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FAC3704NOTES
, Page |1
Learning Unit 1 & Vol 1
1. A GROUP OF ENITIES AND ITS FINANCIAL STATEMENTS - CHAPTER 1 GS
CONTROL IFRS 10
IFRS 10 requires that the investor determine whether it is a parent of the investee.
ELEMENTS OF CONTROL:
1) Power over Investee
2) Exposure, or rights to, variable return from involvement with the investee
3) Ability to use power over investee to affect the amount of the investor's returns.
1) Power comes form rights:
voting rights
rights embedded in a contract
Rights that gives an investor power:
Voting rights through owning equity
Potential voting rights
Rights to appoint, reassign or remove key management positions that have the ability to direct the relevant
activities
Rights to direct the investee to enter into or veto any changes to, transactions for the benefit of the
investor
Other rights that give the holder the ability to direct the relevant activities
2) Exposure/rights to variable returns:
To control an investee, the investor must have exposure or rights to the variable returns of the investee
from its involvement with it
Returns include: dividends, other distributions embodying economic benefits (e.g interest on loans),
remuneration for services, fees and exposure to losses from providing credit/liquidity/other financial
support and returns through synergy benefits.
3) Link between POWER and RETURN:
A parent must not only have power over and investee and exposure/rights to returns - BUT it must ALSO
have the ABILITY to USE its POWER over the investee to AFFECT its RETURN from its involvement with the
investee.
GROWTH
Company itself can grow
Can combine with other entities
After studying this learning unit, you should be able to prepare group financial statements as at the
date of acquisition according to the requirements of the International Financial Reporting Standards
(IFRS).
, Page |2
Learning Unit 1 & Vol 1
SHARES, THE CAPACITY IN WHICH THEY ARE HELD AND VOTING RIGHTS
I.T.O THE COMPANIES ACT, 2008
Every share, regardless of its class, has associated with it one general voting right, unless provided for
otherwise by
o Companies Act
o Preferences, rights & limitation etc as determined by the MOI
To determine whether a person controls all or a majority of the voting rights, voting rights which are only
exercisable in specific circumstances must only be taken into account when those circumstances arise and
for as long as they continue
Voting rights exercisable on the instruction of another are treated as being held by a nominee for that
other person
Voting rights held by a person in a fiduciary capacity are treated as being held by the beneficiary of those
voting rights.
Every share has associated with it an irrevocable right of the shareholder to vote on any proposal to amend
preferences, rights and limitations and other terms.
The acquisition of a shareholding in another entity can result in one of the following: SG p9
Where the investor (the entity which acquired the shareholding in another entity) exercises some form of
control over the investee, the investor is the parent of the investee, which is called its subsidiary.
The investee is an associate of the investor if the investor exercises significant influence over the investee.
If two or more entities hold shares in an investee and have joint control of the investee in terms of a
contractual arrangement, the investor is in a joint arrangement with the other investor.
Group (FAC2602)
Where a parent is linked with a subsidiary to form a larger economic unit, it is customary to refer to
the entity as a group.
The basic characteristic of such a group is that the management of the different independent parent
and subsidiary entities comprising the group is co-ordinated in such a way that they are managed on a
central and unified basis in the interest of the group as a whole.
This management on a unified basis is possible because of the control which the parent exercises over
its subsidiaries.
After studying this learning unit, you should be able to prepare group financial statements as at the
date of acquisition according to the requirements of the International Financial Reporting Standards
(IFRS).
, Page |3
Learning Unit 1 & Vol 1
GROUP STRUCTURES
Simple Group example:
1 Parent and 1 Subsidiary:
P Ltd
51% P determined that it controls S through
holding the majority of the voting rights
S Ltd by virtue of holding 51% equity
Complex group example: P is the Parent
P Ltd
S1, S2 & S3 are fellow subsidiaries of P
S1 Ltd S2 Lted S3 Ltd
SS1 Ltd is a subsidiary of S2 Ltd, which is
also a subsidiary of P, therefore SS1 is also
SS1 Ltd
a subsidiary of P
Vertical Group
P Ltd P Ltd hold 51% of shares in S Ltd and S Ltd hold 51%
in SS Ltd - therefore S Ltd is a subsidiary of P Ltd,
51%
S Ltd which is the parent - P is able to direct the relevant
51% activities of S.
SS Ltd
SS is a subsidiary of S, which is the parent as S has
the ability to direct the relevant activities of SS
P is also the parent of SS as SS is controlled by S
which is controlled by P
Simple group with spread shareholding 1
P Ltd P Ltd owns 48% in S Ltd. S has no other classes of shares the remaining shares
48% are held by 1 000 minority shareholders and no shareholder agreements exist
S Ltd between those shareholders to make collective decsions.
S is therefore a subsidiary of P, which is the Parent - P can exercise power
through its 48% shareholding - the relative size of the other shareholders'
interests gives P a large enough dominant voting interest to meet the power
criteria.
After studying this learning unit, you should be able to prepare group financial statements as at the
date of acquisition according to the requirements of the International Financial Reporting Standards
(IFRS).
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