Windermere has been offered 45% of the ordinary share capital of Ambleside Ltd (Ambleside), a provider of telecommunications devices in Mauritania, a new market in which Windermere has very little presence but which shows indications of strong growth.

The Finance Director has provided the following summarised consolidated financial information for Windermere as at 30 September 2022 (one year later than question 1):

         £m

   Borrowings

         430

         370

Additional information

The following additional information is relevant to the potential investment in Ambleside:

(i) The acquisition would cost £30m. This would be paid for in cash.

(ii) Ambleside has £60m of loans.

(iii) The directors of Windermere are currently negotiating terms of the investment and are considering the following:

The remaining 55% of the shares would be shared across nine other institutional investors, one of which (Derwent Ltd) owns 45% of the shares.

There are currently 11 members of the board of directors of Ambleside. Windermere would be entitled to appoint between four and six members of the board.

One of the Board members Windermere will appoint is a specialist in emerging digital technologies, knowledge which none of the other directors currently posses but which is likely to enable Ambleside to introduce extra functionality to their mobile devices and increase their likely sales price and profits. However, this individual is due to retire within the next three years.

Derwent will continue to appoint the Chief Executive Officer of Ambleside.

Historically, on average, five of the investors, including Derwent Ltd, have attended the Annual General Meeting (AGM) of Ambleside.

Two of these investors have indicated that they would be willing to vote with Windermere at the AGM.

As part of the agreement, all investing decisions would be taken by Windermere but Derwent would retain a veto over any financing decisions.

Windermere would be fully responsible for the research and development activities of Ambleside. Derwent would continue to take decisions relating to the distribution of the products.

Windermere are also in negations to gain a right to acquire some convertible debt securities. Once issued, would allow Windermere to gain between 5-15% of the new ordinary share capital from either 1 April 2023 or 1 April 2024 onwards. The exercise price currently being discussed would result in the shares being out of the money but not deeply out of the money.

Required:

a) Using figures from this scenario from the Advance Information to illustrate your answer, discuss why the directors of Windermere would prefer to account for Ambleside as an associate rather than as a subsidiary. As part of your answer you should consider both the accounting and practical implications of the different accounting treatment required for both a subsidiary and an associate.

You should aim to write no more than 300 words for this requirement.

b) Based on the information provided, evaluate whether the investment by Windermere in Ambleside should be accounted for as an associate, joint venture or

subsidiary.

You should also:

• Explain any assumptions you make

• State what additional information you might require.