Case Study 7: Control (AASB10)

Daffy Duck Ltd has acquired, during the current year, the following investments in shares issued by other companies.

Elmer Ltd         $120 000 (40% of issued capital)

Fudd Ltd          $117 000 (35% of issued capital)

Daffy Duck Ltd is unsure how to account for these investments and has asked you, as the auditor, for some professional advice.

Specifically, Daffy Duck Ltd is concerned that it may need to prepare consolidated financial statements under AASB 10/IFRS 10. To help you, the company has provided the following information about the two investee companies:

Elmer Ltd

• The remaining shares in Elmer Ltd are owned by a diverse group of investors who each hold a small parcel of shares.

• Historically, only a small number of the shareholders attend the general meetings or question the actions of the directors.

• The current board of directors has five members, out of which three are retiring at the next annual general meeting. Daffy Duck Ltd has nominated three new directors to replace the ones that are retiring and expects that they will be appointed at the next annual general meeting.

Fudd Ltd

• The remaining shares in Fudd Ltd are owned by a small group of investors who each own approximately 15% of the issued shares. One of these shareholders is Elmer Ltd, which owns 17%.

• The shareholders take a keen interest in the running of the company and attend all meetings.

• Two of the other shareholders, including Elmer Ltd, already have representatives on the board of directors who have indicated their intention of nominating for re-election.

Required

1. Advise Daffy Duck Ltd as to whether, under AASB 10/IFRS 10, it controls Elmer Ltd and/ or Fudd Ltd. Support your conclusion.

2. Would your conclusion be different if the remaining shares in Elmer Ltd were owned by three institutional investors each holding 20%? If so, why?