ATT3ZGJ9 - B407F Week 3 Tutorial Solution - Legal...

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B407F Week 3 Tutorial Solution - Legal requirements of group accounts Question 1 A C B D Question 2 (a) Question 3 An enterprise has to assess all the potential impact of all outstanding options, convertibles and warrants etc. when it considers whether it has control over another enterprise. In the case of FSCL, the exercise of the outstanding option granted to SCL will have the potential of reducing its voting rights in BGL to 46%, i.e. less than one- half of the voting rights in BGL. In addition, in this case, SCL has the sole discretion to exercise the option or not. This is also out of control of FSCL. SCL will likely 55% 100% 80% B – subsidiary C – subsidiary D - subsidiary Alpha 20% 100% 15% Epsilon 60% Beta Delta 80% 10% 100% Gamma Phi (b) Alpha and subsidiaries – Beta, Gamma, Epsilon (c) Holding Companies – Alpha ,Beta, Delta
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exercise such an option since it is at zero consideration while BGL is making a profit and has positive equity amounts. In accordance with HKAS27 “Consolidated and Separate Financial Statements”, a subsidiary is defined as an entity that is controlled by another entity (known as the parent). Control is defined as the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. This is usually in the case when accompany has more than half of the voting rights of that particular enterprise. When a reporting entity has less than half of the voting rights in an enterprise, control is usually evidenced with the existence of the following: power over more than half of the voting rights by virtue of an agreement with other investors; power to appoint or remove the majority of the members of the board of directors; power to cast the majority of votes at meetings of the board of directors; power to govern the financial and operating policies by law or by agreement. Therefore, in the case of FSCL, William Tam has to consider whether FSCL still has control over BGL after considering the impacts of having SCL to exercise the option. If control does not exist after considering the above criterion as defined in HKAS27, BGL should not be treated as a subsidiary and should not be consolidated even though FSCL has a current ownership of 51% in BGL. On the other hand, if control still exists, FSCL should consolidate the results of BGL
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This note was uploaded on 02/24/2012 for the course ACT 407 taught by Professor Mshui during the Fall '11 term at The Open University.

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ATT3ZGJ9 - B407F Week 3 Tutorial Solution - Legal...

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