Case Scenario

PART A (40 Marks)

Fox Ltd is a majority shareholder of Rabbit Ltd.

Fox Ltd is a company that produces films and television shows. It also owns a media streaming business that broadcasts Fox Ltd.s movies and television shows.

On 31 December 2020, Fox Ltd transferred its entire media streaming assets and share capital to Rabbit Ltd. As part of this transaction, Rabbit Ltd acquired $100 million in debt. Rabbit Ltd also acquired an additional media streaming business, incurring $1 million of debt. Fox Ltd. did not guarantee this debt.

Several months after the transfer of assets and share capital, Rabbit Ltd issued ordinary shares in an initial public offering, raising nearly $1 billion in cash and reducing Fox Ltd.s ownership interest in Rabbit Ltd to 41%. The remaining 59% of Rabbit Ltd.s voting interest is widely held.

Rabbit Ltd has entered into broadcast contracts with Fox Ltd, pursuant to which Rabbit Ltd must purchase 90% of their television shows from Fox Ltd. Fox Ltd. determines all payment terms and conditions. The agreement provides Rabbit Ltd all exclusive rights to broadcast Fox Ltd.s movies and television shows in specific geographic areas. This covers approximately 45% of the countrys population. Fox Ltd provides promotional and marketing services for all its movies and television shows on behalf of Rabbit Ltd.

Under this contract, Rabbit Ltd has limited rights to engage in businesses other than the sale of Fox Ltd.s movies and television shows. In its most recent financial year, 90% of Rabbit Ltd.s sales were Fox Ltd movies and television shows.

Additional information: Rabbit Ltd rents office space from Fox Ltd in its headquarters facility. The renewable lease agreement, which will expire in 10 years time.

Required

With reference to AASB10 and the relevant facts from the case study above, prepare a report to explain why Fox Ltd does or does not control Rabbit Ltd. Support your argument with appropriate definitions and references using the relevant Australian Accounting Standards. Word limit: 700

Show all relevant workings if necessary