LM has made the following share purchases during the year: • Purchased 55% of the equity share capital of OP. • Purchased 45% of the equity share…

The ethical principle of professional competence and due care requires applying the correct accounting standards. According to IFRS 10, an investor controls an investee when it has power over it. LM controls OP through its 55% majority shareholding. LM also controls QR, despite holding only 45% of the shares, because its power to appoint the majority of the board gives it power over QR's relevant activities. Therefore, both OP and QR are subsidiaries and must be consolidated.

Under IAS 28, significant influence is the power to participate in policy decisions. LM's 30% holding and board representation in ST create a presumption of significant influence, making ST an associate. Associates must be accounted for using the equity method.

B. This is incorrect because LM has control over QR through its power to appoint the board, which requires consolidation, not equity accounting.

C. This is incorrect as LM controls QR (requiring consolidation) and has significant influence over ST (requiring equity accounting), not valuation at cost.

D. This is incorrect as LM has control over both OP and QR, which mandates consolidation, not the equity method.

1. IFRS Foundation. (2021). IFRS 10 Consolidated Financial Statements.

Paragraph 7: "An investor controls an investee if and only if the investor has all the following: (a) power over the investee...".

Paragraph B19: States that rights to appoint

reassign or remove members of an investee’s key management personnel who can direct relevant activities are an indicator of power. This supports the consolidation of QR.

2. IFRS Foundation. (2021). IAS 28 Investments in Associates and Joint Ventures.

Paragraph 5: Defines significant influence and states that if an investor holds 20 per cent or more of the voting power

it is presumed that the investor has significant influence

unless it can be clearly demonstrated that this is not the case.

Paragraph 6(a): Lists "representation on the board of directors or equivalent governing body of the investee" as evidence of significant influence. This supports the equity accounting treatment for ST.

3. University of Cambridge

Judge Business School. (2020). MFin Accounting Core Course: Lecture 5 - Group Accounting.

Section 3.2

"Control": Explains that control under IFRS 10 is not solely based on majority shareholding but on the existence of power

which can be evidenced by rights such as appointing the majority of the board of directors.

Section 4.1

"Significant Influence": Clarifies that holdings between 20% and 50% coupled with board representation typically lead to an associate classification requiring the equity method.