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Accounting
8
Edition
for Corporate
Combinations and
Arthur
Associations Luff
Keet
Egan
Howieson
Ram

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 Preface
The aims of this book are to explain, illustrate and evaluate the methods used to account for
investments in other entities and contractual arrangements in the form of joint operations. A
major focus of the book is on the process of consolidation and related accounting issues that
are associated with the process of preparing financial statements for larger entities and groups,
including the preparation of information related to operating segments. In accounting for larger
groups, the accountant will need to have an understanding of the measurement of assets and
liabilities at fair value acquired and assumed as part of a business combination (including goodwill),
the measurement methods of non-controlling interest in subsidiaries, the treatment of transactions
between members of a group and the translation of the financial statements of foreign operations.
The issues covered in this book are thus of particular relevance in the modern business
environment where economic activity is increasingly dominated by large corporate groups. These
groups frequently form strategic alliances with other corporations, groups or government entities
that can take a range of forms, including joint arrangements. With the continuing trend towards
the globalisation of business, accounting for the effects of exchange rate changes is becoming
increasingly relevant to accounting practitioners. Also, an understanding of the impact of
exchange rate changes on income, financial position and cash flows is important for those involved
in financial analysis.
The book is also suitable for students in undergraduate and postgraduate accounting courses
and for candidates for professional accounting qualifying examinations (in particular the CPA
Australia or CA programs). An understanding of the topics covered in the book is relevant not
only to those intending to pursue a career in accounting, but also to those intending to pursue a
career in banking, investment advice and finance or wealth management to assist in evaluating
investment decisions and providing investment advice.
The book is structured as follows. The first part of the text (Chapters 1–7) explains the issues
and techniques relevant to consolidation accounting including:

• Identification of subsidiaries that are part of the group with specific reference to the application
of the criterion of ‘control’.

• Issues in accounting for business combinations including the measurement of goodwill (or
bargain purchase gain) associated with a business combination, and fair value issues in relation to
an acquiree’s assets and liabilities.

• The inputs, processes and outputs of consolidation accounting.

• Intragroup transactions.
• Measurement and disclosure of non-controlling interests.
• Consolidation of multiple subsidiaries.
• Preparation of the consolidated statement of cash flows.
The second part of the book (Chapters 8–11) covers related accounting issues that are commonly
faced by accountants preparing accounts for larger entities and groups including:

• Accounting for investments in associates and joint arrangements.

• Translation of foreign currency financial statements.
vii
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 • Accounting for joint arrangements.
• Segment reporting by diversified groups and entities.
As in previous editions of the book, the sequence of the material and the content of the
individual chapters are designed to provide a text that provides instructors with maximum
flexibility. This will allow the book to be used without loss of continuity in courses that omit
certain topics covered in the text. For example, if an instructor chooses to omit the chapter on
consolidated cash flow statements from course materials, the subsequent chapters, such as the
translation of foreign currency financial statements, will link to the earlier material covered by
students. The current edition is now significantly updated for changes in accounting standards
that have occurred since the 7th edition was written. The text is based on the revised suite of
standards, including AASB 10, 11, 12, 127 and 128, that applied to investments in subsidiaries,
associates, joint arrangements and other investments as at 31 December 2015. Amendments
made to IFRS 10, 11 and 12 and IAS 27 and 28 in 2014 are therefore also reflected in the book. As
well as these changes, the examples used in the text have been revised and updated for the impact
of the myriad other changes that are relevant to the preparation of financial statements, including
changes to AASB 101, Presentation of Financial Statements, as well as recent amendments to
AASB 9, Financial Instruments.
Over time, the number of differences between Australian accounting standards and IFRS has
become fewer, as have the number of differences between US GAAP and IFRS. A new feature
in this 8th edition of the book is a description of the differences between the requirements of
IFRS (and Australian GAAP) and US GAAP. Some of these differences referred to in the book, for
example the fair value option in accounting for associates under US GAAP, create potential issues
for class discussion and opportunities for students to reflect on alternate approaches.
The book retains some of the key features of previous editions that have made the book popular
with both students and instructors. The book includes extensive reference to relevant accounting
research to assist students to see the links between research, standards and practice. To cater for
students with different learning styles, diagrams have been incorporated in the text to illustrate
the main ideas and concepts. In addition, the detailed explanations and comprehensive examples
provided in the book cater for the increasing number of students studying in ‘blended learning’ or
‘flipped classroom’ contexts.
A key feature of the answers to the end-of-chapter exercises is the extensive use of Excel
spreadsheets, which enable students to check not just the numbers in the answers, but more
importantly the formulas used to calculate the numbers. This facilitates the understanding of the
structure of the worksheets. This allows the instructor to show how the changes in one variable,
such as the cost of acquisition, affect other variables such as goodwill.
The chapters in the book include examples that progress from relatively simple examples
through to explorations of complex practical issues. By introducing the main ideas and methods,
the book allows students to develop an understanding of the more complex issues and methods
that represent an extension of the methods used to account for simpler examples. This approach
also allows instructors the flexibility of omitting some of the more advanced issues dealt with in
separate sections at the end of most chapters.
We hope that this book proves a valuable resource for students and instructors and encourage
feedback from all users.

viii Accounting for Corporate Combinations and Associations

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 Educator Resources
A suite of resources is provided to assist with delivery of the text, as well as to support teaching
and learning. These resources are downloadable from the Pearson website: www.pearson.com.au.

SOLUTIONS MANUAL
The Solutions Manual provides educators with detailed, accuracy-verified solutions to the end-of-
chapter problems in the book.

TEST BANK
The Test Bank provides a wealth of accuracy-verified testing material. Updated for the new
edition, each chapter offers a wide variety of true/false and multiple-choice questions, arranged
by learning objective and tagged by AACSB standards.

POWERPOINT LECTURE SLIDES

A comprehensive set of PowerPoint slides can be used by educators for class presentations or by
students for lecture preview or review. They include key figures and tables, as well as a summary
of key concepts and examples from the text.

DIGITAL IMAGE POWERPOINT SLIDES

All the figures and tables from the text are available for lecturer use.

ix
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 About the authors
Neal Arthur
BEc (USyd), MCom (Hons) (UNSW), PhD (USyd), CA, is a senior lecturer in the University of
Sydney Business School. Neal’s current research areas are financial reporting and corporate
governance. He has contributed articles to Accounting and Finance, the Australian Accounting Review,
the Australian Journal of Management, Charter, Corporate Governance, the International Journal of
Accounting, Auditing and Taxation and the Journal of Accounting Education. Neal has also been
a co-author of previous editions of Accounting for Corporate Combinations and Associations. He
has previously held visiting positions overseas, including at the University of Michigan and the
University of Texas. Prior to entering academia, Neal was employed at Deloitte.

Louise Luff
BBus (UTS), M.Edu (USyd), CA, is a lecturer in the University of Sydney Business School and
has also lectured in the Master of Accounting Program at Macquarie University. Louise has had
significant financial reporting and management experience in both professional and commercial
organisations, including the role of an accounting technical manager for a large Australian financial
institution. She has written materials for the Chartered Accountants Australia and New Zealand
CA and Quality Assurance programs, domestic and foreign undergraduate programs at Charles
Sturt University and for various past programs within the School of Taxation at the University of
New South Wales.

Peter Keet
BEc, MBA is a lecturer at the School of Accounting at RMIT University. Peter specialises in
teaching courses based on accounting standards to both undergraduate and postgraduate
masters students. Prior to teaching at RMIT University, Peter taught financial accounting for
20 years at various other Victorian universities. Peter has also taught business finance and
auditing. Peter was actively involved in the financial accounting modules of the CPA program
for 13 years, from 2001 to 2013. Peter has acted as treasurer for a number of community-based
non-profit organisations.

Matthew Egan
BCom Melb., BSc(Env) (Hons), PhD Sydney, CA, is a Senior Lecturer in the Discipline of Accounting
in the University of Sydney Business School. His research interests include the emergence of
organisational strategies focused on ‘sustainability’ and understanding how that impacts on
management practice, accounting routines and other organisational behaviours. Matthew has
worked as a finance manager, company secretary, external auditor and internal auditor including
experience within a medium-sized publicly listed entity and over seven years’ experience in two
chartered accounting firms in Australia and the Solomon Islands.

x
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 Bryan Howieson
MCom. FCPA FAFAANZ is Associate Professor in the School of Accounting and Finance at the
University of Adelaide. He has held prior positions at the Adelaide Graduate School of Business
and the Universities of South Australia and Western Australia. His teaching and research interests
relate primarily to financial reporting and accounting standard setting but he also has strong
interests in accounting education, professional ethics and corporate governance. Bryan has
published extensively in academic and professional journals. Bryan has had a long association with
accounting standards setting in Australia including acting as an alternate member of Australia’s
Urgent Issues Group and the Consultative Group, and has assisted the Australian Accounting
Standards Boards (AASB) in research projects. He was recently appointed to the AASB’s
Academic Advisory Panel. He has undertaken a number of consultancies in the private and public
sectors in the areas of financial reporting and codes of conduct. Bryan has served as a director
of several not-for-profit entities including as President (Australia) of the Accounting and Finance
Association of Australia and New Zealand and as Vice-President on the Executive Committee of
the International Association for Accounting Education and Research. Bryan was a member of
CPA Australia’s ‘Member of the Future’ committee, is a Past President of the South Australian
Division of CPA Australia, and now serves on CPA Australia’s Professional Qualifications Advisory
Committee.

Ronita Ram
BA, PGDip (Uni SPac), PhD (USyd), CA, is a lecturer in the Henley Business School at the University
of Reading. Prior to that Ronita was a lecturer in the Business School at the University of Sydney.
Ronita has over eight years’ teaching experience at the tertiary level. During this time she has
taught both undergraduate and postgraduate financial accounting units. Ronita’s current research
areas are international financial reporting and accounting for SMEs and developing countries.
Prior to entering academia, Ronita was employed at PricewaterhouseCoopers.

ABOUT THE AUTHORS xi

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 Acknowledgements
FROM THE AUTHOR TEAM:
Neal Arthur wishes to dedicate this book to his family and thanks them for their support and
understanding during the period in which the manuscript was prepared.
We appreciate the assistance of the Portfolio Manager, Jo Hobson, Anna Carter Development
Editor, Bronwyn Smith Project Manager and Fiona Crawford Lead Editor.

FROM THE AUTHORS AND PUBLISHER:

The authors and publisher would also like to thank the following academics for their invaluable
contribution in providing feedback and suggestions for this new edition. These include:
Dr Tracy Artiach, UQ Business School
Dr Dianne Mayorga, Senior Lecturer, UNSW

xii
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 1
Learning objectives
Text objectives and
After studying this chapter
you should be able to: introduction to
consolidation
• Explain the concept of a group.
• Describe the different
classifications for investments in
other entities and the accounting
methods that apply to each.
• Outline the historical development
of consolidated financial reporting and
demonstrate the importance of proper
consolidation accounting.
• Determine the entities that must prepare consolidated
financial statements.
• Describe the definition of control and the indicators of control as set out in AASB 10 Consolidated Financial
Statements.
• Apply the definition of control to examples likely to be found in practice (including in the not-for-profit sector).
• Identify the main uses and limitations of consolidated financial statements.

AASB standards referenced in this chapter

AASB Framework for the Preparation and Presentation of Financial Statements
AASB 3 Business Combinations
AASB 5 Non-current Assets Held for Sale and Discontinued Operations
AASB 9 Financial Instruments
AASB 10 Consolidated Financial Statements
AASB 11 Joint Arrangements
AASB 12 Disclosure of Interests in Other Entities
AASB 101 Presentation of Financial Statements
AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
AASB 119 Employee Benefits
AASB 127 Separate Financial Statements
AASB 128 Investments in Associates
AASB 139 Financial Instruments: Recognition and Measurement
AASB 1057 Application of Australian Accounting Standards

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 1.1 Introduction
This book describes and explains how to account for, and report upon, inter-entity
investment relationships. An ‘entity’ is defined in paragraph 6 of SAC 1 Definition of the
Reporting Entity, as “any legal, administrative, or fiduciary arrangement, organisational
structure or other party (including a person) having the capacity to deploy scarce resources
in order to achieve objectives”. Entities can include companies, partnerships and trusts,
as well as other types of arrangements as indicated in the SAC 1 definition. Entities can
have many different types of relationships with each other. For example, they can buy and
sell goods and services from each other, borrow or lend money to each other, combine
to jointly produce a good or service, or one entity can take an ownership interest in
another by way of purchasing the latter entity’s equity (for instance, A Ltd (the ‘investor’)
may purchase 100% of the issued shares of B Ltd (the ‘investee’)). In this book our main
focus is the situation in which two or more entities combine in some way, usually but not
exclusively through equity ownership, to conduct operations. For ease of exposition, this
book will typically explore accounting for investor–investee relationships using corporate
entities, although the principles throughout the book can be applied to any type of entity.
In the next section we provide a broad overview of some of the key concepts and basic
terminology that are relevant to understanding these inter-entity relationships. In later
sections of this chapter and throughout this book, these basic concepts will be explored
in greater detail.

1.2 Some basic concepts and terminology

The nature of the relationship between two or more entities can vary greatly. For example, if X
Ltd held only 5% of the issued shares of Y Ltd, then it would be very unlikely that X Ltd could
use its shareholding to impact upon how Y Ltd conducted its operations. On the other hand, if
X Ltd held 100% of the issued shares of Y Ltd, then it could effectively direct Y Ltd to behave in
any manner X Ltd wished. Clearly, the nature of X Ltd’s asset—its investment in Y Ltd—is very
different depending upon which of these two types of investment relationship it has. If X Ltd has
100% of the issued shares of Y Ltd, then it can effectively employ not only its own net
assets, but it can also use its voting power in Y Ltd to use the net assets of Y Ltd in X
Ltd’s operations. Consequently, the central accounting problem that is explored in this
X Ltd
book is, if two or more entities operate together, how should the economic impacts of that
relationship be reflected in financial reporting? Another way of stating this problem is to
100%
ask if we should prepare two sets of general purpose financial statements: one for X Ltd
and a separate set for Y Ltd, or is the economic substance of the relationship between
Y Ltd X Ltd and Y Ltd so close that they effectively operate as if they were only one entity
and so only one set of financial statements should be prepared based on the combined
100% net assets of X Ltd and Y Ltd? The short answer to this problem depends on the extent
to which the investor entity can direct the key relevant activities of the investee. In the
Z Ltd case where the investor can ‘control’ the investee, then for accounting purposes we treat
the two separate entities as though they were one ‘economic entity’ and prepare one
set of financial statements for the economic entity, often called the ‘group’ financial
FIGURE 1.1 The X Ltd group statements. Figure 1.1 explains the nature of the economic entity.

2 Accounting for Corporate Combinations and Associations

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 As X Ltd, Y Ltd and Z Ltd are companies, they each are recognised as separate entities under
the law. In principle, X Ltd, Y Ltd and Z Ltd could each present their own set of general purpose
financial statements. However, X Ltd owns 100% of the issued voting shares of Y Ltd and Y Ltd
owns 100% of the issued voting shares of Z Ltd. As X Ltd can use its voting power to direct Y Ltd’s
activities, it can effectively also direct Z Ltd’s activities because of Y Ltd’s power over the voting
shares of Z Ltd. Consequently, X Ltd controls the net assets of both Y Ltd and Z Ltd. As a result,
for accounting purposes, X Ltd, Y Ltd and Z Ltd are viewed as though they are one economic
entity. The economic entity is represented by the shaded boxes in Figure 1.1. We would call this
economic entity the ‘X Ltd group’.
Take a moment to consider more deeply the membership of the X Ltd group and the relationships
between the three companies that make up the group. If we begin from the bottom of the group,
Z Ltd is called the ‘subsidiary’ of Y Ltd because Y Ltd has control over Z Ltd due to its holding
of 100% of Z Ltd’s voting shares. In the Y Ltd/Z Ltd relationship, Y Ltd is the ‘parent’ of Z Ltd
(see AASB 10 Consolidated Financial Statements, Appendix A). However, if we then go further up the
group, we can see that this relationship is repeated between X Ltd and Y Ltd. As X Ltd controls
the voting shares of Y Ltd, X Ltd is the parent of Y Ltd and Y Ltd is X Ltd’s subsidiary. If we take the
whole group together, X Ltd is called the ‘ultimate’ parent and both Y Ltd and Z Ltd are subsidiaries
of X Ltd because X Ltd can effectively control both Y Ltd and Z Ltd. If we assume for the moment,
that the X Ltd group is a reporting entity, then it must prepare general purpose financial statements
for the economic entity that is the X Ltd group. As will be described in more detail throughout this
book, only one set of general purpose financial statements are prepared for the X Ltd group based
on the combined net assets of the parent and its subsidiary. The financial statements of the group
are called ‘consolidated financial statements’. In practice, X Ltd, Y Ltd and Z Ltd would likely
prepare individual financial statements for internal use by management but when preparing general
purpose financial reports for use by parties external to the X Ltd group, it would be usual to prepare
only consolidated general purpose financial reports. In other words, the example in Figure 1.1 is
treating the X Ltd group as the reporting entity responsible for preparing general purpose financial
reports rather than X Ltd, Y Ltd and Z Ltd being treated as separate reporting entities in their own
right. As an aside, if Y Ltd was also deemed to be a reporting entity, then it would prepare its own
consolidated financial statements for the Y Ltd group (consisting of Y Ltd and Z Ltd’s net assets).
The issue of identifying reporting entities is examined in more depth in Section 1.6.2 of this chapter.
It should also be noted that a group does not necessarily need to take the structure shown in
Figure 1.1. Many different types of structures could be groups for accounting purposes. As just one
example, X Ltd may own 100% of Y Ltd’s voting shares and directly own 100% of Z Ltd’s voting
shares as shown in Figure 1.2. The X Ltd group still consists of three entities but the structure of
their interrelationships is different. The common element in both Figure 1.1 and Figure 1.2 is that
X Ltd controls Y Ltd and Z Ltd.

X Ltd

100% 100%

Y Ltd Z Ltd

Figure 1.2 The X Ltd group

Chapter 1 Text objectives and introduction to consolidation 3

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 1.3 Why do entities form groups?
A group such as that depicted in Figure 1.1 may arise following takeover activity undertaken
to control a larger share of market activity and reduce costs per unit of output. Motivations
for a takeover include vertical or horizontal integration to increase the scale of operations and
market share. Alternatively, sometimes the companies in a group are formed (incorporated)
for a specific purpose, such as to undertake a new business opportunity or to operate in a
new location. It is possible for companies in a group to operate in the same industry, related
industries or unrelated industries. In addition, the companies may operate in different or similar
geographical regions.
The Australian Companies and Securities Advisory Committee (2000), Ramsay and Stapledon
(2001) and Dean and Clarke (2005) identified the following potential benefits of conducting
economic activity through a group structure, including:

• Reducing commercial risk or maximising potential returns by diversification.

• Attracting capital without forfeiting control. Management may not wish to allow outside investors
to increase their level of ownership in the parent company, but want outside investment as part
of their overall business.

• Lowering the risks of legal liability, including environmental and consumer liability. By setting up
a number of separate subsidiaries, certain assets can be isolated and protected from high-liability
risks. Effectively, this amounts to using the ‘corporate veil’ to manage risk.

• Providing better security for proposed loans. By transferring assets into a separate company, a
potential lender will have the opportunity to obtain a first charge over specific assets. This could
benefit the group by facilitating a lower cost of borrowing, particularly through project financing.

• Complying with regulatory requirements. Some multinational groups need to comply with the
domestic rules that require business operations to be conducted through local subsidiaries.

• Minimising taxation. Different countries have different company tax rates, which can be exploited
(within certain constraints) using transfer pricing.

The survey by Van der Laan and Dean (2010) reports that the average number of controlled
entities for ASX-listed companies is approximately 12. Not surprisingly, the median is much
lower at four (the distribution is positively skewed). Large companies tend to have a large number
of subsidiaries—for the largest 10% of companies by market capitalisation the mean number of
controlled entities is 62 (median is 33).
While a group structure may provide significant benefits to its stakeholders, there are potential
abuses of such a structure. In Australia there have been a number of well-publicised cases recently,
such as the one involving James Hardie, which have raised issues about the structuring and
restructuring of corporate groups and ‘asset shuffling’ to achieve the strategic aims of management
(see Clarke and Dean, 2007). More generally, the global financial crisis (GFC) of 2008 provided
further examples of how structuring inter-entity relationships could be used to transfer risk and
avoid transparency in financial reporting. Such practices have challenged accounting standard
setters around the world to develop accounting rules that minimise the ability of financial statement
preparers to exploit structured entities for opportunistic purposes. Accounting standard setters’
responses to this behaviour are explored in more detail in Section 1.5.

4 Accounting for Corporate Combinations and Associations

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 1.4 Overview of accounting for different
investor–investee relationships
In Section 1.2 the focus was upon an inter-entity relationship in which the investor entity had
control over the investee entity. This gave rise to a parent/subsidiary relationship with the result
that for accounting purposes the two separate legal entities were treated as though they were one
economic entity. Of course, not all inter-entity relationships are based on one entity controlling
another. Relationships between investor and investee entities range across a continuum from
control to no special interaction (e.g., an investor may be holding an equity interest in an investee
only for short-term speculation). As stated in Section 1.2, as the strength of the relationship
between the investor and investee changes, the economic substance of the investor’s asset (i.e.,
its investment in the investee) changes. The investor’s accounting for that asset should also differ
as a result. In their efforts to ensure that general purpose financial statements present decision-
useful information, accounting standard setters have identified four types of investor–investee
relationships and specified the different accounting policies that must be adopted for each of these
four categories of relationship. Table 1.1 provides a high-level summary of the relevant accounting
requirements for investor–investee relationships.

TABLE 1.1 Summary of accounting for investor–investee relationships

Nature of
relationship Relevant Accounting
between investor & Name given to Name given to accounting method for
investee investee entity investor entity standard(s) investor’s interest
No special Investee Investor AASB 139 OR Fair value
relationship AASB 9
Significant influence Associate Investor AASB 128 Equity method—
proportional share of
associate’s profits

Joint control Joint arrangement Venturer or operator AASB 11/AASB 128 Proportional share of
joint arrangement’s
assets, liabilities &
expenses or the
equity method
Control Subsidiary Parent AASB 10 Consolidation–
combination of all
entities’ financial
statements

Table 1.1 shows that as the strength of the investor’s relationship with the investee grows, the
appropriate accounting method changes to reflect the greater level of interest the investor has
in the investee’s net assets. In the case where there is no special relationship, the investor shows
its interest in the investee as a mere ‘one-line’ asset (e.g., ‘Investment in Y Ltd’) but at the other
extreme where the investor controls the investee, the investor’s one-line asset in the investee is
effectively replaced by all the individual assets and liabilities of the investee. As the investor–
investee relationship becomes more complex, so does the investor’s associated accounting
method. These complexities are explored in detail in later chapters but a brief summary is
provided in the following sections. In practice, an investor may have a range of investees, some of
which are ‘controlled’, some subject to joint control, some significantly influenced by the investor,

Chapter 1 Text objectives and introduction to consolidation 5

Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2017 — 9781488611520 — Arthur/Accounting for Corporate Combinations and Associations 8e
 and some for which there is no special relationship. In such cases consolidated general purpose
financial statements would be prepared that include not only the combined financial statements
of the investor and its subsidiaries but also interests in joint arrangements and associates that are
accounted for using either the line-by-line method or the equity method.

1.4.1 Investments in controlled entities (subsidiaries)

Figure 1.1 depicts a group that comprises three companies, X Ltd, Y Ltd and Z Ltd. It was noted
in Section 1.2 that since X Ltd owns 100% of the issued capital of Y Ltd and Y Ltd owns 100%
of the issued capital of Z Ltd, X Ltd is able to control the economic resources owned by Y Ltd
and Z Ltd. X Ltd is also in a position to direct how those resources are used in operating activities.
Consequently, where X Ltd controls Y Ltd and Z Ltd, one set of consolidated financial statements
will be prepared for the X Ltd group.
Section 1.2 indicated that the companies in Figure 1.1 represent three separate legal entities.
A question arises as to whether the needs of users desiring information on the economic activities
of X Ltd are satisfied by a financial report based on the financial position and financial performance of
X Ltd (only) or whether financial information relating to the group is more relevant. The relevance
of group information can be demonstrated by using the example of the X Ltd group in Figure 1.1.
The assets of the parent X Ltd include a 100% interest in the net assets (assets less liabilities) of
Y Ltd and Z Ltd. The parent entity controls the resources and operations of all companies in the
group and investors in the parent entity need financial information based on the group to hold
management of the parent company responsible for the financial performance of the group.
X Ltd’s control over Y Ltd and Z Ltd implies the following for the investors in X Ltd:

• Since X Ltd owns 100% of the net assets of its two subsidiaries, it owns all of the equity of the
subsidiaries. For example, if Y Ltd were wound up, then X Ltd would be entitled to 100% of any
surplus of Y Ltd’s assets remaining after its liabilities were settled or extinguished.

• Any increase in the net assets of a controlled company, as represented by profits and other
comprehensive income, ultimately benefits its shareholders as residual claimants. For example,
if Y Ltd earned a profit of $10million the portion distributed as a cash dividend would increase
X Ltd’s net assets (and cash balance). This, in turn, could be distributed to X Ltd’s shareholders,
provided the legal test of solvency is met. The portion of the profit reinvested by Y Ltd, rather than
being distributed as dividends, would expand Y Ltd’s operations, increasing the value of the parent
company’s investment asset and indirectly the value of the shares held by investors in X Ltd.

• The cash flows of the parent company are related to the cash distributions that it may receive
from a controlled (subsidiary) company.
It follows that relevant information for the shareholders of X Ltd includes the financial
performance, financial position and cash flows of its controlled investments, Y Ltd and Z Ltd, that
is, the economic entity as a whole. Financial statements that include financial information relating to
subsidiaries (i.e., the controlled entities) assist stakeholders in the group in making rational economic
decisions by releasing information about the underlying assets, liabilities and profits relating to
investments in subsidiaries. Such information also allows an assessment of how management has
discharged its accountability for the use of controlled economic resources. If this information were
given by attaching the separate financial statements of each subsidiary to the parent’s financial
statements it would be difficult to use, particularly if the parent had numerous subsidiaries and there
were numerous transactions between entities within the group. The solution is to summarise the

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 financial information of the parent company and all its subsidiaries into one consolidated report
that includes consolidated financial statements reporting on the financial performance, financial
position, changes in equity and cash flows of the group. Consolidation accounting in Australia
is regulated by AASB 10 Consolidated Financial Statements. Although a number of (sometimes
complex) adjustments are required to avoid double-counting of the group’s net assets, consolidated
financial statements are in principle created by adding together the financial statements of the
individual entities within the group. For example, the consolidated Statement of Financial Position
of the X Ltd group in Figure 1.1 would be obtained by adding the Statement of Financial Position
of X Ltd, to that of Y Ltd, and to that of Z Ltd. The consolidation process is explained in detail in
later chapters.
The importance of the consolidated financial statements can be seen by noting that the financial
press focuses on the profit reported by the group when commenting on the accounting results
reported by management. Indeed, such is the focus on group (compared to parent) income that the
financial press most commonly omits the reference to ‘group’ when discussing the income number.
Financial journalists focus on the group’s performance and how this compares to expectations.
Similarly, analysts forecast group rather than parent entity earnings and earnings per share.
Subsequent to the release of results for the year, the chairman of the board of directors of a
listed parent entity and the CEO of the listed parent entity will review and comment on the results
of operations for the period. These are normally referred to as the ‘Chairman’s Review’ and the
‘Chief Executive Officer’s Report’. Comments on results and strategies are also at the level of the
group. In conclusion, analysts, the financial press, management and the board are all focused on
the measure of group earnings, which is the outcome of the consolidation process.

1.4.2 Investments in jointly controlled entities and operations

A company will sometimes share control of economic resources with another or other entities. For
accounting purposes, shared control becomes ‘joint control’ only when there is a contract between
the controlling parties stating that all strategic decisions relating to the jointly controlled economic
resources must have the unanimous consent of all the controlling parties. Note that joint control
is necessarily a lower level of power than the unilateral control that creates a parent–subsidiary
relationship. Joint control of economic resources is often necessary or desirable because the scale
of some projects is so large that one entity does not wish to absorb all of the business risks of
a project. Joint control may also be preferred to control because it enables two or more entities
to bring different economic resources to a project that enable the overall value of that project
to be maximised through their joint participation. For example, one entity may have acquired
an intangible such as a mining licence and another entity may have experience and expertise in
conducting mining operations. In some cases, joint control is necessary because the government
of a particular country may prefer that a foreign company operates in that country by way of a
joint arrangement with a local company. A joint arrangement with a local company can also bring
valuable knowledge and expertise about differences in legal and cultural aspects of conducting
business in that country. For example, in September 2014, Telstra and Telkom Indonesia entered
into a joint arrangement to provide Network Application and Services (NAS) to Indonesian
enterprises, multinationals and Australian companies operating in Indonesia. In a Telstra media
announcement, a Telstra executive noted: “By partnering with Telkom Indonesia in the fast
growing NAS market we leverage local expertise, a respected brand and service capabilities. The
JV will deliver locally supported managed data network and security services, as well as cloud

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 and unified communications services” (see http://www.telstraglobal.com/newsitem/telstra-and-
telkom-indonesia-sign-joint-venture, accessed 24 August 2015).
One way of sharing economic resources is for all parties involved to transfer resources into a
jointly controlled entity. For example, in the Telstra and Telkom Indonesia NAS joint arrangement,
a company was formed in which Telkom Indonesia owns 51% of the new company and Telstra
owns 49%. Note that the fact that the two parties own 100% of the voting shares between them is
not enough to establish joint control—there must also be a contract between the two shareholders
requiring unanimous consent to major decisions (AASB 11 Joint Arrangements, paragraph 7).
It is also possible for companies to share economic resources in a joint arrangement without
transferring the resources to a separate legal entity. For example, one company may agree to
share the production of an oil and gas site with another company that offers financial resources
and experience in successful site development. These arrangements are based on contractual
agreements that determine the rights and obligations of the participants. Once again, the contract
must establish that the parties have joint control.
AASB 11 classifies joint arrangements into two categories: (1) joint operations; and (2) joint
ventures. A joint operation is a joint arrangement in which the parties (known as joint operators)
have joint control over the rights to the assets and obligations for the liabilities of the arrangement.
A joint operator accounts for its interest in the joint operation using the line-by-line method.
The line-by-line method involves recognising the operator’s proportionate share in each asset,
liability and expense that relates to the contractual arrangements. Where, for example, the jointly
controlled asset is a wharf with a cost of $10million an operator with a 40% interest will recognise
a carrying amount of $4million (its share) for the wharf on its statement of financial position.
Unlike a joint operation, a joint venture is a joint arrangement in which the parties (known as
joint venturers) have control over the rights to the net assets of the arrangement. For example,
two telecom companies may decide to form a third company with which they will conduct a
joint venture. Each of the telecom companies owns 50% of the shares in the third company and
receives a return based on profits generated by the third company. As the rights of the telecom
companies extend only to the net assets of the third company, the arrangement is a joint venture.
It should be noted that although the creation of a separate entity for the joint arrangement might
normally be a signal that a joint venture has been formed, this is not always the case and the
classification of a joint arrangement as a joint operation or a joint venture depends on a detailed
examination of the specific facts in each case. Chapter 9 provides detailed coverage of accounting
for joint arrangements.

1.4.3 Investments in significantly influenced entities (associates)

An investee may be subject to significant influence as opposed to control or joint control. If
A Ltd has the power to participate in the financial and operating policy decisions of B Ltd,
but does not have either control or joint control over the financial and operating policies of
B Ltd, then A Ltd has significant influence over B Ltd and B Ltd is an ‘associate’ of A Ltd.
Significant influence normally occurs when one entity has a substantial ownership interest in
another entity. In practice, investments in associates are quite common, particularly for listed
companies. Investments in associates are accounted for using the equity method of accounting.
This involves the initial recognition of the investment at cost. The investment asset carrying
amount is later increased (or decreased) by the investor’s percentage share of the post-acquisition
profits (or losses) and other comprehensive income of the associate. Changes in the investment

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 asset carrying amount lead to associated changes in the profits and reserves of the investor. The
equity method reports income and investment asset values that provide more information on
investment performance and investment value than the cost method, which records revenues
when dividends are received (or receivable) and restates the carrying amount in the case of
impairment or disposal of the investment. However, there is controversy over whether the equity
method is a valid form of accounting. Some commentators argue that it is unclear whether the
equity method is a form of measuring the value of an investment in an associate or whether it
is a form of consolidation because the application of the equity method requires some of the
adjustments that are associated with preparing consolidated financial statements (Miller and Leo,
1997). In addition, given that the equity method involves the investor bringing onto its financial
statements net assets over which it only has significant influence, it is debatable whether the
equity method breaches the definition of an asset in the AASB Framework for the Preparation
and Presentation of Financial Statements, which requires that an entity control economic resources
(paragraph 49(a)). Chapter 9 provides detailed coverage of the application of the equity method
of accounting for investments in associates.

1.4.4 Investments in other equity interests

An investor can also hold an equity interest in an investee without attaining control, joint control
or significant influence over that entity. This will commonly be the case when a company holds a
relatively small stake in the equity of another entity. It is a very common form of investment and
is usually undertaken with the objective of achieving a return on the investment (i.e., capital gains
and dividends) as a passive investor. Investments of this type may precede further investments
that eventually result in the investor achieving significant influence and even control. Normally,
small equity investments are classified as ‘financial assets’. At present, financial assets could
be accounted for using either AASB 139 Financial Instruments: Recognition and Measurement or
AASB 9 Financial Instruments. AASB 139 was issued in July 2004 and is currently the mandatory
standard with regard to the recognition and measurement of financial assets. However, as a result
of reforms instituted by accounting standard setters in response to the GFC, the various provisions
of AASB 139 are being incrementally replaced by those in AASB 9 and other standards. AASB 9,
first issued in 2009, has a mandatory application date for annual reporting periods beginning on or
after 1 January 2018. Entities have the option to ‘early adopt’, but if they do so they must apply all
the requirements of that standard (AASB 9 Aus1.3). Many entities have made the choice to early
adopt AASB 9 and so the broad requirements of both of those standards are described here. Note
that under AASB 139.2 and AASB 9.2.1, equity investments that are subsidiaries, associates or
joint arrangements are excluded from the scope of AASB 139 and AASB 9.1
AASB 139 has the following relevant requirements. Except for investments, the fair value
of which cannot be reliably measured and must be measured at cost (AASB 139. 46(c)), equity
investments are measured at fair value. The accounting for changes in fair value required by AASB
139 depends on the classification of financial assets into one of four possible categories. In the
case of small equity investments only the following two categories are relevant.

1 Financial asset at fair value through profit or loss (AASB 139.9).

This classification applies if the investment is either held for trading or is designated at fair value
through profit or loss on initial recognition. This class of financial assets is measured at fair value
with changes in fair value forming part of the profit or loss for the period (AASB 139.55(a)).

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 2 Available-for-sale financial assets (AASB 139.9).
This classification applies to investments that are designated as available-for-sale or are
investments that cannot be included in any other category. These assets are measured at fair
value. However, unlike assets classified as fair value through profit or loss, changes in fair value
are initially included as part of other comprehensive income for the period. The gain or loss is
transferred to profit or loss when either sold or written off (AASB 139.55(b)).
If an entity adopts AASB 9 for the recognition and measurement of its equity investments,
then paragraph 5.1.1 requires that those financial assets be initially measured at the fair value of
acquisition plus any direct acquisition costs. However, direct acquisition costs are expensed at
the time the financial assets are acquired if those financial assets meet the definition of fair value
‘held for trading’. Held for trading is defined in AASB 9.A and, in essence, means that the financial
asset has been acquired principally for the purpose of selling or repurchasing in the short term.
AASB 9 classifies financial assets as being one of two categories, “measured at amortised cost” or
“measured at fair value”. Paragraph 4.1.2(b) makes it clear that equity investments do not satisfy
the definition of “measured at amortised cost” and so they must be classified as “measured at fair
value”. After initial recognition, any movements in the fair value of the equity investments must be
recognised in the entity’s current profit or loss (AASB 9.5.7.1) unless the entity makes a choice to
take the movements through other comprehensive income. This choice cannot be changed later
and cannot be applied to equity investments that are “held for trading” (AASB 9.5.7.5).

1.5 The importance of consolidation

accounting
Section 1.4.1 described some of the reasons why aggregated financial information about the
group may be more decision-useful than simply the provision of financial information about
the individual members of the group. As a practice, the preparation and presentation of consolidated
financial statements has had a long history. Initially, consolidation accounting was unregulated
and entities made their own choices about whether they would provide consolidated financial
statements. However, over time it became recognised that some managers chose to structure
their groups in various ways so as to provide less accountability and transparency than would
be desired by investors, creditors and other financial statement users. For example, managers
have employed group structures to try to boost profits and asset values, hide underperforming
subsidiaries, transfer risk from one entity to another, and hide risks such as high leverage. These
undesirable practices have prompted a variety of regulatory reforms that have sought to minimise
managers’ ability to use entity structures as a means of reducing the decision usefulness of their
group’s financial statements. These reforms continue to the present day where recent high-profile
corporate collapses and the GFC revealed certain inadequacies in accounting regulations relating
to consolidation. This section details a history of the development of regulation associated with
consolidation as a means of demonstrating how managers have tried to use entity structures
inappropriately. It also highlights some of the key methods used to structure groups of related
entities. Understanding this history will provide a better understanding of why the current standard,
AASB 10, contains the requirements that it does and why it employs a definition of a group based
on the principle of ‘control’ rather some other more clear-cut definition such as, for example,
percentage of voting shares owned by the investor.

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 1.5.1 The historical development of consolidation reporting regulations
The concept of ‘holding company’ (now described as a parent company) existed in the US prior
to 1850. In Australia, holding companies have been traced back to 1882 when Elder Smith and
Co Ltd acquired a subsidiary (Spence, 1949). Whittred (1987a) argues that changes in Australian
taxation laws provided one of the incentives for the growth in the formation of Australian groups.
In the US, the preparation of consolidated accounts as a means of financial reporting on the
activities of a group can be traced back to the beginning of the 20th century. During the period
from 1900 to 1940, consolidated accounts appear to have become increasingly popular. Similarly,
in the UK, consolidation accounting was widely adopted by the late 1940s (Bircher, 1988). Walker
(1978) attributes the UK’s adoption of consolidated reporting to the inadequacies of conventional
accounting methods for accounting for inter-corporate investments, specifically in relation to asset
measurement and revenue recognition.
The development of groups and consolidated reporting in Australia largely follows the
experience of the US and the UK. Table 1.2 builds on a chronology prepared by Walker and
Mack (1998) and provides a summary of the evolution of Australian regulatory requirements
encouraging or requiring the presentation of consolidated financial statements.

TABLE 1.2 Development of Australian regulatory requirements for consolidated reporting

Year Reporting development
1925 Sydney and Melbourne stock exchanges require listed companies to provide statements of
financial position and profit and loss accounts of subsidiaries as supplements to reports of holding
companies
1927 Melbourne Stock Exchange (MSE) allows the choice of either separate accounts of subsidiaries or
aggregate statements of subsidiaries as supplements to the reports of holding companies
1928 Sydney Stock Exchange (SSE) also allows the use of aggregate statements (as above)
1936 The Victorian Companies Act requires ‘group accounts’, which could take the form of consolidated
accounts or separate accounts for subsidiaries
1941 SSE and MSE listing rules require newly listed companies to provide consolidated statements or
separate statements for subsidiaries
1961 Australian uniform Corporations Law requires holding companies to provide consolidated accounts
or separate accounts for all subsidiaries
1966 Australian Associated Stock Exchanges (AASE) require listed companies to provide notices of annual
results in consolidated form
1971 AASE require annual accounts to be in consolidated form (unless an alternative presentation has
been approved by the AASE)
1987 The Australian Accounting Research Foundation (AARF) issued ED 40 Consolidated Financial
Statements
1990 The Accounting Standards Review Board (ASRB) issued ASRB 1024 Consolidated Financial
Statements; ASRB 1024 did not take effect because of legal impediments in the Companies Code
at that time
1990 AAS 24 Consolidated Financial Statements issued
1990 AASB 1024 Consolidated Accounts issued (gazetted in 1991)
1991 The Corporations Law (as it was then called) was amended so that it did not conflict with the
requirements of AASB 1024—particularly the definition of a subsidiary for the purpose of financial
reporting and the requirement to produce group accounts, which, prior to this amendment, did not
necessarily mean consolidated accounts. These amendments were necessary before AASB 1024
could be gazetted
1992 AASB 1024 and AAS 24 were revised and reissued, requiring a consolidated cash flow statement
instead of a consolidated funds statement

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 Continued
Year Reporting development
2002 ED 139 Business Combinations was issued; it prescribed the accounting treatment of goodwill
2004 AASB 127 Consolidated and Separate Financial Statements and AASB 3 Business Combinations
were issued
2005 ED 141 Proposed Amendments to AASB 127 and ED 139 Proposed Amendments to AASB 3 were
issued in July
2008 Revised AASB 3 and IAS 27 were issued. These revisions allowed for the use of the full goodwill
approach as an alternative to the purchased goodwill approach
2010 ED 171 Consolidated Financial Statements was issued
2011 AASB 10 Consolidated Financial Statements was issued
2013 AASB 10 amended to exempt certain ‘investment entities’ from consolidating their subsidiaries
2013 AASB 10 amended to include new Appendix E to provide implementation guidance for not-for-profit
entities

The issue of Accounting Standard AASB 1024 Consolidated Accounts in 1991 is pivotal to the
history of consolidation accounting in Australia. From the commencement of AASB 1024, group
accounts were legally required to be in the form of a single set of consolidated financial statements
that covered all members of the group. It was no longer possible to consolidate some members of
the group but selectively omit to consolidate others.

1.5.2 The debate over voluntary consolidated reporting in Australia

Table 1.2 indicates that in the decades prior to 1991, when AASB 1024 mandated accounting
requirements for consolidated financial statements, there had been a progressive strengthening of
the regulatory requirements and a narrowing of reporting options available to holding companies.
It is interesting to note that many Australian holding companies prepared consolidated accounts
before legal requirements to do so were introduced. The 1966 Australian Associated Stock
Exchanges listing rules were the first formal requirement for consolidated reporting. However,
as documented by Whittred (1986) and Walker and Mack (1998), the provision of consolidated
financial information by Australian listed companies was commonplace by the 1950s.
Whittred (1987b) attributes the evolution of consolidated reporting and its voluntary adoption
by Australian parent entities as, in part, a result of the emergence of an innovative debt market that
used cross-guarantees for debt obligations among the members of a corporate group. Typically,
a cross-guarantee would involve each company in the group becoming jointly and severally liable
for the debt obligations of some or all of the other companies in the group. This meant that a
debt provider could claim against the assets of other companies in the group if the borrowing
company defaulted on its loan payments. In addition, the debt obligations of the other companies
in the group became relevant to the debt provider because of the possibility of claim dilution (a
reduction in the probability of payment to a debt holder). Therefore, the effect of cross-guarantees
was to remove the advantage of limited liability of the individual companies within the group.
Consequently, the constraints in debt covenants, such as leverage ratios, were defined on a group
basis by including the assets and debt obligations of other group companies that were guarantors.
It follows that the most relevant financial information for the debt provider concerned not the
individual company to whom the loan had been made but the combined financial information
of the group (i.e., the consolidated financial statements). This assumes that all companies in the
group are parties to the cross-guarantee. In practice, the situation can be more complex as debt

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 Another Random Document on
Scribd Without Any Related Topics
I knew no mercy would be shown me by Hadj Absalam’s
band, who delighted in cruelty to their victims, and whose
religious rites were practised amid scenes of horror and
bloodshed. Yet if they meant to simply leave me there to
starve and die under the blazing sun, why did they secure
me in this fashion? They could have maimed my feet and
hands, and there would have been no need of this elaborate
preparation.

A sudden shout caused me to try and look up. Several men

were running towards me, their white burnouses flowing
behind them. One of them carried in his hand a little stick
with a noose on the end, and in the noose there writhed a
large black asp, one of the deadly denizens of the rocks.

The sight froze my blood. I knew that they meant to kill me.

Amid the wild excitement of the crowd, who had now gone
half mad at the prospect of seeing an Infidel done to death,
two long thin thongs of mule-skin were placed through the
skin and muscles of the snake, close to its tail. The serpent
squirmed under the pain, but his head was held fast in the
loop.

Within four feet of my face another stake was driven into

the ground, and to this the loose ends of the thongs were
fastened. The Arabs sprang back. The snake was free from
the noose, but bound fast by the thong through its tail.

My face was directly before it; yet I could not move! In an

instant the snake was in a half coil, with its bead-like eyes
fixed upon mine.

As I held my breath in that brief second, the warning of Ali

Ben Hafiz again flashed through my mind. The sweat stood
upon my brow. The crowd pressing around me became
hushed in expectancy. To have been murdered with my
fellow-travellers would have been far preferable to this
torture.

The horror of that moment was awful.

The serpent, enraged by pain, raised its flat head ready to

strike. I set my teeth and closed my eyes, waiting to feel its
deadly fangs upon my cheek.

Another instant, and its venom would be coursing through

my veins!
 Chapter Four.
A Veiled Face.

But my cruel captors intended to torture me; to delay my

death as long as possible.

Like a flash the head of the gliding serpent shot out. The
thong withstood its spring. It fell two inches short of my
face. A tiny drop of liquid spurted upon my temple and ran
down my cheek. It was the venom from the fangs that
failed to reach! The Arabs roared with laughter.

But they were wasting time. From their conversation I

gathered that a squadron of Spahis were in search of them
to punish them for the many robberies and murders they
had committed, and that they were moving at dawn
towards the Tanezrouft, a waterless desert that has never
been wholly explored by Europeans. They had to examine
the packs of Ali Ben Hafiz’s camels, so, after laughing and
jeering at me for some time, they teased the asp, and then
returned to their encampment.

Through the long brilliant evening I lay there alone, the

snake’s head playing before my eyes, more of the venom
being spat into my face.

The sun at last disappeared in a blaze of crimson, and the

clouds covered the heavens.

The snake had learned that it could not reach my face. It

lay coiled at the foot of the stake watching. For a while
longer it struck each time I moved my head, but presently it
lay again in its sullen coil. The strain of holding my head
back, back, until the cords fairly cracked, was awful. How
long, I wondered, would it be before my mind would give
way and madness relieve me from this deadly terror?

Darkness crept on. Above the low Iraouen hills the moon
rose, and shone full upon my face. The beating of
derboukas, the playing of kánoons, and sounds of singing
and dancing made it plain that the marauders had
discovered the great value of the merchandise they had
stolen, and were making merry. Slowly the moments
dragged. Time after time I struggled to get free, but in vain.
The outlaws had bound me in such a manner that the more
I struggled the deeper sank the cords into my flesh.
Presently I heard shuffling footsteps, and, looking up, saw
approaching two of the villainous men who had assisted to
bind me. One of them carried a pitcher of water he had
procured from the well.

“Take thy knife and kill me,” I cried. “Death is better than
this horrible torment.”

They both laughed derisively, and, bending, poured water

upon the rope that held me and upon the serpent’s thongs.

“Thou wilt be claimed by Eblis soon enough,” one of the

men replied, grimly.

“My throat is dry. Give me a drop of water—one mouthful—

that I may quench this terrible thirst consuming me,” I
implored.

But again they only laughed, and, flinging the water from
the battered copper pitcher upon the sand, the man said,
“Thou art accursed of Allah, and our father hath decreed
that thou shalt die.”

“Then kill me! kill me!” I cried in agony. “I am going mad.”

“That is part of thy punishment,” replied the other man,
unconcernedly shrugging his shoulders and walking away,
followed by his laughing companion. My heart sank within
me.

The cool wind that had sprung up revived me, and I felt the
pangs of hunger. Still before me I saw those coils and that
flat head. In the white moonlight I could distinguish the
snake’s tongue darting out; he was preparing for another
spring.

He struck, but still he could not reach. An inch more, and

his venomous fangs would have buried themselves in my
cheek!

I rubbed my face in the sand to clear it of the horrible

poison now thickening upon it.

I must have lapsed into unconsciousness for a long time,

but on awaking, all was silent as the grave. The nomads of
the Ennitra, who had long been hunted in vain by the
Algerian soldiers, were asleep. I felt the strain of the rope
growing more painful. I had been pulling back on it with all
my force, but now I felt a counter-pull that was slowly
drawing me towards the asp and death.

Why did I not push my face towards the serpent and end
the torture? I had a presentiment that I should die from the
moment I had fallen into the hands of these robbers. I knew
that I must succumb to hunger and thirst, even if the asp
did not reach me. But life is always sweet. I could not bring
myself to die. My mad brain refused to order the muscles to
meet the reptile.

The rope pulled harder. Then I knew. The water those

brutes had poured upon it was shrinking it! The distance
between my face and the fangs of my black enemy was
gradually being lessened. An inch more would mean death!

I dug my toes into the ground. I pulled back until the rope
cut deeply into my flesh and the blood flowed. The cords
that bound me were shortening!

Water had also been poured upon the thongs that held the
snake. The mule-hide swelled and stretched, while the
hempen rope shrank.

The snake tried to crawl away. The strings in its flesh held it
back. The pain enraged it, and its head shot forth once
again. Its tongue came within half an inch of my forehead!

Closing my eyes, I must have once more lapsed into a state

of half-consciousness, knowing that the thongs which held
the reptile were stretching, and that in a few minutes death
would release me from the torture.

Suddenly the frou-frou of silk greeted my ears, and a

second later I became aware of someone leaning over me.

“Hist! Peace be upon thee!” exclaimed a soft voice in tuneful

Arabic. “Lissa fih wákt!” (“There is yet time.”) The face
bending over me was closely veiled, but above the adjar a
pair of bright sparkling eyes peered into mine, while across
the white forehead hung rows of golden sequins. I was
amazed. Whether my strange visitant were young or old I
could not tell, but her splendid eyes had a curious
fascination in them such as I had never before experienced.

Her arm, bare to the shoulder, was white and well rounded;
on her slim wrists were heavy Arab bracelets of gold and
silver, studded with jacinths and turquoises, and in her hand
was a long thin knife, the blade of which flashed in the
moonlight.
“What art thou?” I gasped. “Who art thou?”

“Thy friend,” she replied, quietly. “Make not a sound, for my

life as well as thine is at stake. See! I cut the cords that
bind thee!” and so saying, she severed my bonds quickly
and deftly with her curved dagger, the jewelled scabbard of
which hung upon her girdle.

Half dazed, but finding both hands and feet free, I jumped
up, and, stepping aside from the spot where the serpent
darted forth, stood before my mysterious deliverer.

She was of medium height, slim and graceful. The hideous

haick and baggy white trousers which always shroud the
women of the Arabs when out of doors were absent, for
apparently she had stolen from her tent, and, with the
exception of the flimsy veil across her face, she was still in
her harem dress. Set jauntily upon her head she wore the
usual dainty little skull-cap of velvet thick with gold and
seed pearls, her serroual of pale blue China silk were drawn
tight midway between the knee and ankle, her rich velvet
zouave was heavily trimmed with gold, and her bare feet
were thrust into tiny velvet slippers. A wide sash of silk
encircled her waist, and the profusion of gold bangles on
her ankles had been tied together so that they should not
jingle as she walked.

“Al’hamdu lillâh dâki lakom!” she exclaimed solemnly, which

translated meant, “Praise be unto Allah, praying for thee.”

“Allah be praised!” I responded fervently. “Thou art my

deliverer. How can I ever sufficiently thank thee?”

Shrugging her shoulders with infinite grace, she replied,

“Thanks are not necessary. The knowledge that thou hast
escaped a horrible death is all the reward I require.” She
spoke in low musical tones, and her accents were those of a
town-dweller rather than of a nomad of the Sahara.

“But why dost thou run such risks in order to deliver me—
an Infidel?” I asked, recollecting that if detected, little
mercy would be shown her by that barbarous fanatical
band.

“I watched thee brought before the Sheikh, and I heard him

condemn thee to the torture. For hours I have been awake
thinking, and at last determined to save thee. Come, make
no noise, but follow.”

Cautiously she moved away, taking care to keep in the

shadow of the rocks. So graceful was her carriage, so
supple was her figure, that, as I walked behind her, I felt
convinced that she must be young. Once she halted, and,
turning her splendid eyes upon me, said—

“Thou wilt forgive my people, wilt thou not? I make no

excuse for their barbarities, I only ask thee to forgive.”

“Thou hast saved my life,” I replied. “How can I refuse any

request thou makest?”

She laughed a short, silvery laugh, and, turning, sped on

again, her little slippers coming to sad grief over the rough
stones. Presently I stopped her, and, placing my hand
lightly on her shoulder, said—

“May I not gaze upon thy face for one brief moment?”

“I cannot permit,” she cried, shrinking from me.

“Remember, thou art an Infidel!”

Her answer was a stinging rebuff.

“None of thy people are here to witness,” I urged. “Let me
for one second unclasp thy adjar and gaze upon thy
countenance;” and at the same time I made a movement as
if to tear away the tantalising veil that concealed her
features.

“No! no!” she cried in alarm, stepping back and covering her
face with both hands. “Thou must not! Thou shalt not! This,
then, is thy reward to one who has risked so much to save
thee?” she said reproachfully.

“Forgive me,” I exclaimed quickly, dropping upon my knee

and raising her soft, delicate hand to my lips. But she drew
it away firmly, as if my touch stung her.

“Rise,” she said, rather harshly. “I forgive thee, of course,

but there is no time for courtesies. Come.”

Passing round to the other side of the rock, I found tethered

in the centre of a patch of tamarisk a splendid Arab horse
with handsome trappings.

When she approached, the animal pawed, rubbing its nose

upon her hand.

“It is mine,” she said, “and I give it to thee in the hope that
Allah may guard thee, and that thou wilt get away to the
Atlas in safety. I saddled it with mine own hands, so in the
bags thou wilt find both food and drink. On leaving here,
keep straight over yonder hill, then spur with all speed
always towards the east. Before three suns have set, thou
wilt rest on the Oasis of Meskam, where are encamped the
Spahis who are in search of us. Thou wilt be safe with them,
although thou wilt not inform them of our whereabouts?”

“No, I promise to preserve thy secret,” I said.

Dawn was spreading quickly, and in the grey light I could
see more distinctly the part of her countenance left
uncovered.

Grasping her slim, white hand, with its fingers laden with
roughly-cut gems, I looked earnestly into her magnificent
eyes, and again asked, “Is thy decision utterly irrevocable?
May I not look for once upon thy face? Think, I have been
delivered from a horrible death, yet to recognise my
deliverer again will be impossible!”

“You and I are strangers,” she replied slowly. “Thou art a

European, while I am a homeless wanderer of the desert. If
thine eyes do not gaze upon my countenance, I shall have
committed one sin the less, and thou wilt never be troubled
by any recollections. Memories are apt to be tiresome
sometimes, and it is written that the True Believer is—”

“With me thy memory will always remain that of a brave,

tender, but mysterious woman, to whom I owe my life.”

“That is how I wish thee to think of me. Perhaps I too may

remember thee sometimes, though it would be sinful for me
to do so. What is thy name?”

“Cecil Holcombe.”

She repeated the four syllables with a pretty Arab accent.

“And thine?” I asked, still holding her white hand and gazing
into her eyes.

She hesitated. I felt she was trembling. Her breath came

quickly.

“Mount, and go,” she said. “I—I have risked too much.
Besides, thou mayest not discover who I really am. It would
be fatal!”

“But thy name?” I urged. She seemed bent upon preserving

her incognita, and I was growing impatient. That she was
lovely I felt sure. No face could be ugly with those
magnificent eyes. “Surely thou wilt not withhold from me
thy name?”

She was silent. Her slim, bejewelled fingers closed over

mine with a slight pressure as she sighed. Then, lifting her
eyes, she replied—

“I am called Zoraida.”

“The daughter of whom?”

“Daughter of the Sun,” she replied, smiling.

“Then thou wilt not tell me the name of thy father?” I said,
disappointedly.

She shook her head, replying, “No. To thee I am only

Zoraida. My father’s name is of no concern.”

“And may I not carry with me some little souvenir of this

strange meeting?” I asked.

Slowly she drew a quaint, old-fashioned ring from her finger

and placed it upon my hand, laughing the while, saying—

“When thou art far beyond the mountains, this will remind
thee how near thou hast been to death;” adding anxiously,
“Now go, I beg. See! the sun will soon break forth! Do not
tarry another instant—for my sake!”

“Zoraida, shall we never meet again?” I asked desperately,

for the mystery surrounding her and her strange words
caused me to forget the danger of lingering. “Art thou never
in Algiers or Oran, or any of the towns by the sea?”

“Sometimes in Algiers. But very, very seldom. Yet even if I

were, we could not meet. The Korân forbids.”

“When wilt thou visit Algiers again?”

“Perhaps in the month of Rbi-el-tani. Then I go to the

koubba of Sidi-Djebbar.”

“On what day?” I asked, eagerly.

“Probably on the first Al-go’omah,” she replied. “But why

dost thou ask? To attempt to meet again would only bring
disgrace upon me—perhaps death. Thou knowest full well
how strict is our religion, and how terrible is the punishment
meted out to those of my sex who hold converse with the
Roumis.”

“Yes, alas!” I said. “Nevertheless, we shall meet again, I feel

certain, because we—”

“I make no promise. But if ever we chance to cross each

other’s path, thou wilt not compromise me in the eyes of
my people?” she urged, with terrible earnestness.

“Never,” I replied, fervently. “None shall ever know of our

meeting.”

“Now mount and go, or we shall be discovered,” she

begged, in evident alarm. “Remember the directions I have
given thee, and know that thou hast my blessing.”

With a last look into her big, wonderful eyes, I raised the
tiny white hand I had held and kissed it. Then, vaulting into
the saddle, I uttered profound thanks for my deliverance,
and bade her adieu.

“Slama!” she cried, standing erect with both bare arms

outstretched towards me. “Allah Iselemeck. Slama!”

And digging my heels into the splendid Ku-hai-lan horse she

had given me, I shot away like an arrow, and rode for life
towards the sand-hills of the Iraouen that looked black and
bare against the streak of saffron dawn in the sky beyond.
 Chapter Five.
Zoraida’s Pledge.

Over the dunes, regardless of the dust and heat, I rode,

well knowing that my life and that of my fair rescuer
depended upon my successful escape.

Glancing back now and then, I strained my eyes in the

direction of the oasis, half expecting to see a party of Arabs
with their long guns held aloft bearing down upon me; but
not a living thing was in sight. Again I was alone in that
vast, silent wilderness.

About noon, at a spot where a few dry plants and tufts of

hulfa grass struggled to maintain a miserable existence, I
dismounted in order to rest my tired horse, and eagerly
searched the saddle-bag. It had been packed by the
mysterious Zoraida herself, and as I drew forth one package
after another, I saw how thoughtful she had been. In
addition to dates, figs, Moorish biscuits, and a little skin full
of water, I drew from the bottom of the bag a bulky Arab
purse. Roughly made of crimson leather, ornamented with a
crescent and star embroidered in silver thread, it had
evidently been well worn. Opening it, I was astonished at
finding it full of French napoleons, while in the centre
compartment, secured by a tiny flap, was a little scrap of
paper. Upon it, traced in pencil in a hurried, uncertain hand,
were a number of Arabic characters.

For a long time I puzzled over them. Some of the characters

were illegible, and, being run into one another, they
appeared to have been written in the dark. At length,
however, I succeeded in satisfying myself as to their
purport, for they read as follows:—

“Know, O Unbeliever, that thou art welcome to this poor

assistance that I can offer thee. Thou, a stranger from far
beyond the sea, may some day be able to render assistance
to the unhappy woman who severed thy bonds. Thou art
named Amîn (‘the Faithful’). It is by that name that thou
wilt be remembered if ever we should chance to meet.
Allah, the One Merciful, is gracious, and will guide thee—
praised be His name.”

This strange note caused me a good deal of thought, as,

sitting upon a stone, I ate the dates my mysterious rescuer
had provided for my sustenance. Not content with releasing
me from certain death, she, a member of a notorious
robber band, had given me her purse! Doubtless she was
well aware that her people had taken from me everything I
possessed, and as reparation had placed some of her own
money in the bag. The note, however, was curious, because
it made plain the reason why this mysterious Queen of the
Desert had taken so much trouble to accomplish my
release. She was unhappy, and I could assist her! How?
Who was she? what was she? I wondered. Visions of neglect
and ill-treatment were immediately conjured up before my
eyes; for woman in Algeria is not better off than in other
Oriental countries. The victim of a stupid and brutalising
social code founded on a religion whose theory is pure, but
whose practice is barbarous, she is always contemned or
maltreated, a toy to the wealthy, a beast of burden to the
poor.

What, I mused, could be the cause of Zoraida’s infelicity?

Was she, as the daughter of the murderous old Sheikh,
leading the usual wretched existence of Arab girls,
neglected by her mother and relegated to a corner of the
harem in the charge of some ugly old negress? Every Arab
woman looks upon a son as a blessing and a daughter as an
incubus; therefore it is little wonder that the life of the
daughters of wealthy Moors and Arabs is a truly pitiable
one. But on due reflection I saw how improbable it was that
an outlaw like Hadj Absalam, who, being continually hunted
by the French soldiers sent out to capture him, and
compelled to be ever on the move in the most inaccessible
spots, would cause his family to travel with him. In case of
a sudden attack by the Spahis or Turcos, the paraphernalia
of a harem would considerably hamper his movements; and
that he could be exceedingly active and show serious fight
had already been proved times without number.

No. A man of his stamp would never be troubled with his

daughter while bent on plunder and murder. There were,
therefore, but two other suppositions. Zoraida was either a
captive, or Hadj Absalam’s wife. This caused me to
remember that if a captive she certainly would have
endeavoured to fly with me; while the possession of horses
and money, her refusal to allow me to gaze upon her face,
and her agitation when I pressed her hand to my lips, all
pointed to one fact, namely, that my mysterious deliverer,
the woman who by her exquisite form and grace had
enchanted me, was none other than the wife of the brigand
whose many atrocious crimes had from time to time sent a
shudder through the readers of European newspapers.

Zoraida the wife of a thief and murderer! No! I could not

bring myself to believe it. She was so young, with arms and
hands so delicately moulded and eyes so clear and wide
open, that it seemed impossible that she was actually
wedded to a villain like Hadj Absalam.

Again I read through her note, carefully tracing each of the

hastily-scrawled characters. Though ill-formed, it was not
owing to lack of education, for the vowels were marked in
position correctly in order to make it easier for me to
translate. As I held the paper in my hand, it emitted a
pleasant sensuous odour. The perfume that clung to it was
geranium, the same sweet scent that had pervaded Zoraida
when with her keen knife she had bent and freed me from
the poison of the asp.

Sitting in the noonday sun, with my burnouse loosened and

my arms resting on my knees, that sweet odour brought
back vividly the events of the previous night, its horrors, its
surprises, its joys. Again I saw Zoraida, gorgeous in her silk
and gauze, a vision of loveliness, an ideal of Arab beauty,
ready to risk her life to save mine. But it was only for a
second; then my memory became hazy again, and it all
seemed like some strange, half-remembered dream.

A desert lark rose near me and burst into joyous song. My

horse turned its head slowly, and regarded me steadily for a
few moments with his large, serious eyes. The utter
loneliness in that arid waste, one of the most dreary regions
of the Sahara, was terribly depressing.

But on my finger was her ring. The souvenir was by no

means a valuable one, yet so dearly did I prize it that I
would not have given it in exchange for anything that might
be offered. It was of a type common among Arab women;
heavy oxydised silver, and around it, in small Arabic
characters of gold, ran a text from the Korân, “Allah is
gracious and merciful.” Taking it off, I examined the inside,
and found it quite bright and smooth by constant wear.

Whatever my mysterious enchantress was, or whoever she

would prove to be, this was her pledge of trust. And she,
whose face I had not looked upon, had named me “the
Faithful!”
Yet as I sat thinking, grim, uncanny feelings of doubt and
insecurity filled my mind, for I remembered the strange
words of Ali Ben Hafiz, and the fateful Omen of the Camel’s
Hoof.

I had at last become enmeshed as the dead man had

prophesied!
 Chapter Six.
The Man with a Secret.

At sundown, three days after my escape from the Ennitra,

my eyes distinguished the palms of the Meskam Oasis
standing at the foot of a large sand-hill. Zoraida had
correctly informed me, for under feathery trees, amid the
luxuriant vegetation which one finds here and there in the
Sahara, the Spahis and Chasseurs d’Afrique had established
an advanced post.

In an hour I had entered the camp, and being taken before

the French commandant, related my story. I told him of my
journey with Ali Ben Hafiz, of the attack, and of the
massacre.

“Bien! and you alone escaped!” exclaimed the officer, a

thorough boulevardier, who sat before his tent with
outstretched legs, lazily puffing a cigarette.

“Yes,” I replied.

He was as well groomed, and his moustache was as

carefully waxed, as if he were lounging outside the Café de
la Paix.

“You were exceedingly fortunate,” he exclaimed, rolling his

cigarette carelessly. “Those who fall into Absalam’s clutches
seldom escape. Diable! he’s the most fierce cut-throat in all
Algeria. How did you manage it?”

I hesitated. Had I not promised Zoraida to preserve the

secret of their whereabouts for her sake? If her people were
to escape, I should be compelled to make misleading
statements. At last I replied—

“They left me bound to a tree during the night, and I

succeeded in loosening the cords. Finding a horse ready
saddled, I jumped upon it and rode away.” After I had
uttered the words, I saw how lame was my story.

“But how did you know we were here?” asked the

commandant, blowing a cloud of smoke from his lips,
regarding me rather critically, and then offering me a chebli
from his case.

“I had no idea,” I replied. “Seeing the palms from yonder

ridge, I came here to rest. Had I not discovered the oasis, I
should most likely have perished.”

“You certainly would not have lived many days,” he said.

“The nearest well is two hundred miles in any direction,
therefore, if you had missed this, the vultures would soon
have made a meal off you. But,” he continued, “describe to
me where we are likely to find Hadj Absalam. We have been
in search of him these three months, but, strangely enough,
his spies appear to watch all our movements, with the
result that he evades us in a manner simply marvellous.”

I was silent for a moment, thinking.

“I have travelled for three days due north,” I said,

apparently reflecting. “If you send your men due south
three days’ journey, they will come upon a small oasis. This
must be passed, and still south again, a three hours’ ride,
there is a larger oasis on the further side of a high ridge. It
is there that Hadj Absalam is taking his ease.”

“Good!” exclaimed the officer, calling over a Chasseur who

was sauntering past with his hands in his pockets and
ordering him to send immediately a sous-officier, whom he
named.

“It’s a fine night,” he said. “We will start when the moon
rises, and, mon Dieu! it will not be our fault if we do not
exterminate the band, and bring the black-faced old
scoundrel back with us. The caravans will never be safe
until his head is in the lunette.”

“But he may have moved by this time,” I suggested.

“Then we will follow and overtake him,” he replied, brushing

some dust from his braided sleeve. “He shall not escape us
this time. When I was quartered in Biskra, I knew old Hafiz
well. Though prejudiced against France, he was always good
to our men, poor old fellow.”

“Yes,” I said. “Though a strict Moslem, he was most amiable

and generous.”

At that moment a lieutenant of Chasseurs strode up and

saluted.

“Victor,” the commandant exclaimed, addressing him, “we

leave at once, with the whole of your enfants d’enfer, in
search of Absalam, who is three days’ journey south. This
time we will pursue him till we run him to earth. The Spahis
will remain;” and, turning to me, he added: “M’sieur
Holcombe, you are welcome to stay here also, if it pleases
you.”

Thanking him, I assured him how deeply I appreciated his

hospitality, and then, having been handed over to the care
of a sous-officier, I was shown to the tent which the
commandant ordered should be placed at my disposal,
while the Spahis—or homards, as they are termed in the
argot of the 19th Army Corps, because of their red
burnouses—were busy assisting their comrades to prepare
for departure.

Our evening meal of thin onion soup, black bread, and

rough, bitter coffee having been disposed of, the Chasseurs,
numbering about two hundred, paraded with their horses,
and were briefly but keenly inspected by the officer in
command, whose name I learned was Captain Paul
Deschanel. The inspection over, the commandant addressed
his men, and the order was given to mount. Then, amid the
shouts of “Vive les Chasseurs! À bas les Ennitra! Vive la
France!” from the assembled Spahis, the smart troop of
cavalry, with the captain at their head, galloped away into
the moonlit desert, and were soon lost in the gloom.

As I sat watching the receding horsemen, and inwardly

chuckling that by sending them three days’ journey into the
country of the Inemba-kel-Emoghri, Absalam and his people
would be six days’ journey distant in an opposite direction, I
was startled by a hand being laid upon my shoulder. Turning
quickly, I found it was a Spahi.

“M’sieur is English, if I mistake not?” he inquired, with a

pleasant smile upon his swarthy but refined face.

“True,” I replied. “And, judging from your accent, you are

not an Arab, but a Parisian.”

“Yes,” he said, speaking in fairly good English. “I have been

in England once. If you care to spend an hour in my tent, I
can offer you absinthe and a cigarette. That is about the
extent of the hospitalities of the oasis.”

Thanking him for his invitation, I accompanied him, and a

few moments later we were sitting in the bright moonlight
on a mat spread outside his small tent.
“So you have been in England?” I said presently, when he
had told me his name was Octave Uzanne.

“Yes,” he replied, with a slight sigh, allowing the water to

trickle slowly into his absinthe, and drawing his scarlet
burnouse closer about him. It was strange to hear English in
this region of silence and desolation.

“Is not the recollection of your visit pleasant?” I asked.

“Ah! forgive me, m’sieur,” he exclaimed quickly; “I can

never hear your tongue, or think of London, without
becoming triste. I associate with your great gloomy city the
saddest days of my life. Had I not gone to London, I should
never have been here, leading the wild semi-barbarous life
in an Arab regiment of the Army of Africa. We of the Spahis
have a saying, ‘N’éveillez pas le chat qui dort’—but
sometimes—”

“It is a good adage, but we cannot always let our sorrows

lie,” I interrupted sympathetically. He had spoken with the
accent of a gentleman, and with the white light of the moon
streaming upon his face, I saw that he was about thirty
years of age, with a countenance clean-cut and noble,
refined and somewhat effeminate. His dark eyes were deep-
set and serious, yet in his face there was an expression of
genuine bonhomie. The average Spahi is feared by Moor
and Jew, by Biskri and Koulougli, as the fiercest and most
daring of soldiers. In drink he is a brute, in love he is
passionate, in the saddle he is one of the finest riders in the
world; in the town he is docile and obedient, fond of
lounging in the cafés, idling over his eternal cigarette; yet
away in the desert, all his old instincts return; he is an Arab
again, and knows no measure either in attachment or in
hatred. A blow from his scabbard is the only payment when
scouring the country for food, a thrust of his sabre the only
apology to those he insults, while in the field, seated on his
fleet horse, he rides like the wind, and has the strength and
courage of a lion.

This quiet, intellectual, bearded young Frenchman sitting

cross-legged on the mat beside me, was, I felt sure, a man
with a past. One of his comrades came up and asked him a
question in Arabic, to which he replied, speaking the
language of his regiment like a true-born Bedouin. As we
sipped our absinthe in silence for some minutes, watching
the camp settling down for the night, it struck me as
curious that, instead of being in the Chasseurs d’Afrique, he
should be masquerading in burnouse in an exclusively
native regiment.

We began talking of England, but he was not communicative

regarding himself, and in reply to my question said—

“I desire to live here in the desert and to forget. Each time

we return to Algiers, the glare and glitter of the European
quarter unlocks the closed page of my history. It was
because this wild roving beyond the pale of civilisation was
suited to my mood that I became a homard.”

“Has your experience of life been so very bitter, then?” I

asked, looking into the handsome face, upon which there
was a shadow of pain, and which was set off by the spotless
white haick surrounding it.

“Bitter?—Ah!” he exclaimed, with a deep sigh. “You see me

now, dragging out a wretched existence in this wilderness,
exiled from my home, with name, creed, nationality—
everything changed.”

“In order to conceal your identity?” I hazarded.

“Yes, my past is erased. Dead to those who knew me, I am
now merely known as Octave Uzanne. I have tasted of life’s
pleasures, but just as I was about to drink of the cup of
happiness, it was dashed from me. It is ended. All I have
now to look for is—is a narrow bed in yonder sand.”

“My dear fellow,” I exclaimed, “don’t speak so

despondently! We all have our little debauches of
melancholy. Cannot you confide in me? Perhaps I might
presume to give advice.”

Silently and thoughtfully he rolled a cigarette between the

fingers of his bronzed hand, completing its manufacture
carefully.

“My story?” he said dreamily. “Bah! Why should I trouble

you—a stranger—with the wretched tragedy of my life?”

“Because I also have a skeleton in my cupboard, and I can

sincerely sympathise with you,” I answered, tossing away
my cigarette end and lighting a fresh one.

Murmuring some words that I did not catch, he sipped his

absinthe slowly, and, passing his sinewy, sun-tanned hand
wearily across his forehead, sat immovable and silent, with
his eyes fixed upon the dense growth of myrtle bushes and
prickly aloes before him.

Lighted candles stuck upon piles of rifles flickered here and

there among the tents, the feathery leaves of the palms
above waved in the night breeze like funeral plumes, the
dry hulfa grass rustled and surged like a summer sea; while
ever and anon there came bursts of hearty laughter from
the Arab soldiers, or snatches of a chanson eccentrique with
rollicking chorus that had been picked up a thousand miles
away in the French cafés of Algiers.
 Chapter Seven.
A Forgotten Tragedy.

Octave Uzanne roused himself.

“My career has not been brilliant,” he said slowly, and with
bitterness. “It is only remarkable by reason of its direful
tragedy. All of us keep a debtor and creditor account with
Fortune, and, ma foi! my balance has always been on the
wrong side. Seven years ago I left the university at
Bordeaux with honours. My father was a Senator, and my
elder brother was already an attaché at our Embassy in
London. In order to study English, with the object of
entering the diplomatic service, I went over to reside with
him, and it was he who, one night, when leaving a theatre,
introduced me to the goddess at whose shrine I bowed—
and worshipped. We became companions, afterwards
lovers. Did she love me? Yes. Though she was a butterfly of
Society, though it is through her that I am compelled to
lead this life of desert-wandering, I will never believe ill of
her. Never! Violet Hanbury—why should I conceal her name
—had a—”

“Violet Hanbury?” I cried, starting and looking to his face.

“Do you mean the Honourable Violet Hanbury, daughter of
Lord Isleworth?”

“The same,” he replied quickly. “What!—are you acquainted

with her?”

“Well, scarcely,” I answered. “I—I merely know her by

repute. I have seen her photograph in London shop-
windows among the types of English beauty.”
I did not tell him all I knew. Vi Hanbury, the beauty of a
season, had been mixed up in some unenviable affair. The
matter, I remembered, had been enshrouded in a good deal
of mystery at the time, but gossips’ tongues had not been
idle.

“Ah!” he continued, enthusiastically; “I have no need then

to describe her, for you know how handsome she is. Well—
we loved one another; but it was the old story. Her parents
forbade her to hold communication with me for two reasons
—firstly, because I was not wealthy, and secondly, because
they were determined that she should marry Henri de
Largentière, a sallow, wizened man old enough to be her
father, but who had been Minister of Education in the
Brisson Cabinet.”

“Yes,” I said; “the engagement was discussed a good deal in

the clubs after its announcement in the Morning Post.”

“Engagement? Sacré!” he exclaimed, with anger. “She was

snatched from me and given to that old imbecile. I was
compelled to fly from her and leave her, a pure and honest
woman, at their mercy, because—because—”

He paused for a moment. His voice had faltered and the

words seemed to choke him. Flinging away his cigarette
viciously, he took a gulp from the tin cup beside him, then,
continuing, said—

“Because Violet’s cousin, Jack Fothergill, who was one of

her most ardent admirers and had declared his love, was
discovered one night dead in his chambers in St. James’s
Street—he had been murdered!”

“Murdered?” I ejaculated. “I don’t remember hearing of it. I

must have been abroad at the time.”
“Yes,” he said, speaking rapidly. “Jack Fothergill was brutally
done to death with a knife that penetrated to the heart. But
that was not all: the stiletto left sticking in the wound was
discovered to be mine, a gold pencil-case belonging to me
was found upon the floor, and the valet gave information to
the police that at ten o’clock that night he had opened the
door to allow me to depart!”

In the moonlight his eyes had a fierce glitter in them and

his bare brown arms were thrust through the folds of his
burnouse as he gesticulated to emphasise his words. There
was a silence over the camp, but the gay café-chantant
song of Mdlle. Duclerc, with which one of the Spahis was
entertaining his comrades, sounded shrill and tuneful in the
clear bright air—

“Je jou’ très bien d’ la mandoline,

Ça fait moins d’ train que le tambourin;
Puisque quand on a la jambe fine,
Ça permet d’ la faire voir un brin.”

“Strangely enough,” my companion continued, after a

pause; “I remained that night with a friend, and judge my
horror and amazement when next morning I read in the
newspapers of the tragedy, and learned that I was
suspected of the crime! It was true that I had called upon
the murdered man just before ten o’clock, that the pencil-
case had been in my pocket, but of the murder I was
entirely innocent. Yet how could I prove an alibi, especially
when the doctor had given an opinion that death had
occurred at ten o’clock—the hour I left! The police were
searching for me, but through that long and terrible day I
remained in hiding. Once or twice I was tempted to give
myself up and bravely face the awful charge; but there was
one thing which prevented this. All interest in life had been
crushed from my heart by an announcement of two lines in
the same issue of the paper, stating that a marriage had
been arranged and would shortly take place between Violet
and De Largentière. My hopes were shattered, for my love
had been cast aside. She had actually accepted the man
she had professed to hate!”

“But did you not clear yourself?” I asked. “Surely you could
easily have done so?”

“How could I? Were not the suspicions rendered more

justifiable by reason of my visit just prior to the crime.
Again, I had not returned to my chambers that night, so
day after day I remained in hiding. Though innocent, I was
not wholly prepared to meet the charge, for I saw clearly
that Jack and I had fallen victims of a foul plot. The crime
that cost my friend his life was attributed to jealousy on my
part, and with an incentive thus invented, I clearly saw that
the circumstantial evidence was strong enough to convict
me. I sought my brother’s assistance, and, half mad with
terror and despair, I escaped from England. To return to
France would be to run into the arms of the police, so I
resolved to come here and in the wild life of the desert to
bury the past.”

“But by whom was your friend Fothergill stabbed?” I asked.

“Let me tell you,” he replied. “Since that day, when like a

criminal I fled from the trial I was afraid to face, I have
learned only one fact, though not until a year ago did it
come to my knowledge. It appears that on the evening of
the murder, Fothergill wrote telling me that during a visit to
Paris he had discovered certain details connected with the
relations between Mariette Lestrade, a pretty singer whose
chansons de poirrot were well known at the Moulin Rouge
and Ambassadeurs and the ex-Minister of Education. He had
that day called at Long’s Hotel, in Bond Street, where the
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