Essays on Financial Reporting Assignment

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a) Paula Ltd and India Ltd own 80% and 20% respectively of the ordinary shares that carry voting rights at a general meeting of shareholders of Cook Island Ltd. Paula Ltd sells half of its interest to Kobe Ltd and buys call options from Kobe Ltd that are exercisable at any time at a premium to the market price when issued and, if exercised, would give Paula Ltd its original 80% ownership interest and voting rights. At 30 June 2012, the options are out of the money. (Leo K., Hoggett J., and Sweeting J, Company Accounting 9th Edition, page 755)Discussion whether Paula Ltd is the parent of Cook Island Ltd.

(300 words) (4 marks)Before discussing whether or not Paula Ltd is the parent of Cook Island, it is worth defining what is meant by the term” Parent company”. According to Rossini (1998), it is simply a firm or a company that posses another firm (its subsidiary) or a substantial amount of shares and voting rights aimed at exerting the greatest control or power over the company. In other words, a parent company is simply a body which have in its possession one or many subsidiaries entities.

It is an organization which control significant voting rights or shares in a bid to influence the day to day operations of subsidiary and having some degree of influence on their decision making organs. One can therefore derive a working definition of a parent company as an entity with a higher influence associated with the governance of not only finances but also operating issues of a unit in order to accrue maximum benefits from its undertakings.

These qualities are well manifested by the Paula Ltd as discussed below. Unlike India Company, Paula Ltd has significant voting rights which correspondents to its substantial amount of ordinary shares. Even if Paula Ltd sells half of its interest to Kobe Ltd, there will be still good shares left and eventually will have the full ownership of 80 % interest including voting rights which would also guarantee the company some control. Hewitt (2011) believes that voting rights is a good avenue and opportunity to supervise administrative issues and to eventually approve or disapprove such decisions, sentiment shared by Yermack (2010) who argues that voting can be adopted as a communication tool particularly with boards of directors, to bring about major changes in the overall management of the corporate.

With the huge influence and significant voting rights, Paula Ltd poses the power to appoint or remove members of the board. Buying call options from Kobe Ltd still gives Paula Ltd some advantages, the right, but not the obligation, to buy shares at a preset price (Kieso, 2008) unless Paula Ltd is caught up with times since call option as vulnerable to time decay which may affect the option-value as it often decrease with expiry date thus affecting realization of any profitb) Mensa Ltd has acquired all the shares of cancer Ltd.

The accountant for Mensa Ltd, having studied the requirements of AASB 3 business combination, realises that all the identifiable asset and liabilities of cancer Ltd must be recognised in the consolidated financial statements at fair value. Although he is happy about the valuation of these items, he is unsure of a number of other matters associated with accounting for thee assets and liabilities.

He has approached you and asked for your advice. (Leo K., Hoggett J., and Sweeting J, Company Accounting 9th Edition, page 805)

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