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Big Bang's Control Over Subsidiaries

The document outlines the criteria for determining control over an investee according to IFRS 10, highlighting three essential elements: power, exposure to variable returns, and the ability to affect those returns. It provides specific examples of Big Bang's control over Penny (Pty) Ltd and Sheldon, demonstrating how Big Bang's rights and voting power establish its control, necessitating consolidation of both subsidiaries in the group financial statements. Ultimately, it concludes that both Penny and Sheldon are subsidiaries of Big Bang and must be included in its financial reports.

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3 views3 pages

Big Bang's Control Over Subsidiaries

The document outlines the criteria for determining control over an investee according to IFRS 10, highlighting three essential elements: power, exposure to variable returns, and the ability to affect those returns. It provides specific examples of Big Bang's control over Penny (Pty) Ltd and Sheldon, demonstrating how Big Bang's rights and voting power establish its control, necessitating consolidation of both subsidiaries in the group financial statements. Ultimately, it concludes that both Penny and Sheldon are subsidiaries of Big Bang and must be included in its financial reports.

Uploaded by

edwardsyaameen
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Suggested Solution:

Based on IFRS 10p6 states that an investor controls an investee when it is


exposed, or has rights to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over the investee.
(2)

3 elements which must be presented for an investor to determine whether it has


control over the investee is therefore,

1) power,

2) exposure or right to variable return and

3) the ability to use its power over the investee to affect the amount of the
investor’s returns.

Once control exists, we can conclude that parent subsidiary relationship exists
(1), and the subsidiary will have to be consolidated in the group financial
statements (1)

Big Bangs investment in Penny (Pty) Ltd:

Power:

 IFRS 10p10 states that an investor has control when it has existing rights
which gives to the current ability to direct relevant activities. Relevant
activities are activities which are significantly affect the investee’s
returns. (1)
 Based on the agreement, Big Bang has a right to appoint all the board
members of Penny (Pty) Ltd. (1)
 Big Bang thus have power over all the relevant activities of Penny (Pty)
Ltd (1) and thus have power over Penny (Pty) Ltd. (1)

Return:

 IFRS 10p15 states that the Big Bang must have a right to variable returns
in Penny (Pty) Ltd, due to its involvement in the operations of Penny
(Pty) Ltd (1)
 Based on the agreement, Big Bang has the right to 25% of the dividends
declared by Penny (Pty) Ltd. (1)
 This return does arise due to its involvement with Penny (Pty) Ltd as Big
Bang can appoint all the directors. (1)

Link between power and return:

 Due to the fact that Big Bang can appoint 100% of the board of directors
of Penny (Pty) Ltd, Big Bang is the principal (1).There is thus a link
between power and control (1).

Control:
 Even though Big Bang only has 30% of the equity shares in Penny (Pty)
Ltd, Big Bang still controls Penny (Pty) Ltd. (1)

Penny will therefore be the subsidiary of Big Bang (Pty) Ltd and will have to be
consolidated into the group financial statements. (1)

Big Bang’s investment in Sheldon:

Power:

 Big Bang has 45 001 ordinary shares and 35 000 N shares. (1)
 In terms of voting rights, the Sheldon has 150 000 voting rights in total
from ordinary shares and 150 000 (50 000 x 3) voting rights in total from
N shares. Total voting rights are therefore 300 000 in total. (1)
 To control the company, 50% plus one voting rights will therefore be
needed. (1)
 Big bang therefore has 45 001 ordinary voting rights and 105 000 (35 000
x 3) N share voting rights, resulting in a total of 150 001 voting rights in
total. (1)
 Since this exceeds 50% of the voting rights in Sheldon (150 001 /
300 000) (1)
 Big Bang (Pty) Ltd has the power to direct the relevant activities, and can
therefore control Sheldon through its power over the voting rights in
Sheldon. (1)

Returns:

 Based on the agreement between Big Bang and Sheldon, Big Bang are
entitled to an ordinary dividend, once declared by Sheldon. (1)
 Big Bang therefore is exposed to a variable return of Sheldon. (1)

Link between power and return:

 Based on the above discussion, where the voting rights provide control
and having the control impacts Big Bang return from Sheldon, the link
between power and return does exist. (1)

Conclusion:

Based on the above discussion, Big Bang has control over Sheldon and
Sheldon is therefore considered a subsidiary of Bing Bang, which will have to
be consolidated in the group financial statements. (1)

Logical discussion and layout 2 marks


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