Home Assignment

As an intern working for an audit firm, you are required to make judgement about the existence of
parent–subsidiary relationship in three hypothetical scenarios as follows.

1. Canterbury Ltd is a company that was hurt by a recent global financial crisis. As a result, it
experienced major trading difficulties. It previously obtained a significant loan from Fremantle Bank,
and when Canterbury Ltd was unable to make its loan repayments, the bank made an agreement
with Canterbury Ltd to become involved in the management of that company. Under the agreement
between the two entities, the bank had authority for spending within Canterbury Ltd. Canterbury
Ltd.’s managers had to obtain authority from the bank for acquisitions over $10 000, and was
required to have bank approval for its budgets.

2. Broome Ltd owns 80% of the equity shares of Shark Bay Ltd, which owns 100% of the shares of
Geraldton Ltd. All companies prepare reports under IFRS standards. Although the shares of Shark
Bay Ltd are not traded on any stock exchange, its debt instruments are publicly traded.

3. Regis Ltd is a major financing company whose interest in investing is return on the investment.
Regis Ltd does not get involved in the management of its investments. If the investees are not
managed properly, Regis Ltd sells its shares in that investee and selects a more profitable investee to
invest in. It previously held a 35% interest in Esperance Ltd as well as providing substantial
convertible debt finance to that entity. Recently, Esperance Ltd was having cash flow difficulties and
persuaded Regis Ltd to convert some of the convertible debt into equity so as to ease the effects of
interest payments on cash flow. As a result, Regis Ltd.’s equity interest in Esperance Ltd increased to
52%. Regis Ltd still wanted to remain as a passive investor, with no changes in the directors on the
board of Esperance Ltd. These directors were appointed by the holders of the 48% of shares not held
by Regis Ltd.

Required:

Analyze the above cases and determine whether a parent–subsidiary relationship exists, and which
entity, if any, is a parent and is required to prepare consolidated financial statements under IFRS 10.
Total marks for this assignment are 100 as detailed below:

a) 75 marks (25 marks*3 cases) are allocated for correctness of your judgement;

b) 25 marks are allocated to the quality of writing including the coherence of discussion with your
judgement, relevance of accounting standards, correctness of citations and reference list (uses APA-
6 conventions), professional appearance, style, grammar and spelling;

c) There is a limit of maximum 500 words for the solution to this assignment. Solution that exceeds
this limit may be penalized up to 20% of the marks allocated.