Question

QUESTION 1 (IFRS 10, IAS 28) (20) Invincible Ltd, a company registered in Namibia, is at the early stages of producing group financial statements. The company’s first Audit Committee meeting to discuss the financial statements is scheduled for in a few weeks’ time and you have been asked to prepare a paper for presentation at the meeting to discuss the appropriate basis for accounting for entities mention below: Waka Ltd: Waka ltd.’s relevant activities are directed by ordinary shareholders votes. Invincible owns a controlling 60% of the shares in Cresta Ltd. Cresta Ltd owns 45% of the shares in Waka Ltd and Invincible owns a further 20% of Waka Ltd. The remaining shares in Waka Ltd are held by an empowerment group that also owns a golden share. The golden share entitles the empowerment group to veto any decisions made by vote at the shareholders meetings. The Audit Committee has specifically asked what the effect of the golden share is I.e. what treatment would be both with the golden share and assuming that the golden share did not exist. Space Pty Ltd: Invincible Ltd has recently designed a very powerful telescope that it plans to target at the astronomy market. In order to launch, manufacture and sell the product it incorporated Space Pty Ltd (Space) with a capital injection of $10m. before being launched and sold, the right to sell the telescope is required to be registered under a license so that only holders of the license and those authorized to sell under the license can sell these telescopes. Registration of telescope licenses is a very specialized area of law and as such Invincible Ltd partnered with Dynamic Ltd that specializes in registering licenses to sell newly developed telescopes. Although registering the license is a formality for Dynamic Ltd given its highly experienced staff, Dynamic Ltd.’s directors negotiated that it should share in 60% of Space’s after-tax operational profits for the first 3 years of Space’s operations with Invincible Ltd sharing in the other 40% of profits for the first 3 years and 100% thereafter. In terms of the agreement for the running of Space’s operations  Dynamic Ltd.’s staff will register the license in its own name. after 3 years Space will have the option to buy the license from Dynamics Ltd for a stipulated nominal amount.  Space has an unconditional right to sell the telescope under Dynamic Ltd.’s license for the first 3 years of operations, unless Space does not pay Dynamics the 60% profits to Page 11 of 19 which it is entitled, within 2 months of its year end or if Space’s current debt equity ratio doubles within the 3 years.  Invincible Ltd.’s Chief Operations Officer (COO) will coordinate the launch of the product, its manufacture and sales as soon as the license is registered.  Dynamic Ltd’s staff will assist with on-going legal and compliance work in respect of the registration of the license but will not be involved in the selling of the product. Profits are expected to be low for the first 3 years of operations and the 60% profit sharing ratio for 3 years is likely to equate to the fees that Dynamic Ltd would normally charge for its services. Required: Draft a memorandum to the Audit Committee explaining to the 2 companies referred to above should be treated in the group financial statements. While it is not necessary to explain the process involved in consolidating, equity accounting etc., it is necessary to include what % of the group profits will be included in the group financial statements. Your Memo should deal with the nature of the investment and the type of accounting for the investment that would be appropriate in the group financial statements. If you determine that an entity is a subsidiary briefly state the extent to which any NCI would be attributed a share of the total comprehensive income when companies should be equity accounted, the % of the investee’s profits that should be equity accounted as well as the group’s effective interest should be discussed. If consolidation is required effective interest should be calculated. You are not required to deal with disclosure. (20)

financial accounting

Answer 1

Page 1 JF ÀS 10 SI 12528; ; Invincible Ltd., is a company registered ina Namibia. The company's first Adult comitteen meeting to. Discuss the financial Statement B schedules. The following are the matters, to be discussed at the meeting for accoxen ting for the entities mentioned below's WAKA LTD : . ... .....!! Tiportant points to be noticed »! " Invincible Hd. Holds 60% share. In cresta ltd and 20% share in waka ltd and cresta Ltd. holds 40% shares in waka ltdi Invincible itd 60% cresta itd 20% :...40%, .. , Wakel. Itd 4011 ".. Em podement group, 'As per IFRS 10 a company hold. contood. Over the another entity if it holds more than 50% of the voting right in the company's shareholiss

meeting. Therefore as invincible Ltd, holds boy! voting power of the company therefore it holds control over cresta Ltd. and therefore in vinzible Y3 de quired to prepare a consolidated Hinanzel i statement with cresta Ltda As creste Ltd. subsidiray of Inisindible Lol holds 40% share in wake Ltd and invincibie led holds -20% share on Watia ltd. As Invincible! 17d together with his subsidasily cresta Ltd holds more than 50% of holding Pie 60%. therefore Waka Ltd is also a subsidiary of Invincible Ltd. . It is to be noted that the empowerment group which holds 40% on the share of wala itd. also owns golden share and the golden share entitles the emporter ment group to Veto any decision made by vote at the share holders! meeting. Golden share is share in a company that gives control of atleast 51% of the voting righit . ns golden share as avenes by empowerment group' it gives them the opportimity to take SETS - AS

the fpral dession of the meeting. It gives them a right to seject a decision or proposal made by the shareholders at the meeting. if the golden share did not exist or is not owned by empowerment group then as a holding company Invincible itol, has the fall parier over the decisious of the waka Ltd at the meeting points to be noted : U AS Waka Ltd Ps a subsidiary of invinzable Ltd with more than 50% of the control and 13. to be' Preludes cubile preparing the group ! foran sal statement. '! i 2) Full consolidation method to be applies while preparing consolidation financial statement. 3) 40% of the profit to be shown as Nel and 60% profit of Waka Ltöl to be included in group profet. Sises in the group-financiel Statement space 'ply Ltd Invincible. itd heis recently designed very powerful coe nad in order to launch, manatacterde and sale the product it incorporated it

incorporates space pty.ltd with a capital inject Of $10 m. before being launched and soldy the right I to sell the telescope B deguired to be registered Hunder a license so that only holders of the licenses and those authorized to sell under the lirense can sell these tele stopes. Tod that Invincible. Itd partnered with Dynamic Hd that speadlizes registering licenses: Dynamie ld's doredors negotiated with lovpn cible Ltd that it shold share in 60% of space's after tax operationeel profpt for the first 3 years to space's operations with invincible ltd Sharing in the order 40% profits for the first 3 years Tans. 100% thereafter. : : As per the provision of IAS 28, an associate is a compancy in which an investor.com : exercise " significan't ontluence" Pie paver to participate in operating and financial decisions. i normal steketion Significant com be proved it an investir has 20% 50% voting pover of an ent744.

*As due to the negotiatlon blw Dynamic Ltd and invincible Ltd., Invincible Ltd. holds only 40% of the share in the company spacepty Itd therefore Space Pty Ltd is an associate for Invincible ltd and therefore as per the allows Hing rules consolidates Financial Stectement are mandatory whether the Investor and has sub sidiary of associate or bint ventures. As per IAS 28 "Investment Pins Associate aired Joint venture" we should apply equity methool pn preparing group financial stetement of Invincible Lid for 3 years. points to be noted O space pty.Ltd to be treated as an associate in the group financial statement. 2) 40% of the the profit of space pty. Ltd to be Pncluded in the group financial statement. 3) AS per las 22 equity method to be used for the accounting of space ply Ltd. in the group financial statement of Invenable Ltd.