Question

Barney Ltd has acquired, during the current year, the following investments in shares issued by other companies.

Ted Ltd $120 000 (40% of issued capital)
Mosby Ltd $117 000 (35% of issued capital)

Barney Ltd is unsure how to account for these investments and has asked you, as the auditor, for some professional advice.
Specifically, Barney Ltd is concerned that it may need to consider those entities as subsidiaries under AASB 10/IFRS 10. To help you, the company has provided the following information about the two investee companies.

Ted Ltd
The remaining shares in Ted Ltd are owned by a diverse group of investors, each of which holds a small parcel of shares.
Historically, only a small number of the shareholders attend the general meetings or question the actions of the directors.
The current board of directors has five members, of which three are retiring at the next annual general meeting. Barney Ltd has nominated three new directors to replace the ones that are retiring and expects that they will be appointed at the next annual general meeting.

Mosby Ltd
The remaining shares in Mosby Ltd are owned by a small group of investors, each of which owns approximately 15% of the issued shares. One of these shareholders is Ted Ltd, which owns 17%.
The shareholders take a keen interest in the running of the company and attend all meetings.
Two of the other shareholders, including Ted Ltd, already have representatives on the board of directors who have indicated their intention of nominating for re-election.

1) Advise Barney Ltd as to whether, under AASB 10/IFRS 10, it controls Ted Ltd and/or Mosby Ltd. Support your conclusion.

2) Would your conclusion be different if the remaining shares in Ted Ltd were owned by three institutional investors each holding 20%? If so, why?

Answer 1

Barney Ltd. owns 35% of Mosby Inc.

Barney Ltd. owns 40% of Ted ltd owns 17% of Mosby Inc.

(a) In order to determine if Barney Ltd. controls Ted ltd. and/or Mosby Inc., must consider the definition of control.

The power to govern or the capacity to control depends on an entity having the ability to direct the policies of another entity so as to benefit from it and to be able to use that power to increase those benefits.

The determination of control requires judgment. The ability to exert control depends on factors such as:

• The size of the voting interest

• The dispersion of the other shareholdings

• The level of disorganization or apathy of the non-controlling shareholders

• The attendance levels at the annual general meetings

• Contractual arrangements

• Arrangements between friendly parties

Applying these to the above example, it would be expected that Ted ltd. is a subsidiary of Barney Ltd. and if Ted ltd. is a subsidiary, then Mosby Inc. is also a subsidiary, and, as such, Barney Ltd. would control 52% of the vote.

(b) A change in the relative ownerships within Ted ltd. would suggest that, dependent on other factors, it would lose subsidiary status. Mosby Inc. would also then lose its subsidiary status.