Question：The share capital of DEF Co at 31 December 19X1 was $50,000,000. This is analysed as follows: Class 'A' $1 ordinary shares: $30m; Class 'B' $1 ordinary shares: $20m. Each 'A' share carries one vote whereas each 'B' share carries two votes.
ABC Co acquires the following interest in DEF Co at 31 December 19X1:
Class 'A' $1 ordinary shares: $16m; Class 'B' $1 ordinary shares: $9m.
ABC Co has other subsidiaries and must produce consolidated accounts.
Which of the following options correctly describes the accounting treatment of the investment in DEF Co in the consolidated accounts?
A. DEF is treated as an associated company.
B. As the value of shares held in DEF equals 50% by value of DEF share capital, the investment is treated as a joint venture.
C. DEF is treated as a 50% owned subsidiary.
D. DEF is treated as a subsidiary with a non-controlling interest of 51.5%.
The correct answer is: DEF is treated as an associated company.
ABC has 25/50 = 50% by value of DEF share capital, but 34/70 = 48.5% by voting rights in DEF.
Therefore assuming that possession of 48.5% of the votes in DEF would allow the exercise of significant influence, DEF would be treated as an associate.
The calculations of the group share of associate's assets and profits would however be performed using a 50% share.
Control is exercised by votes secured.
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