Homewrok Topic_6 - Business School ACCT5942 Corporate...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Topic 6: HOMEWORK SOLUTION (CH.18, CH.19) Chapter 18 Consolidation: controlled entities Review Question 5 - the meaning of power in the control definition When does an investor have power over an investee? There are 3 key elements to the definition of control: 1. Power over the investee 2. Exposure or rights to variable returns from the parent’s involvement with the subsidiary 3. The ability to use the power over the subsidiary to affect the amount of the parent’s returns. Power is defined as “existing rights that give the current ability to direct the relevant activities” An investor has power over an investor when it has the current right to direct the relevant activities of the investee. Relevant activities are activities of the subsidiary that significantly affect the investee’s returns. Examples are: (a) selling and purchasing of goods or services; (b) managing financial assets during their life (including upon default); (c) selecting, acquiring or disposing of assets; (d) researching and developing new products or processes; and (e) determining a funding structure or obtaining funding. A parent must have the ability to use its power over the investee to affect the returns received from the investee. The parent must be able to use its power to increase the benefits and limit its losses from the subsidiary’s activities. If the investor has power in that it has the majority voting power in the investee, but all the operating decisions have already been established in the constitution of the investee , then the investor does not have control over the investee . AASB 10 Paragraphs B22-B28 Business School ACCT5942 Corporate Accounting and Regulation Sem1, 2017
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 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 . B23 Determining whether rights are substantive requires judgement , taking into account all facts and circumstances. Factors to consider in making that determination include but are not limited to: (a) Whether there are any barriers (economic or otherwise) that prevent the holder (or holders) from exercising the rights. Examples of such barriers include but are not limited to: (i) financial penalties and incentives that would prevent (or deter) the holder from exercising its rights. (ii) an exercise or conversion price that creates a financial barrier that would prevent (or deter) the holder from exercising its rights. (iii) terms and conditions that make it unlikely that the rights would be exercised, for example, conditions that narrowly limit the timing of their exercise. (iv) the absence of an explicit, reasonable mechanism in the founding documents of an investee or in applicable laws or regulations that would allow the holder to exercise its rights.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern