Potential investment 1 investment in shares of Batteries Ltd

Kkc has been offered 40% of the ordinary share capital of Batteries Ltd (Batteries), a

supplier of one of the electric battery component parts for the Two. As part of the

negotiations, the management of Batteries would continue to have responsibility for

the day to day running of Batteries.

Additional information for potential investment 1

1The remaining 60% of the ordinary share capital would be spread amongst 8

institutional investors.

2Historically, an average of six of these investors have attended the Annual General

Meeting (AGM) of Batteries.

3. In about three quarters of past AGM decisions, these investors have voted together.

However, one of these investors also holds a 5% investment in Kkc and they

have indicated that going forward they would vote with Kkc.

4. Kkc would be entitled to appoint 4 out of the 9 directors. Kkc plan on one of

these appointments being a specialist in electric batteries. This knowledge would

enable Batteries to significantly improve their technical knowledge, resulting in

batteries that can run a greater distance without needing to be recharged.

5. As part of the agreement all major investing and financing activities of Batteries can

be made unilaterally by Kkc. However, the remaining investors would retain a

power of veto over any investing decisions that would result in the gearing ratio

(defined as debt / [debt + equity]) exceeding 40%.

6. One of the investors also supplies Batteries with replacement non-current assets,

normally every 5 years. As part of the agreement, this arrangement would continue.

Potential investment 2 investment in shares of Windscreens Ltd

Kkc has been offered 35% of the ordinary share capital of Windscreens Ltd

(Windscreens), a supplier of windscreens for the Three. The other 65% of the ordinary

share capital would be held by a single investor, Target plc (Target). Kkc are also in

negotiations to acquire some convertible debt securities which could be converted into

ordinary shares.

Additional information for potential investment 2

1. The convertible debt securities, once issued, would allow Kkc to convert the

debt into a further 10-20% ownership of the existing ordinary share capital from

either 1 July 2021 onwards or 1 January 2022 onwards.

2. The exercise price currently being discussed would result in the shares being out of

the money but not deeply out of the money.

3. The activities of Kkc are similar to those of Windscreens and cost savings could

be made between the two entities

4. If the investment in the ordinary shares of Windscreens takes place, the

management of Kkc do not intend converting the convertible debt securities

into ordinary shares unless they were significantly in the money.

5. As part of the acquisition Kkc would be entitled to appoint three out of the

thirteen directors. If Kkc converted the convertible debt securities into ordinary

shares, they would be entitled to appoint a further 2 directors. One of these further

director appointments would be the right to appoint the Chief Executive Officer of

Windscreens.

6. In addition to the investment in shares, Kkc also provides a substantial loan to

Windscreens.

Required:

For each potential investment, evaluate whether the acquisition would be likely to lead to

control by Kkc and explain the financial reporting treatment. You should explain any

assumptions you make and provide an assessment of any further information you might

require to determine whether control exists or not.