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2b BAC200 GS1 2023 BC Sol 1.2 (Chicago)

The document outlines the criteria for control over an investee according to IFRS 10, emphasizing the need for power, exposure to variable returns, and the ability to affect returns. It discusses Chicago Limited's potential control over Atlanta Limited through its voting rights and the voting rights of two other companies it controls. Ultimately, if Chicago Limited can achieve more than 50% voting rights, it would have control over Atlanta Limited's decisions, including dividend declarations.

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55 views2 pages

2b BAC200 GS1 2023 BC Sol 1.2 (Chicago)

The document outlines the criteria for control over an investee according to IFRS 10, emphasizing the need for power, exposure to variable returns, and the ability to affect returns. It discusses Chicago Limited's potential control over Atlanta Limited through its voting rights and the voting rights of two other companies it controls. Ultimately, if Chicago Limited can achieve more than 50% voting rights, it would have control over Atlanta Limited's decisions, including dividend declarations.

Uploaded by

u22536877
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 PDF, TXT or read online on Scribd
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GROUP STATEMENTS

GS1 BUSINESS COMBINATIONS


Suggested Solution 1.2 7 Marks – 14 Minutes

Definition of control:

In terms of IFRS 10, an investor controls an investee if and only if the investor has all of
the following:

a) Power over the investee;


b) Exposure, or rights to variable returns over its involvement with the investee; and
c) The ability to use its power over the investee to affect the amount of the investor’s
returns.

a) Power over the investee:

Control over - The relevant activities of Atlanta Limited are directed through
voting rights shareholders’ voting.

- Chicago Limited holds 30% of the voting rights of Atlanta Limited.


Chicago Limited therefore does not hold the majority of the voting
rights in Atlanta Limited.

- Chicago Limited controls 2 other companies which also hold shares


in Atlanta Limited.

- If these 2 other companies together hold more than 20% of Atlanta


Limited shares, then indirectly Chicago Limited controls more than
50% of the voting rights of Atlanta Limited.

- Control of 50% of the voting rights in Atlanta Limited will then be


possible as Chicago Limited can make these 2 other companies
vote the same way as Chicago Limited votes at Atlanta Limited’s
meetings.

Alternative answer but not the main focus of the scenario:

- If Chicago Limited is able to obtain some sort of other contractual


right which enables it to direct the financial and operating policies or
activities of Atlanta Limited, then Chicago Limited would have
control over the voting rights.

BAC200 GS1 BC S1.2 UP: Dept. of Accounting Page 1 of 2


b) Exposure, or rights to variable returns from its involvement with the investee:

Exposure to - Ordinary shareholders have a right to returns in the form of ordinary


variable dividends.
returns
- Ordinary dividends are variable returns because they are not a
fixed amount and are declared at the discretion of the company.

- Chicago Limited will be entitled to 30% of the total ordinary


dividends distributed by Atlanta Limited.

- Chicago Limited is therefore exposed to variable returns in the form


of ordinary dividends.

c) The ability to use its power over the investee to affect the amount of the
investor’s returns:

- Dividend declaration decisions are part of the relevant activities of a company.

- If Chicago Limited, together with the other two companies that Chicago Limited control,
have indirect control, Chicago Limited will be able to direct the decisions surrounding
dividend declarations.

- This power will then affect the variable return they are exposed to in the form of
dividends.

Conclusion:

Chicago Limited could, therefore, control Atlanta Limited if Chicago Limited ends up
having more than 50% of the voting rights of Atlanta Limited through its direct and indirect
shareholding, combined.

BAC200 GS1 BC S1.2 UP: Dept. of Accounting Page 2 of 2

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