Question

Part A   

Gedolf Ltd and Spike Ltd each hold 50% of the shares in Butch Ltd. All companies are involved in the artificial intelligence industry. Gedolf Ltd agrees that Spike Ltd should provide the management of Butch Ltd because of the expertise provided by its managing director, Rob Gedolf. Spike Ltd receives a management fee for providing its expertise.

Required:                                                                                                                  

Determine whether a parent–subsidiary relationship exists and which entity, if any, is a parent required to prepare consolidated financial statements under AASB 10.

Answer 1

Answer:-

AASB 10 defines control with three elements, these being: –power –exposure to variable returns –the investor’s ability to use power to affect its amount of variable returns.

Determining the existence of ‘power’ will not always be a straightforward exercise.

As paragraph 11 of AASB 10 states: –Power arises from rights. Sometimes assessing power is straightforward, such as when power over an investee is obtained directly and solely from the voting rights granted by equity instruments such as shares and can be assessed by considering the voting rights from those shareholdings. In other cases, the assessment will be more complex and require more than one factor to be considered, for example when power results from one or more contractual arrangements

Factors to be considered :

1. Managing Operations

2.Variable returns and controls the investor's return.

An investor controls an investee if the investor not only has power ( here in this case 50% of butch ltd ) over the investee and exposure or rights to variable returns from its involvement with the investee ( providing the management services)  but also has the ability to use its power to affect the investor’s returns from its involvement with the investee. ( Handling Management operations shows power to affect the investor's return)

Conclusion

Here in this case

Spike LTD holds 50% of the shares of butch Ltd. and also providing the management services which only spike ltd has the expertise to provide and for that they are receiving management fees.

Which clearly stats that there is a variable return from the butch ltd and management activities are also managed by the spike ltd.

so SPIKE LTD will come in the definition of Parrent company and required to consolidate financials of BUTCH ltd with its books.