Case Study 5: Voting rights (AASB10)

Mickey Ltd is a production company that produces movies and television shows. It also owns cable television systems that broadcast its movies and television shows. Mickey Ltd transferred to Mouse Ltd its cable assets and the shares in its previously owned and recently acquired cable television systems, which broadcast Mickey Ltd’s movies. Mouse Ltd assumed approximately $200 million in debt related to companies it acquired in the transaction. After the transfer date, Mouse Ltd acquired additional cable television systems, incurring approximately $2 billion of debt, none of which was guaranteed by Mickey Ltd.

Mouse Ltd was initially established as a wholly-owned subsidiary of Mickey Ltd. Several months after the transfer, Mouse Ltd issued ordinary shares in an initial public offering, raising nearly $1 billion in cash and reducing Mickey Ltd’s interest in Mouse Ltd to 41%. The remaining 59% of Mouse Ltd’s voting interest is widely held.

The managing director of Mouse Ltd was formerly the manager of broadcast operations for Mickey Ltd. Half the directors of Mouse Ltd are or were executive officers of Mickey Ltd.

Mouse Ltd and its subsidiaries have entered individually into broadcast contracts with Mickey Ltd, pursuant to which Mouse Ltd and its cable system subsidiaries must purchase 90% of their television shows from Mickey Ltd at payment terms, and other terms and conditions of supply as determined from time to time by Mickey Ltd. That agreement gives Mouse Ltd and its cable television system subsidiaries the exclusive right to broadcast Mickey Ltd’s movies and television shows in specific geographic areas containing approximately 45% of the country’s population. Mouse Ltd and its cable television subsidiaries determine the advertising rates charged to their broadcast advertisers.

Under its agreement with Mickey Ltd, Mouse Ltd has limited rights to engage in businesses other than the sale of Mickey Ltd’s movies and television shows. In its most recent financial year, approximately 90% of Mouse Ltd’s sales were Mickey Ltd movies and television shows. Mickey Ltd provides promotional and marketing services and consultation to the cable television systems that broadcast its movies and television shows. Mouse Ltd rents office space from Mickey Ltd in its headquarters facility through a renewable lease agreement, which will expire in 5 years’ time.

Required

Should Mickey Ltd consolidate Mouse Ltd? Why?

If Mickey Ltd had not established Mouse Ltd but had instead purchased 41% of Mouse Ltd’s voting shares on the open market, does this change your answer to requirement A? Why?