1. Bayte operates in the shipping industry and owns vessels for transportation. In June 2014, Bayte acquired Mombasa Shipping Company whose assets were entirely investments in small companies. The small companies each owned and operated one or two shipping vessels. There were no employees in Mombasa Shipping Company or the small companies. At the acquisition date, there were only limited activities related to managing the small companies as most activities were outsourced. All the personnel in Mombasa Shipping Company were employed by a separate management company. The companies owning the vessels had an agreement with the management company concerning assistance with chartering, purchase and sale of vessels and any technical management. The management company used a shipbroker to assist with some of these tasks. Bayte accounted for the investment in Mombasa Shipping Company as an asset acquisition. The consideration paid and related transaction costs were recognized as the acquisition price of the vessels. Bayte argued that the vessels were only passive investments and that Mombasa Shipping Company did not own a business consisting of processes, since all activities regarding commercial and technical management were outsourced to the management company. As a result, the acquisition was accounted for as if the vessels were acquired on a stand-alone basis. Additionally, Bayte had borrowed heavily to purchase some vessels and was struggling to meet its debt obligations. Bayte had sold some of these vessels but in some cases, the bank did not wish Bayte to sell the vessel. In these cases, the vessel was transferred to a new entity, in which the bank retained a variable interest based upon the level of the indebtedness. Baytes directors felt that the entity was a subsidiary of the bank and are uncertain as to whether they have complied with the requirements of IFRS 3 Business Combinations and IFRS 10 Consolidated Financial Statements as regards the above transactions.

Required;

Discuss the accounting treatment of the above transaction in the financial statements of Bayte (10 Marks)