BUACC2603 Corporate Accounting Summer Semester 2015/16 Assignment Contribution to overall assessment 20% Financial Advisers Ltd (Advisers) provides financial services to a range of clients. It also has a range of investments in complementary businesses. The Chief Financial Officer (CFO) is concerned whether consolidated financial statements should be prepared for the following two investments: 1. Computing Services Pty Ltd (Computing) 30% of the shares are owned by the managing director and 70% by Shipton Holdings Ltd. (Shipton). 50% of Shipton is owned by Advisers and the remaining 50% by employees of associated companies. 2. Advisers has a 35% interest in Bellinger Travel Pty Ltd (Bellinger). The remaining 65% is owned by the managing director of Bellinger. The majority of Bellinger’s business is with Advisers or an associated company. Advisers has two directors on the board of Bellinger but all operational decisions are made by the managing director. Required Write a report covering the following in relation to the above data: 1. What guidance do the accounting standards and pronouncements provide to the CFO? 2. How are relationships within a group determined? 3. Advise the CFO whether, in your opinion, consolidated statements are required and justify your opinion. INFORMATION Your research essay must be submitted at the end of your lecture in week 10. Penalties will apply for late submission. The following matters should be given particular attention: 1. Writing assignments must not exceed the word counts indicated. Double space your pages, use a 12-pt Times New Roman font, use 2 cm margins on all four sides of your page. 2. Your essay must include an abstract/synopsis, introduction, essay body that clearly addresses the problem areas, a conclusion and a properly referenced bibliography. (refer to the research report marking rubric for further guidance) 3. Evidence of extensive research beyond the prescribed text is required. Ensure these are referenced appropriately in your bibliography. Refer to the statement regarding plagiarism. 4. NO extensions will be granted unless supported by appropriate documentation prior to the due date. 5. This assignment must be handed in for successful completion of the course and will count 20 marks towards the final mark. 6. The word count for the research essay is 2000 words. Please refer to the Research Report Marking Rubric for the specific allocation of word count for each specific section of your research essay (refer point 2 above). 7. The research essay is to be conducted in groups of two. Students do not have the option to extend or reduce the size of the group. If the class has an odd number of students then one student must undertake the assignment on their own. Marking Rubric Bases of assessment HD C P F Content – Identification of relevant issues. Research – Selection of relevant material. A demonstration of critical evaluation of the material. Expression of your viewpoint (and not a catalogue of quotes/ others’ ideas). (10) Structure – Synopsis (Stated the topic, reflected main arguments and identified conclusions reached). Introduction (Provided background/contextual information; clearly stated the essay topic; outlined the plan for addressing the topic). Discussion in appropriately linked sections and paragraphs. Conclusion (no new material; reiterated the main line of argument). (6) Referencing procedure (within the text, and at the end of the text). Appropriately styled and punctuated bibliography. (2) Overall Presentation – including cover page, line spacing, page numbering. (2) Mark (20)
BUACC2603 CORPORATE ACCOUNTING
RESEARCH ASSIGNMENT
SEMESTER 1, 2015
TOPIC
Gum Pty Ltd (Gum) 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:
- Gum has a 25% interest in the share capital of Wattle Pty Ltd (Wattle), which is a company involved in the same industry as Gum. The remaining 75% of the share capital is owned by Wattle’s founders, Mr and MrsRose. Mr and MrsRose are unfamiliar with the industry and so have given Gum three of the five seats available on the board of directors. Gum takes the lead on all decisions but the business is closely monitored by Mr and MrsRose who hold the other two board positions.
- Gum has a substantial loan receivable from Acacia Pty Ltd (Acacia). Acacia, as a result of the current economic climate, has experienced significant trading problems. Acacia has failed to make its regular payments under the loan agreement. Gum has become concerned about the recoverability of the loan and has reach an agreement with the management of Acacia that Gum executives will take control of the company’s finances for a period of five years. An executive of Gum has been given control ofAcacia’s cheque book and makes all payments. Gum has not gained any seats on Acacia’s board of directors, which is still dominated by Acacia shareholders.
- Gum owns 50% of Box Pty Ltd (Box), with the other 50% being owned by Lilly Pty Ltd (Lilly). Both companies have equal voting rights and an equal share of seats on the board of directors. Under an agreement with Lilly, Gum supplies the finance to the company on normal commercial terms. The loan is fully secured against the assets of the company. Lilly provides the management and entrepreneurial flair to Box. Under the agreement forged,Lilly will receive a management fee in respect of the net profits of Box after allowing for interest payments on the Gum loan. In times of no profits the interest payments will still be metbut Lilly will not receive any remuneration.
- Gumoperates the trustee company for the GumTrading Trust. The trust is a discretionary trust with the nominated beneficiaries being the directors of Gum. These directors areMrFuschia, MrsGlady and MrLilac. Over the years the trust has distributed its income in the following proportions; MrFuschia 70, MrsGlady 20 and Mr Lilac 10. Under the terms of the trust deed, Gum has complete control over the operating and financing decisions of the trust.
- Gum holds 75% interest in Orchid Pty Ltd (Orchid). The interest was created when Gum converted a substantial loan it made to Orchid into equity at the invitation ofOrchid when Orchid began trading poorly and recovery of the loan seemed uncertain. Orchid has a large deficiency in net assets and has been consolidated for many years. Gum is a passive investor, having no seats on the board of directors and no say in the financing or operating decisions of Orchid.
REQUIRED
- Advise the finance director of Gum of the requirements of AASB 10 in respect of the control criterion.
- For each of the above investments:
- Discuss in which entity control lies; and,
- Explain whether consolidation is required.
MARKING GUIDE
| Assessment | Score Allocation | Word Count | Very Good | Good | Average | Poor | Very Poor |
| 1. Synopsis / abstract | 2.5 | 150 | |||||
| 2. Introduction | 5.0 | 150 | |||||
| 3. Part 1 – Control | 30.0 | 600 | |||||
| 4. Part 2a – Entity control | 20.0 | 450 | |||||
| 5. Part 2b – Entity consolidation | 25.0 | 500 | |||||
| 6. Conclusion | 5.0 | 150 | |||||
| 7. Referencing and citations | 5.0 | ||||||
| 8. Evidence of reading, quality and quantity | 2.5 | ||||||
| 9. English expression, coherence, grammar and spelling | 5.0 | ||||||
| Score (out of 100) | 100.0 | ||||||
| Mark (score divided by 4) out of 25 | |||||||
INFORMATION
Yourassignment must be submitted at the beginning of your seminar in week 10. Penalties will apply for late submission.
The following matters should be given particular attention:
- Assignments must not exceed the word counts indicated. Double space your pages, use a 12-pt Times New Roman font, use 2 cm margins on all four sides of your page.
- Your assignment must include an abstract/synopsis, introduction, body that clearly addresses the problem areas, a conclusion and a properly referenced appendix.
- Evidence of extensive research beyond the prescribed text is required. Ensure these are referenced appropriately. Refer to the statement regarding plagiarism.
- NO extensions will be granted unless supported by appropriate documentation prior to the due date.
- This assignment must be handed in for successful completion of the course and will count 25 marks towards the final mark.
- The word count for the assignment is 2000 words. Please refer to the Research Assignment Marking Scheme for the specific allocation of words for each specific section of your assignment (refer point 2 above).
- Scores (fractional marks) have also been allocated to each specific section of your assignment.
- Theassignment is to be conducted in groups of two.
Suggested Solution
BUACC 2603 SEMESTER 1, 2015 RESEARCH ASSIGNMENT SUGGESTED SOLUTION
An investor is required to consolidate those investees that are ‘controlled’. AASB 10 defines ‘control of an investee’ as follows:
An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
Paragraph 7 of AASB 10 states:
Thus, an investor controls an investee if and only if the investor has all the following:
(a) power over the investee (see paragraphs 10–14);
(b) exposure, or rights, to variable returns from its involvement with the investee (see paragraphs 15 and 16); and
(c) the ability to use its power over the investee to affect the amount of the investor’s returns (see paragraphs 17 and 18).
(a) Wattle Pty Limited
Gum have a majority on the board of directors, with three of the five seats. In addition Gum takes the lead on all decisions. It would, therefore, appear that Gum has control over Wattle. However, the question is whether Gum has the capacity to control Wattle.
Mr and Mrs Rose have a 75 per cent interest in the share capital of Wattle and thus they have the capacity to control decisions at general meetings—such as the composition of the board.
As Mr and Mrs Rose have capacity to control, Gum thus does not have capacity to control, and therefore is not required to consolidate Wattle Pty Limited.
(b) Acacia Pty Limited
The existence of the agreement would indicate that Gum has control over the financing operations. But this appears to be the extent of the control.
Acacia shareholders still have the capacity to control the composition of the board of directors and thus, the operating activities. Therefore, Gum does not meet the control criterion and should not consolidate Acacia Pty Limited.
(c) Box Pty Limited
In this case Gum and Box have joint interest in Box Pty Limited (Box). There would appear to be joint control and neither entity would be considered to be the parent. Therefore Gum would not consolidate Box Pty Ltd. As paragraph 9 of AASB 10 states:
Two or more investors collectively control an investee when they must act together to direct the relevant activities. In such cases, because no investor can direct the activities without the co-operation of the others, no investor individually controls the investee. Each investor would account for its interest in the investee in accordance with the relevant Standards, such as AASB 11 Joint Arrangements, AASB 128 Investments in Associatesand Joint Ventures or AASB 9 Financial Instruments.
(d) Gum trading trust
Gum is acting in the capacity of trustee to the trust. As a result it has a fiduciary duty to the beneficiaries: Mr Fuschia, Mrs Glady and Mr Lilac. Although Gum has complete control over operating and financing decisions of the trust, it receives no benefits.
As a result Gum would not have capacity to control the trust in order to pursue the objectives of Gum Pty Limited and would, therefore, not consolidate the trust. Mr Fuschia may have control or there may be joint control held by all the beneficiaries. As we should appreciate, paragraph 7 of AASB 10 stipulates that control over an investee requires the following:
(a) power over the investee (see paragraphs 10–14);
(b) exposure, or rights, to variable returns from its involvement with the investee (see paragraphs 15 and 16); and
(c) the ability to use its power over the investee to affect the amount of the investor’s returns (see paragraphs 17 and 18).
From the above we see that a necessary attribute of control is that there is an expectation that the investor will be exposed to variable returns from its involvement with the investee. Specifically, paragraph 15 states:
An investor is exposed, or has rights, to variable returns from its involvement with the investee when the investor’s returns from its involvement have the potential to vary as a result of the investee’s performance. The investor’s returns can be only positive, only negative or both positive and negative.
This requirement means that parties such as trustees would not be required to consolidate a controlled entity’s financial statements with their own statements because, apart from the professional fees being received, those concerned would not be managing such organisations for their own benefit but on behalf of owners and creditors.
(e) Orchid Pty Limited
Gum holds a 75 per cent interest in Orchid. Gum does not have any seats on the board of directors and has no say in the financing or operating decisions. Gum is not exhibiting control in its actions, however, given its 75 per cent interest it will have a capacity to control. Therefore, Orchid should be consolidated by Gum.
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