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Group financial statements: An introduction Learning objectives After you have studied this chapter, you should be able

to: l explain the difference between a parent undertaking and a subsidiary undertaking l explain why it is important to produce consolidated financial statements l d escribe some of the alternative methods whereby control can be acquired by one company over another l explain the relevance of dominant influence to the identification of a parent-subsidiary relationship l explain the relevance of significant influence to the identification of the existence of an associated undertaking Introduction In this chapter, you ll learn about the three principal rights of shareholders; an d about groups (of companies), of how they come about, and of the resulting need for consolidated financial statements.

Shareholders and their rights As you know, the owners of a company are its shareholders, usually just the hold ers of ordinary shares but, when they exist, also holders of preference shares. The rights of these two categories of shareholders are not identical. Anyone who buys ordinary shares in a company is usually given three rights: 1 The right to vote at shareholders meetings. 2 A right to an interest in the net assets of the company. 3 A right to an interest in (i.e. share of) the profits earned by the company. Preference shareholders do not normally have voting rights, except under special circumstances, such as when their dividends are in arrears, or their special ri ghts are being changed by the company. Debenture holders have no rights at all t o vote at general meetings and are not owners of the company. By using their voting rights at shareholders meetings, the shareholders are able to show their approval, or disapproval, of the election of directors and any proposals the dir ectors make at such meetings. It is the directors who manage the affairs of the company. As a result, any group of shareholders, who between them own more than 50 per cent of the voting shares of a company, can control the election of direc tors and, consequently, control the policies of the company through the director s. This would also be true if any one shareholder owned more than 50 per cent of the voting shares. One company may hold shares in another company. Therefore if one company wishes to obtain control of another company it can do so by obtaining more than 50 per cent of the voting shares in that company. Why do you think preference shareholders do not have the same voting rights as o rdinary shareholders? Let s look at what happens when one company acquires sufficient share capital of a nother company to achieve control over it.