AASB 10 Consolidation Financial Statements Assignment

Solution-1
Part (a)
Case - MC has a 25 per cent interest in the share capital of LBX Pty Limited (LBX), which is a company involved
in the same industry as MC. The remaining 75 per cent 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 MC three seats out of the five seats available on
the board of directors. MC takes all the lead on all decisions, but the business is closely monitored by Mr and Mrs T,
who hold the other two board positions.
Analysis –Control can be acquired by two means, one by holding more than 50% of share capital or another by
situations which shows that the company has the power and ability to control and lead the investee company’s
decisions. If any one of the two criteria is met, then it is said that the investor company holds the investee company.
In the current situation, the MC Ltd. has the power to control and lead the decisions by virtue of having 3 out of 5
seats in board of directors, in spite of the fact that MC Ltd. holds just 25% of share capital.
The relevant extract of para 10 of AASB 10, “Consolidation Financial Statements”, which supports above statement,
is as below:
“10. An investor has power over an investee when the investor has existing rights that give it the current ability to
direct the relevant activities, i.e. the activities that significantly affect the investee’s returns.”
Further, as per the accounting standard if the power to control and lead the decisions lies with the company then it is
said to be Parent company and consolidation of financials is required. The relevant extract of para 20 is as below:
“20 Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease
when the investor loses control of the investee.”
Part (b)
Case - MC has a substantial loan receivable from BBT Pty Ltd (BBT). 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
with the management of BBT that MC executives will take control of the company's finances for a period of five
years. An executive of MC has been given control of BBT's cheque book and makes all payments. MC has not
gained any seats on BBT's board of directors, which is still dominated by BBT shareholders.
Analysis – The control does not only arise from shareholding or having more seats in board of directors, it also
arises from the direction and controlling of relevant activities that affects the company’s business. In the given
situation, since the MC executives have control on the company’s finance, it is said that the company BBT is under
the control of MC as the MC has all rights and controls over the payments and cheques and other business finance
activities for a significant time period i.e. 5 years, so it is a good evidence which reflects that the power of
controlling is with MC. The relevant extract of para 12 of AASB 10 is reproduced below:
“12 An investor with the current ability to direct the relevant activities has power even if its rights to direct have yet
to be exercised. Evidence that the investor has been directing relevant activities can help determine whether the
investor has power, but such evidence is not, in itself, conclusive in determining whether the investor has power over
an investee.”
Since, the control is with MC, the MC needs to consolidate the financials of BBT as per para 20 of AASB 10.

Part (c)
Case - MC owns 50 per cent of Chatime Tea Ltd (CTL), with the other 50 per cent being owned by Boost Juice Ltd
(BJL). Both companies have equal voting rights and an equal share of seats on the board of directors. Under the
agreement with BJL, MC supplies the finance to the company on normal commercial terms. The loan is fully
secured against the assets of the company. BJL provides the management and entrepreneurial flair to CTL. under the
agreement forged, BJL will receive a management fee in respect of the net profits of CTL after allowing for interest
payments on the MC loan. In times of no profits, the interest payments will still be met, but BJL will not receive any
remuneration.
Analysis – For consolidation of financials, the control should be established. So, determining control is of utmost
priority. In the given situation, the 50% shareholding is with MC and another 50% is with BJL. Since, both holds the
equal % of shares then nobody is said to have control over CTL as for any decision making consent of both the
companies is required. But in additional to that, the company BJL has an agreement with CTL for providing
management and entrepreneurial flair and the compensation will be based on the net profits earned. Since, BJL has
the ability to control the managerial activities due to this agreement and its activities directly affect the profits of the
investee i.e. CTL, it is concluded that the power of controlling lies with BJL and not with MC. The para 13 of
AASB 10 supports the above view.
“13 If two or more investors each have existing rights that give them the unilateral ability to direct different
relevant activities, the investor that has the current ability to direct the activities that most significantly affect the
returns of the investee has power over the investee.”
So, the MC does not consolidate the financials of CTL as it has no control over the company.
Part (d)
Case - MC, Coffee Club Ltd (CCL) and Gloria Jeans Ltd (GJL) are each 33.33 per cent shareholders of PGH Pty
Ltd, a small proprietary company that is involved in the music industry. CCL and GJL are passive shareholders with
the one board seat each out of a total of three. MC has one board seat and is also involved in the day-to-day running
of the business.
Analysis – In the given situation, all the three shareholders have equal % of shareholding, further they have equal
rights and power with respect to seats held in the board of directors. So, all the shareholders are on the same footing
and do not have any special power. Just merely by the fact that MC is involved in the day to day business of the
company and other two shareholders are passive shareholders, does not give MC the power to control the company,
i.e. PGH. As for establishing control both rights and ability should be established. In the given situation, only ability
to control is there and right to control is absent.
So, it is concluded that the MC has no control over PGH and hence no need to consolidate the financials.
Part (e)
Case - MC hold a 75 per cent interest in JB Wifi Pty Ltd. The interest was created when MC converted a substantial
loan it made to JB Wifi into equity at the invitation of JB Wifi when JB Wifi began to trade poorly and recovery of

the loan seemed uncertain. JB Wifi has a large deficiency in net assets and has been consolidated for many years.
MC is a passive investor, having no seats on the board of directors and no say in the financing or operating decisions
of JB Wifi.
Analysis – Power and rights go hand in hand. When an investor holds significant shareholding, i.e. more than 50%
then it is said that the investor has power to control the investee. As in the major decisions, the investor’s decision
will prevail due to large % of shareholding. In the given situation, the MC holds 75% of shares of JB Wifi and due
to this shareholding the MC has right to take conclusive decision of every transactions irrespective of the fact that he
is involved in the business of JB or not. The para 11 of AASB 10, also states that,
“11 Power arises from rights. Sometimes assessing power is straightforward, such as when power over an investee
is obtained directly and solely from the voting rights granted by equity instruments such as shares, and can be
assessed by considering the voting rights from those shareholdings. In other cases, the assessment will be more
complex and require more than one factor to be considered, for example when power results from one or more
contractual arrangements.”

Solution-2
Acquisition Analysis as on 30 June, 2018
Net fair value of identifiable assets and liabilities of TakeItEasy Ltd.
Share capital 500,000
Retained earnings 200,000
Fair Value
Property, Plant & Equipment ((530000-430000)*(1-30%)) 70,000
Net fair value 770,000
Net consideration paid 900,000
Goodwill 130,000
Consolidation Worksheet entries
1 Pre - Acquisition Entry as on 30 June, 2018
Share capital Dr 500,000
Retained earnings Dr 200,000
Business combination valuation reserve Dr 70,000
Goodwill Dr 130,000
To Shares in TakeItEasy Ltd. Cr (900,000)
(To record acquisition analysis)
2 Business Combination Valuation Entries as on 30 June, 2019
(a) Accumulated Depreciation - Property, Plant & Equipment Dr 270,000
To Property, Plant & Equipment Cr (170,000)
To Deferred tax liability Cr (30,000)
To Business combination valuation reserve Cr (70,000)
(To record fair valuation of equipment)
(b) Depreciation exp - Property, Plant & Equipment (100,000/10) Dr 10,000
To Accumulated Depreciation - Property, Plant & Equipment Cr (10,000)
(To record depreciation on fair valued amount of equipment)
(c) Deferred tax liability Dr 3,000
To Income tax expense Cr (3,000)
(To record tax expense on above depreciation)
(d) Impairment Loss - Goodwill Dr 70,000
To Accumulated Impairment Loss - Goodwill Cr (70,000)
(To record impairment of goodwill)
(e) Dividend Received Dr 40,000
To Retained earnings (30/06/18) Cr (40,000)
(Elimination of interim dividend)