B407F Revision (student)

B407F Revision (student) - B407F Advanced Financial...

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1 B407F Advanced Financial Reporting and Analysis I Revision 2 HKAS27 (old) Hold over 50% of voting rights Presume control exists Power over >50% of voting rights (by agreement) Power to govern financial and operating policies Power to appoint or remove the majority of Board of members Power to cast a majority of votes at Board meetings Inadequate, lack of transparency - (HKFRS10) Create PDF files without this message by purchasing novaPDF printer ( http://www.novapdf.com )
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2 3 Control (HKFRS10) General consideration: • Some kind of involvement with the investee • Control is the investor’s rights (gains) or exposure (losses) to variable returns which (may) result from its involvement with the investee 4 Control (HKFRS10) An investor controls the investee if and only if the investor has the following three elements of control: Power over the investee • Exposure, or rights, to variable returns from its involvement with the investee • The ability to use its power over the investee to affect the amount of the investor’s return. Create PDF files without this message by purchasing novaPDF printer ( http://www.novapdf.com )
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3 5 Control Power Exposure to variability in returns Current ability to direct relevant activities: Substantive rights, not protective rights Dividends, remuneration, tax benefit, economies of scale , cost saving Vary according to investee performance Ability to use power over investee to affect investor’s return 6 Power "Power" exists when the investor has existing rights that give it the current ability to direct the activities that significantly affect the investee's returns (the relevant activities). Power most commonly arises through voting rights granted by equity instruments, but can also arise through other contractual arrangements. Rights to direct the relevant activities do not need to be exercised for them to provide an investor power. Create PDF files without this message by purchasing novaPDF printer ( http://www.novapdf.com )
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4 7 Only substantive rights and rights that are not protective are considered in assessing power Substantive rights - the holder has the practical abilities to exercise the rights when the decisions about the relevant activities of the investee need to be made: No barrier to exercise the right by investor (penalty to exercise, inability to obtain information to exercise the rights) Do practical mechanism exists? (need to agree by other parties, pre-emption rights? Independent Board of Directors?) What are the holder’s benefit? Potential voting rights is a type of substantive rights 8 Protective rights - the holder do not have the power over an investee and could not prevent another party from having such power, example: Franchise • right to seize assets in the event of default.
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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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B407F Revision (student) - B407F Advanced Financial...

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