Question 1

According to AASB 10/IFRS 10 Consolidated Financial Statements, which of the following factors indicate the existence of control? I. Possessing existing rights that give the current ability to direct the relevant activities.
II) Shared power in the governance of financial and operating policies of another entity so as to obtain benefits.
III) The power to have significant influence over the operating policies of an entity so as to obtain benefits.
IV) Ownership of more than 50% of the voting rights in the subsidiary.

Accepted Answer

According to AASB 10/IFRS 10, the existence of control is indicated by possessing existing rights that give the current ability to direct the relevant activities (I), and ownership of more than 50% of the voting rights in the subsidiary (IV). Shared power in the governance of financial and operating policies of another entity (II) and the power to have significant influence over the operating policies of an entity (III) are indicative of joint control and significant influence respectively, but not of control. Therefore, choice B (I and IV only) is the best answer.

Question 2

The entity that is represented by a single set of consolidated financial statements is:

Accepted Answer

A single set of consolidated financial statements represents an economic entity, which includes a parent entity and all of its subsidiaries. Therefore, options B and C are not the best choices as they represent only a part of the economic entity. Option D is not entirely correct as the term "consolidated entity" is not commonly used in accounting.

Question 3

A group of entities comprised of Kerri Limited (parent entity), Georgia Limited (subsidiary entity) and Emily Limited (subsidiary entity) have the following inventory balances. - Kerri Limited $41 000
- Georgia Limited $14 000
- Emily Limited $12 000
Which of the following amounts is shown as the consolidated inventory balance in the consolidated financial statements?

Accepted Answer

The consolidated inventory balance includes the inventory balances of the parent entity and all its subsidiaries, so it is $41,000 (Kerri Limited) + $14,000 (Georgia Limited) + $12,000 (Emily Limited) = $67,000.

Question 4

Which of the following is not one of the three elements of control according to AASB 10/IFRS 10 Consolidated Financial Statements?

Accepted Answer

The three elements of control according to AASB 10/IFRS 10 Consolidated Financial Statements are power over the investee, exposure, or rights, to variable returns from involvement with the investee, and the ability to use power over the investee to affect the amount of the investor's returns. Dominating the decision making of the investee is not explicitly mentioned as one of the elements of control.

Question 5

At balance date, Company A has 40% of the voting rights in Company B. In addition Company A holds potential voting rights in Company B amounting to 6% that are currently exercisable, and a further 9% of voting rights in Company B that can be exercised in two years' time. Which of the following statements is correct?

Accepted Answer

The answer of At balance date, Company A has 40%...

Question 6

When one entity controls another entity, the business combination results in which of the following types of relationship?

Accepted Answer

A parent-subsidiary relationship occurs when one entity (the parent) has control over another separate entity (the subsidiary) by owning more than 50% of the subsidiary's voting stock. Therefore, this is the correct answer.

Question 7

For the purposes of consolidated financial reporting, a group is:

Accepted Answer

A group for consolidated financial reporting purposes is a parent entity and all its subsidiaries, meaning any entity that is controlled by the parent through ownership of more than 50% of the voting power of the entity's shares.

Question 8

The process of preparing consolidated financial statements requires that:

Accepted Answer

Consolidated financial statements are prepared by combining the financial statements of the parent and its subsidiaries without making adjustments to the individual financial statements or ledger accounts of the entities in the group. Adjustments are made in the consolidation process, not in the individual accounts.

Question 9

A subsidiary is an entity that:

Accepted Answer

A subsidiary is an entity that is controlled by another entity, typically referred to as the parent company. The parent company owns the majority of the shares of the subsidiary, giving it the power to make important decisions regarding the subsidiary's operations and financials. Therefore, option D is the correct answer.

Question 10

The equity in a subsidiary not attributable to a parent is known as a/an:

Accepted Answer

The equity in a subsidiary not attributable to a parent is known as a non-controlling interest, which represents the ownership interest held by minority shareholders in a subsidiary.

Question 11

The key characteristic that determines when consolidated financial statements should be prepared is:

Accepted Answer

The key characteristic that determines when consolidated financial statements should be prepared is control. If one entity has control over another entity, then the financial statements of both entities need to be consolidated to present a true and fair view of the group's financial position and performance. Transactions, substance over form, and significant influence are all factors that can determine the extent of consolidation adjustments, but they do not determine whether or not consolidated financial statements should be prepared in the first place.

Question 12

AASB 10/IFRS 10 Consolidated Financial Statements defines a 'parent' and a 'subsidiary' as which of the following? $\begin{array}{|l|l|}
\hline \text { Parent } & \text { Subsidiary } \
\hline \begin{array}{l}
\text { An entity which is controlled by another } \
\text { entity. }
\end{array} & \begin{array}{l}
\text { An entity that controls one or more } \
\text { entities. }
\end{array} \
\hline \begin{array}{l}
\text { An entity which owns more than } 20 \% \text { of } \
\text { the voting shares of another entity. }
\end{array} & \begin{array}{l}
\text { An entity which is owned partly by another } \
\text { entity. }
\end{array} \
\hline \begin{array}{l}
\text { An entity that has one or more } \
\text { subsidiaries. }
\end{array} & \begin{array}{l}
\text { An entity which is controlled by a parent } \
\text { entity. }
\end{array} \
\hline \begin{array}{l}
\text { An entity that controls one or more } \
\text { entities. }
\end{array} & \begin{array}{l}
\text { An entity which is controlled by another } \
\text { entity. }
\end{array} \
\hline
\end{array}$

Accepted Answer

The answer of AASB 10/IFRS 10 Consolidated Financial Statements defines...

Question 13

Eastpac Bank has lent Alexandra Ltd $500 000. Part of the loan contract prevents Alexandra from borrowing money in the future from other banks without the permission of Eastpac. As a result of this relationship:

Accepted Answer

The loan contract does not establish a parent-subsidiary relationship between the two parties. Although Eastpac has some level of control over Alexandra's borrowing activities, this does not necessarily mean that it has the ability to direct all of its relevant activities, which is a key feature of a parent-subsidiary relationship.

Question 14

In a consolidated group of entities, control over the subsidiaries in the group:

Accepted Answer

Control in a consolidated group implies that the parent company has the ability to govern the financial and operating policies of a subsidiary so as to benefit from its activities. This control is typically not considered shared control, as shared control would imply a joint arrangement, not a parent-subsidiary relationship. Control does not require 100% ownership—more often, it is achieved through a majority of voting rights. Protective rights are designed to safeguard an investor's interest rather than establish control.

Question 15

The process of preparing the combined financial statements of a group of entities is known as:

Accepted Answer

The process of preparing the combined financial statements of a group of entities is known as consolidation. Consolidation involves combining the financial statements of the parent company and its subsidiaries into one set of financial statements that represents the entire group. This process involves eliminating intercompany transactions, adjusting for non-controlling interests and equity method investments, and presenting a combined set of financial statements that accurately reflects the financial position and performance of the group as a whole.

Question 16

When deciding whether or not one entity controls another entity:

Accepted Answer

The concept of control in the context of determining whether one entity controls another is based on the capacity to control, rather than the actual exercise of power, active involvement in decision-making, or exertion of control over financing policies. This means that if an entity has the rights or means to direct the relevant activities of another entity, it is considered to have control, regardless of whether these rights are actively exercised.

Question 17

In the context of control, which of the following is correct regarding rights?

Accepted Answer

In the context of control, it is important that rights must be substantive and not just protective. Substantive rights provide actual decision-making power, whereas protective rights only provide limited veto power. Rights can arise from various sources, including legal contracts, but this is not a necessary requirement for the exercise of control. Future events may also give rise to rights, but this is also not a defining characteristic of control. Therefore, the correct option is D) They must be substantive rights.

Question 18

The reasons for the preparation of consolidated financial statements include which of the following?

Accepted Answer

The preparation of consolidated financial statements provides all of these benefits. It helps to report on the risks and benefits of a group of companies, provides comparable information across different entities within the group, and supplies relevant information for decision-making purposes.

Question 19

Rights to variable returns from an investee include:

Accepted Answer

Rights to variable returns from an investee include all of the above choices - (A) returns from economies of scale, (B) remuneration from provision of services, and (C) returns from denying or regulating access to a subsidiary's assets. These rights are typically a result of having an ownership or control stake in the investee company.

Question 20

A single set of financial statements that combines the separate sets of financial statements for all entities within an economic entity, is known as:

Accepted Answer

The question describes consolidated financial statements, where financial information from multiple entities within an economic entity is combined into a single set of financial statements. Choices A and B (concise and condensed financial reports) do not accurately describe this process, and choice C (combined financial statements) is not as specific as consolidated financial statements.

Quiz 9: Consolidation: Controlled Entities