Gorgeous Georgie Pty Ltd (Georgie) is a private company with many strategic inve

Question

Gorgeous Georgie Pty Ltd (Georgie) is a private company with many strategic investments. The
finance director is concerned that he might be required to consolidate some of these investments in
accordance with AASB 127. Details of the investment relationships are as follows:
(a) Georgie has a 25 percent interest in the share capital of LBX Pty Ltd (LBX) which is a company
involved in the same industry as Georgie. The remaining 75 percent of the share capital is owned by
LBX's founders Mr and Mrs T. Mr and Mrs T are unfamiliar with the industry and so have given
Georgie three out of the five seats available on the board of directors. Georgie takes the lead on all
decisions but the business is closely monitored by Mr and Mrs T who hold 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 experienced significant 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 with the management of BBT that
Georgie's executives will take control of the company's finances for a period of five years. An
executive of Georgie has been given control of BBT's cheque book and makes all payments. Georgie
has not gained any seats on BBT's board of directors, which is still dominated by BBT's share holders.
(c) Georgie owns 50 percent of Aqua Pty Ltd (Aqua) with the other 50 percent being owned by Blue
Pty Ltd (Blue). Both companies have equal voting rights and an equal share of seats on the board of
directors. Under an agreement with Blue, Georgie supplies finance to the company on normal
commercial terms. The loan is fully secured against the assets of the company. Blue provides the
management and entrepreneurial flair to Aqua. Under the agreement Blue will receive a management
fee tied to the net profits of Aqua after allowing for interest payments on the loan from Georgie. In
times of no profits the interest payments will still be met but Blue will not receive any remuneration.
(d) Georgie operates as the trustee company for the Georgie Trading Trust. The Trust is a
discretionary trust with the nominated beneficiaries being the directors of Georgie. These directors are
Mr M, Mrs A and Mr J. Over the years the Trust has distributed its income in the following
proportions: Mr M 70, Mrs A 20, Mr J 10. Under the terms of the Trust Deed Georgie has complete
control over the operating and financing decisions of the Trust.
(e) Georgie holds a 75 percent interest in JIB Pty Ltd (JIB). The interest 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 the invitation of JIB when JIB began to trade
poorly and recovery of the loan seemed uncertain. JIB has a large deficiency 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 of JIB.
Required
Advise Georgie's finance director of AASB 127's requirements with respect to control. For each of the
above investments indicate where the control rests and whether or not consolidation is required. Give
reasons for each piece of advice.

Explanation / Answer

a)According to consolidate some of these investments in accordance with AASB(Australian Accounting Standards Board) Georgie has a 25% interest in the share capital of the company. The remaining 75% of the share capital is owned by founders of the company. Georgie has given by three out of the five seats available on the board directors. Georgie takes the lead on all decisions but the businiess is closely monitored by who hold the other two board positions is ethical. b) Georgie has not gained any seats on BBTs board of directors, which is still dominated by bbTs share holders, because of Georgie owns no shares in BBT Pty Ltd.Hence , it is ethical. c) In this situation Blue will be get remeneration from Aqua company. d) The Trust is a discretionary trust with the nominated beneficiaries being the directors of Georgie. The directors are entitle to get income according to their proportions. This is ethical. e)George holds a 75 percent interest in JIB Pty Ltd. JIB has a large deficiency in net assets and has been consolidated for many years. George has no seats on the board of directors. Hence Georgie has no responsibility in the financing or operating decisions of JIB.  

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.