Question

Bill Pty Ltd (Bill) is a private company with many strategic investments. The finance director is concerned that he might be required to consolidate some of these investments, pursuant to AASB 10. Details of the investment relationships are as follows:

1. Bill has a 25% interest in the share capital of William Pty Ltd (William), which is a company involved in the same industry as Bill. The remaining 75% of the share capital is owned by William’s founders, Mr and Mrs Russel. Mr and Mrs Russel are unfamiliar with the industry and so have given Bill three of the five seats available on the board of directors. Bill takes the lead on all decisions, but the business is closely monitored by Mr and Mrs Russel who hold the other two board positions.

2.Bill has a substantial loan receivable from Susan Pty Ltd (Susan). Susan, as a result of the current economic climate, has experienced significant trading problems. Susan has failed to make its regular payments under the loan agreement. Bill has become concerned about the recoverability of the loan and has reach an agreement with the management of Susan that Bill executives will take control of the company’s finances for a period of five years. An executive of Bill has been given control of Susan’s cheque book and makes all payments. Bill has not gained any seats on Susan’s board of directors, which is still dominated by Susan shareholders.

3.Bill owns 50% of Tom Pty Ltd (Tom), with the other 50% being owned by Jerry Pty Ltd (Jerry). Both companies have equal voting rights and an equal share of seats on the board of directors. Under an agreement with Jerry, Bill supplies the finance to the company on normal commercial terms. The loan is fully secured against the assets of the company. Jerry provides the management and entrepreneurial flair to Tom. Under the agreement forged, Jerry will receive a management fee in respect of the net profits of Box after allowing for interest payments on the Bill loan. In times of no profits the interest payments will still be met but Jerry will not receive any remuneration.

REQUIRED

Advise the finance director of Bill of the requirements of AASB 10 in respect of the control criteria

For each of above investment

a. discuss in which control lies

b. explain whether consolidation is required

Answer 1

ANSWER A

According to paragarph 7 of AASB 10

An investor can controls an investee if and only if the he has all the following:

(a) power over the investee ;

(b) exposure, or rights, to variable returns from its involvement with the investee ; and

(c) the ability to use its power over the investee to affect the amount of the investor’s returns

if the rights on company is in form of protective it need not to consolidate

Temporary control

Since all the shares are acquired and held as stock in trade in the subsidiary company with an intention to dispose them off within 12 months of acquition then in this senerio the control is temporary. And, if there is restrictions on transferability of funds to the parent company on subsidiary company then temporary control is not found and also consolidation is not required.

ANSWER B

As mentioned above having rights on susan on finances for over period of five years which is not the protective right, therefore billy pte ltd have to consolidate the financial statements