Section 40 - AASB 127 - Consolidated and Separate Financial Statements - July 2004 - The following disclosures shall be made in the notes to the consolidated financial statements: | Zoe
40 The following disclosures shall be made in the notes to the consolidated financial statements:
(a) [Deleted by the IASB]
(b) [Deleted by the IASB]
(c) the nature of the relationship between the parent and a subsidiary when the parent does not own, directly or indirectly through subsidiaries, more than half of the voting power;
(d) the reasons why the ownership, directly or indirectly through subsidiaries, of more than half of the voting or potential voting power of an investee does not constitute control;
(e) the end of the reporting period of the financial statements of a subsidiary when such financial statements are used to prepare consolidated financial statements and are as of a date or for a period that is different from that of the parent, and the reason for using a different date or period; and
(f) the nature and extent of any significant restrictions (e.g. resulting from borrowing arrangements or regulatory requirements) on the ability of subsidiaries to transfer funds to the parent in the form of cash dividends or to repay loans or advances.
41 When separate financial statements are prepared for a parent that, in accordance with paragraphs 10 and Aus10.1 elects not to prepare consolidated financial statements, those separate financial statements shall disclose:
(a) the fact that the financial statements are separate financial statements; that the exemption from consolidation has been used; the name and country of incorporation or residence of the entity whose consolidated financial statements that comply with International Financial Reporting Standards have been produced for public use; and the address where those consolidated financial statements are obtainable;
(b) a list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held; and
(c) a description of the method used to account for the investments listed under (b).
42 When a parent (other than a parent covered by paragraph 41), venturer with an interest in a jointly controlled entity or an investor in an associate prepares separate financial statements, those separate financial statements shall disclose:
(a) the fact that the statements are separate financial statements and the reasons why those statements are prepared if not required by law;
(b) a list of significant investments in subsidiaries, jointly controlled entities and associates, including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held; and
(c) a description of the method used to account for the investments listed under (b);
and shall identify the financial statements prepared in accordance with paragraph 9 of this Standard, AASB 128 and AASB 131 to which they relate.
Aus42.1 In respect of not-for-profit public sector entities, where a group of entities is a reporting entity, but separate financial statements for the parent are not prepared, the notes to the consolidated financial statements shall disclose a list of significant subsidiaries, including:
(a) the name;
(b) country of incorporation or residence (where other than Australia); and
(c) proportion of ownership interest and, if different, proportion of voting power held.
Effective Date of IAS 27 Effective Date of IAS 27
Effective Date of IAS 27
43 [Deleted by the AASB]
43A [Deleted by the AASB]
Withdrawal of Other IASB Pronouncements Withdrawal of Other IASB Pronouncements
Withdrawal of Other IASB Pronouncements
44 [Deleted by the AASB]
45 [Deleted by the AASB]
IMPLEMENTATION GUIDANCE IMPLEMENTATION GUIDANCE
IMPLEMENTATION GUIDANCE
Guidance on implementing AASB 127 Consolidated and Separate Financial Statements, AASB 128 Investments in Associates and AASB 131 Interests in Joint Ventures
Consideration of Potential Voting Rights
IG1 Paragraphs 14, 15 and 23 of AASB 127 Consolidated and Separate Financial Statements and paragraphs 8 and 9 of AASB 128 Investments in Associates require an entity to consider the existence and effect of all potential voting rights that are currently exercisable or convertible. They also require all facts and circumstances that affect potential voting rights to be examined, except the intention of management and the financial ability to exercise or convert potential voting rights. Because the definition of joint control in paragraph 3 of AASB 131 Interests in Joint Ventures depends upon the definition of control, and because that Standard is linked to AASB 128 for application of the equity method, this guidance is also relevant to AASB 131.
IG2 Paragraph 4 of AASB 127 defines control as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Paragraph 2 of AASB 128 defines significant influence as the power to participate in the financial and operating policy decisions of the investee but not to control those policies. Paragraph 3 of AASB 131 defines joint control as the contractually agreed sharing of control over an economic activity. In these contexts, power refers to the ability to do or effect something. Consequently, an entity has control, joint control or significant influence when it currently has the ability to exercise that power, regardless of whether control, joint control or significant influence is actively demonstrated or is passive in nature. Potential voting rights held by an entity that are currently exercisable or convertible provide this ability. The ability to exercise power does not exist when potential voting rights lack economic substance (e.g. the exercise price is set in a manner that precludes exercise or conversion in any feasible scenario). Consequently, potential voting rights are considered when, in substance, they provide the ability to exercise power.
IG3 Control and significant influence also arise in the circumstances described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, which include consideration of the relative ownership of voting rights. AASB 131 depends on AASB 127 and AASB 128 and references to AASB 127 and AASB 128 from this point onwards should be read as being relevant to AASB 131. Nevertheless it should be borne in mind that joint control involves contractual sharing of control and this contractual aspect is likely to be the critical determinant. Potential voting rights such as share call options and convertible debt are capable of changing an entity’s voting power over another entity – if the potential voting rights are exercised or converted, then the relative ownership of the ordinary shares carrying voting rights changes. Consequently, the existence of control (the definition of which permits only one entity to have control of another entity) and significant influence are determined only after assessing all the factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, and considering the existence and effect of potential voting rights. In addition, the entity examines all facts and circumstances that affect potential voting rights except the intention of management and the financial ability to exercise or convert. The intention of management does not affect the existence of power and the financial ability of an entity to exercise or convert is difficult to assess.
IG4 An entity may initially conclude that it controls or significantly influences another entity after considering the potential voting rights that it can currently exercise or convert. However, the entity may not control or significantly influence the other entity when potential voting rights held by other parties are also currently exercisable or convertible. Consequently, an entity considers all potential voting rights held by it and by other parties that are currently exercisable or convertible when determining whether it controls or significantly influences another entity. For example, all share call options are considered, whether held by the entity or another party. Furthermore, the definition of control in paragraph 4 of AASB 127 permits only one entity to have control of another entity. Therefore, when two or more entities each hold significant voting rights, both actual and potential, the factors in paragraph 13 of AASB 127 are reassessed to determine which entity has control.
IG5 The proportion allocated to the parent and minority interests in preparing consolidated financial statements in accordance with AASB 127, and the proportion allocated to an investor that accounts for its investment using the equity method in accordance with AASB 128, are determined solely on the basis of present ownership interests. The proportion allocated is determined taking into account the eventual exercise of potential voting rights and other derivatives that, in substance, give access at present to the economic benefits associated with an ownership interest.
IG6 In some circumstances an entity has, in substance, a present ownership as a result of a transaction that gives it access to the economic benefits associated with an ownership interest. In such circumstances, the proportion allocated is determined taking into account the eventual exercise of those potential voting rights and other derivatives that give the entity access to the economic benefits at present.
IG7 AASB 139 Financial Instruments: Recognition and Measurement does not apply to interests in subsidiaries, associates and jointly controlled entities that are consolidated, accounted for using the equity method or proportionately consolidated in accordance with AASB 127, AASB 128 and AASB 131 respectively. When instruments containing potential voting rights in substance currently give access to the economic benefits associated with an ownership interest, and the investment is accounted for in one of the above ways, the instruments are not subject to the requirements of AASB 139. In all other cases, instruments containing potential voting rights are accounted for in accordance with AASB 139.
IG8 The five examples below each illustrate one aspect of a potential voting right. In applying AASB 127, AASB 128 or AASB 131, an entity considers all aspects. The existence of control, significant influence and joint control can be determined only after assessing the other factors described in AASB 127, AASB 128 and AASB 131. For the purpose of these examples, however, those other factors are presumed not to affect the determination, even though they may affect it when assessed.
Entities A and B own 80% and 20% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity A sells one-half of its interest to Entity D and buys call options from Entity D that are exercisable at any time at a premium to the market price when issued, and if exercised would give Entity A its original 80% ownership interest and voting rights.
Although the options are out of the money, they are currently exercisable and give Entity A the power to continue to set the operating and financial policies of Entity C, because Entity A could exercise its options now. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity A controls Entity C.
Entities A, B and C own 40%, 30% and 30% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entity A also owns call options that are exercisable at any time at the fair value of the underlying shares and if exercised would give it an additional 20% of the voting rights in Entity D and reduce Entity B and C’s interests to 20% each. If the options are exercised, Entity A will have control over more than one-half of the voting power. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D.
Example 3: Other rights that have the potential to increase an entity’s voting power or reduce another entity’s voting power
Entities A, B and C own 25%, 35% and 40% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entities B and C also have share warrants that are exercisable at any time at a fixed price and provide potential voting rights. Entity A has a call option to purchase these share warrants at any time for a nominal amount. If the call option is exercised, Entity A would have the potential to increase its ownership interest, and thereby its voting rights, in Entity D to 51% (and dilute Entity B’s interest to 23% and Entity C’s interest to 26%).
Although the share warrants are not owned by Entity A, they are considered in assessing control because they are currently exercisable by Entities B and C. Normally, if an action (e.g. purchase or exercise of another right) is required before an entity has ownership of a potential voting right, the potential voting right is not regarded as held by the entity. However, the share warrants are, in substance, held by Entity A, because the terms of the call option are designed to ensure Entity A’s position. The combination of the call option and share warrants gives Entity A the power to set the operating and financial policies of Entity D, because Entity A could currently exercise the option and share warrants. The other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 are also considered, and it is determined that Entity A, not Entity B or C, controls Entity D.
Entities A, B and C each own 33⅓% of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entities A, B and C each have the right to appoint two directors to the board of Entity D. Entity A also owns call options that are exercisable at a fixed price at any time and if exercised would give it all the voting rights in Entity D. The management of Entity A does not intend to exercise the call options, even if Entities B and C do not vote in the same manner as Entity A. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D. The intention of Entity A’s management does not influence the assessment.
Entities A and B own 55% and 45% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity B also holds debt instruments that are convertible into ordinary shares of Entity C. The debt can be converted at a substantial price, in comparison with Entity B’s net assets, at any time and if converted would require Entity B to borrow additional funds to make the payment. If the debt were to be converted, Entity B would hold 70% of the voting rights and Entity A’s interest would reduce to 30%.
Although the debt instruments are convertible at a substantial price, they are currently convertible and the conversion feature gives Entity B the power to set the operating and financial policies of Entity C. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity B, not Entity A, controls Entity C. The financial ability of Entity B to pay the conversion price does not influence the assessment.
Guidance on implementing AASB 127 Consol Guidance on implementing AASB 127 Consolidated and Separate Financial Statements, AASB 128 Investments in Associates and AASB 131 Interests in Joint Ventures
Guidance on implementing AASB 127 Consolidated and Separate Financial Statements, AASB 128 Investments in Associates and AASB 131 Interests in Joint Ventures
Consideration of Potential Voting Rights Consideration of Potential Voting Rights
IMPLEMENTATION GUIDANCE
Guidance on implementing AASB 127 Consolidated and Separate Financial Statements, AASB 128 Investments in Associates and AASB 131 Interests in Joint Ventures
Consideration of Potential Voting Rights
IG1 Paragraphs 14, 15 and 23 of AASB 127 Consolidated and Separate Financial Statements and paragraphs 8 and 9 of AASB 128 Investments in Associates require an entity to consider the existence and effect of all potential voting rights that are currently exercisable or convertible. They also require all facts and circumstances that affect potential voting rights to be examined, except the intention of management and the financial ability to exercise or convert potential voting rights. Because the definition of joint control in paragraph 3 of AASB 131 Interests in Joint Ventures depends upon the definition of control, and because that Standard is linked to AASB 128 for application of the equity method, this guidance is also relevant to AASB 131.
IG2 Paragraph 4 of AASB 127 defines control as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Paragraph 2 of AASB 128 defines significant influence as the power to participate in the financial and operating policy decisions of the investee but not to control those policies. Paragraph 3 of AASB 131 defines joint control as the contractually agreed sharing of control over an economic activity. In these contexts, power refers to the ability to do or effect something. Consequently, an entity has control, joint control or significant influence when it currently has the ability to exercise that power, regardless of whether control, joint control or significant influence is actively demonstrated or is passive in nature. Potential voting rights held by an entity that are currently exercisable or convertible provide this ability. The ability to exercise power does not exist when potential voting rights lack economic substance (e.g. the exercise price is set in a manner that precludes exercise or conversion in any feasible scenario). Consequently, potential voting rights are considered when, in substance, they provide the ability to exercise power.
IG3 Control and significant influence also arise in the circumstances described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, which include consideration of the relative ownership of voting rights. AASB 131 depends on AASB 127 and AASB 128 and references to AASB 127 and AASB 128 from this point onwards should be read as being relevant to AASB 131. Nevertheless it should be borne in mind that joint control involves contractual sharing of control and this contractual aspect is likely to be the critical determinant. Potential voting rights such as share call options and convertible debt are capable of changing an entity’s voting power over another entity – if the potential voting rights are exercised or converted, then the relative ownership of the ordinary shares carrying voting rights changes. Consequently, the existence of control (the definition of which permits only one entity to have control of another entity) and significant influence are determined only after assessing all the factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, and considering the existence and effect of potential voting rights. In addition, the entity examines all facts and circumstances that affect potential voting rights except the intention of management and the financial ability to exercise or convert. The intention of management does not affect the existence of power and the financial ability of an entity to exercise or convert is difficult to assess.
IG4 An entity may initially conclude that it controls or significantly influences another entity after considering the potential voting rights that it can currently exercise or convert. However, the entity may not control or significantly influence the other entity when potential voting rights held by other parties are also currently exercisable or convertible. Consequently, an entity considers all potential voting rights held by it and by other parties that are currently exercisable or convertible when determining whether it controls or significantly influences another entity. For example, all share call options are considered, whether held by the entity or another party. Furthermore, the definition of control in paragraph 4 of AASB 127 permits only one entity to have control of another entity. Therefore, when two or more entities each hold significant voting rights, both actual and potential, the factors in paragraph 13 of AASB 127 are reassessed to determine which entity has control.
IG5 The proportion allocated to the parent and minority interests in preparing consolidated financial statements in accordance with AASB 127, and the proportion allocated to an investor that accounts for its investment using the equity method in accordance with AASB 128, are determined solely on the basis of present ownership interests. The proportion allocated is determined taking into account the eventual exercise of potential voting rights and other derivatives that, in substance, give access at present to the economic benefits associated with an ownership interest.
IG6 In some circumstances an entity has, in substance, a present ownership as a result of a transaction that gives it access to the economic benefits associated with an ownership interest. In such circumstances, the proportion allocated is determined taking into account the eventual exercise of those potential voting rights and other derivatives that give the entity access to the economic benefits at present.
IG7 AASB 139 Financial Instruments: Recognition and Measurement does not apply to interests in subsidiaries, associates and jointly controlled entities that are consolidated, accounted for using the equity method or proportionately consolidated in accordance with AASB 127, AASB 128 and AASB 131 respectively. When instruments containing potential voting rights in substance currently give access to the economic benefits associated with an ownership interest, and the investment is accounted for in one of the above ways, the instruments are not subject to the requirements of AASB 139. In all other cases, instruments containing potential voting rights are accounted for in accordance with AASB 139.
IG8 The five examples below each illustrate one aspect of a potential voting right. In applying AASB 127, AASB 128 or AASB 131, an entity considers all aspects. The existence of control, significant influence and joint control can be determined only after assessing the other factors described in AASB 127, AASB 128 and AASB 131. For the purpose of these examples, however, those other factors are presumed not to affect the determination, even though they may affect it when assessed.
Entities A and B own 80% and 20% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity A sells one-half of its interest to Entity D and buys call options from Entity D that are exercisable at any time at a premium to the market price when issued, and if exercised would give Entity A its original 80% ownership interest and voting rights.
Although the options are out of the money, they are currently exercisable and give Entity A the power to continue to set the operating and financial policies of Entity C, because Entity A could exercise its options now. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity A controls Entity C.
Entities A, B and C own 40%, 30% and 30% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entity A also owns call options that are exercisable at any time at the fair value of the underlying shares and if exercised would give it an additional 20% of the voting rights in Entity D and reduce Entity B and C’s interests to 20% each. If the options are exercised, Entity A will have control over more than one-half of the voting power. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D.
Example 3: Other rights that have the potential to increase an entity’s voting power or reduce another entity’s voting power
Entities A, B and C own 25%, 35% and 40% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entities B and C also have share warrants that are exercisable at any time at a fixed price and provide potential voting rights. Entity A has a call option to purchase these share warrants at any time for a nominal amount. If the call option is exercised, Entity A would have the potential to increase its ownership interest, and thereby its voting rights, in Entity D to 51% (and dilute Entity B’s interest to 23% and Entity C’s interest to 26%).
Although the share warrants are not owned by Entity A, they are considered in assessing control because they are currently exercisable by Entities B and C. Normally, if an action (e.g. purchase or exercise of another right) is required before an entity has ownership of a potential voting right, the potential voting right is not regarded as held by the entity. However, the share warrants are, in substance, held by Entity A, because the terms of the call option are designed to ensure Entity A’s position. The combination of the call option and share warrants gives Entity A the power to set the operating and financial policies of Entity D, because Entity A could currently exercise the option and share warrants. The other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 are also considered, and it is determined that Entity A, not Entity B or C, controls Entity D.
Entities A, B and C each own 33⅓% of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entities A, B and C each have the right to appoint two directors to the board of Entity D. Entity A also owns call options that are exercisable at a fixed price at any time and if exercised would give it all the voting rights in Entity D. The management of Entity A does not intend to exercise the call options, even if Entities B and C do not vote in the same manner as Entity A. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D. The intention of Entity A’s management does not influence the assessment.
Entities A and B own 55% and 45% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity B also holds debt instruments that are convertible into ordinary shares of Entity C. The debt can be converted at a substantial price, in comparison with Entity B’s net assets, at any time and if converted would require Entity B to borrow additional funds to make the payment. If the debt were to be converted, Entity B would hold 70% of the voting rights and Entity A’s interest would reduce to 30%.
Although the debt instruments are convertible at a substantial price, they are currently convertible and the conversion feature gives Entity B the power to set the operating and financial policies of Entity C. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity B, not Entity A, controls Entity C. The financial ability of Entity B to pay the conversion price does not influence the assessment.
Introduction Introduction
IG1 Paragraphs 14, 15 and 23 of AASB 127 Consolidated and Separate Financial Statements and paragraphs 8 and 9 of AASB 128 Investments in Associates require an entity to consider the existence and effect of all potential voting rights that are currently exercisable or convertible. They also require all facts and circumstances that affect potential voting rights to be examined, except the intention of management and the financial ability to exercise or convert potential voting rights. Because the definition of joint control in paragraph 3 of AASB 131 Interests in Joint Ventures depends upon the definition of control, and because that Standard is linked to AASB 128 for application of the equity method, this guidance is also relevant to AASB 131.
Guidance Guidance
IG2 Paragraph 4 of AASB 127 defines control as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Paragraph 2 of AASB 128 defines significant influence as the power to participate in the financial and operating policy decisions of the investee but not to control those policies. Paragraph 3 of AASB 131 defines joint control as the contractually agreed sharing of control over an economic activity. In these contexts, power refers to the ability to do or effect something. Consequently, an entity has control, joint control or significant influence when it currently has the ability to exercise that power, regardless of whether control, joint control or significant influence is actively demonstrated or is passive in nature. Potential voting rights held by an entity that are currently exercisable or convertible provide this ability. The ability to exercise power does not exist when potential voting rights lack economic substance (e.g. the exercise price is set in a manner that precludes exercise or conversion in any feasible scenario). Consequently, potential voting rights are considered when, in substance, they provide the ability to exercise power.
IG3 Control and significant influence also arise in the circumstances described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, which include consideration of the relative ownership of voting rights. AASB 131 depends on AASB 127 and AASB 128 and references to AASB 127 and AASB 128 from this point onwards should be read as being relevant to AASB 131. Nevertheless it should be borne in mind that joint control involves contractual sharing of control and this contractual aspect is likely to be the critical determinant. Potential voting rights such as share call options and convertible debt are capable of changing an entity’s voting power over another entity – if the potential voting rights are exercised or converted, then the relative ownership of the ordinary shares carrying voting rights changes. Consequently, the existence of control (the definition of which permits only one entity to have control of another entity) and significant influence are determined only after assessing all the factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 respectively, and considering the existence and effect of potential voting rights. In addition, the entity examines all facts and circumstances that affect potential voting rights except the intention of management and the financial ability to exercise or convert. The intention of management does not affect the existence of power and the financial ability of an entity to exercise or convert is difficult to assess.
IG4 An entity may initially conclude that it controls or significantly influences another entity after considering the potential voting rights that it can currently exercise or convert. However, the entity may not control or significantly influence the other entity when potential voting rights held by other parties are also currently exercisable or convertible. Consequently, an entity considers all potential voting rights held by it and by other parties that are currently exercisable or convertible when determining whether it controls or significantly influences another entity. For example, all share call options are considered, whether held by the entity or another party. Furthermore, the definition of control in paragraph 4 of AASB 127 permits only one entity to have control of another entity. Therefore, when two or more entities each hold significant voting rights, both actual and potential, the factors in paragraph 13 of AASB 127 are reassessed to determine which entity has control.
IG5 The proportion allocated to the parent and minority interests in preparing consolidated financial statements in accordance with AASB 127, and the proportion allocated to an investor that accounts for its investment using the equity method in accordance with AASB 128, are determined solely on the basis of present ownership interests. The proportion allocated is determined taking into account the eventual exercise of potential voting rights and other derivatives that, in substance, give access at present to the economic benefits associated with an ownership interest.
IG6 In some circumstances an entity has, in substance, a present ownership as a result of a transaction that gives it access to the economic benefits associated with an ownership interest. In such circumstances, the proportion allocated is determined taking into account the eventual exercise of those potential voting rights and other derivatives that give the entity access to the economic benefits at present.
IG7 AASB 139 Financial Instruments: Recognition and Measurement does not apply to interests in subsidiaries, associates and jointly controlled entities that are consolidated, accounted for using the equity method or proportionately consolidated in accordance with AASB 127, AASB 128 and AASB 131 respectively. When instruments containing potential voting rights in substance currently give access to the economic benefits associated with an ownership interest, and the investment is accounted for in one of the above ways, the instruments are not subject to the requirements of AASB 139. In all other cases, instruments containing potential voting rights are accounted for in accordance with AASB 139.
Illustrative examples Illustrative examples
IG8 The five examples below each illustrate one aspect of a potential voting right. In applying AASB 127, AASB 128 or AASB 131, an entity considers all aspects. The existence of control, significant influence and joint control can be determined only after assessing the other factors described in AASB 127, AASB 128 and AASB 131. For the purpose of these examples, however, those other factors are presumed not to affect the determination, even though they may affect it when assessed.
Example 1: Options are out of the money Example 1: Options are out of the money
Entities A and B own 80% and 20% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity A sells one-half of its interest to Entity D and buys call options from Entity D that are exercisable at any time at a premium to the market price when issued, and if exercised would give Entity A its original 80% ownership interest and voting rights.
Although the options are out of the money, they are currently exercisable and give Entity A the power to continue to set the operating and financial policies of Entity C, because Entity A could exercise its options now. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity A controls Entity C.
Example 2: Possibility of exercise or co Example 2: Possibility of exercise or conversion
Entities A, B and C own 40%, 30% and 30% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entity A also owns call options that are exercisable at any time at the fair value of the underlying shares and if exercised would give it an additional 20% of the voting rights in Entity D and reduce Entity B and C’s interests to 20% each. If the options are exercised, Entity A will have control over more than one-half of the voting power. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D.
Example 3: Other rights that have the po Example 3: Other rights that have the potential to increase an entity’s voting power or reduce another entity’s voting power
Example 3: Other rights that have the potential to increase an entity’s voting power or reduce another entity’s voting power
Entities A, B and C own 25%, 35% and 40% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entities B and C also have share warrants that are exercisable at any time at a fixed price and provide potential voting rights. Entity A has a call option to purchase these share warrants at any time for a nominal amount. If the call option is exercised, Entity A would have the potential to increase its ownership interest, and thereby its voting rights, in Entity D to 51% (and dilute Entity B’s interest to 23% and Entity C’s interest to 26%).
Although the share warrants are not owned by Entity A, they are considered in assessing control because they are currently exercisable by Entities B and C. Normally, if an action (e.g. purchase or exercise of another right) is required before an entity has ownership of a potential voting right, the potential voting right is not regarded as held by the entity. However, the share warrants are, in substance, held by Entity A, because the terms of the call option are designed to ensure Entity A’s position. The combination of the call option and share warrants gives Entity A the power to set the operating and financial policies of Entity D, because Entity A could currently exercise the option and share warrants. The other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128 are also considered, and it is determined that Entity A, not Entity B or C, controls Entity D.
Example 4: Management intention Example 4: Management intention
Entities A, B and C each own 33⅓% of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity D. Entities A, B and C each have the right to appoint two directors to the board of Entity D. Entity A also owns call options that are exercisable at a fixed price at any time and if exercised would give it all the voting rights in Entity D. The management of Entity A does not intend to exercise the call options, even if Entities B and C do not vote in the same manner as Entity A. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127 and paragraphs 6 and 7 of AASB 128, are considered and it is determined that Entity A controls Entity D. The intention of Entity A’s management does not influence the assessment.
Example 5: Financial ability Example 5: Financial ability
Entities A and B own 55% and 45% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity B also holds debt instruments that are convertible into ordinary shares of Entity C. The debt can be converted at a substantial price, in comparison with Entity B’s net assets, at any time and if converted would require Entity B to borrow additional funds to make the payment. If the debt were to be converted, Entity B would hold 70% of the voting rights and Entity A’s interest would reduce to 30%.
Although the debt instruments are convertible at a substantial price, they are currently convertible and the conversion feature gives Entity B the power to set the operating and financial policies of Entity C. The existence of the potential voting rights, as well as the other factors described in paragraph 13 of AASB 127, are considered and it is determined that Entity B, not Entity A, controls Entity C. The financial ability of Entity B to pay the conversion price does not influence the assessment.
endnoteS endnoteS
endnoteS
Endnotes are part of AASB 127
AASB 2011-5 early application amendments
1 Australian Accounting Standard AASB 2011-5 Amendments to Australian Accounting Standards – Extending Relief from Consolidation, the Equity Method and Proportionate Consolidation may be applied early to annual reporting periods beginning on or after 1 January 2005 but before 1 July 2011, provided that AASB 2007-4 Amendments to Australian Accounting Standards arising from ED 151 and Other Amendments is also applied to such periods.
2 These amendments to AASB 127 (July 2004, as amended) in paragraphs 3-7 below are relevant only if this Standard is applied early to an annual reporting period beginning on or after 1 January 2005 but before 1 July 2009, and a version of AASB 127 (July 2004) is applied to the period. As required by paragraph 1 above, the amendments to AASB 127 by AASB 2007-4 would also be applied to the period. Accordingly, the subject paragraphs below already reflect the impact of AASB 2007‑4.