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28 Sep 2019
Gorgeous Georgie Pty Ltd (Georgie) is a private company with manystrategic investments. The
finance director is concerned that he might be required toconsolidate some of these investments in
accordance with AASB 127. Details of the investment relationshipsare as follows:
(a) Georgie has a 25 percent interest in the share capital of LBXPty Ltd (LBX) which is a company
involved in the same industry as Georgie. The remaining 75 percentof the share capital is owned by
LBX's founders Mr and Mrs T. Mr and Mrs T are unfamiliar with theindustry and so have given
Georgie three out of the five seats available on the board ofdirectors. Georgie takes the lead on all
decisions but the business is closely monitored by Mr and Mrs T whohold the other two board
positions.
(b) Georgie has a substantial loan receivable from BBT Pty Ltd(BBT) but owns no shares in it. BBT,
as a result of the current economic climate has experiencedsignificant trading problems. BBT has
failed to make its regular payments under the loan agreement.Georgie has become concerned about
the recoverability of the loan and has reached an agreement withthe management of BBT that
Georgie's executives will take control of the company's financesfor a period of five years. An
executive of Georgie has been given control of BBT's cheque bookand makes all payments. Georgie
has not gained any seats on BBT's board of directors, which isstill dominated by BBT's share holders.
(c) Georgie owns 50 percent of Aqua Pty Ltd (Aqua) with the other50 percent being owned by Blue
Pty Ltd (Blue). Both companies have equal voting rights and anequal share of seats on the board of
directors. Under an agreement with Blue, Georgie supplies financeto the company on normal
commercial terms. The loan is fully secured against the assets ofthe company. Blue provides the
management and entrepreneurial flair to Aqua. Under the agreementBlue will receive a management
fee tied to the net profits of Aqua after allowing for interestpayments on the loan from Georgie. In
times of no profits the interest payments will still be met butBlue will not receive any remuneration.
(d) Georgie operates as the trustee company for the Georgie TradingTrust. The Trust is a
discretionary trust with the nominated beneficiaries being thedirectors of Georgie. These directors are
Mr M, Mrs A and Mr J. Over the years the Trust has distributed itsincome in the following
proportions: Mr M 70, Mrs A 20, Mr J 10. Under the terms of theTrust Deed Georgie has complete
control over the operating and financing decisions of theTrust.
(e) Georgie holds a 75 percent interest in JIB Pty Ltd (JIB). Theinterest was created when Georgie
Charles Sturt University Subject Outline
ACC322 201130 W I-12 February 2011-Version 1 Page 13 of 19
converted a substantial loan it made to JIB into equity at theinvitation of JIB when JIB began to trade
poorly and recovery of the loan seemed uncertain. JIB has a largedeficiency in net assets and has
been consolidated for many years. Georgie is a passive investor,having no seats on the board of
directors and no say in the financing or operating decisions ofJIB.
Required
Advise Georgie's finance director of AASB 127's requirements withrespect to control. For each of the
above investments indicate where the control rests and whether ornot consolidation is required. Give
reasons for each piece of advice.
Gorgeous Georgie Pty Ltd (Georgie) is a private company with manystrategic investments. The
finance director is concerned that he might be required toconsolidate some of these investments in
accordance with AASB 127. Details of the investment relationshipsare as follows:
(a) Georgie has a 25 percent interest in the share capital of LBXPty Ltd (LBX) which is a company
involved in the same industry as Georgie. The remaining 75 percentof the share capital is owned by
LBX's founders Mr and Mrs T. Mr and Mrs T are unfamiliar with theindustry and so have given
Georgie three out of the five seats available on the board ofdirectors. Georgie takes the lead on all
decisions but the business is closely monitored by Mr and Mrs T whohold the other two board
positions.
(b) Georgie has a substantial loan receivable from BBT Pty Ltd(BBT) but owns no shares in it. BBT,
as a result of the current economic climate has experiencedsignificant trading problems. BBT has
failed to make its regular payments under the loan agreement.Georgie has become concerned about
the recoverability of the loan and has reached an agreement withthe management of BBT that
Georgie's executives will take control of the company's financesfor a period of five years. An
executive of Georgie has been given control of BBT's cheque bookand makes all payments. Georgie
has not gained any seats on BBT's board of directors, which isstill dominated by BBT's share holders.
(c) Georgie owns 50 percent of Aqua Pty Ltd (Aqua) with the other50 percent being owned by Blue
Pty Ltd (Blue). Both companies have equal voting rights and anequal share of seats on the board of
directors. Under an agreement with Blue, Georgie supplies financeto the company on normal
commercial terms. The loan is fully secured against the assets ofthe company. Blue provides the
management and entrepreneurial flair to Aqua. Under the agreementBlue will receive a management
fee tied to the net profits of Aqua after allowing for interestpayments on the loan from Georgie. In
times of no profits the interest payments will still be met butBlue will not receive any remuneration.
(d) Georgie operates as the trustee company for the Georgie TradingTrust. The Trust is a
discretionary trust with the nominated beneficiaries being thedirectors of Georgie. These directors are
Mr M, Mrs A and Mr J. Over the years the Trust has distributed itsincome in the following
proportions: Mr M 70, Mrs A 20, Mr J 10. Under the terms of theTrust Deed Georgie has complete
control over the operating and financing decisions of theTrust.
(e) Georgie holds a 75 percent interest in JIB Pty Ltd (JIB). Theinterest was created when Georgie
Charles Sturt University Subject Outline
ACC322 201130 W I-12 February 2011-Version 1 Page 13 of 19
converted a substantial loan it made to JIB into equity at theinvitation of JIB when JIB began to trade
poorly and recovery of the loan seemed uncertain. JIB has a largedeficiency in net assets and has
been consolidated for many years. Georgie is a passive investor,having no seats on the board of
directors and no say in the financing or operating decisions ofJIB.
Required
Advise Georgie's finance director of AASB 127's requirements withrespect to control. For each of the
above investments indicate where the control rests and whether ornot consolidation is required. Give
reasons for each piece of advice.
finance director is concerned that he might be required toconsolidate some of these investments in
accordance with AASB 127. Details of the investment relationshipsare as follows:
(a) Georgie has a 25 percent interest in the share capital of LBXPty Ltd (LBX) which is a company
involved in the same industry as Georgie. The remaining 75 percentof the share capital is owned by
LBX's founders Mr and Mrs T. Mr and Mrs T are unfamiliar with theindustry and so have given
Georgie three out of the five seats available on the board ofdirectors. Georgie takes the lead on all
decisions but the business is closely monitored by Mr and Mrs T whohold the other two board
positions.
(b) Georgie has a substantial loan receivable from BBT Pty Ltd(BBT) but owns no shares in it. BBT,
as a result of the current economic climate has experiencedsignificant trading problems. BBT has
failed to make its regular payments under the loan agreement.Georgie has become concerned about
the recoverability of the loan and has reached an agreement withthe management of BBT that
Georgie's executives will take control of the company's financesfor a period of five years. An
executive of Georgie has been given control of BBT's cheque bookand makes all payments. Georgie
has not gained any seats on BBT's board of directors, which isstill dominated by BBT's share holders.
(c) Georgie owns 50 percent of Aqua Pty Ltd (Aqua) with the other50 percent being owned by Blue
Pty Ltd (Blue). Both companies have equal voting rights and anequal share of seats on the board of
directors. Under an agreement with Blue, Georgie supplies financeto the company on normal
commercial terms. The loan is fully secured against the assets ofthe company. Blue provides the
management and entrepreneurial flair to Aqua. Under the agreementBlue will receive a management
fee tied to the net profits of Aqua after allowing for interestpayments on the loan from Georgie. In
times of no profits the interest payments will still be met butBlue will not receive any remuneration.
(d) Georgie operates as the trustee company for the Georgie TradingTrust. The Trust is a
discretionary trust with the nominated beneficiaries being thedirectors of Georgie. These directors are
Mr M, Mrs A and Mr J. Over the years the Trust has distributed itsincome in the following
proportions: Mr M 70, Mrs A 20, Mr J 10. Under the terms of theTrust Deed Georgie has complete
control over the operating and financing decisions of theTrust.
(e) Georgie holds a 75 percent interest in JIB Pty Ltd (JIB). Theinterest was created when Georgie
Charles Sturt University Subject Outline
ACC322 201130 W I-12 February 2011-Version 1 Page 13 of 19
converted a substantial loan it made to JIB into equity at theinvitation of JIB when JIB began to trade
poorly and recovery of the loan seemed uncertain. JIB has a largedeficiency in net assets and has
been consolidated for many years. Georgie is a passive investor,having no seats on the board of
directors and no say in the financing or operating decisions ofJIB.
Required
Advise Georgie's finance director of AASB 127's requirements withrespect to control. For each of the
above investments indicate where the control rests and whether ornot consolidation is required. Give
reasons for each piece of advice.
Collen VonLv2
28 Sep 2019