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Homework answers / question archive / Bill Pty Ltd (Bill) is a private company with many strategic investments
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.
a. Discuss in which entity control lies; and, b. Explain whether consolidation is required.
AASB 10 Consolidation of Financial Statement states that,
When an entity(Parent Company) controls one or more other entity(Subsidary company) then standard establishes its principles for the preparation and presentation of the consolidation of financial statement.
But the question arise here is what is the meaning of the ''control'',
As per the standard, The 'control' is said to be established if and only if it form part of any of the following:
1. Power over investee.
2. Exposure, or rights, to variable returns from its involvement with the investee.
3. The ability to use its power over the investee to affect the amount of the investor’s returns.
In the given case, the bill as 25% interest in the share capital in William Pty Ltd, with this till now we can conclude that bill does not have any influence power over William pty Ltd, hence bill is termed as the minority shareholder and in the books of the Bill Pty Ltd 25% interest in the share capital of william Pty ltd is merely shown as the Investment in William Pty Ltd and not to be consolidated.
Going further, more than half of the board seats (i.e, 3/5*100 = 60%) is held by the Bill Pty Ltd and also all the lead decisions are taking by the Bill. Therefore, considering substance over form it has been concluded that Bill Pty Ltd has power over the William Pty ltd hence, William Pty Ltd books will form part of the Bill Pty Ltd i.e, Consolidation of Financial Statements to be done as per AASB 10.
