International Studies of Management

Running head: FINANCIAL ACCOUNTING AND REPORTING
Financial accounting and reporting
Name of the Student:
Name of the University:
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FINANCIAL ACCOUNTING AND REPORTING
Date: 15th June, 2019
To: King Edwards ([e-mail])
From: Samantha Cole ([e-mail])
Subject: Accounting Issues: Business combination and consolidated financial statement
Dear Edwards,
I have prepared this memorandum in response to the e-mail sent by you regarding the
accounting issues faced by the company related to the Business combination and Consolidated
Financial Statements. It would help in addressing the accounting issues that has been raised
related to the event of determining a parent-subsidiary relationships. The purpose of writing this
memorandum is to identify the issues and provide the board of directors with the solution that
would be in accordance with the Australian accounting Standard. This would assist the board of
directors in the process of decision making. (Macve 2015). Therefore, in order to make the board
well understand the accounting treatment relating to the acquisition, I have addressed the
identified issues in accordance with the requirements of the standard.
I have found that the boards of directors are concerned about the decision making process
related to the existence of parent-subsidiary relationship. I would be discussing the parent-
subsidiary relationship in accordance with the AASB 10. To meet the objective of the
Accounting standard of the Consolidated Financial statements, the parent company requires an
entity that controls one or more entities of subsidiaries to present consolidated financial
statements. The entity which is a parent body has to be presented in Consolidated Financial
Statements. As per the accounting requirements, a parent company shall prepare consolidated

FINANCIAL ACCOUNTING AND REPORTING
financial statements using uniform accounting policies like transactions and other events in
similar circumstances. This is required for combining like items of assets, liabilities, equity,
income, expenses and cash flows of the parent with those of its subsidies.
As mentioned in AASB 10 Consolidated Financial Statements a parent-subsidiary
relationship exists when the parental company i.e. the investor controls the subsidiary company
i.e. the investee. To determine whether there is a parent-subsidiary relationship in the Tom Ltd
and Toots Ltd where they hold both 50% shares in Jerry Ltd the reference of B22 and B23
paragraph of AASB 10 is needed (Aasb.gov.au 2019).
As per the AASB 10, in B22 paragraph under the section of substantive rights an investor
has the power and control over the investee. The holder must possess a practical ability to
exercise that right. It should have exposure to the risk and rights which in return will be
profitable by getting involved with the investee. The investor does have the power to use its
decision through which the other shareholders can get influenced (Hussey and Ong 2017).
As per the paragraph, B23 the investor has the authority to direct the relevant activities of
the investee and to make a decision relating to relevant activities. In the section of B23, it states
that there should be no barriers that will prevent the holder from exercising the rights
(Aasb.gov.au 2019). When the exercise of the rights requires the concern of more than one
parties, it checks whether the mechanism is in place. This provides the parties with the practical
ability to exercise their rights collectively. If more parties agree to exercise the rights, less likely
it is that the rights will be substantial. In that case, the member of board of directors, who are
independent of the decision maker may serve as a mechanism for many investors to act
collectively in exercising their rights (Elliott et al. 2019).

FINANCIAL ACCOUNTING AND REPORTING
In the above case, it is seen that Tom ltd and toots ltd both are holding equal portion of
shares in jerry ltd. It is seen that there is a parent-subsidiary relationship because Tom ltd is
giving fee to toots ltd for management provided by it. It shows that the tom ltd is having power
to direct relevant activities of jerry ltd. Thus, it can be concluded that tom ltd is having the power
to take the decision which can influence the returns of the other shareholders. As Tom ltd is
having control over the jerry ltd, it should prepare the consolidated financial statements.
In the second case, the directors have raised concern about the fact that Tom ltd has
acquired 35 interest in tyke ltd, a company that has discovered large deposits of iron ore.
According to the AASB10, in the b222 and 23 paragraphs, the investor has the control and power
over the investee to determine whether there is a parent-subsidiary relationship (Aasb.gov.au
2019).
According to the B22 of the AASB 10, the control of Tom Ltd should have the power
over Tyke Ltd. It should have the rights of the variability of returns from the investee. It should
have the power to use the decision making which can be influence other shareholders. From the
above issue it is seen that the Tom Ltd. Has got the power to make decisions because it has the
majority in the board membership of Tyke Ltd. All the board members will get their share of the
profit. Therefore, the variability of returns is being exposed (Maa et al. 2015).
In addition to this, an investee’s power is considered to determine the level of power. The
design of the investee and also the relevant activities are to be considered by the investee. There
should be a benefit from the exercise of these rights (Gul et al. 2018). So, from the issue it is
clear that Tom Ltd. make decisions of the relevant activities due to the majority in the board.

FINANCIAL ACCOUNTING AND REPORTING
Hence it can be concluded that there is a parent-subsidiary relationship and Tom Ltd. is a
parent company of the Tyke Ltd. and it should prepare a consolidated financial statements.
The third issue that has being into the concern of the directors is that Tom Ltd. holds the
maximum shareholding of 30%. This particular issue has been explained in accordance with
AASB 10 (Aasb.gov.au 2019). Tom Ltd. should have the power over the Toodles Ltd. in order to
have control. Tom Ltd. should have the exposure or the rights to have the variability of the return
from the investee. Tom Ltd. has the power to use the decision making which will have an
influence over the shareholder’s return.
In this issue Tom Ltd. got the maximum number of directors in the board, thus it will
affect the decisions as well as the returns of the shareholders. As Tom holds 30% of the shares; it
has the exposure to the variability of the returns and risk of the Toodles Ltd. The rights of the
investor should have the ability to direct the relevant activities. As per B3 paragraph of AASB
10, the investor should have the power to make decisions of the relevant activities as per the
design and the purpose of the investee (Lessambo 2018).
From the above issue it can be concluded that Tom Ltd. can influence the decisions
relating to the important activities because it has majority of members in the board. Tom Ltd.
will be considered as the parent company because it holds the highest percentage of the shares in
the Toodles Ltd. and out of seven shareholders four of the shareholders are appointed by Tom
Ltd (Pereira et al. 2015). Thus in this situation its can be considered that there is a parent-
subsidiary relationship and Tom Ltd. is the parent company of Toodles Ltd. therefore, it should
prepare consolidated financial statements.

FINANCIAL ACCOUNTING AND REPORTING
The fourth issue which the directors are concerned about is that whether Beep Ltd needs
to prepare a set of consolidated financial statement. For this particular issue there is a need for
referencing to AASB 10. In the AASB 10, it has been stated that a parent entity should present
consolidated statement.
As per the AASB 10, there are certain conditions to be fulfilled by the parent such that it
is not needed to present the consolidated financial statements. Firstly, it should be the wholly-
owned or a partially-owned subsidiary of the other entity. The other owner, and those who are
not entitled to vote, has been informed (Morris 2017). In such a case, the parent company does
not need to present consolidated financial statements. Secondly, the parent company should not
trade the debt or equity instrument in the public market. Thirdly, the financial statements are not
filled with the securities commission for the purpose of issuing any instruments in a public
market. Lastly, the parent company should produce consolidated financial statements which are
for public use and comply with International Financial Reporting Standards.
From the issues it is seen that Looney Ltd is a subsidiary company of Beep Ltd. and the
ultimate parent company i.e. Tom Ltd, prepares reports under AASB, which comply with the
IFRS. One of the issues is that the debt instrument of Beep Ltd are traded publicly. This means it
breaches the third point where the company needs to prepare the consolidated financial
statements (Park and Chung 2019). Thus, it can be concluded that both Tom Ltd and Beep Ltd
would require preparing Consolidated Financial Statements.
The above discussion relates to the accounting issues have been done in accordance
with the requirement of Australian Accounting Standards. I hope, I have been able to address all

FINANCIAL ACCOUNTING AND REPORTING
the concerned issues associated with the parent-subsidiary relationship and also if any parent
entity is required to prepare Consolidated Financial Statements. It is expected that the answer of
your raised issues would be able to assist the directors and members of the board in gaining an
understanding of the accounting treatment and the related concepts associated with the
acquisition.
Samantha Cole ([e-mail])
40 Collins Street, Melbourne,
VIC 3000
Pwc limited

FINANCIAL ACCOUNTING AND REPORTING
References list:
Aasb.gov.au. (2019). [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed 1 Sep.
2019].
Elliott, W.B., Fanning, K. and Peecher, M.E., 2019. Do Investors Value Higher Financial-
Reporting Quality, and Can Expanded Audit Reports Unlock This Value?. The Accounting
Review.
Gul, F.A., Hsu, A.W.H. and Liu, S.H.T., 2018. Parent-subsidiary investment layers and audit
fees. Journal of Accounting, Auditing & Finance, 33(4),
Hussey, R. and Ong, A., 2017. Corporate Financial Reporting. Macmillan International Higher
Education.
Kimmel, P.D., Weygandt, J.J., Kieso, D.E. and Trenholm, B., 2016. Financial Accounting.
Wiley Custom Learning Solutions.
Lessambo, F.I., 2018. Overview of Financial Statements. In Financial Statements (pp. 3-22).
Palgrave Macmillan, Cham.
Li, J., Jiang, F. and Shen, J., 2016. Institutional distance and the quality of the headquarters–
subsidiary relationship: The moderating role of the institutionalization of headquarters’ practices
in subsidiaries. International Business Review, 25(2), pp.589-603.

FINANCIAL ACCOUNTING AND REPORTING
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production, 136, pp.237-
248.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Morris, R.D., 2017. Discussion of: The Phoenix Rises: The Australian Accounting Standards
Board and IFRS Adoption. Journal of International Accounting Research, 16(2), pp.155-157.
Park, H. and Chung, C.C., 2019. The role of subsidiary learning behavior and absorptive
capacity in foreign subsidiary expansion. International Business Review, 28(4), pp.685-695.
Pereira, V., Munjal, S. and Nandakumar, M.K., 2016. Reverse dependency: A longitudinal case
study investigation into headquarter-subsidiary relationship in the context of an emerging
economy. International Studies of Management & Organization, 46(1), pp.50-62.
Perera, D. and Chand, P., 2015. Issues in the adoption of international financial reporting
standards (IFRS) for small and medium-sized enterprises (SMES). Advances in
accounting, 31(1), pp.165-178.