X Ltd ( 60% ) : Y Ltd ( 40% ) No change to control as option for Y to convert the bonds to ordinary shares are not exercisable until 1/1/20x4. Hence, X will need to prepare CFS for the year ending December 20x2 and 20x3 as it has control. Y continues to possess “significant influence”, but no control, and hence will not have to prepare CFS. Question 1a 9
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20x4 Convertible bonds of Y are exercisable. Logically , total number of Z Ltd shares now is 200 mil Apparent Percentage Shareholding: X Ltd ( 30% ) : Y Ltd ( 70% ) since Y possess (140/200) shares But Y Ltd did not exercise option to convert as it feels it is not “ financially beneficial ” to do so before 20x5 So does Y have control? Question 1a 10
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FRS 110 B22 An investor, in assessing whether it has power, considers only substantive rights relating to an investee (held by the investor and others). For a right to be substantive, the holder must have the practical ability to exercise that right.
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