Page 40 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions

CIMA NOVEMBER 2018 – MANAGEMENT CASE STUDY

● ability to use power to affect the variable returns
In practical terms, control is normally demonstrated by one entity holding the majority of equity
shares in another. This enables the investor to control the membership of the board of directors
and, consequently, to control the strategic and operating policies of the investee. It will therefore
be in a position to exert power and receive the benefit of the variable returns generated by the
investee.

If control over another entity is established, that will require recognition of goodwill and the
preparation of annual consolidated financial statements. Such consolidated financial statements
should exclude intra‐group transactions and balances, along with any unrealised profits arising on
transactions between entities under common control. If control is established by owning less than
100% of the issued share capital of the subsidiary, this will also require recognition of non‐
controlling interests in the statement of profit and loss and other comprehensive income, the
statement of financial position and the statement of changes in equity.

Application to Grapple
In conjunction with IFRS 3, if an acquisition was financed wholly or in part by the issue of shares
by Grapple, this would reduce the percentage controlling interest of Roger Grapple who currently
owns a 60% controlling interest in Grapple. he may seek to ensure that he still retains a
controlling interest after the issue of any shares by Grapple to acquire a subsidiary.

Group accounting issues ‐ IFRS 11 Joint Arrangements
IFRS 11 defines a joint arrangement as an arrangement of which two or more parties have joint
control. Joint control is defined as the contractually agreed sharing of control of an arrangement,
which requires unanimous consent of the parties to the joint arrangement.

There are two forms of joint arrangement as follows:
● joint operation ‐ a joint arrangement operation whereby the parties to the arrangement
have rights to the assets and obligations for the liabilities. A separate entity or vehicle is not
established for a joint operation.
● joint venture – a joint arrangement whereby the parties to the arrangement have rights to
the net assets of the arrangement. A separate entity or vehicle is established for a joint
venture.

Application to Grapple
Although Grapple does not yet have any investments which have been classified as joint
arrangements, it is possible or feasible that it may do so at some later date.

For example, it could enter into a joint arrangement to share market stall and selling staff with a
complementary business (e.g. a food seller) during the Athletics World Cup to be staged in
Zedland and agree to split costs and revenues on an agreed basis.

90 KAPLAN PUBLISHING