b) On 1 January 2018 Charlie plc acquired 40% of the ordinary share capital of Alan Ltd. As part of the purchase agreement, the management of Alan Ltd will continue to have responsibility for the day to day running of Alan Ltd. However all major investing and financing activities of Alan Ltd require agreement from Charlie plc. Additionally, Charlie plc was granted an option to purchase a further 20% of the share capital offan Ltd at a price of f2 per share on 30 June 2019. The current market price of the shares in Aan Ltd is £3.

Charlie plc have appointed 4 out of the 9 directors to the Board of Directors of Alan Ltd. The directors appointed by Charlie pic have specialist knowledge, which has meant that the Board of Directors have deferred to the 4 directors appointed by Charlie plc for all major decisions since acquisition. Charlie plc has a loan covenant in place that requires the gearing ratio (defined as Debt / (Debt + Equity) x 100) to remain below 50% of the total financing of the group.
The following are summary extracts from the statements of financial position.

Statements of financial position at 31 December

Required
(i) Analyse why the management of Charlie plc might prefer to account for Alan Ltd as an associate rather than a subsidiary. You should use figures to illustrate your answer.
(ii) Evaluate whether Charlie plc has control over Alan Ltd. Explain any assumptions that you have made.

Question

b) On 1 January 2018 Charlie plc acquired 40% of the ordinary share capital of Alan Ltd. As part of the purchase agreement, the management of Alan Ltd will continue to have responsibility for the day to day running of Alan Ltd. However all major investing and financing activities of Alan Ltd require agreement from Charlie plc. Additionally, Charlie plc was granted an option to purchase a further 20% of the share capital offan Ltd at a price of f2 per share on 30 June 2019. The current market price of the shares in Aan Ltd is £3.
 
Charlie plc have appointed 4 out of the 9 directors to the Board of Directors of Alan Ltd. The directors appointed by Charlie pic have specialist knowledge, which has meant that the Board of Directors have deferred to the 4 directors appointed by Charlie plc for all major decisions since acquisition. Charlie plc has a loan covenant in place that requires the gearing ratio (defined as Debt / (Debt + Equity) x 100)  to remain below 50% of the total financing of the group.
The following are summary extracts from the statements of financial position.
 
Statements of financial position at 31 December
 
  
 
Required
(i) Analyse why the management of Charlie plc might prefer to account for Alan Ltd as an associate rather than a subsidiary. You should use figures to illustrate your answer.
(ii) Evaluate whether Charlie plc has control over Alan Ltd. Explain any assumptions that you have made.

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