Stuck on Group Accounts query - please help!!

The Magician

Hi,

The query is regarding IAS 27 Consolidated Financial statements. It is taken from the L4 FNST mock exam on their site.


IAS 27 states that control is presumed to exist when the parent owns, directly of indirectly through subsidiaries, more than half of the shares of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control?

a. True
b. False.

The answer here was false. I'm not sure why here. All I can think is because it does not provide the technical definition.

Control is the power to govern the financial and operating policy decisions, so as to obtain benefit from its activites and arises when more than 50 % of the shares are owned. That is the technical definition of IAS 27,but yet 50% share ownership part would constitute control?

Is it an error or just an issue with the definition?

NicF

I think it's because owning more than 50% of the shares always constitutes control so there are no exceptional circumstances when this does not happen, which makes the statement false. I'm not completly sure about this though and would happily be corrected if I'm wrong.

Nicola

Diddy Mau

NicF wrote: »

I think it's because owning more than 50% of the shares always constitutes control so there are no exceptional circumstances when this does not happen, which makes the statement false. I'm not completly sure about this though and would happily be corrected if I'm wrong.

Nicola

I would second Nic's comment

uknitty

50 % share is typically *presumed* to constitute control, but it does not always give absolutle control in every circumstance.

IAS 27 gives 4 specific examples of other forms of control that may exist.

Power over more than half the voting rights by virtue of an agreement
Power to govern the financial an operating policies by virtue of statute or agreement
Power to appoint or remove the majority of the board of directors
Power to cast the majority votes at the meeting of the board of directors

So as an example it may well be that you own 51% of the shareholding, but there may be an agreement in place with the owner of the other 49% that they will govern the financial and operating policies of the business. In which case although you would have a greater share of ownership, you would not have the controlling interest.

I am far from an IAS expert so this is just a very general overview.

Steve Collings

Hi,

Be careful here! You are assuming a 50% ownership would give control but it won't! Control is deemed to be obtained when the parent owns (as per the question above in the OP's thread) more than half of the shares/net assets in a subsidiary - i.e. 51% onwards.

I agree that the question is correct and the other posters reasons why the answer is false. However, bear in mind (as uknitty says) that control can be obtained by the parent by other means. It's not just a blanked % approach as there are other indicators of control even if the parent owns less than 51% of the shares.

All the best
Steve

The Magician

Thanks very much for taking the time to help me here.

I really do need to brush up on !AS 27 / 28 and IFRS 3.

I think the multiple choice questions on IAS /IFRS are the hardest bit to grace the FNST paper.

Thanks.