QUESTION 3 [16 + 6 = 22 Marks]

Gum Pty Ltd (Gum) is a private company with many strategic investments. The finance director Adam William 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. 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 Wattles founders, Mr and Mrs Rose. Mr and Mrs Rose 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 Mrs Rose who hold the other two board positions.
2. 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 Acaciathat Gum executives will take control of the companys finances for a period of five years. An executive of Gum has been given control of Acacias cheque book and makes all payments. Gum has not gained any seats on Acacias board of directors, which is still dominated by Acacia shareholders.
3. 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 met but Lilly will not receive any remuneration.
4. Gum operates the trustee company for the Gum Trading Trust.The trust is a discretionary trust with the nominated beneficiaries being the directors of Gum. 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, Gum has complete control over the operating and financing decisions of the trust.
5. 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 of Orchid 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

Write a report to Adam William, 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 Adam William should include the results of the investments within the consolidated accounts explaining the reasons for your decision. (16 marks)

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. A formal business report format includesTitle (To whom is the report addressed), Executive Summary / Introduction, each situation dealt with, Business English and Conclusion. (6 marks)

Marking Guide: 4 cases x 4 marks = 16 marks

Report Structure: 6 marks: Title (To whom is the report addressed): 1-mark, Executive Summary / Introduction: 1 mark, each situation dealt with: 2 marks, Business English: 1 mark and Conclusion: 1 mark.