Accra Ltd, a government business entity, acquires 40% of the voting rights of Tema Ltd. The remaining investors each hold 5% of the voting rights of Tema Ltd. A shareholder agreement grants Accra Ltd the right to appoint, remove and set the remuneration of management responsible for key business decisions of Tema Ltd. To change this agreement, a two-thirds majority vote of the shareholders is required.
Required:
In accordance with IFRS 10: Consolidated Financial Statements, discuss whether Accra Ltd controls Tema Ltd. (5 marks)
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Composition of control according to IFRS 10
- Power over the investee to direct relevant activities
The absolute size of Accra Ltd’ shareholding in Tema Ltd (40%) and the relative size of the other shareholdings alone are not conclusive in determining whether Accra Ltd has rights sufficient to give it power. However, the shareholder agreement which grants Accra Ltd the right to appoint, remove and set the remuneration of management responsible for the key business decisions of Tema Ltd gives Accra Ltd power to direct the relevant activities of Tema Ltd. This is supported by the fact that a two-thirds majority is required to change the shareholder agreement and, as Accra Ltd owns more than one-third of the voting rights, the other shareholders will be unable to change the agreement whilst Accra Ltd owns 40%. - Exposure or rights to variable returns of the investee
As Accra Ltd owns a 40% shareholding in Tema Ltd, it will be entitled to receive a dividend. The amount of this dividend will vary according to Tema Ltd’s performance and Tema Ltd’s dividend policy. Therefore, Accra Ltd has exposure to the variable returns of Tema Ltd. - Ability to use power over the investee
The fact that Accra Ltd might not exercise the right to appoint, remove and set the remuneration of Tema Ltd’s management should not be considered when determining whether Accra Ltd has power over Tema Ltd. It is just the ability to use the power which is required and this ability comes from the shareholder agreement. - Conclusion
The IFRS 10 definition of control has been met. Accra Ltd controls Tema Ltd and therefore Accra Ltd should consolidate Tema Ltd as a subsidiary in its group financial statements. (Any 2 points at 2.5 marks each = 5 marks)