According to the provisions of AASB10, control is the major factor affecting the preparation of consolidated financial statements. Control incorporates three main elements: the power of the investor company over the investee, the rights or exposure to specific returns, as well as the ability of the investing company to utilize its power over the investee company with the aim of affecting the extent of returns it gets from the investment (Commonwealth of Australia, 2013). In light of the above, the change of investment conditions in Mouse Limited could lead to a very different conclusion.
The rationale for the above finds its basis in the fact that the scope of control changes a lot. Even with the share capital remaining at 40% for Mickey Ltd in Mouse Ltd, the change in the distribution of the rest 60% brings a whole new control scope. Initially, the diversified distribution among very many small-scale investors paves an easy way for Mickey Ltd to exercise control substantial enough to allow Mickey Ltd to prepare consolidated financial statements featuring Mouse Ltd. However, the new scope changes the former control substantially. For one, the distribution of the remaining 60% stake in Mouse Ltd changes from the several small-scale group of investors to just three institutional investors, each with a 20% stake.
With respect to joint ventures and group accounts, the major accounting and operational decisions find their basis in the controlling interests (Ashurst, 2014). In light of the above, Mickey Ltd can consolidate the financial statements of Mouse Ltd on the basis of having exclusive voting rights, as stipulated by other Australian Accounting Standards. In the first case, Mickey Ltd can direct the relevant activities of Mouse Ltd in the pursuit of significantly affecting the return on investment it has in that company (Grant Thornton, 2013). The minority shareholders have rights but as a result of their size of individual investments, it is far from impossible to have their rights having priority with respect to the rights of Mickey Ltd. On the other hand, by having just three investors sharing the remaining 60% stake in Mouse Ltd equally, their minority rights are become too significant in the control of Mouse Ltd. First, a 20% stake is very crucial in decision-making. Second, with just three investors sharing the 60% stake, it is easily possible to have all of them pushing for a common agenda (BDO Australia, 2015). The above reduces the control of Mickey Ltd on Mouse Ltd meaning that it would have no basis to consolidate the financial statements of Mouse Ltd.
Ideally, the two scenarios highlight the factors necessary for the establishment and maintenance of de facto control of an investor company in an investee company. By de facto control, it means that all the underlying conditions between the investor and the investee company allow the investor company to consolidate the financial statements of the investee company (PwC, 2011). There are two key factors necessary for achieving de facto control. The first one is share capital. In both cases, Mickey Ltd has enough (40%) shares to allow for consolidation. The other factor is the distribution of the remaining stake among other stakeholders (Commonwealth of Australia, 2013). The distribution is widespread in the first case, allowing Mickey Ltd the control, but too closes in the second case, denying the control.
Ashurst. (2014). Development Joint Ventures. Melbourne: Ashurst.
BDO Australia,. (2015). Will the new consolidation and joint arrangements standards change your financial statements? – BDO Australia. Bdo.com.au. Retrieved 13 May 2015, from http://www.bdo.com.au/resources/newsletters/accounting-news/accounting-news,-may-2013/will-the-new-consolidation-and-joint-arrangements-standards-change-your-financial-statements
Commonwealth of Australia. (2013). Amendments to AASB 1038 arising from AASB 10 in relation to consolidation and interests of policyholders. Melbourne: Commonwealth of Australia.
Grant Thornton. (2013). Impact of AASB 10 on Asset Managers. Sydney: Grant Thornton.
PwC. (2011). Consolidated Financial Statements: Redefining Control. Sydney: Pwc Australia.