Question

Novak Ltd has acquired 45% of ordinary shares in Spetz Ltd. Another investor has a 10% shareholding in Spetz Ltd whilst the remaining voting rights are held by thousands of shareholders, none of whom individually hold more than 1% of the voting rights. Novak Ltd holds convertible debt instrument that, as at 31 August 2019, are convertible into ordinary shares of Spetz Ltd at a price of $ 9 per share. At 31 August 2019, the shares of Spetz Ltd trade at $ 8.80 per share. Novak Ltd would hold 60% of the voting rights in Spetz Ltd if Novak Ltd exercise its right to convert the debt. Both companies operate in same industries and would benefit from synergies.
Discuss how Novak Ltd’s investment in the ordinary shares of Spetz Ltd should be treated in the consolidated financial statements for the year ended 31 August 2019.

Answer 1

As mentioned in this case Novak Ltd has acquired 45% of the ordinary shares in spetz Ltd.

So Novak Ltd is not a parent company to a spetz Ltd at this point but as mentioned in case Novak Ltd convert it's convertible debt instruments which is $9 per share into ordinary share by this Novak Ltd becomes holder of 60% voting rights of spetz Ltd which is more then 50% and as owning more then 50% voting rights makes a company a parent company so Novak Ltd has became parent company to its subsidiary spetz Ltd

Consolidated financial for reporting purpose

There is s accounting requirement of IFRS 10 and financial instrument 9

For preparing financial statements IFRS 10 suggests the following consolidation procedures

Combine asets, liabilities, equity, cash flow, equity, income and expenses of parent with those of subsidiary and less the amount of parent investment in subsidiary company and parent equity of subsidiary

Now less the full intergroup assets, liabilities, equity, expenses, income and cash flow which relates to transactions between entities of group.