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.

Asia Pacific College of Business and Law ACT503 Corporate Accounting Assignment Semester 2, 2020 Page 4 of 5

IV. Bill operates the trustee company for the Bill Trading Trust. The trust is a discretionary trust with the nominated beneficiaries being the directors of Bill. These directors are Mr Fuschia, Mrs Glady and Mr Lilac. Over the years the trust has distributed its income in the following proportions; Mr Fuschia 70, Mrs Glady 20 and Mr Lilac 10. Under the terms of the trust deed, Bill has complete control over the operating and financing decisions of the trust.

V. Bill holds 75% interest in Felix Pty Ltd (Felix). The interest was created when Bill converted a substantial loan it made to Felix into equity at the invitation of Felix when Felix began trading poorly and recovery of the loan seemed uncertain. Felix has a large deficiency in net assets and has been consolidated for many years. Bill is a passive investor, having no seats on the board of directors and no say in the financing or operating decisions of Felix.

REQUIRED

1. Advise the finance director of Bill of the requirements of AASB 10 in respect of the control criterion.

2. For each of the above investments:

   1. Discuss in which entity control lies; and,

   2. Explain whether consolidation is required.

Answer 1

Requirements of AASB 10 in respect of control criteria are :

1. Power of investor in directing relevant activities of the investee,
2. Exposure or rights of investor in variable returns from involvement in investee, and
3. Ability of Investor to use its power to affect returns arising from involvement with the investee.

Situation I :

Consolidated financial statements should be prepared for Bill Pty Ltd And Williams Pty Ltd because all the required conditions have been fullfilled.

Situation 2:

Consolidated financial statements can not be prepared because the condition "Power of investor in directing relevant activities of the investee" is not fulfilled here as no voting rights have been given to Bill executives. Bill has not gained any seats on Susan’s board of directors, which is still dominated by Susan shareholders.

Situation 3:

Consolidated financial statements should be prepared as all the required conditions have been fulfilled.

Situation 4:

Consolidated financial statements should be prepared because all the required conditions have been fulfilled.

Situation 5:

Consolidated financial statements should not be prepared because none of the required conditions have been fulfilled. Bill is a passive investor, having no seats on the board of directors and no say in the financing or operating decisions of Felix. Therefore, no requirement of consolidation.