For each of the below independent situations, determine whether or not control exists and, if so, by which party (pursuant to AASB 10). Discuss the reasons for your answers.

1. SPG Ltd, a supplier of sailing equipment, was incorporated 10 years ago and is 60 percent owned by GPS Ltd. SPG has been a very successful business, averaging annual profits of $500 000. However, during the past two years, the company has run into financial difficulties and has defaulted on its loan with its bank. Consequently, the bank has used the powers in the loan agreement to monitor the company’s activities closely in order to obtain repayment of its debt. The company must now obtain the bank’s authorization for any expenditure over $5000 and no changes in operations of the company are permitted without the bank’s approval.

2. S Ltd is owned 50 percent by B1 Ltd and 50 percent by B2 Ltd (the founding shareholders). Each has two seats on the board, with no party having a casting vote, although B1 Ltd appoints the managing director. Profits are split 50–50 after the provision of the managing director’s salary. B2 Ltd has agreed that it will pay a management fee to B1 Ltd, equivalent to 50 percent of the results for the year. B1 Ltd is the holder of 10 options, which are exercisable at any time at a 10 percent discount to the fair value of the shares as of the exercise date.

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