Question

During the year ended 30 June 2020, Starhub Ltd acquired the following investments in shares issued by other companies:

M3 Ltd	$480 000 (42% of issued capital)
Republic Ltd	$680 000 (35% of issued capital)

Starhub Ltd is unsure how to account for these investments and asked you for some professional advice.

Specifically, Starhub Ltd is concerned that it may need to prepare consolidated financial statements under AASB 10. The company provided the following information about the two investee companies:

M3 Ltd

• The remaining shares in M3 Ltd are owned by:
  o two sisters who hold 10% of shares respectively and
  o a diverse group of investors who each hold a small parcel of shares.

• Historically, only a small number of the shareholders attend the general meetings or question the actions of the directors.

• Starhub Ltd has nominated three new directors and expects that they will be appointed at the next annual general meeting. The current board of directors has five members, out of which three are retiring at the next annual general meeting.

  Republic Ltd

• The remaining shares in Republic Ltd are owned by:
  o M3 Ltd which owns 20% of the shares,
  o Pontes Ltd which owns 20% of the shares and
  o a diverse group of investors who each own a small parcel of shares.

• The shareholders take a keen interest in the running of the company and attend all meetings.

• Two of the other shareholders, including M3 Ltd, already have representatives on the board of directors who have indicated their intention of nominating for re-election.

QUESTION:

Advise Starhub Ltd as to whether, under AASB 10, it controls M3 Ltd and/or Republic Ltd. Support your conclusion.

Answer 1

AASB 10 is a standard which establishes principles for the presentation and preparation of consolidated financial statements where an entity holds one or more other entities.

As provided in the question, Starhub Ltd. has shareholding of two companies which is " M 3 Ltd" and Republic ltd".

Controlling power in case of M3 ltd is as follows:

facts of the case : As starhub ltd holds 42 % shares of M 3 ltd. The remaining shares are held by two sister having 10 % respectively and other shareholding are widely dispersed as many shareholders have small portions of total shareholding.

As per AASB 10, an entity have control on the other entity when it holds more than 50 % of the shares of the compnay. But sometimes entity still have control over the other entity even if it holds less than 50 % of the shares. it happens when direction of the relevant activities can be determined by majority of votes and the investing entity holds significantly more voting rights than any other shareholders or a group of shareholder.

in this case, Starhub has nominated three directors in the company through which he can control the activities of the company. further, among other shareholders only some of them attend the meeting.the two sisters who holds jointly only 20 % of the shares which is less than strahub ltd's shareholding. remaining shareholding are widely dispersed. so in that case, Starhub ltd can control the activities of the company as he has nominated the directors in the company as well as he holds 42 % shareholding which is a major shareholding as compared to shareholding held by small group of shareholders.

Conclusion : hence, Starhub Ltd has control over M3 Ltd as per AASB 10.

Controlling power in case Republic Ltd of is as follows:

Facts of the case : As Starhub Ltd holds 35 % shares of the Republic Ltd. Further M 3 Ltd also holds 20 % shares of Republic ltd. As explained above, M3 Ltd is a subsidiary of Starhub Ltd. hence Starhub ltd holds 55 % of shares of the Republic ltd directly or indirectly. Hence, it has more than 50 % of the shares controlling power of the company Republic ltd.

Further, M3 Ltd has representatives on Board of directors of Republic ltd.Hence, it can control the direct activities of the company as well. And Starhub can control the activities of M3 Ltd. So, it has an indirect control over Republic ltd as well.

Conclusion: Yes, As per AASB 10 Starhub ltd has control over Republic Ltd as well.

So "Starhub Ltd" has to prepare Financial statements according to the AASB 10.