Answered step by step
Verified Expert Solution
Question
1 Approved Answer
CASE 4 - 2 Telco Ltd . Telco Ltd . is a Danish telecom company that prepares consolidated financial statements in full compliance with IFRS
CASE
Telco Ltd
Telco Ltd is a Danish telecom company that prepares consolidated financial statements in full compliance with IFRS The company has expanded dramatically in Central Asia in recent years by investing in three units: KMobe, UMobe, and TMobe, 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, Page 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 percent of the voting shares of KMobe. The other shares are owned by local institutions: percent are owned by an investment fund connected to the stateowned oil company, and percent are owned by the municipal government of Almaty, Kazakhstan's largest city. The legal documents establishing KMobe specify that Telco possesses the right to fill a majority of the seats on KMobe'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 percent of the voting shares of UMobe. The other shares are owned by local institutions: percent are owned by an investment fund connected to a stateowned mining company, and percent are owned by the municipal government of Tashkent, Uzbekistan's capital city. The legal documents establishing UMobe specify that Telco possesses the right to fill out of seats on UMobe's board of directors, as well as to appoint its CEO. Of the seats on UMobe's board, only possess voting rights. Tashkent's municipal government has been allocated 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 daytoday running of the company.
c Telco owns percent of the voting shares of TMobe and possesses the right to fill out of seats on TMobe's board of directors, as well as to appoint its CEO. The other percent of the voting shares are owned by Storm Bank, a large local bank that appoints TMobe's CFO. The current CFO was a longtime employee of Storm Bank before joining TMobe and will return to the bank once her tenure as CFO is completed. TMobe relies heavily on shortterm 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 TMobe'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, TMobe'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 TMobe's financial statements. TMobe's shortterm 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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started