Consolidation Theory Question

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  • Avatar of angryhamtaro
    angryhamtaro
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    Hello Mike!

    I’m having difficulty understanding the requirement for this question. Could you help me out?

    “The director of Samat Ltd. proposes to set up a company, Diamond to enable the company to conduct online trading business. Samat intends to put $3 mil in Diamond. They money will be invested in specialised products. A manager will be employed to take charge of the trading business and will own all the share capital of Diamond.

    The manager will be paid a fixed remuneration and will be prohibited from obtaining access to the products for his personal benefit.

    Samat will obtain 95% of the profit and absorb 100% of all Diamond’s losses. An annual transfer of the profit/ loss will occur on 31 Dec and the capital will be returned to Samat in four years time.”

    Discuss whether Diamond should be consolidated.

    Many thanks!


    Avatar of MikeLittle
    MikeLittle
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    Hi. This is effectively the same as a former exam question ( or is it, in fact, the past exam question? )

    I believe this comes down to a matter of “control”. The manager is not able to have access to the company’s products, but equally the manager does not appear to be answerable to Samat. I seem to remember that, in the exam question, there was rather more information given – for example, does Samat have the power to remove the “manager” before the expiration of the four year term?

    Look to see who is in control. If the answer is Samat, it doesn’t matter that they hold no shares. It’s a subsidiary. If Samat does NOT have control, then it’s not a subsidiary

    I believe

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