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ACCA Applied Knowledge · Financial Accounting · Subsidiaries

Pillar holds 45% of the voting rights in Stone. The remaining 55% is held by 1,100 shareholders, none holding more than 0.1%. Over the past five years, hardly any of these shareholders have attended general meetings, and Pillar has always been able to pass resolutions and appoint all directors. How should Stone be treated in Pillar's consolidated financial statements?

Stone is a subsidiary because Pillar has de facto control. Although it holds under 50% of votes, the remaining shares are widely dispersed and passive, and Pillar has consistently directed decisions and appointed all directors, so it has power under IFRS 10.

  1. AAs an associate, because Pillar holds under 50%
  2. BAs a trade investment at fair value, because Pillar holds under 50%
  3. CAs a subsidiary, because Pillar has de facto controlCorrect
  4. DAs a joint venture, because the other shareholders are dispersed

Explanation

IFRS 10 looks at power, not just percentage holdings. Pillar's large relative holding, the dispersion of other holders and its history of directing decisions give it the practical ability to direct relevant activities, so it controls Stone. Treating it as an associate based only on 45% ignores this.

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