Ifrs 10 Application to Hyundai and Kia

- ACCT333 Advanced Financial Accounting - host catch Assignment (IFRS 10) Cheong Wang Shen Gordon Prep ard for Prof Bernardine Low Prep bed by Gordon Cheong Wang Shen Jason convert Zhu En Twain Teo Wei Ren Wee Huixiang (G4) T fitted of Contents dubiety 1 IFRS 10 flowchart3 Question 25 (a) Identifying ambiguity of grow5 Background5 mark off issues5 Co-owning of subsidiaries5 Inter- familiarity film indicateor transaction6 analogous platform manufacturing6 b) & (c) Application of IFRS 10 flowchart to determine earthly concern of suss out by Hyundai7 smell 1 Determine the decl ar oneself and soma of investee (Kia)7 Step 2 Determine pertinent activities7 Step 3 Determination of force to direct relevant activities8 Step 4 Determine if unresolved to inconsistent returns9 Step 5 Determine if Hyundai is a principal or an constituent10 Question 310 Identification of four requirements in IFRS 10 that be ch bo accordinglyging to attend and obtain10 Considering the purp ose and object of the investee10 Determining the intercourse size of it of voting rights11Considering cerebrate parties12 Determining if investor is a principal or element12 References14 Question 1 IFRS 10 flowchart Question 2 (a) Identifying ambiguity of control Background The Hyundai repulse keep company (hereafter referred to as Hyundai) is a multinational car maker based in Seoul, S turn outh Korea. Hyundai is one of the two best-known divisions of the planetary conglomerate Hyundai, the some new(prenominal) macrocosm Hyundai Heavy Industries, the largest shipbuilder globally. 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 Automotive Group (HKAG). It consists of multiple affiliated companies connect through complex dispense keeping agreements, although Hyund ai is taken to be the de facto representative in proceeding done with HKAG. During the eruditeness of Kia in 1998, Hyundai out-bidded Ford motors to acquire 51% of the companys shareholding. After a series of divestments all over the years, the total ownership of Hyundai in Kia has been reduced to save 33. 5%. Hyundai and Kia are twain listed one after an other(a) on the Korean Stock Exchange. In 2008, Hyundai was ranked the 8th largest automaker in the world. It was in like manner the fastest growing automaker globally for 2 consecutive years (2010 and 2011). The chairman and CEO of Hyundai is Chung Mong-koo, one of the surviving sons of Chung Ju-yung. Control issues Hyundai currently has a 33. 75% direct shareholding in Kia, with the remaining shareholdings being presumably wide dispersed. As such(prenominal), it evidently has signifi sesst influence over the operations and running of Kias business.However, establishing direct control amidst Hyundai and Kia is not as strai ghtforward. There are a yield of issues that we boast to matter at. Co-owning of subsidiaries Hyundai and Kia co-own a large number of subsidiaries. As indicated by the 2010 amalgamated fiscals of Hyundai, the global branches of the Kia Motors Group are 100% held by Hyundai through Kia themselves. twain companies as well energise percentage ownership in Hyundais versatile component manufacturing companies like Hyundai HYSCO Company Limited and Hyundai Powertech Company Limited.Aside from this, they in any case open holdings in Autoever Systems Corporation, where their main Research and Development unit is located. Inter-company director relations The current Chairman and CEO of HMC is Chung Mong-koo. He took over Hyundai in 1992 when the Hyundai Group split into its various divisions. The Hyundai stem itself follows a South Korean contrast form of conglomerate known as chaebol, where the unique characteristic is that it is unremarkably a huge family controlled corporat e group.As such, it is not surprising to down that many of the third generation members of Chung Ju-yungs family are headland many of the divers(prenominal) divisions of the Hyundai Group. Chung Mong-koos only son, Chung Eui-sun was a key 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 wickedness chairman of Hyundai and is on the immanent board of directors for Kia. Aside from this, Chung Mong-koo also has a 5% shareholding in Kia. said(prenominal) platform manufacturingBoth Hyundai and Kia co-own manufacturing subsidiaries that produce component parts to both companies. As a result, their convergenceion facilities get the similar component parts from the like suppliers. The companies also routine the same mightiness trains (railway locomotives and transmissions) all manufactured largely from the Hyundai Powertech Company Limited. A majority of the automobile ele ctronic components from both brands also distinguish 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 vice president of design based in HMC actually oversees the design solicitude of both brands. The family controlled heading of both Hyundai and Kia allows us to escort the possibility of Hyundai having a controlling influence over Kia, especially with Chung Eui-suns dual positions on both companies board of directors. Further more, ceden the fact that both companies virtually grow from the same tot chain, and control over their research and development and design of the vehicles are headed by staff based in Hyundai, we keep see hat these revenue generating activities greatly affect the business operations of both companies. Even though Kia is clearly not a subsidiary at first glance, give the meagre 33. 75% ownership by Hyundai, it would wait that Hyundai may be exerti ng more than just signifi buttockst influence over Kia through the various figures mentioned. (b) & (c) Application of IFRS 10 flowchart to determine existence of control by Hyundai Step 1 Determine the purpose and design of investee (Kia) Hyundai purchased shares in Kia for 1. 18 trillion won in November 1998.The purpose of this acquisition in Kia is for Hyundai to gain signifi groundworkt foothold and widen its market share in the auto industry. By taking over Kia Motor, the Hyundai-Kia group was up to(p) to forge a solid position having over 70% of home(prenominal) market share and become the 7th or 8th global automaker by combining its affiliates harvest-feastion capacity into the total rule book of 2. 9 million units in 1999. Step 2 Determine relevant activities Activities Does it signifi hindquarterstly affect investees returns relevant activities? Example of conclusivenesss to the highest degree relevant activities How decisions about relevant activities are make? Re search and development Yes Reduce the number of platforms to 718 by the end of 2005, in sight to save the costs of product development and manufacturing and produce a variety of car models having differing external styling and privileged options for the brands of Hyundai and Kia Decisions are made by a joint R&D Division led by the Chief Technology Officer (for Hyundai and Kia combined) Auto-assembly Yes Which emblem of vehicle that each vegetation should produce? Whether Hyundai and Kia should share power-train parts (i. e. engine and transmission) to be supplied to assembly plantsWhether Hyundai and Kia should share production technology Decisions are made by top management 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 engage? Decisions are made by Joint Material Handling Division that Hyundai and Kia great deal up Marketing and competition Yes Whether to focus on price or non price competition such as customer service and product quality Decisions are made by top management of the Hyundai-Kia groupStep 3 Determination of strength 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 signifi understructuretly less than the 50% shareholding that would give Hyundai the majority of the voting rights. However, we are unable to find any evidence that anyone has control of a large proportion of the remaining shares, and thus we intuitive feeling that the assumption that the rest of the shares in Kia are highly dispersed is a reasonable one.If that is the case, then it is al roughly impossible that all these shareholders forget together with outvote Hyundai when a decision needs to be made, so Hyundai can be said to have p ower over the relevant activities. other factor to admit 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 have a sealed amount of influence over Kias decision-making process. This factor, coupled with Hyundais holding of voting rights, lend much(prenominal) freight to the claim that Hyundai can direct the relevant activities.Last but not least, we notice 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. numerous companies in the supply chain are subsidiaries or associates co-owned by these two parents. However, because Hyundai owns a larger portion of shares, and hence voting rights, in most of these entities, Kia is understandably at risk if it goes all out to oppose Hyundai in some way or another.It can be seen that when decisions are made, Hyundai is better 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 have decent power to direct the relevant activities. Step 4 Determine if exposed to variable returns If Hyundai has actual control of Kia, they entrust be exposed to returns, which can be positive, negative or both.Also these returns essential be variable preferably than fixed. The returns that Hyundai is exposed to can be classified into two categories 1) Returns not acquirable to other interest holders. This refers to cost savings and synergies that arise from Hyundai owning Kia, which other shareholders in Kia would not be entitled to. In this case, they are mostly in the form of cost savings, due to the similar operations of the two companies. consolidation of R&D centres of Hyundai and Kia, sharing of R&D centres allowed both companies to displace costs by reducing number of employees in the R&D centres * Products share similar core platforms leads to savings and economies of scale * Sharing of factories leads to farther specialisation, for example, Kias Kwangju plant was designated as a specialised assembly plant for small-sized commercial vehicles for both Hyundai and Kia, leading to cost reduction * Sharing auto-part suppliers to apply greater pressure on suppliers for cost savings on supplies 2) Dividends Kia compensable out 96 billion won in dividends in 2010 * Hyundais ownership of common stock entitles them to receive dividends from Kia. Thus, it can be seen that Hyundai meets all our requirements that would allow it to classify Kia as a subsidiary. Our last step would be to ensure that Hyundai is acting in the capacity of a principal, rather than that of an cistron, which is holding delegated power. Step 5 Determine if Hyundai is a principal or an agentIn as true whether Hyundai is acting as a principal or an agent, we need to consider four factors 1) Scope of decision making authority * 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) video to variability of returns from investees * High cost savings due to economies of scale Many of Hyundais subsidiaries depend on Kia for revenue * Affected by dividends compensable out by Kia 4) Remuneration * Almost solely dependent on dividends, which are highly variable * No actual fixed stipend In consideration of all the four factors, Hyundai is most likely a principal and not an agent. Hence we can reasonably conclude, after arrant(a) 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 separate 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 identify 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.Paragraphs B51-B53 then 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 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, which dissever B5 suggested. A simplistic scenario is given in divide B6, whereby the investee is controlled by means of equity investments.Beyond this straightforward case, divide 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 much professional judgment. For instance, paragraph B51 states that in the process of assessing the purpose and design, we evaluate whether the transaction terms and features of the function (at investees inception) provide the investor with rights that are sufficient to give it power.No conclusive elaboration is provided by IFRS 10, and it is uncertain whether being involved in the investees inception signifies control. This creates much ambiguity and inconsistent interpretation across firms. instead than making it seem like an isolated step with little purpose, IFRS 10 should provide clearer guidance for the objective of determining the purpose and design of the investee. Clearer linkages, between the consideration of purpose and de sign 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 comprehensive and conclusive guidelines could be included to standardise the interpretation of the purpose and design of the investee. Determining the relative size of voting rights fit 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. However, because relativity encompasses the use of personal judgement, this section may be open to manipulation.In Hyundais case, it holds rough 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 say that it has control because it is very improbable that all the other parties will come together to collectively outvote Hyundai. On the other hand, Hyundai can also claim that thither is still a possibility that the other shareholders will collectively vote against Hyundai if it introduces a policy that does not derive them, so in that case, Hyundai does not have control.We notice that the voting expression remains the same, yet different interpretations can be derived. Paragraph B42 also says that other circumstances, such as voting patterns at previous shareholders meetings, can be considered, but it is hard to say if the historical patterns are able to predict 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 smear will definitely change.IFRS 10 can provide more diminutive guidance to ensure that this section is applied 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 tactual sensation 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 related parties Paragraph B18 states that an investor can consider whether the investees key management personnel are related 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 always be a good 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 sense, this requirement would be more land up if guidance on the influence commanded by related parties was given. Instead of only determining whether there are related parties in the investees government bodies, the investor should also take into account 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 ha s power. But if the related parties do not have the final say, then only a minimal 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 crucial 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 positivist 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 wo uld have to take all five conditions into account when trying to decide if the investor is an agent. However, there is no prescription in IFRS 10 about how to consider these conditions.In a situation where some of the conditions even towards the investor being an agent and some point 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 reflect a better financial position of the firm. This could lead to reduced accuracy of financial statements and less comparison among financial statements of different companies.To make this requirement easier to interpret and apply, IFRS 10 should clearly state the relative importance 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 import ance. 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 increasing comparability among different financial statements.References 1) Hyundai 2010 Annual Report http//worldwide. hyundai. com/company-overview/investor-relations/financial-information-Annual-Report-view. aspx? idx=13&&nCurPage=1&ListNum=11 2) Kia 2010 Annual Report http//www. kmcir. com/eng/library/annual. asp 3) Merger 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 effectuate (Hyunjoong Jun) http//gerpisa. org/rencontre/9. rencontre/S13Jun. pdf