Bpp kit pg 7 Q5 d)

Hi Sir. Question from bpp kit ( 2018-2019)Pg 7

Which sentences in the following question it refers to “ the terms and conditions associated with those options are such that the options are not considered substantive.”? And why?

(d) Scrooge holds 70% of the voting rights of Cratchett. Marley has 30% of the voting rights of Cratchett. Marley also has an option to acquire half of Scrooge’s voting rights, which is exercisable for the next two years, but at a fixed price that is deeply out of the money (and is expected to remain so for that two-year period).

Required
Explain whether either of Scrooge or Marley should consolidate Cratchett in accordance with IFRS 10.

Answers

Scrooge holds a majority of the current voting rights of Cratchett, so is likely to meet the power criterion because it appears to have the current ability to direct the relevant activities. Although Marley has currently exercisable options to purchase additional voting rights (that, if exercised, would give it majority of the voting rights in Cratchett), the terms and conditions associated with those options are such that the options are not considered substantive.

Thus voting rights, even combined with potential voting rights, may not be the deciding
factor. Scrooge should consolidate Cratchett.