Determining Control: Accounting Criteria for Subsidiaries and Influence in Business Structures

subsidiary control voting rights equity interest consolidation financial statements accounting standards business ownership

Which of the following entities is not a subsidiary of EBC? A. EBC Ltd. has a direct interest in 48% of XYZ Co. XYZ Co. is listed on the London Stock Exchange. The rest of XYZ Co.'s equity is dispersed among shareholders than do not hold more than 1% of XYZ Co.'s equity each. B. EBC Ltd. has a direct interest in 25% of Douro Wines. At the beginning of this year, EBC Ltd. entered into an agreement whereby it established an option to increase its holding with more than 26% of the equity interests of Douro Wines. The exercise price of the call option is in the money and it can be exercised at any moment. C. EBC Ltd. has 49% of JIK Ltd. and has absolute veto rights over the decisions made by board of directors with regard to the annual operating budget. The remaining 51% of JIK Ltd. is widely held by thousands of shareholders (none of whom holds more than 1% of the voting rights). D. EBC Ltd. has an interest of 51% in XYZ Ltd. and signed an agreement with shareholder B, whereby B is responsible for the production and commercial operations of XYZ Ltd., while EBC is responsible for the marketing decisions and human resources department.

Based on the provided information, the following entities can be analyzed as follows:

A. EBC Ltd. owning 48% of XYZ Co. does not meet the threshold for control, as it holds less than half of the voting rights. Additionally, the dispersion of the remaining equity among numerous small shareholders doesn't indicate control.

B. EBC Ltd.'s 25% direct interest in Douro Wines, even with the option to acquire more than 26%, does not establish control currently, as it does not have the ability to exercise control at the present time.

C. EBC Ltd. owning 49% of JIK Ltd. but having absolute veto rights over the annual operating budget indicates control, as this level of influence goes beyond the proportion of ownership and suggests that EBC Ltd. can control significant financial and operational decisions of JIK Ltd.

D. EBC Ltd. owning 51% of XYZ Ltd. combined with an agreement that allocates specific responsibilities between EBC and shareholder B could indicate shared control or significant influence, depending on the terms of the agreement. However, without knowing the details of the agreement, it's not possible to determine if EBC has control or merely significant influence.

Therefore, based on the principle that control typically requires more than half of the voting rights (IFRS 33), only option C seems to clearly meet the criteria for control, making it a subsidiary. In contrast, options A and D might indicate significant influence but not necessarily control, and option B does not meet the control criteria at the current time.

So, the entity that is not a subsidiary of EBC according to the given information is A. EBC Ltd.

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