The Hindu Business Line : Apply standards to problem situations

1) Significant influence is: a) control of the financial policy decisions of an enterprise; b) control of the operating policy decisions of an enterprise; c) participation in the financial and/or operating policy decisions of an enterprise; d) both (a) and (b).

2) An enterprise is considered to control the composition of the board of directors when: a) a person cannot be appointed as director without the exercise in his favour by that enterprise of such a power; b) a person's appointment as director follows necessarily from his appointment to a position held by him in that enterprise; c) the director is nominated by that enterprise; and d) all the above.

3) What per cent interest should an enterprise hold, directly or indirectly, so that it is considered to have a substantial interest in another enterprise? a) 50; b) 20; c) 10; d) 8.

4) Which among the following is not a related party transaction?

a) remuneration paid to non-executive directors; b) management contracts for deputation of employees between related parties; c) remuneration paid to key management personal; d) license agreements between related parties

5) A Ltd owns 60 per cent of the voting power of B Ltd which, in turn, owns 40 per cent of the voting interest in C Ltd. Further, A Ltd also directly owns 15 per cent of the voting interest in C Ltd.

As a result of the holding interest, A Ltd has an economic interest in C Ltd of 39 per cent. In view of the above, which is true in respect of A Ltd? a) A Ltd has direct control over C Ltd; b) A Ltd has indirect control over C Ltd; c) A Ltd has only significant influence over C Ltd; d) none of the above

6) AB Ltd acquires a 12 per cent voting power in LM Ltd. AB Ltd, being the single largest shareholder of LM Ltd, appoints the chairman and one other member of the board of directors of LM Ltd (of a total of 12 directors).

These nominees of AB Ltd are not directors of AB Ltd. By virtue of its representation on the board (through two nominees) of LM Ltd, AB Ltd participates in the financial and operating policy decisions of the enterprise taken at the board meetings. LM Ltd is a related party of AB Ltd because:

a) it owns, directly or indirectly, more than half of the voting power of LM Ltd; b) it has significant influence over LM Ltd; c) it controls the composition of the board of directors of LM Ltd; d) it holds a substantial interest of the voting power in LM Ltd

7) The reporting enterprise, A Ltd, is a wholly-owned subsidiary of PQ Plc, UK. XYZ Inc., of the US, is another wholly-owned subsidiary of PQ Plc. As regards disclosure requirements, the relationship between A Ltd and XYZ Inc is:

a) not required to be disclosed since no transactions have been undertaken during the reporting period; b) required to be disclosed even if no transactions have been undertaken during the reporting period; c) not required to be disclosed since there is no existence of control between them; d) none of the above

Answer check

1(c) Para 10 of the Standard defines significant influence to be participation in the financial and/or operating policy decisions of an enterprise, but not control of these policies.

2(d) Para 11 enumerates the various clauses whereby an enterprise is considered to control the composition of the board of a company.

3(b) According to para 12 of the Standard, an enterprise is considered to have a substantial interest in another enterprise, if that enterprise owns, directly or indirectly, 20 per cent or more interest in the voting power of that other enterprise.

4(a) As per the definition of related-party transaction, it should be between related parties to qualify as one. Non-executive directors, vide GC 13/2002, are not treated as related parties; the transaction is not one among related parties.

5(b) As A Ltd is a majority shareholder in B Ltd, it has control over it. Further, as A Ltd and B Ltd together are major shareholders in C Ltd, A Ltd has indirect control over it.

Accordingly, A Ltd has the ability to control C Ltd, indirectly, via the share ownership in B Ltd, apart from its individual shareholding in C Ltd.

6(d) By virtue of its ownership of voting power to the extent of 12 per cent and being the single largest shareholder, AB Ltd participates in the financial and operating policy decisions of LM Ltd.

Therefore, in this case, it is clearly demonstrated that AB Ltd has significant influence over LM Ltd. Accordingly, LM Ltd is a related party of AB Ltd.

7(c) Paragraph 21 of the Statement states that "name of the related party and nature of the related party relationship, where control exists, should be disclosed irrespective of whether or not there have been transactions between the related parties".

While the Statement includes fellow subsidiaries as a related party relationship, there is no existence of control between them.

Thus, disclosure is not required in the absence of control.

(Concluded)

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