Question

F Berhad is a public listed company with many strategic investments. The Chief Financial Officer is concerned that he might be required to consolidate some of these investments in accordance with IFRS 10/ MFRS 10. Details of the investment relationships are as follows:

a) F has 25% interest in the share capital of L Berhad, which is a company involved in the same industry as F. The remaining 75% of the share capital is owned by L’s founders, Mr. and Mrs. Lim. Mr. and Mrs. Lim are unfamiliar with the industry and so have given F three out of the five seats available on the board of directors. F takes the lead on all decisions, but the business is closely monitored by Mr. and Mrs. Lim who hold the other two board positions.

b) F holds 75% interest in J Berhad. The interest was created when F converted a substantial loan it made to J into equity at the invitation of J when J began to trade poorly and recovery of the loan seemed uncertain. F is a passive investor, having no seats on the board of directors and no say in the financing or operating decisions of J.

c) F owns 50% of A Berhad, with the other 50% being owned by B Berhad. Both companies have equal voting rights and an equal share of seats on the board of directors. Under an agreement with B, F supplies the finance to the company on normal commercial terms. The loan is fully secured against the assets of the company. B provides the management and entrepreneurial flair to A. Under the agreement forged, B will receive a management fee in respect of the net profits of A after allowing for interest payments on the F loan. In times of no profits, the interest payments will still be met but B will not receive any remuneration.

Required:

Advise the CFO of F Berhad of the requirements of IFRS 10/ MFRS 10 in respect of the control criterion. For each of the investments, indicate where the control rests and whether or not consolidation will be required.

Answer 1

For any decisions of Board of directors we required majority only. i.e. more than 50% votes are required for passing or denying any of the resolutions which are put into the meeting. If there is total 5 Board of Directors in that case 3 persons should be required to be in same side. Suppose if any of the director is interested in any of the transaction then he cannot participate in that discussion. In that case other than that person are eligible for casting votes.