Question

In: Accounting

On 1 March 2019, Heckle Ltd acquired 40% of the voting shares of Jeckle Ltd. Under...

On 1 March 2019, Heckle Ltd acquired 40% of the voting shares of Jeckle Ltd. Under the company’s constitution, each share is entitled to one vote. On the basis of past experience, only 65% of the eligible votes are typically cast at the annual general meetings of Jeckle Ltd. No other shareholder holds a major block of shares in Jeckle Ltd.

The financial year of Jeckle Ltd ends on 30 June each year. The directors of Heckle Ltd argue that they are not required under AASB 10 to include Jeckle Ltd as a subsidiary in Heckle Ltd’s consolidated financial statements at 30 June 2019 as there is no conclusive evidence that Heckle Ltd can control the financial and operating policies of Jeckle Ltd. The auditors of Heckle Ltd disagree, referring specifically to past years voting figures.

Required:

Provide a report to Heckle Ltd on whether it should regard Jeckle Ltd as a subsidiary in its preparation of consolidated financial statements at 30 June 2019.

Solutions

Expert Solution

The investor establishes whether it is the parent company or not through assessing the controls over the investee. The investor takes into consideration all the pertinent circumstances and facts while evaluating that whether it controls the investee or not. The investor controls the investee while it is exposed or it has the rights, to variable returns under the involvement with the investee and it is able to influence those returns through the power it has over the investee.

Discussion:

The investor will be considered to have control over the investee only if investor has all the below mentioned elements-

  1. Ability to use the power over investee for influencing the amount of the return of the investor.
  2. Rights or exposure to the variable returns from the investor's involvement with the investee.
  3. The investor has the power over investee that it is the investor has the existing rights that will enable it to direct relevant activities and the activities will significantly influence the results of the investee.

However, the power generates from rights and such rights can be of complex nature that is embedded in the contractual rights or can be staraightforward that is through the voting rights. An investor who holds the protective rights only can not have power over the investee and therefore does not have control over the investee(AASB,2015). Further the investor shall have rights or shall be exposed thorugh varaible returns under the involvement with the investee to have control over it. These returns should be able to vary the outcome of investee's performance and that may be negative, positive or both. Further, the parent must be able to use the power on the i nvestee for influencing the returns from the involvement with the investee, While assessing the fact that whether the investor has control over the investee, the decision making rights of the investor determines whether it is acting as the principle or as the agent of the other party.(Maroun & van Zijl, 2016)

Conclusions and Recommendation

The criteria for the consolidation are not based on the ownership percentage rather it is based on control concept. Further when percentage interest is lower than 50%, the judgement on the existence of the control is required. The accountant has to depend on other evidences while performing his opinion. Here in the given case, Heckle Ltd has 40% investment on the shares of Jeckle Ltd and each share is eligible for 1 vote. However, there is no evidence that Heckle Ltd has control over Jeckle Ltd on its operating and financial policies. Therefore, on;y the fact that there is no other major shareholder block for Jeckle Ltd will not establish the fact that Heckle Ltd has control over Jeckle Ltd and therefore, Hcekle Ltd shall not consider Jeckle ltd as the subisidiary while preparing the consolidated financial statement on 30th June.


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