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ACCA Strategic Professional · Strategic Business Reporting (International) · Discussion of issues in financial reporting

Orion plc's finance director instructs the group accountant to classify a 40% holding in Delta as an associate rather than a subsidiary. Orion has the contractual right to appoint 5 of 7 Delta directors and direct its relevant activities. The group accountant believes control exists under IFRS 10 but the director cites a 'rule of thumb' that over 50% of votes is required. Which response best demonstrates appropriate professional judgement and ethics?

Delta should be treated as a subsidiary, because IFRS 10 defines control by power over relevant activities, exposure to variable returns and the ability to use power to affect them, not by a fixed voting percentage. The accountant should also escalate the disagreement ethically rather than comply with an unsupported instruction.

  1. AFollow the director's instruction because the 50% rule is easier to audit
  2. BConclude Delta is a subsidiary because control under IFRS 10 depends on power, exposure to variable returns and the link between them, not only on voting percentage, and raise the disagreement through appropriate channelsCorrect
  3. CTreat Delta as a joint venture to compromise between the two views
  4. DDisclose the 40% holding in the notes and leave it unconsolidated

Explanation

IFRS 10 is principles-based: power can arise from rights other than majority votes, such as board appointment rights over relevant activities. The accountant should apply the control model and escalate rather than yield to pressure, in line with fundamental ethical principles of integrity and professional competence. A joint venture requires joint control, so a compromise label is unsupported, and disclosure does not replace consolidation.

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