Company ABC, a public limited company, builds, develops and operates airports. During the financial year ended 31 December 2016 a section of an airport collapsed and several people were hurt. The accident resulted in the terminal closure and legal action against the ABC. When the financial statements for the year ended 31 December 2016 were being prepared, the investigation into the accident and the reconstruction of the section of the airport damaged were still in progress and no legal action had yet been brought in connection with the accident. The expert report that was to be presented to the civil courts in order to determine the cause of the accident and to assess the respective responsibilities of the various parties involved, was expected in 2017.
Financial damages arising related to the additional costs and operating losses relating to the unavailability of the building. The nature and extent of the damages, and the details of any compensation payments had yet to be established. The directors of ABC felt at present, there was no requirement to record the impact of the accident in the financial statements.
Compensation agreements had been arranged with the victims, and these claims were all covered by ABC insurance policy. In each case, compensation paid by the insurance company was subject to a waiver of any judicial proceedings against ABC and its insurers. If any compensation is eventually payable to the third parties, this is expected to be covered by the insurance policies.
Company ABC was one of the three shareholders in a regional airport DEF. As at 31 December 2016, the majority shareholder held 60.1% of voting shares, the second shareholder held 20% of the voting shares and Company ABC held 19.9% of the voting shares. The board of directors consisted of ten members. The majority shareholder was represented by six of the board members, while ABC and the other shareholder were represented by two members each. A shareholders’ agreement stated that certain board and shareholder resolutions required either unanimous or majority decision. There is no indication that the majority shareholder and the other shareholders act together in a common way. During the financial year, ABC had provided DEF with maintenance and technical services and had sold the entity a software license for $3 million. Additionally, ABC had sent a team of management experts to give business advice to the board of DEF. ABC didn’t account for its investment in DEF as an associate, because of lack of significant influence over the entity. ABC felt that the majority owner of DEF used its influence as the parent to control and govern its subsidiary.
