Exercise 20.5 ★ ★ DETERMINING SUBSIDIARY STATUS Required In the following independent situations, determine whether a parent–subsidiary relationship exists, and which entity, if any, is a parent required to prepare consolidated fi nancial statements under IFRS 10. 1. Perth Ltd is a company that was hurt by a recent global fi nancial crisis. As a result, it experienced major trading diffi culties. It previously obtained a signifi cant loan from Fremantle Bank, and when Perth Ltd was unable to make its loan repayments, the bank made an agreement with Perth Ltd to become involved in the management of that company. Under the agreement between the two entities, the bank had authority for spending within Perth Ltd. Perth Ltd’s managers had to obtain authority from the bank for acquisitions over $10 000, and was required to have bank approval for its budgets. 2. Broome Ltd owns 80% of the equity shares of Shark Bay Ltd, which owns 100% of the shares of Geraldton Ltd. All companies prepare reports under IFRS Standards. Although the shares of Shark Bay Ltd are not traded on any stock exchange, its debt instruments are publicly traded. 3. Denmark Ltd is a major fi nancing company whose interest in investing is return on the investment. Denmark Ltd does not get involved in the management of its investments. If the investees are not managed properly, Denmark Ltd sells its shares in that investee and selects a more profi table investee to invest in. It previously held a 35% interest in Esperance Ltd as well as providing substantial convertible debt fi nance to that entity. Recently, Esperance Ltd was having cash fl ow diffi culties and persuaded Denmark Ltd to convert some of the convertible debt into equity so as to ease the effects of interest payments on cash fl ow. As a result, Denmark Ltd’s equity interest in Esperance Ltd increased to 52%. Denmark Ltd still wanted to remain as a passive investor, with no changes in the directors on the board of Esperance Ltd. These directors were appointed by the holders of the 48% of shares not held by Denmark Ltd.