Reference no: EM132440598

On 4 June 2010, P Ltd purchased 40% of the issued ordinary shares of MLK Pty Ltd. The remaining 60% of the issued ordinary shares of MLK are owned by 2 shareholders, C Ltd, which owns 40% of the shares, and D Ltd, which owns 20% of the shares.

MLK's constitution provides that at general meetings of the company, ordinary shareholders are entitled to vote on resolutions and elect directors, on the basis of one vote per ordinary share. MLK's five-member board of directors consists of:

(i) two representatives of P Ltd;

(ii) two representatives of C Ltd; and

(iii) one representative of D Ltd.

Each member of MLK Pty Ltd's board of directors is entitled to one vote on issues/resolutions being considered by the board of directors.

On 19 October 2019, P Ltd purchased 55% of the issued ordinary shares of D Ltd, thereby obtaining control of D Ltd.

P Ltd does not own any investments in other entities.

Required:

Explain whether P Ltd controls MLK Pty Ltd at 31 December 2019, in accordance with the requirements of AASB10: Consolidated Financial Statements.

Advice:

Answer the question by applying each element of the control definition to the facts of the case study:

A Parent (investor) controls a Subsidiary (investee) if and only if:

(a) The Parent has power over the Subsidiary;

• A Parent has power over a Subsidiary when the Parent has existing rights, (e.g. voting rights attached to shares) that give it the current ability to direct the subsidiary's operating and financing policies that significantly affect the amount of returns the Parent receives from the Subsidiary. [AASB10.10; .B5; .B6]
• Whether an entity has control over another entity needs to be determined, in the context of all the prevailing facts and circumstances. [AASB10.8].
• The power to direct operating and financial decision making does not require the parent to control more than 50% of the voting power in the subsidiary. [AASB10.B38].

(b) The Parent has exposure or rights to variable returns from its involvement with the Subsidiary; and

• Ordinary shares in a subsidiary provide shareholders with variable amounts of dividends, and capital gains or losses, depending upon the performance of the subsidiary.

(c) The Parent has the ability to use its power over the Subsidiary, to affect the amount of the Parent's returns.

[AASB10.7, and B2]