Reference no: EM132712766
Strike Ltd is going through a period of expansion. Strike Ltd holds direct or indirect ownership interests in the following five investee companies, Athorn Ltd, Beatie Ltd, Conti Ltd, Douthwaite Ltd, and Gupta Ltd, as detailed below (as at 30 June 2021).
- Strike Ltd owns 70% of the issued share capital of Athorn Ltd. According to the constitution of Athorn Ltd, each share conveys one vote to the shareholder at the annual general meetings (AGM) of the company (this is the case of most corporations unless specified otherwise).
- Athorn Ltd owns 30% of the issued share capital of Beatie Ltd. In addition, Athorn holds call options which would allow it to acquire 21% of Beatie Ltd's shares at a pre-specified price of $10.50 per share from external unrelated shareholders who currently hold those shares. Beatie Ltd's shares are trading at $11.00 per share on 30 June 2021. Furthermore, according to the constitution of Beatie Ltd, the chief executive officer (CEO) of Athorn Ltd has the authority to remove any director from the board of Beatie Ltd in the event of proven criminal activity on the part of that director, and a new director would be elected by Beatie Ltd's shareholders at an extraordinary AGM convened for this purpose.
- Strike Ltd owns 33% of the issued share capital of Conti Ltd. Conti Ltd's remaining 67% share capital is held by an external company, Ricci Ltd. In addition, Strike Ltd has the right to appoint one of four directors on the board of Conti Ltd.
- Strike Ltd owns 80% of the issued share capital of Douthwaite Ltd. The remaining 20% shares of Douthwaite Ltd are held by Allerton Ltd. According to a special contractual agreement between Strike Ltd and Allerton Ltd, a minimum of 90% of votes are required to pass any resolution at AGMs regarding major financing and operating decisions of Douthwaite Ltd.
- Strike Ltd owns 10% of the issued share capital of Gupta Ltd. Strike Ltd originally purchased the shares in Gupta Ltd with the intention of reselling them in the short-term to make a rapid capital gain.
- On 30 June 2021, the CEO of Strike Ltd is seeking your advice regarding the nature of its relationships with all the investee companies for financial reporting purposes and the consequent accounting requirements for recording these investments.
Provide your advice to the CEO of Strike Ltd. Your answer must cover the following:
Problem 1: Explain the nature of the relationship that exists between Strike Ltd and each of its direct and indirect investees, Athorn Ltd, Beatie Ltd, Conti Ltd, Douthwaite Ltd, and Gupta Ltd.
Problem 2: Provide recommendations to Strike Ltd about the relevant accounting methods appropriate for recording its investment in each investee company.
Problem 3: Identify which companies belong to the reporting entity of the "Strike Ltd Group" and explain the accounting implications.
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