Week11_Practice_Question_Solutions - Week 11 Practice...

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Week 11 Practice Questions 23.1 Explain the circumstances that give rise to indirect ownership interests. Who has indirect interests? An indirect interest is an ownership interest that shareholders have in an entity that their company has invested in. Both parent shareholders and NCI can have indirect interests in their company’s subsidiaries. Indirect interests of parent shareholders arise when the parent company controls another (nested) group. Thus the group structure must have at least three tiers of (ultimate) parent, subsidiary (intermediate parent), and sub-subsidiary. The indirect interest refers to the ultimate parent shareholders’ ownership interest in the sub-subsidiary, none of whose shares may be held by that parent. For indirect NCI to arise, the intermediate parent in a three or more tier structure must be a partly owned subsidiary of the ultimate parent. The non-controlling shareholders of the subsidiary will have an indirect ownership interest in the sub-subsidiary. It is common, with respect to a particular sub-subsidiary, that parent shareholder and NCI indirect interests are both present at the same time. 23.2 How are indirect ownership interests calculated? The short answer is that indirect interests are calculated as the product of ownership at each tier in the pyramid. Thus, in a three-tier structure, the parent shareholder indirect interest is the parent ownership of the subsidiary times the subsidiary’s ownership of the sub-subsidiary; and the NCI indirect interest is the NCI ownership of the subsidiary times the subsidiary’s ownership of the sub-subsidiary. Indirect interests are discussed alongside direct interests in chapter 17, on pages 489–492.
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23.5 Explain why the pre- and post-control distinction is irrelevant to the direct NCI, but is relevant to NCI’s indirect interest. Direct NCI are shareholders in a partly owned subsidiary. As they are not participants in the action or event that establishes parental control over the subsidiary they are unaffected by the requirement to eliminate pre-control equity. The pre-control and post-control distinction
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Week11_Practice_Question_Solutions - Week 11 Practice...

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