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27/03/2021 Client: saad24vbs Deadline: 2 Day

WORKSHOP WEEK 7: CHAPTER 26 AASB3 BUSINESS COMBINATIONS AND CHAPTER 27 AASB3 AND AASB12

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Online practice exercises available through Wiley+

Chapter 26

Comprehensive Questions

1. What is a group, a parent and a subsidiary?

According to Appendix A of AASB 10/IFRS 10 Consolidated Financial Statements:

· A group is formed by a parent and all its subsidiaries.

· A parent is an entity that controls one or more entities.

· A subsidiary is an entity that is controlled by another entity, a parent.

3. What are the key elements of control?

Based on the definition of control from Appendix A of AASB 10/IFRS 10, paragraph 7 of AASB 10/IFRS 10 identifies three elements that must be held by an investor in order for it to have control:

· Power over the investee

· Exposure or rights to variable returns from the parent’s involvement with the subsidiary

· The ability to use the power over the subsidiary to affect the amount of the parent’s returns.

8. What is the link between ownership interest and control?

As paragraph B35 of AASB 10/IFRS 10 states, where an investor holds more than half of the voting rights of the investee, the investor has power over the investee in the absence of other evidence. Different classes of shares may have different voting rights. However, unless otherwise specified in the company’s constitution, each shareholder has one vote for each share held. Therefore, it is normally assumed that the percentage of ownership interest of an investor is equivalent to the percentage of voting rights that this investor holds in the investee. As such, it is normally assumed that an investor that has more than 50% ownership interest in an investee has the power over the investee. Given that the shares give to the shareholders the right to receive dividends, it is further assumed that an investor holding more 50% ownership interest has control. Of course, a shareholder with less than 50% ownership interest may still have control if there is any other evidence that the shareholder is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Also, a shareholder with more than 50% ownership interest may not have control, especially if most of the shares held are non-voting shares.

11. What are the reasons for preparing consolidated financial statements?

Some of the reasons for which the regulators require the parent entity to prepare consolidated financial statements are as follows:

i. To supply relevant information to investors in the parent entity. The information obtained from the consolidated financial statements is relevant to investors in the parent entity. A shareholder’s wealth in the parent is dependent not only on how that entity performs, but also on the performance of the other entities controlled by the parent. To require these investors in analysing their investment to source their information from the financial statements of each of the entities comprising the group would place a large cost burden on those investors.

ii. To allow comparison of the group with similar entities. Some entities are organised into a group structure such that different activities are undertaken by separate entities within the group. Other entities are organised differently, with some having all activities conducted within the one entity. Access to consolidated financial statements makes comparisons across the group an easier task for the users of financial statements.

iii. To assist in the discharge of accountability by management of the group. A key purpose of financial reporting is the discharge of accountability by management. Entities that are responsible or accountable for managing a pool of resources — being the recipients of economic benefits and responsible for payment of obligations — are generally required to report on their activities and are held accountable for the management of those activities. The consolidated financial statements report the assets under the control of the group management as well as the claims on those assets.

iv. To report the risks and benefits of the group as a single economic entity. There are risks associated with managing an entity, and an entity rarely obtains control of another without also obtaining significant opportunities to benefit from that control. The consolidated financial statements allow an assessment of these risks and benefits. Note, however, that the benefits from intragroup transactions are eliminated when preparing consolidated financial statements, as those statements should only reflect the effects of transactions with external parties.

Exercise 26.8

Determining subsidiary status

In the following independent situations, determine whether a parent–subsidiary relationship exists, and which entity, if any, is a parent required to prepare consolidated financial statements under AASB 10/IFRS 10.

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