ACCA – Past Exam – March 2019

Dear Sir,

I would like to ask about the question from ACCA past exam:

“3 (a) (i) Crypto operates in the power industry, and owns 45% of the voting shares in Kurran. Kurran has four other investors which own the remaining 55% of its voting shares and are all technology companies. The largest of these holdings is 18%. Kurran is a property developer and purchases property for its renovation potential and
subsequent disposal. Crypto has no expertise in this area and is not involved in the renovation or disposal of the property.
The board of directors of Kurran makes all of the major decisions but Crypto can nominate up to four of the eight board members. Each of the remaining four board members are nominated by each of the other investors. Any major decisions require all board members to vote and for there to be a clear majority. Thus, Crypto has effectively the power of veto on any major decision. There is no shareholder agreement as to
how Kurran should be operated or who will make the operating decisions for Kurran. The directors of Crypto believe that Crypto has joint control over Kurran because it is the major shareholder and holds the power of veto over major decisions.
The directors of Crypto would like advice as to whether or not they should account for Kurran under IFRS® 11 Joint Arrangements.”

I understand that IFRS 11 defines joint control as “Joint control involves the contractually agreed sharing of control and arrangements subject to joint control are classified as either a joint venture (representing a share of net assets and equity accounted) or a joint operation (representing rights to assets and obligations for liabilities, accounted for accordingly).”

Referring to the questions, as the control decision is made by Kuran’s boards of directors of which up to four members could be decided by Cryto. Does it mean that in case Cryto nominated 4 board members accounting for half of the members of Kuran, it could share the control with 4 members from 4 other investors? So why Cryto cannot account for Kurran under IFRS11?