MAA716 Financial Accounting: AASB 10 and Control Concepts - Deakin

This report discusses control concepts in financial accounting with reference to AASB 10, focusing on the circumstances under which an entity should present consolidated financial statements. It explains how an investor determines control over an investee through power, rights, and returns, illustrating this with two scenarios involving West Limited and East Limited. The first scenario establishes East Limited as the parent company of West Limited due to its majority voting rights. The second scenario describes a contractual situation where neither company controls the other, highlighting that voting power alone does not determine control when contractual agreements dictate otherwise. The report concludes by emphasizing the importance of assessing financial positions through assets and liabilities when control is lost, referencing relevant academic sources.

Name of the author
Name:
Date:

Control Concepts
Introduction
The AASB 10 accounting standard sets financial reporting standards for entity reporting
when an entity controls another entity or entities and when to present a consolidated financial
statement. This helps each in identifying the purpose of a financial statement for each entity.
A consolidated financial statement is a statement that shows all financial instruments example
equity, liabilities and subsidiaries are stated in one entity. This enables parents of different to
actively control its subsidiary. An investor has full control over an investee through power,
rights and amount of returns earned by the investee.
In scenario 1
West limited is a subsidiary of east limited company. East completely owns 40% shares out
of total 75% shares that are to vote in the meeting. This means that East Limited will have
more than 50% votes to decision on board members of West Limited making it a parent
company. Investor determines whether it controls an investee through an entity, which it
becomes a parent (Stuchbery, 2017). The investor has control over the investee through its
powers. East limited has obtained power which is through company rights. In the previous
year, east limited was highly represented with a margin of seventy five percent voting. Note
that powers are directly obtained through voting. Whereas rights are progressed through
equity instruments such as shares and used by the shareholders as privilege to vote. East can
decide to make decisions without involving west limited. In other circumstances voting may
not be considered due to contractual progress.
In Scenario 2
Both West and east limited are individual investors. There is no subsidiary due change in
circumstances or facts concerning powers or rights. We are observing a contractual situation.
This happens when more than two or three companies give directive instructions. West
limited decides to have a meeting without shareholders of east limited. To voting in East
Limited even if east will gain majority votes in this situation amount of returns or rights
doesn’t determine subsidiary or parent (Walker, 2011). In the previous year, east limited was
highly represented with a margin of seventy five percent voting. Note that powers are directly
obtained through voting. An individual company cannot solely control other stakeholders

without informing other players. At this point no limited company can make decisions on
equity transactions. . A consolidated financial statement is a statement that shows all financial
instruments example equity, liabilities and subsidiaries are stated in one entity. In this
scenario west has lost control over east. West has recognised its own financial position
through availability of assets and liabilities. Becoming it own investor. .

References
Stuchbery, T.V., 2017. The Reporting Entity Concept in Australia: An Exploration of the
Impact and Comparison to International Standards (Bachelor's thesis, Università Ca'Foscari
Venezia).
Walker, R.G., 2011. Issues in the preparation of public sector consolidated statements.
Abacus, 47(4), pp.477-500.