Advanced Financial Accounting

This document discusses the accounting requirements and outcomes of investing in the issued shares of Orange Limited under two different alternatives. It also explores the accounting standards AASB 15 and AASB 107, which cover revenue recognition and statement of cash flows, respectively.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student:
Name of the University:
Authors Note:

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Contents
Answer 1:.........................................................................................................................................2
Investment in 35% of issued shares of Orange Limited:.............................................................2
Investment in 80% of issued shares of Orange Limited:.............................................................3
Answer 2:.........................................................................................................................................4
References:......................................................................................................................................6

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Answer 1:
To: The Manager of Hamilton Limited.
From: Accountant of Hamilton Limited
Date: 14th May, 2019.
The Australian Intellectual Property Law encourages innovation to prosper by stating that the
business entities and individuals developing new innovation will be provided with necessary
protection under the law to ensure that it is not copied and used by other businesses and
individuals without the consent and the permission of the innovator. Intellectual property
includes designs, trademarks, formulas, patents and secret processes. As per the Intellectual
Property Law in the country the third parties are prohibited from using the patented innovation
without the consent of the innovator.
In this case Hamilton Limited is looking to reduce its operating cost by using new technological
processes and innovation most of which are patented by the Orange Limited. Hamilton Limited
has tried to convince Orange Limited to sell the patent or allow the former to use the patented
technology of the later without any success. In order to gain access to the patented technology
Hamilton Limited has decided to invest in the issued shares of Orange Limited. Accordingly, the
accounting requirements and subsequent outcome of investment in the issued shares of Orange
Limited are explained below under two different alternatives.
Investment in 35% of issued shares of Orange Limited:
As per Accounting Standard AASB 128, Investment in Associates and Joint Ventures an entity
will be considered to have significant influence in the investee company if the former holds more
than 20% of the voting power in the investee. In this case if Hamilton Limited buys 35% of

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issued shares of Orange Limited then the later will be considered an associate of the former.
AASB 128 requires an entity to disclose the investment in associates and joint ventures in the
financial statements properly to allow the users of financial statements to understand the
financial implications of such investment (Dorata, 2011).
AASB 128 states that the entity investing in another entity by acquiring more than 20% of the
issued shares shall use equity method to disclose the investment in the financial statements of the
company. Under the equity method the investment in the associates or joint ventures is
recognized at cost. The carrying amount of investment is adjusted for the share of profit or loss
of the entity in the profit or loss of investee after the date of acquisition (He, Evans & He, 2016).
However, investment of 35% of shares in associate does not give any assurance to the investor of
using the patented license or technology of the investee for the benefits and operations of the
investor company. Thus, the acquisition of 35% of issued shares of Orange Limited does not
give any guarantee to Hamilton Limited of using the patented license and technology of Orange
Limited for the operations of Hamilton Limited. It is only if the Board of directors of the investee
decides to allow Hamilton Limited to use the patented technology that it will be possible for
Hamilton Limited to use the patented technology for its operations (Howieson, 2017).
Investment in 80% of issued shares of Orange Limited:
AASB 3, Business Combinations, prescribes principles and requirements to be followed for
entities to form business combinations. An entity acquiring more than 50% of the voting power
in another entity shall follow the prescribed guidelines of AASB 3 to ensure that the financial
statements are prepared in accordance with the guidelines to show the true and fair picture of an
organization. As per AASB 3, an entity must follow acquisition method to account for business

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combinations. The following important points are required under acquisition method to account
for business combination as per AASB 3 (Nguyen & Gong, 2014).
I. Identification of acquirer.
II. Date of acquisition must be determined correctly.
III. Recognition and measurement of assets acquired after proper identification of such
assets.
IV. Calculation of goodwill or capital reserve arising on the date of acquisition.
In this case Hamilton Limited will have to follow AASB 3 to account for business combinations
resulting from the acquisition of 80% issued shares in Orange Limited. As the acquisition of 80%
shares of Orange Limited has resulted in business combinations, Hamilton Limited in this case
can significantly influence the decision making process of Orange Limited. Hence, in this case
the patented license and technology held by Orange Limited can be used by Hamilton Limited by
taking a decision in this respect in the meeting of the Board of Directors of the former (Pentsov,
2017).
Answer 2:
AASB 15, Revenue from contracts with customers and AASB 107, Statement of Cash flows
have been selected as the two accounting standards to elaborate in this part of the document. The
reasons for choosing these two standards are explained below.
AASB 15:
AASB 15, Revenue from contracts with customers will help the students to understand when and
how to recognize revenue from contracts with customers. Revenue recognition is one of the most

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important aspect of financial reporting hence, it is important to know the actual conditions to be
fulfilled before revenue can be recognized (Stevenson, 2012).
AASB 107:
AASB 107, Statement of Cash Flows will help the students to properly present cash flows in a
manner suitable and helpful to understand the cash collected and disbursed under different heads.
Four activities to be undertaken to learn about the two accounting standards:
The following four activities can be undertaken to learn about AASB 15 and AASB 107
subsequent to the completion of graduation:
I. To read the draft of both the accounting standards, i.e. AASB 15 and AASB 107
issued by the Australian Accounting Standards Board.
II. To read other pronouncements issued by AASB on both these standards subsequent to
the issuance of the drafts.
III. Reading the amendments, if any issued by the AASB on both the standards.
IV. For practical understanding verifying the financial statements of different
organizations and their financial statements will be very helpful (Taylor, 2011).

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References:
Dorata, N. (2011). Determinants Of Reporting Nonrecurring Charges Subsequent To Business
Combinations. Journal Of Applied Business Research (JABR), 24(3). doi:
10.19030/jabr.v24i3.1345
He, L., Evans, E., & He, R. (2016). The Impact of AASB 8Operating Segmentson Analysts’
Earnings Forecasts: Australian Evidence. Australian Accounting Review, 26(4), 330-340.
doi: 10.1111/auar.12132
Howieson, B. (2017). The Phoenix Rises: The Australian Accounting Standards Board and IFRS
Adoption. Journal Of International Accounting Research, 16(2), 127-154. doi: 10.2308/jiar-
51825
Nguyen, A., & Gong, G. (2014). Measurement of Formal Convergence of Vietnamese
Accounting Standards with IFRS. Australian Accounting Review, 24(2), 182-197. doi:
10.1111/auar.12033
Pentsov, D. (2017). Contractual Joint Ventures in International Investment Arbitration. SSRN
Electronic Journal, 2(4), 17-124. doi: 10.2139/ssrn.3214785
Stevenson, K. (2012). The Changing IASB and AASB Relationship. Australian Accounting
Review, 22(3), 239-243. doi: 10.1111/j.1835-2561.2012.00182.x
Taylor, S. (2011). Corporate Governance, Standards and Enforcement. Australian Accounting
Review, 21(4), 315-316. doi: 10.1111/j.1835-2561.2011.00152.x

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