solution manual for Advanced Financial Accounting in Canada 1st Edition By Nathalie Johnstone
Review Questions
1-1. Arguments for classification as a passive investment: Delta only owns 15% of the voting shares of Epsilon. The remaining shares are held by one company, indicating that Delta may not have influence.
Arguments for classification as an associate: Typically, a shareholding of 20% or more is indicative of significant influence. However, this factor is not definitive. Other factors should also be considered to determine whether or not significant influence exists. In this case, Delta Corporation can elect one member of the board of directors, indicating that there is some influence over the policies of Epsilon. Delta also possesses a patent that Epsilon needs in its operations, which it allows Epsilon to use. This patent further indicates that there is significant influence.
Conclusion: Based on the information provided, the investment in Epsilon should be classified as an associate and Delta Corporation should use the equity method to account for its investment.
1-2. IFRS 10 outlines the three criteria that must be present for control to exist. They are the power criterion, return criterion, and the link between the two. The power criterion refers to the ability of an investor to direct the relevant activities of the investee. The return criterion refers to the risks and rewards associated with the earnings of the investee. The link between the first two criteria is the ability to use its power to affect the earnings of the investee.
1-3. Factors that should be considered in determining control include:
- Voting rights along with convertible rights.
- Right to choose key personnel, such as the board of directors or key management.
- The right to veto key decision of the investee or right to force the investee to enter into a specific transaction.
- Material transactions with the investee.
- Exchange of management or technology.
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