Chapter 8 Company Accounting Solutions
ACCT2201 CORPORATE ACCOUNTING
Tutorial 8 – Week beginning 5th of May
REVIEW QUESTIONS
Chapter 15
8. When are potential voting rights considered when deciding if one entity controls another?
Potential voting rights are rights to obtain voting rights of an investee, such as within an option or convertible instrument.
Potential voting rights are only considered if the rights are substantive ie practical or utilitarian. This depends on the terms and conditions associated with the options.
If an investor holds options that are deeply out of the money – such that the investee would never exercise those options – the options would not be considered to be substantive.
9. Is the non-controlling interest classified as a liability or equity?
It is classified as equity as the group does not have a present obligation to outflow funds to those shareholders. CASE STUDY
Chapter 15
JAPAN LTD-MALDIVES LTD
-
Discuss: the concept of control the need to apply judgement these situations are often referred to “strawmen” – other parties that act as agents or in conjunction with the NCI. In the example in this question, the NCI has an assurance that the voting of the investment bank will always be aligned with its own, ensuring that it cannot be outvoted. If control is the basis for consolidation, a factor to consider is the influence available through a friendly party.
Note however, that there is no guarantee that the investment bank will always vote with the
NCI – the relationship may change over time. However, many of the other factors considered in relation to an NCI and control, such as the attendance at the AGM and the size of blocks of shareholdings may also change over time.
Page 1 of 4
PRACTICE QUESTIONS
QUESTION 16.2
PAVO LTD – OCTANS LTD
Acquisition analysis: 1 July 2014
Net fair value of identifiable assets and liabilities of Octans Ltd
Consideration transferred
Previously held equity interest
Goodwill acquired
Unrecorded
Tutorial 8 – Week beginning 5th of May
REVIEW QUESTIONS
Chapter 15
8. When are potential voting rights considered when deciding if one entity controls another?
Potential voting rights are rights to obtain voting rights of an investee, such as within an option or convertible instrument.
Potential voting rights are only considered if the rights are substantive ie practical or utilitarian. This depends on the terms and conditions associated with the options.
If an investor holds options that are deeply out of the money – such that the investee would never exercise those options – the options would not be considered to be substantive.
9. Is the non-controlling interest classified as a liability or equity?
It is classified as equity as the group does not have a present obligation to outflow funds to those shareholders. CASE STUDY
Chapter 15
JAPAN LTD-MALDIVES LTD
-
Discuss: the concept of control the need to apply judgement these situations are often referred to “strawmen” – other parties that act as agents or in conjunction with the NCI. In the example in this question, the NCI has an assurance that the voting of the investment bank will always be aligned with its own, ensuring that it cannot be outvoted. If control is the basis for consolidation, a factor to consider is the influence available through a friendly party.
Note however, that there is no guarantee that the investment bank will always vote with the
NCI – the relationship may change over time. However, many of the other factors considered in relation to an NCI and control, such as the attendance at the AGM and the size of blocks of shareholdings may also change over time.
Page 1 of 4
PRACTICE QUESTIONS
QUESTION 16.2
PAVO LTD – OCTANS LTD
Acquisition analysis: 1 July 2014
Net fair value of identifiable assets and liabilities of Octans Ltd
Consideration transferred
Previously held equity interest
Goodwill acquired
Unrecorded