Accounting for Investment in Wakefield Ltd: Passive, Associate, and Consolidation Accounting

Advance financial accounting

QUESTION 1: ACCOUNTING FOR INVESTMENT
By considering the given case scenario, there are three possibilities for accounting of investment
by company. For accounting of investment, it is essential to determine the type of investment.
Generally, there is four types of investment, such as Passive investment, Associates, Joint
arrangement, and consolidation accounting. Passive investment means investment where investor
does not exercise any power on the company. Further, Associate investment means investor can
exercise significant influence by holding shares of company. The joint arrangement gives joint
control by contractual agreement among the companies. Moreover, if the company is controlled
by investor, then it is considered as subsidiary company. It can be said that the level of control
makes the impact on classification of investment (Potter, Pinnuck, Tanewski, & Wright, 2019).
In the case of passive investment, there is no requirement of consolidated financial statement. If
the Wakefield acquires 5% or more but less than 20% shares in Hobson Ltd, then accounting
should be done as per Australian Accounting standard 9 which is related to a financial
instrument. In this, Wakefield Company recognizes investment as per fair value method. Any
changes in the fair value should be recognized in Income and expenditure as income or loss
(Financial Instrument 2014). However, it can also be recognized in other comprehensive income
if the company has policy to recognize gain or loss by other comprehensive income (Handley,
Wright, & Evans, 2018). Any dividend paid by company should be recognized in profit or loss
account of investor company.
Further, if the investor acquires 20% or more, then it is considered that significant influence can
be exercised by the investor over Investee Company. In the given case if Wakefield acquires at
least 20% shares of Hobson Ltd, then it is considered as associate entity. In Australia, Australian