Question 1

Novak Ltd has acquired 45% of ordinary shares in Spetz Ltd. Another investor has a 10% shareholding in Spetz Ltd whilst the remaining voting rights are held by thousands of shareholders, none of whom individually hold more than 1% of the voting rights. Novak Ltd holds convertible debt instrument that, as at 30 September 2021, are convertible into ordinary shares of Spetz Ltd at a price of $ 9 per share. At 30 September 2021, the shares of Spetz Ltd trade at $ 8.80 per share. Novak Ltd would hold 60% of the voting rights in Spetz Ltd if Novak Ltd exercise its right to convert the debt. Both companies operate in same industries and would benefit from synergies.

Discuss how Novak Ltd's investment in the ordinary shares of Spetz Ltd should be treated in the consolidated financial statements for the year ended 30 September 2021.

[ 15 Marks]