Explaining Accounting Requirements Of Investment

This report explains the accounting requirements for a proposed investment by the company in another company, including the purchase of shares and ownership of patents.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced financial accounting
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Question 1........................................................................................................................................2
Introduction..................................................................................................................................2
Body.............................................................................................................................................2
Conclusion...................................................................................................................................3
Question 2........................................................................................................................................5
Answer (a)...................................................................................................................................5
Answer (b)...................................................................................................................................5
Reference.........................................................................................................................................6

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Question 1
MEMORANDUM
To: Management, Hamilton Ltd
From: Accountant, Hamilton Ltd
Subject: Explaining Accounting Requirements Of Investment
Introduction
I am writing this report for stating the accounting requirement for proposed investment by the
company in another company, Orange Ltd. Suggestions required for 2 options including
purchase of 35% of the shares of Orange Ltd and purchase of 80% of the shares of Orange Ltd.
Body
Purchasing 35% shares
When shares purchased are between 20% and 50% of the outstanding common stock of other
company, purchasing company’s influence on the acquired company is significant. Deciding
factor however is whether it has significant influence or ability to have any say of the investor in
the business decision taken by the business owner. If other factors remains that may reduce
influence or the significant influence is obtained through ownership of lower than 20% equity
method will be appropriate. Under this approach the purchaser entity records the investment at
original cost. Balance of investment is enhanced by pro-rata share of investee’s income and
reduced by the pro-rata share of the dividends declared by the subsidiary. At the time of purchase
goodwill can be generated from the difference among cost of investment and book value of
investment for underlying assets.
Before acquiring the shares, the entity shall obtain most recent reviewed or audited financial
statement of the Orange Ltd for analysing the share price. When the transaction is for more than
20% of the paid up capital, opinion shall be taken from the accountants regarding the rationality
of transaction price before entering into the transaction. If the accountant applies the consultancy
report, it shall be dealt in accordance with the accounting standards. All the securities obtained

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by the entity must be submitted with the finance department for the purpose of custody or shall
be stored in the safe deposit box. As per the provision of relevant accounting standard, finance
department must collect relevant information that will be submitted with the accountants for the
purpose of regular evaluation and follow-up.
Purchasing 80% shares
Ownership of greater than 50% of the voting stocks cerates the subsidiary and the financial
statements of the entity are consolidated into parent’s financial statement. Subsidiary entity is
partially or completely owned by the parent entity. Purchasing more than 50% shares allows the
purchaser to take the decisions regarding newly acquired assets without the company’s
shareholders approval. Acquisition may take place with or without the approval of target entity.
Though technically takeover and acquisition sounds same, in general, acquisition means
amicable transaction. By purchasing 80% shares of Orange Ltd, Hamilton Ltd will effectively
obtain control on Orange Ltd. before acquiring Orange Ltd, Hamilton Ltd shall evaluate the
share price for and shall assure that the asking price does not exceed the metrics. Further, the
liability level of Orange Ltd shall be analysed as the entity with high level of debt is not good to
deal with. Though lawsuits are very common for any business, good acquisition is not to deal
with litigation level that is more than what is nor mal for the industry and business size. Further,
the financial performance shall be scrutinized that will allow Hamilton Ltd to exercise the due
diligence comfortably. Transparent and complete financials will also help in preventing
unwanted surprises after completion of acquisition. In addition to all these the above mentioned
steps shall be followed those are mentioned for purchase of 35% shares.
Ownership of patent
Under the share purchase approach, target entity is purchase as whole with its assets such as
patents and any other type of intellectual property that is owned by the target entity along with its
liabilities. Ownership of intellectual property including patent are automatically carried across
with shares in target company and hence, there is no requirement of separate assignment.
Conclusion
Controlling interest is the instance while one entity holds majority of the shareholders of another
entity. By definition, controlling interest applies for at least 50% holding plus one in another

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company. Controlling interest provides significant influence over the target entity for the
acquirer. Benefit of holding controlling interest is it has the power of overturning the decision
taken by the existing board member. However, the controlling interest can be acquired through
purchasing more than 50% of shares of the target entity. Hence, if Hamilton Ltd purchases 35%
shares of Orange Ltd, it will not gain any controlling right and will not have any right on its
patent. However, if Hamilton Ltd purchases 80% shares of Orange Ltd, it will gain controlling
interest on Orange Ltd and ownership of patent are automatically carried across with shares in
Orange Ltd
Another option available to Hamilton Ltd for gaining ownership of Orange Ltd’s patent is to
merge with the company.
Hope the above advices will assist you to comply with the accounting requirement while shares
will be purchased and gaining control on ownership of patent accordingly.
Emily Richardson,
Accountant, Hamilton Ltd

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Question 2
2 accounting standards those were not examined in this unit are – AASB 112 – income
taxes and AASB 139 – Financial instruments: recognition and measurement
Answer (a)
AASB 112 – reason why this accounting standard has been selected and requirement of this
accounting standard is that this standard prescribes accounting treatment for the income taxes
which is required in provide tax related advices and computing tax for own business. Further,
major issue in income taxes accounting is how future as well as current tax shall be accounted
for. This standard helps in dealing with such accounting (Aasb.gov.au, 2019).
AASB 139 – reason why this accounting standard has been selected and requirement of this
accounting standard is that this standard prescribes principles to recognise and measure the
financial liabilities, financial assets and some of the contracts for selling or buying non-financial
items (Aasb.gov.au, 2019). It will help in dealing in financial instruments.
Answer (b)
Four activities that can be undertaken by learning requirements of these 2 accounting
standards are –
 Providing tax related advices in any entity
 Acting as tax return preparer for any individual or any entity
 Dealer for financial instruments
 Stock broker (Aasb.gov.au, 2019).
Above mentioned 4 activities can be carried out with complete knowledge of the
accounting standards mentioned above. 1st two activities can be carried out with help of AASB
112 and last 2 activities can be carried out with help of AASB 139.

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Reference
Aasb.gov.au. (2019). Retrieved 10 May 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB139_07-04_COMPoct10_01-
11.pdf
Aasb.gov.au. (2019). Retrieved 10 May 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB112_08-15.pdf
Asic.gov.au (2019). ASIC Home | ASIC - Australian Securities and Investments Commission.
Retrieved 10 May 2019, from https://asic.gov.au/
Legislation.gov.au. (2019). AASB 3 - Business Combinations - July 2004 . Retrieved 10 May
2019, from https://www.legislation.gov.au/Details/F2009C01053
Legislation.gov.au. (2019). Accounting Standard AASB 2018-6 Amendments to Australian
Accounting Standards – Definition of a Business . Retrieved 10 May 2019, from
https://www.legislation.gov.au/Details/F2019L00020

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