Question

Options (AASB10)

Toby Ltd and Fred Ltd own 80% and 20% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Stella Ltd. Toby Ltd sells half of its interest to Coco Ltd and buys call options from Coco Ltd that are exercisable at any time at a premium to the market price when issued and, if exercised, would give Toby Ltd its original 80% ownership interest and voting rights. At the end of the current financial period, the options are out of the money.

Required

Discuss whether Toby Ltd is the parent of Stella Ltd.

Answer 1

Parent company: It refers to a company which holds the controlling interest in other company(Subsidiary) in order to control its management and operations

Controlling interest: The firm in order to be a parent company need not necessarily hold all its shares. If a company owns greater than 50% of the outstanding shares or a significant portion of shares having voting rights in other company, then it implies having a controlling interest

IFRS 10 Consolidated financial statements gives a control model in understanding controlling interest in a much better way.

As per IFRS 10, Control refers to

1.A substantial power over the investee of another company

2.Exposure to variable returns of the company owing to its involvement with the investee

3.Having agency relationships

4.Potential holding of voting shares in the majority

5.The ability to use its power over the investee

In the above question,

Before Sale, Tony Ltd held 80% ownership of Voting shares

Fred Ltd held 20% ownership of Voting shares

As tony ltd has controlling interest( holding Majority of voting shares) over Stella ltd, it is a parent company of Stella Ltd. here

After the sale of its interest by Toby Ltd to Coco Ltd,

Ownership of Voting shares is as follows:

Tony Ltd=80%-(80%/2)=80%-40%

Tony Ltd=40%+Call options

Coco Ltd = 40%

Fred Ltd=20%

In exchange for the sale of shares, the Tony Ltd acquired Call options which are exercisable at any time at a premium to the market price when issued and, if exercised, would give Toby Ltd its original 80% ownership interest and voting rights.

Even though Tony Ltd doesn't have Voting power, still as it has call options which are capable of increasing the controlling interest to 80%, it would have been considered as having controlling interest, but since by the end of the year, the Call options are out of the money, Tony Ltd would not exercise the Call options and now as the Call options no longer hold the substantial power over the Stella ltd, it would not be considered as having controlling interest over the Stella Ltd

Hence, Toby Ltd is NO longer a Parent company of Stella ltd.