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There is a question: Recommend the principal audit procedures that should be performed on the classification of non-controlling investments made by Grissom Co.
Are non-controlling investment associates?
Also some of the procedures mentioned in the answer is not clear:
– Confirm that the percentage shareholding is within the normal range for an associate i.e. between 20 and 50% of equity shares. (Should we mention this as having significant influence is more appropriate than percentage classification)
– Obtain a list of directors (using published financial statements or an internet search) for the companies to confirm whether Grissom Co has appointed director(s) to the boards. (How is this. a procedure?
– Consider the identity of the other shareholders and the relationship between them and Grissom Co. This may reveal that the situation is in substance a joint venture and would need to be accounted for as such. (Please explain this)
It tells you in the scenario ” Non-controlling interests representing long-term investments have been made in two companies – an internet-based travel agent, and a chain of pet shops.
In the consolidated balance sheet, these investments are accounted for as associates, as Grissom Ltd is able to exert significant influence over the companies.”So what do you need to do to confirm that treatment as associate is appropriate? You have to draw on assumed knowledge of SBR (which you should know from FR and even FA!) that shareholding is not the only criteria for determining significant influence. It is really your FR/SBR notes that you need to revisit.
I don’t understand your first query. 2nd point is a procedure because it is relevant to the influence/power/control that might be exercised. 3rd point is asking you to consider whether relationship with other shareholders means that investments are joint ventures rather than associates.
Thank you, I got the question wrong, it is clear now. First query was if it is appropriate to consider it through just percentage of share ownership as the procedure is stating to confirm it is between 20% o 50%.
One more question relation to 2nd point, having significant influence does not mean you have the power to appoint directors right?
“An associate is an entity over which the investor has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee without the power to control or jointly control those policies.”
Representation on the board of directors therefore evidences significant influence – even if the shareholding is less than 20%. It does not give a general power to appoint directors – that requires passing of ordinary resolution of shareholders in general meeting (i.e. at least 50%).
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