Telco Ltd. is a Danish telecom company that prepares consolidated financial statements in full compliance with IFRS 10. The company has expanded dramatically in Central Asia in recent years by investing in three units: K-Mobe, U-Mobe, and T-Mobe, supplying cellular service to customers in Kazakhstan, Uzbekistan, and Tajikistan, respectively. 

Telco’s corporate investment policy is to take majority ownership stakes in overseas subsidiaries when possible, but to accept lower levels of ownership when majority ownership is not possible or practical. The investment structures of the three Central Asia units are as follows: 

a. Telco owns 45 percent of the voting shares of K-Mobe. The other shares are owned by local institutions: 30 percent are owned by an investment fund connected to the state-owned oil company, and 25 percent are owned by the municipal government of Almaty, Kazakhstan’s largest city. The legal documents establishing K-Mobe specify that Telco possesses the right to fill a majority of the seats on K-Mobe’s board of directors, as well as to appoint its CEO and CFO. The agreement stipulates that the CEO be a Kazakh national. However, it contains no other restrictions covering whom Telco may appoint or the executives’ exercise of power once appointed. 

b. Telco also owns 45 percent of the voting shares of U-Mobe. The other shares are owned by local institutions: 30 percent are owned by an investment fund connected to a state-owned mining company, and 25 percent are owned by the municipal government of Tashkent, Uzbekistan’s capital city. The legal documents establishing U-Mobe specify that Telco possesses the right to fill 5 out of 12 seats on U-Mobe’s board of directors, as well as to appoint its CEO. Of the 12 seats on U-Mobe’s board, only 9 possess voting rights. Tashkent’s municipal government has been allocated 3 nonvoting seats as a mechanism to provide the board with expert opinions of key city officials. The agreement contains no restrictions covering whom Telco can appoint or on the CEO’s exercise of power in the day-to-day running of the company. 

c. Telco owns 55 percent of the voting shares of T-Mobe and possesses the right to fill 7 out of 12 seats on T-Mobe’s board of directors, as well as to appoint its CEO. The other 45 percent of the voting shares are owned by Storm Bank, a large local bank that appoints T-Mobe’s CFO. The current CFO was a long-time employee of Storm Bank before joining T-Mobe and will return to the bank once her tenure as CFO is completed. T-Mobe relies heavily on short-term loans from Storm that must be rolled over annually. Therefore, the CFO effectively has veto authority over major policy decisions. 

For the past year, Storm Bank has opposed an expensive expansion program pushed by Telco and T-Mobe’s CEO. Recently, Storm’s opposition has become so strident that its five board members have stopped attending board meetings. Local laws require a quorum of nine board members to be present for board decisions to have legal validity. Lacking a quorum, T-Mobe’s board is not able to approve strategic decisions, such as the investment plan. Moreover, a quorum is necessary to release sufficient financial information for Telco’s external auditors to carry out any audit work in relation to T-Mobe’s financial statements. TMobe’s short-term loans from Storm Bank contain covenants requiring it to provide audited financial statements on a regular basis. 

Required: 

Decide which of the units, if any, should be consolidated when preparing Telco’s annual report. Explain your reasoning in each case.