Financial Accounting II

Lecture 03
Relationships Between Companies
 Control / Influence
• One company may have control / influence
over the other due to:
 A business relationship.
 One company holding shares in the other
company.
 Related Party Transactions
• In case of transactions with related parties
certain information has to be disclosed in
financial statements.
• A related party can be:
 An Associate, or
 A Subsidiary
Associated Companies
 Associated Companies
Companies Ordinance 1984
• Any two or more companies or undertakings or a company
and an undertaking would be associated with each other if
one of the following conditions is satisfied
 A single person is owner, partner or director of both
organizations.
Or
 A single person owns 10% or more share holding in both
organizations
 If both companies or enterprises are under common
Management or control or if one is a subsidiary of other
 Associated Companies
International Accounting Standard (IAS) 28
• An enterprise in which the investor has significant
influence and which is neither a subsidiary nor a
joint venture of the investor.
• Significant Influence:
Is the ability to participate but not to control the
financial and management affairs of the
enterprise.
 International Accounting Standard (IAS) 28
• Existence of significant influence is usually
evidenced in one or more of the following ways:
 Representation on the board of directors or
equivalent governing body of the investee;
 Participation in policy making processes;
International Accounting Standard (IAS) 28
 Material transactions between the investor and
the investee;
 Interchange of managerial personnel; or
 Provision of essential technical information.
 Associated Undertakings
• 10% Share holding
• Nomination on Board of Directors
• Common Directors
• Significant Influence
 Policy Making
 Personnel
 Associated Companies
10% - 49 % Share holding

Subsidiary Companies
•50% and above Share holding
Subsidiary Companies
 Subsidiary Companies
Companies Ordinance 1984
• A company should be termed as a subsidiary of another
company if the other company holds more than 50% of its
shares or has the power to appoint more than 50% of its
directors.
 Direct or Indirect Subsidiary

• A is a subsidiary of B and

• B is a subsidiary of C
 Direct or Indirect Subsidiary

Subsidiary Subsidiary
C B A
50% or more shares 50% or more shares
Direct Subsidiary Indirect Subsidiary
 Direct or Indirect Subsidiary

Subsidiary Subsidiary
C B A
 Direct or Indirect Subsidiary
Direct Direct
Subsidiary Subsidiary
C B A

Indirect Subsidiary
 Subsidiary Companies
International Accounting Standards (IAS) 27
•An enterprise would be the subsidiary of another enterprise if
that investor enterprise can control the subsidiary
•Influence:
Control is defined as the ability to govern the financial
and operating policies of an enterprise so as to obtain
benefits from it.
• Control
Control is defined as the ability to govern the financial
and operating policies of an enterprise so as to obtain
benefits from it.
 Types of Subsidiaries
Wholly owned 100%
Or
Partially owned 50% or more