Ifrs 10 Application to Hyundai and Kia

&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212- ACCT333 Advanced Financial story &8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212- collection Project Assignment (IFRS 10) Cheong Wang Shen Gordon brisk for Prof Bernardine Low Prepargond by Gordon Cheong Wang Shen Jason Tan Zhu En Twain Teo Wei Ren pass water Huixiang (G4) Table of Contents Question 1 IFRS 10 flow chart3 Question 25 (a) Identifying equivocalness of control5 Back launch5 Control issues5 Co-owning of subsidiaries5 Inter- attach to manoeuvreor relations6 Same programme manufacturing6 b) & deoxyadenosine monophosphate (c) Application of IFRS 10 flow diagram to resolve existence of control by Hyundai7 tread 1 break the mapping and aim of investee (Kia)7 Step 2 squ be up applicable activities7 Step 3 object of ability to luff germane(predicate) activities8 Step 4 Determine if undetermined to variant quantity returns9 Step 5 Determine if Hyu ndai is a jumper lead or an instrument10 Question 310 realization of quaternity demands in IFRS 10 that argon ch anyenging to date and apply10 Considering the object and design of the investee10 determine the relative surface of pick out rights11Considering colligate parties12 Determining if investor is a spark advance or promoter12 References14 Question 1 IFRS 10 flowchart Question 2 (a) Identifying ambiguity of control Background The Hyundai labour comm building blocky (hereafter referred to as Hyundai) is a multinational auto manufacturer based in Seoul, South Korea. Hyundai is superstar of the two best- known divisions of the world(prenominal) compound Hyundai, the an otherwise(prenominal)wise beingness Hyundai Heavy Industries, the outstandingst shipwright glob in ally. A famous Korean businessman, Chung Ju-yung, founded Hyundai in 1974.Following the Asian Financial Crisis in 1997, Hyundai bought everyplace Kia Motors Corporation (hereafter referred to as Kia) in 1998, which resulted in the formation of the Hyundai Kia railroad carmotive Group (HKAG). It consists of tetradfold affiliated companies think by dint of analyzable sh ar safekeeping agreements, although Hyundai is implyn to be the de facto representative in transactions done with HKAG. During the learnedness of Kia in 1998, Hyundai out-bidded Ford motors to acquire 51% of the comp whatevers sh atomic number 18 retention. After a serial of divestments everywhere the years, the total ownership of Hyundai in Kia has been reduced to single 33. 5%. Hyundai and Kia atomic number 18 twain(prenominal) listed indivi triplely on the Korean Stock Exchange. In 2008, Hyundai was ranked the eighth largest auto repairr in the world. It was to a fault the windy growing auto cropr globally for 2 consecutive years (2010 and 2011). The chair and chief operating officer of Hyundai is Chung Mong-koo, one of the surviving sons of Chung Ju-yung. Control issues Hyundai present ly has a 33. 75% leave pctholding in Kia, with the remaining sh argonholdings being presumably widely outspread. As such, it evidently has epoch-making primptle everywhere the operations and running of Kias business.However, establishing direct control surrounded by Hyundai and Kia is non as univocal. There be a go of issues that we sustain to tonus at. Co-owning of subsidiaries Hyundai and Kia co-own a large number of subsidiaries. As prove by the 2010 consolidated pecuniarys of Hyundai, the global branches of the Kia Motors Group atomic number 18 100% held by Hyundai through Kia themselves. both companies in any case contract pct ownership in Hyundais divers(a) broker manufacturing companies like Hyundai HYSCO Company express and Hyundai Powertech Company Limited. past from this, they alike start holdings in Autoever Systems Corporation, where their main Research and Development unit is located. Inter-company director relations The afoot(predicate) elect ric chair and CEO of HMC is Chung Mong-koo. He took everyplace Hyundai in 1992 when the Hyundai Group split into its sundry(a) divisions. The Hyundai concourse itself follows a South Korean phone line form of conglomerate known as chaebol, where the unique characteristic is that it is usually a huge family control lead corporate group.As such, it is non strike to see that well-nigh of the tertiary multiplication members of Chung Ju-yungs family are heading many of the contrasting divisions of the Hyundai Group. Chung Mong-koos only son, Chung Eui-sun was a list operating officer in various corporate planning divisions in Hyundai-Kia before eventually heading Kia as its president from 2005 to 2009. Currently, he is the ungodliness chairman of Hyundai and is on the internal display panel of directors for Kia. Aside from this, Chung Mong-koo also has a 5% shareholding in Kia. Same platform manufacturingBoth Hyundai and Kia co-own manufacturing subsidiaries that produce p arting parts to both companies. As a result, their action facilities get the similar component parts from the same suppliers. The companies also design the same role trains ( engines and transmissions) all make largely from the Hyundai Powertech Company Limited. A legal age of the automobile electronic components from both brands also come from Hyundai MOBIS Limited. Both these companies are co-owned subsidiaries of Hyundai and Kia. Both Hyundai and Kia also share design studios.In fact, the frailness president of design based in HMC echtly all oversees the design oversight of both brands. The family controlled heading of both Hyundai and Kia tolerates us to conceptualise the possibility of Hyundai having a controlling regularize over Kia, especially with Chung Eui-suns dual fixs on both companies board of directors. Furthermore, assumption the fact that both companies virtually frivol away from the same put out chain, and control over their research and maturement and design of the vehicles are headed by staff based in Hyundai, we roll in the hay see hat these tax generating activities greatly shine the business operations of both companies. Even though Kia is understandably non a subsidiary at first glance, regressn the meagre 33. 75% ownership by Hyundai, it would appear that Hyundai may be exerting more than just signifi tooshiet govern over Kia through the various factors mentioned. (b) & adenylic acid (c) Application of IFRS 10 flowchart to determine existence of control by Hyundai Step 1 Determine the break up and design of investee (Kia) Hyundai purchased shares in Kia for 1. 18 zillion won in November 1998.The purpose of this acquisition in Kia is for Hyundai to gain signifi stinkpott foothold and widen its market share in the auto industry. By taking over Kia Motor, the Hyundai-Kia group was able to forge a solid position having over 70% of domestic market share and force the 7th or 8th global automaker by combining its af filiates fruit capacity into the total volume of 2. 9 million units in 1999. Step 2 Determine germane(predicate) activities Activities Does it significantly affect investees returns > relevant activities? Example of decisions about relevant activities How decisions about relevant activities are do? Research and development Yes Reduce the number of platforms to 718 by the end of 2005, in inn to save the costs of product development and manufacturing and produce a variety of gondola car models having differing external styling and interior options for the brands of Hyundai and Kia Decisions are make by a joint R&D Division led by the Chief Technology ships officer (for Hyundai and Kia combined) Auto-assembly Yes Which type of vehicle that each localize should produce? Whether Hyundai and Kia should share proponent-train parts (i. e. engine and transmission) to be supplied to assembly plantsWhether Hyundai and Kia should share production technology Decisions are made by t op heed of the Hyundai-Kia group, where the de facto representative is Hyundai Auto parts supply Yes Which vendor should supply auto parts to the companies? How many vendors should they use up? Decisions are made by correlative Material Handling Division that Hyundai and Kia set up Marketing and competition Yes Whether to snap on equipment casualty or non price competition such as client service and product quality Decisions are made by top management of the Hyundai-Kia groupStep 3 decisiveness of ability to direct relevant activities Hyundai owns 33. 75% of the shares in Kia Motors. In addition, Chung Eui-sun, the son of the Hyundai Motor Group Chairman, owns another 1. 73% of the shares. This presumably gives Hyundai control of 35. 48% of Kia Motors, which is significantly slight than the 50% shareholding that would give Hyundai the studyity of the pick out rights. However, we are unable to find any secern that anyone has control of a large proportion of the remaining s hares, and thus we intuitive feeling that the assumption that the rest of the shares in Kia are highly dispersed is a mediocre one.If that is the case, because it is almost impossible that all these shareholders impart collectively outvote Hyundai when a decision needs to be made, so Hyundai can be said to drive power over the relevant activities. another(prenominal) factor to contemplate is that Mr Chung is both the vice chairman of Hyundai and an internal director of Kia. As Mr Chung sits on Kias board, he should look at a certain amount of influence over Kias decision-making dish out. This factor, coupled with Hyundais holding of voter turnout rights, lend lots weight to the claim that Hyundai can direct the relevant activities.Last but not least, we punctuate from the table above that the Hyundai and Kia managements jointly make most decisions regarding relevant activities. In fact, Hyundai and Kia share almost the same supply chain. many a(prenominal) companies in th e supply chain are subsidiaries or associates co-owned by these two parents. However, because Hyundai owns a larger portion of shares, and hence choose rights, in most of these entities, Kia is understandably at risk if it goes all out to agree Hyundai in some way or another.It can be seen that when decisions are made, Hyundai is get out represented because of both the presence of its management and its voting rights, and Kia would tend to concede ground to Hyundai when in that respect are disagreements. So, even though Hyundai owns less than 50% of the shareholding in Kia, they probably still own enough power to direct the relevant activities. Step 4 Determine if exposed to variable returns If Hyundai has actual control of Kia, they will be exposed to returns, which can be positive, negative or both.Also these returns must be variable sort of than fixed. The returns that Hyundai is exposed to can be classified into two categories 1) Returns not available to other interest h olders. This refers to cost nest egg and synergies that near from Hyundai owning Kia, which other shareholders in Kia would not be entitled to. In this case, they are by and large in the form of cost savings, repayable to the similar operations of the two companies. integrating of R&D centres of Hyundai and Kia, sacramental manduction of R&D centres allowed both companies to lower costs by minify number of employees in the R&D centres * Products share similar encumbrance platforms leads to savings and economies of scale * Sharing of factories leads to foster specialisation, for example, Kias Kwangju plant was designated as a specialised assembly plant for small-sizingd commercialized vehicles for both Hyundai and Kia, leading to cost step-down * Sharing auto-part suppliers to apply greater twitch on suppliers for cost savings on supplies 2) Dividends Kia paid out 96 one million million million won in dividends in 2010 * Hyundais ownership of common stock entitle s them to scram dividends from Kia. Thus, it can be seen that Hyundai meets all our emergencys that would allow it to classify Kia as a subsidiary. Our closingly step would be to ensure that Hyundai is performing in the capacity of a bargainer, instead than that of an agent, which is holding delegated power. Step 5 Determine if Hyundai is a superstar or an agentIn find out whether Hyundai is acting as a principal or an agent, we need to consider four factors 1) Scope of decision making leave * Unable to find information proving that Hyundai has any limits to the decisions it can make for Kia * Presumably, Hyundai can make most decisions for Kia 2) Rights held by other parties * No evidence of rights held by other parties 3) moving picture to variability of returns from investees * High cost savings due to economies of scale Many of Hyundais subsidiaries depend on Kia for revenue * abnormal by dividends paid out by Kia 4) Remuneration * Almost solely qualified on dividend s, which are highly variable * No actual fixed hire In friendliness of all the four factors, Hyundai is most likely a principal and not an agent. Hence we can moderately conclude, after thorough application of the framework, that Kia is a subsidiary of Hyundai. Question 3Identification of four requirements in IFRS 10 that are challenging to interpret and apply Considering the purpose and design of the investee dissever B5 of IFRS 10 explains that when assessing control of an investee, an investor shall consider the purpose and design of the investee in order to invest the relevant activities, how decisions about the relevant activities are made, who has the current ability to direct those activities and who receives returns from those activities. divides B51-B53 indeed goes on to explain the factors to be considered when determine the purpose and design of the investee. However, IFRS 10 does not explain how the purpose and design of the investee can be used to identify the re levant activities, how decisions about the relevant activities are made, who has the current ability to direct those activities and who receives returns from those activities, which separate B5 suggested. A simplistic scenario is given in paragraph B6, whereby the investee is controlled by means of equity investments.Beyond this straightforward case, paragraph B7 directs readers back to the factors listed in B3 to determine control (relevant activities, ability to direct relevant activities, variable returns and ability to use power over investee to affect returns). Furthermore, the factors provided in paragraphs B51-B53 are hard to determine and require practically professional judgment. For instance, paragraph B51 states that in the process of assessing the purpose and design, we evaluate whether the transaction wrong and features of the involvement (at investees fount) provide the investor with rights that are sufficient to give it power.No determinate polish is provided by IFRS 10, and it is uncertain whether being involved in the investees inception signifies control. This creates a lot ambiguity and inconsistent reading across firms. Rather than making it expect like an isolated step with lower-ranking purpose, IFRS 10 should provide clearer direction for the objective lens of determining the purpose and design of the investee. Clearer linkages, between the consideration of purpose and design of investee and the other factors to be considered when determining control, could also be provided to improve the flow of IFRS 10.Furthermore, more nationwide and conclusive guidelines could be included to value the interpretation of the purpose and design of the investee. Determining the relative size of voting rights agree to paragraph B42, an investor can consider the size of its holding of voting rights relative to the size and dispersion of other holdings of the other vote holders to determine whether its rights are sufficient to give it power. H owever, because relativity encompasses the use of personal judgement, this segmentation may be open to manipulation.In Hyundais case, it holds around 35% of the voting rights, including those held by its vice chairman, Chung Eui-sun. If the rest of the voting rights are very widely dispersed, with nobody else holding more than 1%, Hyundai can adduce that it has control because it is very improbable that all the other parties will come unneurotic to collectively outvote Hyundai. On the other hand, Hyundai can also claim that in that location is still a possibility that the other shareholders will collectively vote against Hyundai if it introduces a policy that does not benefit them, so in that case, Hyundai does not have control.We cross out that the voting structure remains the same, further different interpretations can be derived. carve up B42 also check outs that other circumstances, such as voting patterns at antecedent shareholders meetings, can be considered, but it i s hard to say if the historical patterns are able to look for the future. Shareholders might not have voted in previous meetings because there were no major decisions that affected them, but if Hyundai intends to propose something revolutionary, the voting situation will definitely change.IFRS 10 can provide more fine guidance to ensure that this section is apply appropriately and consistently. For example, when determining how widely dispersed the rest of the voting rights are, an investor should consider only the next 10 largest shareholders. If their combined holding is larger than that of the investor, then the investor does not have control based on this requirement alone. When assessing previous voting patterns, the investor should only look at shareholders meetings where issues of similar impact were raised.If previous meetings did not encompass such issues, then the voting patterns for those meetings cannot be considered. Considering associate parties Paragraph B18 state s that an investor can consider whether the investees key management personnel are cerebrate parties of the investor when determining if the investor has the practical ability to direct relevant activities unilaterally. However, it does not specify how much influence the related parties must have over the investee, so this may not invariably be a groovy indicator of power.For example, Hyundais vice chairman, Chung Eui-sun, is also on Kias internal board of directors. According to paragraph B18, this should provide evidence that Hyundai has power over Kia. But in order to determine whether Hyundai can direct relevant activities through Chung Eui-sun, we must also consider the amount of influence that he has over Kias decision-making process. Kia has 9 directors on its board, of whom two are also presidents in the company, so Chung Eui-sun may not always have his way. If the investor does not take this into consideration, then the determination of control would be flawed.In that se nse, this requirement would be more complete if guidance on the influence commanded by related parties was given. Instead of only determining whether there are related parties in the investees governing bodies, the investor should also take into describe the role and power of the related parties. If the related parties have the final say when it comes to decision-making over relevant activities, then this factor can conclusively determine that the investor has power. But if the related parties do not have the final say, then only a token(prenominal) weight should be placed on this factor.Determining if investor is a principal or agent Being able to determine if the investor is a principal or an agent is of the essence(p) to determining whether the investor has control over the investee. A principal would have power over the investee, but an agent would only have delegated power. Delegated power is held on behalf of a third party who ultimately controls the investee. The method o verconfident in IFRS 10 for determining if a decision maker is an agent is the consideration of the factors listed in paragraph B60.Upon further elaboration of the factors, IFRS 10 provides certain cases where the investee is definitely a principal or an agent. For example, paragraph B70 states that a decision maker cannot be an agent unless the conditions set out in paragraph B69 (a) and (b) are present. However, if none of these extreme conditions are met, we must assume that we would have to take all five conditions into account when assay to decide if the investor is an agent. However, there is no prescription drug in IFRS 10 about how to consider these conditions.In a situation where some of the conditions psyche towards the investor being an agent and some fate towards them being a principal, there is a certain amount of ambiguity in whether the investor should be classified as a principal or an agent. This gives the company some leeway in choosing the decision that would mull over a better financial position of the firm. This could lead to reduced accuracy of financial statements and less comparability among financial statements of different companies.To make this requirement easier to interpret and apply, IFRS 10 should clearly state the relative wideness of each factor. For example, the factors which are given a higher relative importance would have a higher influence on whether the company is a principal or an agent, as compared to those with a lower importance. As such, in ambiguous cases, companies will know which factors should be considered first. Given this, all companies will have more similar definitions of principal/agent, thereby reducing the ambiguity and change magnitude comparability among different financial statements.References 1) Hyundai 2010 one-year Report http//worldwide. hyundai. com/company-overview/investor-relations/financial-information- yearbook-Report-view. aspx? idx=13&&nCurPage=1&ListNum=11 2) Kia 2010 Ann ual Report http//www. kmcir. com/eng/library/annual. asp 3) unification and Reconfiguring of Hyundai-Kia (Byoung-Hoon Lee, Sung Jae Cho) http//gerpisa. org/rencontre/9. rencontre/S13Lee-Cho. pdf 4) HYUNDAI MOTORS DE-CHAEBOLIZATION EFFECTS (Hyunjoong Jun) http//gerpisa. org/rencontre/9. rencontre/S13Jun. pdf