Accting3501 Accounting | Evaluating Aasb Assessment Answers

Bill Handy, The finance director of Northern Australia Global Investments Ltd (NAGIL), is unsure whether he should consolidate some of the investments that the company owns. He has asked your advice as business adviser to NAGIL. The details of the investments are as follows:

(a) NAGIL had provided a loan to Struggle Ltd (SL) some years ago. When it looked as if SL would be unable to repay the loan it was converted into equity which gave NAGIL a 70% holding in SL. SL continues to have a substantial accumulated losses balance and the company’s results have been consolidated with NAGIL for some time. NAGIL does not take an active role in the day to day operations of SL as it has no directors on the board and it takes no part in the operating or financing decisions of the company.

(b) NAGIL has also provided a loan to the Very Big Company Ltd (VBCL). Unfortunately due to an industrial economic downturn the VBCL has failed to meet its loan repayments as required by the loan contract. The board of NAGIL is concerned that not only would the VBCL continue to have problems but also that the whole of the loan would become unrecoverable. The board of VBCL has agreed, as part of a bailout package, that NAGIL would take charge of VBCL’s finances for the next four years. The NAGIL deputy chief finance officer would control all payments made by VBCL and no payments would be made without prior approval. NAGIL does not have board representation on VBCL which is appointed by the VBCL shareholders.

(c) The Medium Sized Company Ltd (MSCL) is part funded by NAGIL, which owns 50% of the shares, and by Sharp Players Ltd (SPL) which owns the other 50%. The votes of the ordinary shares in the annual general meetings and the board representation are shared equally between NAGIL and SPL. SPL and NAGIL have agreed that NAGIL will provide the finance on a standard commercial basis with the loan being secured by a mortgage on MSCL’s property. The agreement also stipulates that SPL will provide the necessary managerial and entrepreneurial expertise in return for a management fee. The management fee will be paid out of ASCL’s net profits after providing for all NAGIL’s loan interest payments. Where MSCL does not make a profit the interest payments will still take place but no management fee will be paid.

(d) Tom and Marjory Legless are founders of CrocsRUs an adventure travel company. They both sit on the board and own 60 per cent of the shares. They have recently retired from actively running the company and have sold the other 40 per cent of the shares to NAGIL who manages the company on their behalf, holding the other three seats on the board. Although Tom and Marjory keep a close eye on the business they let NAGIL make the major decisions.

Required

1.Write a report to Bill, advising him how the control requirements of AASB 10 apply in each of the above investments. State, for each investment, where the control rests, citing and explaining how the relevant paragraphs of AASB10 apply, and whether Bill should include the results of the investments within the consolidated accounts explaining the reasons for your decision.

2.The report should take the format of a formal business report, written by your firm with yourself as lead author. Marks will be awarded for presentation style and an appropriate business format

Answer:

Introduction

The meaning of control provides comprehensive supervision so that a solitary regulator exemplary can be practically applies to all entities. The project was urbanized partially to report apparent discrepancies between IAS 27 and SIC 12, and to boost junction by way of US GAAP. The report gives advice to Billy Handy, the finance director of Northern Australia Global Investment Ltd (NAGIL), for consolidating his investments. (AASB and C.A.S. 2014).

Discussion:

Part A

In the Para 4 of AASB 10, NAGIL is holding 70% of the shares of SL. Ltd. It is not tangled in the administration of SL, non-controlling interest appoints the director for SL. Control is not based upon actual control but it is based on capacity. NAGIL is opened to variety of returns such as dividends that is earned through the ownership of shares, through the ownership of shares, it has powers over investees, and it has the capacity to change the returns as it has the right to be involve in the management according to its wish through the superior voting rights. ( Lyandres and Zhdanov 2014).

NAGIL is the parent company and it should prepare consolidated financial statement as per AASB10.

Part B

The control exists in the hands of VBCL. In AASB10, paragraph B40 it is specified under rights from supplementary contractual arrangements that it provides the investor a right for show the way for the activities that are applicable as it has rights quantified in the contract, which is sufficient to straight the activities related to intended and maneuvers of the company. Therefore, if there is no other right is present pecuniary necessity of an investee on the investor concerning relationship on a supplier and major clients does not primary to the investor having control over the investee. SL will not be a subsidiary of NAGIL because the bank is not visible to variety of returns from the participation with SL. Revenue earned by SL. does not affect the interest expenditures. It cannot use its power over SL to change the figures of yields, as the yields are fixed interest outflows.

Some of the relevant actions over which a parent should have power include determination of funding structure, obtaining funds, processing , researching and developing of new products, disposing, selecting and acquiring of assets, purchasing and selling of services and goods.

Part C

In AASB 10, para 39 it was stated that the contractual agreement held between SPL and NAGIL gives the sufficient right to exercise its voting power. Even if the agreement do not provide the sufficient power to direct, other vote holders that they enable others about the terms of voting to reach out to a decision about the activities those are relevant.

In para B40, it states that the right of voting with the right of other decision-making gives SPL and NAGIL the power to direct the activities those are relevant. This right gives to direct the activities that are related to operations and monetary as this prominently affects the investee`s return. The power lies in the hands of NAGIL and SPL regarding MSCL. Ltd.

From Para`s B68 to B70 states regarding the payment of remuneration. The highest the scale of, and inconsistency associated with, the result maker’s remuneration comparative to the returns predictable from the events of the investee, the additional possible the judgment maker is a main. In defining whether it is a major or a mediator the conclusion maker shall also deliberate whether the subsequent situations exist: that the remuneration of the judgment maker is corresponding with the facilities provided. The remuneration contract includes only rapports, situations or quantities that are usually present in preparations for similar amenities and side-by-side of assistances discussed on an arm’s length basis. (GUPTA 2014).

Part D

In AASB 10, power is termed as the existing right given for directing the relevant activities through current ability. Relevant activities are termed as those activities of the investee that expressively affects the investee`s return. If the actions of Tom and Marjory Legless both affects the return of investee`s then it is essential to determine the actions such as development and obtaining of standing orders approval to supervise he major affected return of the investee. For determining the reason of affection The elements that determine the margin of profit, value and proceeds of the investee as well as the value of adventure, revelation to the varieties of return, designing and fortitude if the investee and the outcome on the investee`s return ensuing from each investor`s verdict making. (Howieson 2013).

In this particular situation the investor would contemplate the ambiguity of, and determination mandatory in obtaining regulatory sanction in view of the investor`s record of effective evolving and procurement the controlling sanction of journey and which depositor control the adventure trips once the expansion phase is over.

Bill should show the investments in the consolidated financial statement.

Conclusion:

In this report applicability of ASSB 10 in different cases of consolidating the financial statements have been discussed while taking four different situations. The aim of the report is to advice Bill to include the investments in its consolidated financial report.

Reference:

AASB, C.A.S., 2014. Financial Instruments. Project Summary.

GUPTA, M.S., 2014. External Commercial Borrowing: Quest in India. International Journal of Multidisciplinary Approach & Studies, 1(4).

Howieson, B., 2013. Defining the Reporting Entity in the Not?for?Profit Public Sector: Implementation Issues Associated with the Control Test. Australian Accounting Review, 23(1), pp.29-42.

Juhmani, O.I., 2013. Ownership structure and corporate voluntary disclosure: Evidence from Bahrain. International Journal of Accounting and Financial Reporting, 3(2), pp.133-148.

Minton, B.A., Taillard, J.P. and Williamson, R., 2014. Financial expertise of the board, risk taking, and performance: Evidence from bank holding companies. Journal of Financial and Quantitative Analysis, 49(2), pp.351-380.

Müller, V.O., 2014. The impact of IFRS adoption on the quality of consolidated financial reporting. Procedia-Social and Behavioral Sciences, 109, pp.976-982.

Pacter, P., 2014. Global accounting standards-From Vision to reality. The CPA Journal, 84(1), p.6.

Lyandres, E. and Zhdanov, A., 2014. Convertible debt and investment timing. Journal of Corporate Finance, 24, pp.21-37.