1 INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Department of Accounting Instructor:

School of Business Adjunct AP Sardool Singh
National University of Singapore Email: bizsardo@nus.edu.sg

ACC3704 ADVANCED CORPORATE ACCOUNTING AND REPORTING

Semester 1, 2022/2023

Topic 1
Consolidated financial statements - Overview

Learning objectives
(Note: Learning objectives are achieved through lecture, tutorial and readings)

1. Explain what consolidated financial statements are.

2. State and explain who needs to prepare consolidated financial statements in Singapore, and
who are exempted.
3. Explain and apply the concept of “control” under SFRS(I) 10.
4. Identify parent-subsidiary relationships, and thus the entities that need to be consolidated.
5. Understand the reasons for preparing consolidated financial statements.
6. Explain what separate financial statements are.

Readings

a) Textbook, Chapter 2 (up to page 49)

b) SFRS(I) 10 Consolidated Financial Statements – up to para 18 + Appendix A + Appendix B (up

to para B85)

c) SFRS(I) 1-27 Separate Financial Statements –focus only on references to “parent” and
“subsidiaries”. Ignore (for the time being) references to associated companies, joint ventures
and investment entities.

Note: SFRS(I) 10 and SFRS(I)1-27 can be found on the ASC website (www.asc.gov.sg). Look for the
2021 Volume under “Pronouncements”, “Singapore Financial Reporting Standards (International)”.

These handouts and examples are mainly extracted from the relevant SFRS(I)

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 2 INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

1. WHAT ARE CONSOLIDATED FINANCIAL STATEMENTS?

Consolidated financial statements are the financial statements of a group in which the
assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries
are presented as those of a single economic entity.

A group is a parent and its subsidiaries.

A parent is an entity that controls one or more subsidiaries.

A subsidiary is an entity, including an unincorporated entity such as a partnership, that is

controlled by another entity (known as the parent).

An investor controls an investee if and only if the investor has all the following:
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the investor’s
returns.

Non-controlling interest [NCI] is the equity in a subsidiary not attributable, directly or indirectly,
to a parent.

Consolidated financial statements typically comprise of: additional set on top of company’s set

i. A consolidated statement of financial position;

ii. A consolidated statement of profit or loss and other comprehensive income;
iii. A consolidated statement of changes in equity;
iv. A consolidated statement of cash flow;
v. Notes to the financial statements.

2. EXAMPLES OF SUBSIDIARIES

Usually, an investor that holds more than half of the voting rights of an investee has power
in the following situations, unless when those voting rights are not substantive.
To determine “control”, USE THE NOMINAL ownership interest, and NOT the effective
(i.e. mathematical or final economic benefit) ownership interest, that is held through
subsidiaries. In multi-tier structures, control must be demonstrated at each intermediate level
before the ultimate holding company can state conclusively that it controls that entity.
However, the actual consolidation is always done on the basis of the effective actual (i.e.
mathematical or final economic benefit) ownership interest.

Examples:

1. A holds more than 50% of the issued ordinary share capital of B. A will be the parent and B will
be the subsidiary. A controls > 50 % of B —> B is a subsidiary of A
B has to be consolidated by A
90%
A B

2. C is a subsidiary of B and A. Nominal ownership of A in C is 80% because since A controls B,

it controls all that B owns in C. Effective ownership of A in C is 70% x 80% = 56%. If C distributes
$1 of dividend, A will finally get $0.56 (if B distributes all that it receives).

70% 80% B and C are consolidated by A

A B C
A controls 70% of B —> B is subsidiary of A B controls 80% of C —> C is subsidiary of B

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 3 INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

3. A is deemed to be a parent of C because A is deemed to have held 95% of the shares of C

(that is, 25% held by A Ltd directly plus 70% held by its subsidiary, B). However, when
consolidating C, NCI equals 33%.
NCI = 25% x (60% + 70%) = 33%
60%
A B

25% 70%

4. Here, P owns 51% of the equity shares in S1, which is therefore its subsidiary. S1 owns 51%
of the equity shares in S2. S2 is therefore a subsidiary of S1 and subsidiary of P. S1 is an
immediate parent and P is the ultimate controlling parent of S2.

P will consolidate the assets and liabilities of S2 BUT NCI will have a 74% share in the net
assets of S2.
NCI = 100% - (51% x 51%) = 74%
51% 51%
P S1 S2

3. MUST CONSOLIDATED FINANCIAL STATEMENTS ALWAYS BE PREPARED?

Consolidated financial statements must always be prepared in accordance with SFRS(I) 10

Consolidated Financial Statements when there is a parent and a subsidiary.

However, a parent that is an investment entity as defined in SFRS(I) 10, need not
consolidate subsidiaries . Instead it is required to measure all of its subsidiaries at fair value
through P/L. [out of scope for ACC3704]

An investment entity is an entity that:

(a) obtains funds from one or more investors for the purpose of providing those investors
with investment management services;
(b) commits to its investor(s) that its business purpose is to invest funds solely for returns
from capital appreciation, investment income, or both; and
(c) measures and evaluates the performance of substantially all of its investments on a fair
value basis.

In addition, a parent need not present consolidated financial statements if it meets all the
following conditions:
ask for permission (from other owners in writing) to not do conso
(a) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and
all its other owners, including those not otherwise entitled to vote, have been informed about,
and do not object to, the parent not presenting consolidated financial statements;

(b) its debt or equity instruments are not traded in a public market;

(c) it did not file, nor is it in the process of filing, its financial statements with a regulatory
organisation for the purpose of issuing any class of instruments in a public market; and

(d) the ultimate or any intermediate parent of the parent produces consolidated financial
statements available for public use and comply with SFRS(I)s (or International Financial
Reporting Standards), in which subsidiaries are consolidated or are measured at fair value
through profit or loss in accordance with this SFRS(I). [10.4]
US companies use US GAAP so does not qualify for condition (d) and hence need to do conso

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 4 INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

4. WHAT IS CONTROL?

An investor controls an investee if and only if the investor has all of the following:

(A) POWER over the investee,

(B) exposure, or RIGHTS, TO VARIABLE RETURNS from involvement with the investee; and

(C) the ability to USE POWER over the investee TO AFFECT the amount of the investor’s
RETURNS.

Entities that could be affected by this definition include:

(1) entities where the distribution of returns is not commensurate with the distribution of
power;

(2) entities with a dominant investor that does not possess a majority voting interest, where
the remaining votes are held by widely-dispersed shareholders;

(3) structured entities which were designed so that voting or similar rights are not the
dominant factor in deciding who controls the entity, such as when any voting rights
relate to administrative tasks only and the relevant activities are directed by means of
contractual arrangements;

(4) entities that have issued significant potential voting rights, which, when exercised, can
result in a change of control; and

(5) asset management entities.

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 5 INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

(A) POWER OVER THE INVESTEE

1. Power exists when the investor has EXISTING RIGHTS that give it the current ability TO
DIRECT THE RELEVANT ACTIVITIES (i.e. the activities of the investee that significantly
affect the investee's returns). relevant activities generate profits, irrelevant activities include HR, security

It may be necessary to CONSIDER some or all of the following FACTORS to determine if an

investor controls an investee:

(1) the purpose and design of the investee;

(2) how decisions about relevant activities are made;
(3) whether the rights of the investor give it the current ability to direct the relevant activities;
and
(4) the nature of its relationship with other parties.

(1) THE PURPOSE AND DESIGN OF THE INVESTEE;

1. Usually an investee is controlled by means of equity instruments that give the holder
MAJORITY VOTING RIGHTS, such as in ordinary shares in the investee. In the absence of
any additional arrangements (e.g. embedded in contractual arrangements) that alter
decision-making, the assessment of control focuses on which party, if any, is able to exercise
voting rights over the investee’s OPERATING AND FINANCING POLICIES (not
administrative tasks).

If two or more investors collectively control an investee when they must act together to direct
the relevant activities, no investor individually controls the investee. Each investor would
account for its interest in the investee in accordance with SFRS(I) 11 Joint Arrangements.
When an investor has significant influence and does not control the investee, the interest in the
investee would be accounted in accordance with SFRS(I) 1-28 Investments in Associates and
Joint Ventures.
If an investor does not have control or significant interest SFRS(I) 9 Financial Instruments will
take over the accounting.

2. An INVESTOR CAN HAVE POWER EVEN IF IT HOLDS LESS THAN A MAJORITY OF THE
VOTING RIGHTS of an investee, for example, through;

(a) A contractual arrangement between the investor and other vote holders, e.g. a contract may
enable the investor to control sufficient votes held by other investors to provide itself with power
over the investee;

Example:
ABC owns 35% of X while XYZ owns 25%. ABC and XYZ have an agreement whereby XYZ
will vote in line with ABC at board meetings and AGMs of X.

(b) Rights arising from other contractual arrangements e.g. such a contractual arrangement may
allow the investor to directly control certain of the investee’s relevant activities (e.g.,
manufacturing);

Example
ABC owns 40% of X. X is licensed to use only ABC’s patented process for its (X)
manufacturing, and to consult ABC should it need to reconfigure the process to suit its product
lines. The 40% ownership + economic dependence may be sufficient to give power to ABC.

(c) The investor's voting rights;

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Example:
At recent AGMs, only the largest investor (45%) attended. None of the other shareholders
have more than 2% shareholdings. Does the largest shareholder have power?

ANS: Yes

(d) Potential voting rights e.g. currently exercisable, in the money warrants or options; or
A owns 40% of C and B owns 60% of C —> B should consolidate C. But if A and B signed an
(e) A combination of the above option agreement for B to sell 40% of its stakes to A and if A exercised the option, A’s stakes
increase to 80% and hence should consolidate C whether exercised or not (controlling
shareholder of C) and would only consolidate the actual stakes owned.
3. CONSIDERATION is also given, but is not limited, TO THE FOLLOWING (ALTHOUGH WITH
GREATER WEIGHT) , which, when considered together with its rights and the indicators in
other paragraphs, may provide evidence that the investor’s rights are sufficient to give it power
over the investee:

(a) The investor can, without having the contractual right to do so, appoint or approve the
investee’s key management personnel who have the ability to direct the relevant activities.

(b) The investor can, without having the contractual right to do so, direct the investee to enter
into, or can veto any changes to, significant transactions for the benefit of the investor.

(c) The investor can dominate either the nominations process for electing members of the
investee’s governing body or the obtaining of proxies from other holders of voting rights.

(d) The investee’s key management personnel are related parties of the investor (for example,
the chief executive officer of the investee and the chief executive officer of the investor are the
same person).

(e) The majority of the members of the investee’s governing body are related parties of the
investor.

4. The FOLLOWING SUGGESTS that the investor has more than a passive interest in the
investee and, in combination with other rights, may INDICATE POWER:

(a) The investee’s key management personnel who have the ability to direct the relevant activities
are current or previous employees of the investor.

(b) The investee’s operations are dependent on the investor, such as in the following situations:
(i) The investee depends on the investor to fund a significant portion of its operations.
(ii) The investor guarantees a significant portion of the investee’s obligations.
(iii) The investee depends on the investor for critical services, technology, supplies or
raw materials.
(iv) The investor controls assets such as licences or trademarks that are critical to the
investee’s operations.
(v) The investee depends on the investor for key management personnel, such as when
the investor’s personnel have specialised knowledge of the investee’s operations.

(c) A significant portion of the investee’s activities either involve or are conducted on behalf of
the investor.

(d) The investor’s exposure, or rights, to returns from its involvement with the investee is
disproportionately greater than its voting or other similar rights. For example, there may be a
situation in which an investor is entitled, or exposed, to more than half of the returns of the
investee but holds less than half of the voting rights of the investee.

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 7 INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

(2) WHAT THE RELEVANT ACTIVITIES ARE AND HOW DECISIONS ABOUT THOSE
ACTIVITIES ARE MADE;

1. Examples of activities that, depending on the circumstances, can be relevant activities

include, but are not limited to:
(a) selling and purchasing of goods or services;
(b) managing financial assets during their life;
(c) selecting, acquiring or disposing of assets;
(d) researching and developing new products or processes; and
(e) determining a funding structure or obtaining funding.

2. Examples of decisions about relevant activities include but are not limited to:
(a) establishing operating and capital decisions of the investee, including budgets; and
(b) appointing and remunerating an investee’s key management personnel or service providers
and terminating their services or employment.

(3) WHETHER THE RIGHTS OF THE INVESTOR GIVE IT THE CURRENT ABILITY TO DIRECT
THE RELEVANT ACTIVITIES;

1. For an INVESTOR THAT HOLDS MORE THAN HALF OF THE VOTING RIGHTS of an
investee, to have power over an investee, the investor’s VOTING RIGHTS MUST BE
SUBSTANTIVE, AND must provide the investor with the CURRENT ABILITY TO DIRECT THE
RELEVANT ACTIVITIES.

Factors to consider on whether rights are substantive requires judgement on:

(a) Whether there are any BARRIERS (economic or otherwise) THAT PREVENT THE HOLDER
FROM EXERCISING THE RIGHTS. Examples:
(i) financial penalties and incentives that would prevent the holder from exercising its rights.
(ii) an exercise or conversion price that creates a financial barrier that would deter the
holder from exercising its rights.
(iii) terms and conditions that make it unlikely that the rights would be exercised, for
example, conditions that narrowly limit the timing of their exercise.
(iv) the inability of the holder of the rights to obtain the information necessary to exercise its
rights.
(v) operational barriers or incentives that would prevent the holder from exercising its rights
(e.g. the absence of other managers willing to provide specialised services).
(vi) legal or regulatory requirements that prevent the holder from exercising its rights (e.g.
where a foreign investor is prohibited from exercising its rights).

(b) The terms and conditions of POTENTIAL VOTING RIGHTS are more likely to be substantive
when the instrument is IN THE MONEY or the investor would benefit for other reasons (e.g. by
realising synergies between the investor and the investee) from the exercise or conversion of
the instrument. To be substantive, rights also NEED TO BE CURRENTLY EXERCISABLE
when decisions about the direction of the relevant activities need to be made.

Read Example 3 to 3D in SFRS(I) 10

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 8 INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Example:

A Ltd, B Ltd and C Ltd owns 40%, 30% and 30% of D Ltd respectively. Assume total issued
shares of D = 1,000. In 2017, D Ltd issues 500 convertible bonds to A Ltd, which are
convertible into 500 ordinary shares (of D) from 1/1/19 and, if converted, A will then own 60%
of D’s issued ordinary shares (B & C will each own 20%).

Prior to 1/1/19:

No one has control (based on actual voting rights). Potential voting rights (embedded in the
convertible bonds) are not substantive because they are not exercisable yet.

From 1/1/19:

Assuming the potential voting rights, which are now exercisable, are substantive, A effectively
owns 60% of actual and voting rights combined and will have power and thus control, EVEN
IF A HAS NOT EXERCISED the convertible bonds.

Note: Potential voting rights are however not used in actual consolidation process, i.e. in the
example above, post 1/1/19, A effectively uses 40% (actual voting rights) with 60% non-
controlling interest (NCI) for consolidation procedures prior to the conversion. After
conversion, A consolidates 60% with 40% NCI.

2. If two or more investors each have existing rights that give them the unilateral ability to
direct different relevant activities, the INVESTOR THAT HAS THE CURRENT ABILITY TO
DIRECT THE ACTIVITIES that most significantly affect the returns of the investee HAS
POWER over the investee.

Example:
Two investors form an investee to develop and market a medical product. One investor is
responsible for all decisions relating to the development of the product and to obtaining
regulatory approval. Once the regulator has approved the product, the other investor makes
all decisions about the manufacture and marketing of the project. If all the stated activities are
relevant activities, each investor needs to consider whether developing and obtaining
regulatory approval or the manufacturing and marketing of the medical product is the activity
that most significantly affects the investee’s returns and whether it is able to direct that activity.
In determining which investor has power, the investors would consider:
(a) the purpose and design of the investee;
(b) the factors that determine the profit margin, revenue and value of the investee as well
as the value of the medical product;
(c) the effect on the investee’s returns resulting from each investor’s decision-making
authority with respect to the factors in (b); and
(d) the investors’ exposure to variability of returns.

3. An investor that holds only PROTECTIVE RIGHTS (sometimes called veto rights) DOES
NOT HAVE POWER OVER AN INVESTEE, and consequently does not control the investee or
prevent another party from having power over an investee. Examples of protective rights:
(i) a lender’s right to restrict a borrower from undertaking activities that could significantly
change the credit risk of the borrower to the detriment of the lender.
(ii) the right of a party holding a non-controlling interest in an investee to approve capital
expenditure greater than that required in the ordinary course of business, or to approve
the issue of equity or debt instruments.
(iii) the right of a lender to seize the assets of a borrower if the borrower fails to meet specified
loan repayment conditions.

TRY QUESTION 1 TO 7

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 9 INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

(4) THE NATURE OF ITS RELATIONSHIP WITH OTHER PARTIES.

When assessing control, an investor shall consider the nature of its relationship with other
parties and whether those other parties are acting on the investor’s behalf (i.e. they are ‘DE
FACTO AGENTS’). Such a relationship need not involve a contractual arrangement.

Examples of de facto agents for the investor:

(a) the investor’s related parties.
(b) a party that received its interest in the investee as a contribution or loan from the investor.
(c) a party that has agreed not to sell, transfer or encumber its interests in the investee without
the investor’s prior approval (except for situations in which the investor and the other party have
the right of prior approval and the rights are based on mutually agreed terms by willing
independent parties).
(d) a party that cannot finance its operations without subordinated financial support from the
investor.
(e) an investee for which the majority of the members of its governing body or for which its key
management personnel are the same as those of the investor.
(f) a party that has a close business relationship with the investor, such as the relationship
between a professional service provider and one of its significant clients.

OTHER ISSUES - SILO

A silo is A PORTION OF AN ENTITY that is treated as a DEEMED SEPARATE ENTITY.

Specified assets of the investee. In substance, all the assets, liabilities and equity of that
deemed separate entity are ring-fenced from other investees and IF THE INVESTOR
CONTROLS THE DEEMED SEPARATE ENTITY, THE INVESTOR SHALL CONSOLIDATE
that portion of the investee.

Example:
X Ltd transferred $100m of its accounts receivables to Entity T Ltd set up by a bank, and in
return has a loan or equity investment in Entity T. Under the setup terms of Entity T, X
continues to manage the $100m accounts receivables and only X is entitled to receive the
cash flows from the $100m of receivables and X alone also suffers from any default loss from
that group of receivables. Entity T also has similar receivables transferred in by other
companies on similar terms. X is not entitled to any of these receivables or its related cash
flows, and is also not exposed to their default losses.

If X controls the silo, it will consolidate the silo but not the rest of Entity T. Whoever is then
determined to control Entity T will not consolidate the $100m silo.

• [self-learning] refer paras B76 to B79. Silos are not examinable in computational questions
because usually involve atypical and complicated transactions

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 10 INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

(B) EXPOSURE, OR RIGHTS, TO VARIABLE RETURNS FROM INVOLVEMENT WITH THE

INVESTEE

To control an investee, an investor must be exposed, or have rights, to variable returns as a result of
the investee's performance. Variable returns CAN BE ONLY POSITIVE, ONLY NEGATIVE OR BOTH
POSITIVE AND NEGATIVE.

Examples of returns include:

(a) dividends, interest from debt securities issued by the investee and changes in the value of
the investor’s investment in that investee.

(b) fees for servicing an investee’s assets or liabilities, fees and exposure to loss from providing
credit or liquidity support, residual interests in the investee’s assets and liabilities on
liquidation of that investee, tax benefits, and access to future liquidity that an investor has from
its involvement with an investee.

(c) returns that are not available to other interest holders. For example, an investor might use
its assets in combination with the assets of the investee to achieve economies of scale, cost
savings, sourcing scarce products, or gaining access to proprietary knowledge. Fixed
performance fees for managing an investee’s assets are variable returns because they
expose the investor to the performance risk of the investee.

(C) THE ABILITY TO USE POWER OVER THE INVESTEE TO AFFECT THE AMOUNT OF
THE INVESTOR’S RETURNS.

An investor controls an investee if the investor not only has power over the investee and rights
to variable returns from its involvement with the investee, but also has the ability to use its power
to affect the investor’s returns from its involvement with the investee.

1. Thus, AN INVESTOR WITH DECISION-MAKING RIGHTS DETERMINES WHETHER IT IS A

PRINCIPAL OR AN AGENT. An agent is a party primarily engaged to act on behalf and for
the benefit of another party i.e. (the principal(s)) and therefore does not control the investee
when it exercises its decision-making authority.

2. The investor (decision maker) reviews all the factors below, in DETERMINING WHETHER IT
IS AN AGENT:

(i) The scope of its decision-making authority over the investee, e.g. the discretion that the
decision maker has when making decisions about those activities

(ii) The rights held by other parties,

When a single party holds substantive removal rights and can remove the decision maker
without cause, this, in isolation, is sufficient to conclude that the decision maker is an agent. A
decision maker that is required to obtain approval from a small number of other parties for its
actions is generally an agent.

(iii) The remuneration to which it is entitled in accordance with the remuneration agreements;
The greater the magnitude of, and variability associated with, the decision maker’s
remuneration relative to the returns expected from the activities of the investee, the more likely
the decision maker is a principal.

(iv) The decision maker's exposure to variability of returns from other interests that it holds in
the investee.
Holding other interests in an investee indicates that the decision maker may be a principal.

TRY QUESTION 8

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 11 INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

SFRS(I) 1-27 SEPARATE FINANCIAL STATEMENTS

1. Separate financial statements are those presented by a parent (ie an investor with control of
a subsidiary) or an investor with joint control of, or significant influence over, an investee.
Separate financial statements are those presented in addition to consolidated financial
statements or in addition to financial statements in which investments in associates or joint
ventures are accounted for using the equity method.

2. An entity exempted in accordance with SFRS(I) 10 from consolidation or FRS 28 from applying
the equity method may present separate financial statements as its only financial statements.

3. An investment entity that is required, throughout the current period and all comparative
periods presented, to apply the exception to consolidation for all of its subsidiaries in
accordance with FRS 110 presents separate financial statements as its only financial
statements.

4. When an entity prepares separate financial statements, it shall account for investments in
subsidiaries, joint ventures and associates either:

(a) at cost;

(b) in accordance with SFRS(I) 9 (FVTPL; FVTOCI as an irrevocable choice); or

(c) using the equity method as described in SFRS(I) 1-28.

5. If a parent is required, in accordance with SFRS(I) 10, to measure its investment in a subsidiary
at fair value through profit or loss in accordance with SFRS(I) 9, it shall also account for its
investment in a subsidiary in the same way in its separate financial statements.

6. Dividends from a subsidiary, a joint venture or an associate are recognised in the separate
financial statements of an entity when the entity’s right to receive the dividend is established.
The dividend is recognised in profit or loss unless the entity elects to use the equity
method, in which case the dividend is recognised as a reduction from the carrying amount of
the investment.

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QUESTIONS

1. An investor acquires 45 per cent of the voting rights of an investee. The remaining voting rights
are held by twenty shareholders, none individually holding more than 10 per cent of the voting
rights. These shareholders do not know each other and do not make collective decisions.

Does the investor control the investee?

2. Investor A holds 45 per cent of the voting rights of an investee. The remaining voting rights are
held by eleven individuals each holding 5 per cent who have signed a shareholder’s agreement
allowing A to direct all the relevant activities.

Does Investor A control the investee?

3. Investor A holds 40 per cent of the voting rights of an investee. Two other investors each hold
30 per cent of the voting rights of the investee.

Does Investor A control the investee?

4. An investor holds 45 per cent of the voting rights of an investee. The remaining voting rights
are held by eleven individuals each holding 5 per cent. These shareholders do not know each
other and do not make collective decisions. However, all shareholders have been attending and
voting in the AGMs and EGMs.

Does the investor control the investee?

5. Investor A holds 60 per cent of the voting rights of an investee. The other Investor, B, has a
signed option to buy half of investor A’s voting rights. The option is exercisable now but deeply
out of the money. Investor A controls a majority of Board seats and has been directing the
relevant activities.

Does investor A control the investee?

6. Investor A holds 60 per cent of the voting rights of an investee. The other Investor, B, has a
signed option to buy half of investor A’s voting rights. The option is exercisable now but is
marginally out of the money. Investor A controls a majority of Board seats and has been
directing the relevant activities.

Does the investor A control the investee?

7. A regulated fund manager of portfolio of debt instruments securities of publicly traded entities
has a 10 per cent stake in the fund. In accordance with the fund management agreement signed
with the other investors, he receives an annual management fee of 1 per cent of the net asset
value of the fund plus a performance fee but does not have any obligation to fund losses beyond
that 10% investment. All the investment decisions (i.e. the relevant activities) are undertaken
by the fund manager with no inputs from the other investors. The investors can redeem their
investments in accordance with the signed investment agreement.

Should the fund manager consolidate the fund?

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