ACCT4104_Advanance financial accounting

Assignment question for Ch. 20: Ex.20.5

Exercise 20.5 Determining subsidiary status

Required
In the following independent situations, determine whether a parent–subsidiary relationship exists, and which
entity, if any, is a parent required to prepare consolidated financial statements under IFRS 10.
1. Perth 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 Perth Ltd was
unable to make its loan repayments, the bank made an agreement with Perth Ltd to become involved in the
management of that company. Under the agreement between the two entities, the bank had authority for
spending within Perth Ltd. Perth 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. Mensa Ltd is a major financing company whose interest in investing is return on the investment. Mensa
Ltd does not get involved in the management of its investments. If the investees are not managed properly,
Mensa 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 Mensa 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, Mensa Ltd's equity interest in Esperance Ltd increased to 52%. Mensa 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 Mensa Ltd.

P.1