Accounting Treatment for Joint Ventures, Intra-Company Transactions and Non-Controlling Interests in Chapmans Limited

This report discusses the accounting treatment for joint ventures, intra-company transactions and non-controlling interests in Chapmans Limited. It also includes the market reaction to the announcement made on 18 August 2017. The report recommends adhering to accounting standards and regulations IAS and any other accounting principles that the regulator deems fit and usable.

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Company Accounting
Name:
Course
Professor’s name
University name
City, State
Date of submission

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Executive summary
Accounting treatment for various issues have changed in previous years. The Australian
Security and Investment Commission is respomsible for regulation of accounting treatments
especially for ASX listed companies like Chapmans Limited. The basic indicator for accounting
treatment is the change in its reporting in different financial years. There are three changes in
accounting treatment mention which are accounting for joint ventures and mergers, accounting
treatment for intra transaction fo the company and accounting for non controlling interest( NCI)
in Chapmans limited. The recommendation is to adhere to accounting standards and regulations
IAS and any other accounting principles that the regulator deemes fit and usable.
Table of Contents

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Executive summary.......................................................................................................................2
Background of the company.........................................................................................................2
Identification of the questioned accounting treatment...............................................................2
1. Accounting treatment for joint ventures..........................................................................2
2. The concept of joint activities, its aspects and accounting features..................................6
3. Accounting treatment for intra companies transactions................................................9
Accounting treatment for Non-controlling interests and goodwill........................................9
Market reaction to the announcement to the market on 18 August 2017..............................10
Recommendation.........................................................................................................................11
Conclusion....................................................................................................................................12
References.....................................................................................................................................13

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Background of the company
The Australian Securities and Investment Commission (ASIC) is an Australian regulator
that undertakes surveillance on financial reporting. 2017 was the year that ASIC raised concerns
over Australian company Chapman’s Limited (ASX code: CHP) about some of the transactions
reported in financial reports ending 31 December 2016. Chapman was tasked to address the
various questions arising from accounting treatment. The issue amended was announced to the
general Australian market on 18th August 2017 (Bhopal, 2016). The summary of the adjustments
were included in the half year ending 30 June 2017.
Identification of the questioned accounting treatment
1. Accounting treatment for joint ventures
The minimum permissible rate of return for an absorption project is determined by the cost of
the investor's capital, adjusted for the level of risk of the project. In the context of the
development of market relations in Australia, the process of joint entrepreneurship has
intensified, including the creation of joint ventures, which, after registration, acquire the right of
a legal entity. However, many of them, approximately every second joint venture, discontinue
their activities in a year or two for various reasons. The procedure for the liquidation of joint
ventures is regulated by the Civil Code of the Australian Federation, in particular Art. 61, 63,
252. In the field of accounting for transactions related to the liquidation of joint ventures, no
single methodology has yet been developed (Blayney, Kalyuga, & Sweller 2015 p. 223).

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In all cases, the JV members prepare and approve the liquidation commission in advance,
which develops, approves and executes the work plan for the liquidation of the legal entity - joint
venture - and acts on behalf of the person being liquidated in court and other organizations.The
liquidation commission places a publication on the liquidation in the mass media (media),
simultaneously notifies the shareholders in writing about the terms of liquidation of the joint
venture, reconciles with debtors and creditors, takes measures to receive accounts receivable and
pay accounts payable (Christopher, Phillips, & Schertzer 2015 p. 34).
In accounting, business transactions related to the liquidation of a joint venture may be
reflected in the following entries:
a) when selling materials:
-"Other incomes and expenses", "Materials";
-"Other incomes and expenses", "Calculations under taxes and tax collections";
b) financial result from the sale:
"Profits and losses", "Balance of other incomes and expenses" - the loss;
"Balance of other incomes and expenses", "Profits and losses" - profit;
c) when selling fixed assets:
One of the main problems arising in the process of acquiring a company by another
company or merging two or more firms (that is, their reorganization) is the regulation of
monetary relations. Within the framework of this problem, it is possible to formulate more

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specific aspects of the role of corporate finance in the process of mergers and mergers of joint-
stock companies (Dopson& Hayes 2016 p. 56):
1. The advantages of absorption are determined by the extent to which this process corresponds
to the strategic goals of the corporation. These advantages can be estimated with a sufficient
degree of accuracy using the discounted cash flow method.
2. When a company absorbs another company (the target firm), it is necessary to take into
account a number of factors: legal, tax, accounting,
3. Absorption is used by shareholders as a tool to control the actions of the company's
management. Sometimes the takeover is the result of a conflict between managers and
shareholders and the decision to change the directorate as a result of the takeover serves as a
means to resolve it (Garvey, Esteban, & Angulo, 2017).
4. Mergers and acquisitions are often unfriendly operations and do not always end with calm
negotiations between companies. An absorbed (target) firm can resist an investor company and
take a defensive position.
Thus, the acquiring company should evaluate:
♦ cash flow, which will result from the purchase of the target company;
♦ possible changes in the return on equity;
♦ estimated payment for the merger - cash, own shares, other securities or a combination thereof.
♦ valuation of target companies;

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♦ participation in the financing of mergers;
♦ use of the tactics of "poisoned pills" and other financial instruments to repel attacks of potential
investor companies. "Poisoned pills" make the purchase of the target company not only
unprofitable, but also meaningless.
In order to determine the financial effectiveness of the takeover or merger project, a
standard method is used, which is based on the Discounted Cash Flow (DCF) technique. This
method includes the following steps:
1. Defining the parameters that are necessary for calculating the cash flow of the company being
absorbed when considering various scenarios for growth in sales volume and profitability.
2. An estimate of the minimum permissible rate of return for an absorption project;
3. Calculation of the maximum allowable purchase price for different scenarios with the
minimum allowable rate of profitability of the project (Granof., Khumawala, Calabrese, &
Smith, 2016 p.67).
4. Definition of the rate of return that an investor will receive under different scenarios of growth
and profitability.
If, after satisfying the creditors' claims, the property remains, it is distributed among the
founders: Then the capital is distributed among the founders and reflected in the account in the
accounts:After carrying out all the calculations, a liquidation balance sheet is created, which is
approved by the founders, and an obligatory audit is carried out with the formulation of the
relevant conclusion.

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2. The concept of joint activities, its aspects and accounting features
The concept of joint activities, a contractual agreement
The agreement on joint activities is often used in Australia business practice. The purpose of
concluding such a contract is to combine efforts and means of entrepreneurs, and to optimize
taxation.
As a rule, speaking of the joint activity of entrepreneurs, we mean the contract of simple
partnership, concluded with the purpose of making profit. Members of a simple partnership can
only be registered individual entrepreneurs or commercial organizations, whereas common
activities without profit can be done by ordinary people or, for example, non-profit partnerships.
An essential condition for a simple partnership agreement is making contributions to the
common cause. The value of deposits, their monetary value is made by agreement of partners
and can be specified in the contract. If this is not done, the contributions are assumed to be equal
in value.
The characteristic features of a simple partnership agreement are:
Unification of two or more persons. In the latter case, the contract is a multilateral transaction;
Association does not lead to the formation of a legal entity.
The tax inspection, the committee for the management of state or municipal property, etc., the
association is associated with the personal participation of each of the comrades in their joint
activities. At the same time, the importance of a personal, trusting factor is quite high: for joint

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activity, comrades contribute and merge their contributions, the association is created to generate
profit or to achieve another goal that does not contradict the law (joint construction of a house,
roads, participation in the privatization of an enterprise, etc.). In cases where the purpose of the
contract is a permanent activity for the extraction of profit (entrepreneurial activity), the parties
can only be individual entrepreneurs and (or) commercial organizations (Marshall, 2016 p.99).
At present, as the crisis phenomena decrease, the processes of integration of the
Australian economy into the global economy are activated, therefore the rules of Australian
accounting are brought in line with the norms of IFRS. Australian tax legislation in terms of
corporate income tax is the first step in the convergence of accounting and tax accounting rules
in Australia.
We give a conditional example of taxation before and after the transition of a group of
taxpayers, whose activities are characterized by the presence of intra-group transactions between
participants, to the consolidated taxation regime. We compare the tax on profits of companies
that are members of the mining companies group taking into account and without taking into
account the consolidated taxation system if there are loss-making enterprises in the group of
companies (Oulasvirta, 2016 p.54).
Corporate income taxation
In this case, the financial result will be reflected only by the group company that sells the
goods to third parties.With this method of adjustment, the financial result will be reflected only
in the last company of REAG selling the goods to third parties. In a number of countries (for
example, the USA), in order to avoid such artificial displacement of profit (loss) in tax

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accounting, the corresponding part of the profit (loss) is reflected in each participant of REAG,
but only at the moment of sale of the goods to third parties. This method seems more logical for
both accounting and control purposes.Example: income tax in the case when not all companies
of a consolidated group are profitable
Consider the calculation of the taxation of this consolidated group, but with an
appropriate reflection of the profit and loss of each member of the group (the method of
excluding profits and losses on intra-group transactions), provided that not all companies of the
group are profitable, since this situation is more true.
If at least one of the group companies is unprofitable, then there is a positive effect from the
use of Chapman financial results. As can be seen from the aggregate amount of tax payable was
137 million cu. It is important to note that in the absence of the possibility of summing up the
profits and losses of the participants of (that is, within the current tax legislation), the cumulative
income tax would be 161 million USD. Thus, it is possible to talk about the existence of savings
from offsetting losses for companies forming the Chapmans, in the presence of a loss-making
company (Schaltegger & Burritt, 2017 p.34).
3. Accounting treatment for intra companies transactions
It should be disregarded that it is very difficult for the members of the chapmans group to
perform intra-group profit adjustments by excluding the group's profit (loss) from intra-group
transactions (following from the current text of draft article 278 of the Tax Code). So, as can be
seen from the above example the enterprise must have information on the profits received by the

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concentrating mill that sold the ore when making the adjustments; metallurgical plant -
information on the correction of profit generated by the concentrator for the purpose of
compiling consolidated statements, that is, with a large number of participants in Chapman and a
significant amount of intra-group transactions between them, the exchange of reliable
information will be quite labor-intensive (Sithole & Abeysekera, 2017.p. 33).
As an alternative correction option, the author suggests using the mechanism of compiling
consolidated reporting by the method of exclusion within
Accounting treatment for Non-controlling interests and goodwill
With the adoption in 2010 of IFRS 10 "Consolidated financial statements", for the first
time there is a requirement to separately reflect the non-controlling interest in the structure of the
consolidated report. A similar requirement is advanced by IFRS 3: "Sometimes, in cases of
reverse acquisition, some owners of a legally-owned subsidiary (the buyer for accounting
purposes)
The Parent Company consolidates all subsidiaries and recognizes non-controlling interests in
relation to shares in its consolidated statements and the possibility of changing the return on
investment (the right to variable return on investment, including the possibility of changing the
returns on investments for subsidiaries). The possibility of changing the return for an actual
agent that is not part of the group will usually be reflected as an non-controlling interest (Sabla,
& Mahmoud, 2017 p.77).

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- assess all components of non-controlling interests at fair value in a manner similar to other
components of the controlling interest in the consolidated share of the entity;
- assess non-controlling interests at their pro rata value in the net identifiable assets at the
acquisition date.
Market reaction to the announcement to the market on 18 August 2017
The first option for estimating the non-controlling interest is, of course, more accurate, but it will
require a full revaluation of all the assets and liabilities of the subsidiary at fair value. This can
be done to achieve comparability in the valuation of assets and liabilities for all members of the
group.
Moreover, in addition to shares belonging to "other" shareholders of the subsidiary, other
components of the subsidiary's capital not purchased by the parent company are also subject to
recognition and valuation: options and warrants, capital components of convertible equity
instruments and equity related to remuneration.
The regulations for the generation of the statement of income and other comprehensive
income are contained in IFRS (1A8). Presentation of Financial Statements". In IAS 1, a
definition of the total (or total) cumulative financial result (total aggregate income - depending
on the transfer) and other aggregate financial result (other comprehensive income - depending on
the transfer) is given. The total (or total) cumulative financial result (income) (total
comprehensive income) is the change in equity during the period as a result of the operations
performed and other events that is different from those that arise as a result of the transactions
with owners (owners).

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Recommendation
For chapman Ltd the following are submitted to the tax inspection: an application (of the
established type), an order for liquidation (or other administrative document), the procedure and
deadlines for liquidation, the appointment of a liquidation commission, an application in the
press, the liquidation balance approved by the founders, an audit report, a list of branches,
registration cards and a letter on the assignment of TIN (taxpayer identification number). After
that, the tax inspection appoints the day of inspection.
The enterprise subject to liquidation must withdraw from the accounts in all off-budget funds and
the tax inspection, close settlement and currency accounts, then it is removed from the
accounting records in the statistics bodies (a statement, a certificate from
New business conditions have led to significant changes in the methodology and organization of
accounting.
The powers of organizations to reflect their own economic operations have significantly
expanded. They independently choose methods for assessing production reserves and methods
for calculating the cost of work, developing accounting policies, determining specific methods,
forms and techniques for maintaining and organizing accounting. In other words, at the present
time only general accounting rules are centrally established, and their specification and
implementation mechanism are developed in each organization, independently on the basis of the
conditions of its activity (Smith, 2017 p. 34).

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Conclusion
In the conditions of a market economy, the basis of economic development is profit, the
most important indicator of the efficiency of the enterprise, the sources of its vital activity. The
growth of profit creates a financial basis for the implementation of the expanded reproduction of
the enterprise and the satisfaction of the social and material needs of the founders and employees
(Yan, & Luo, 2016p. 45). Due to profits, the enterprise's obligations to the budget, banks and
other organizations are fulfilled. Therefore, the reliability of the calculation and distribution of a
positive financial result (accounting profit) becomes the most important task of accounting.
Recently, a rather complicated political and economic situation has developed in
Australia. To solve many problems that arise, it is necessary to reconsider and reassess the
advantages and disadvantages of our national economy, as well as to find and study new
promising directions and forms of activity (Zeff, 2016p. 98). When the revitalization of our
economy is becoming real, attracting foreign direct investment and setting up joint ventures
(JVs) in the country are becoming especially relevant.

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References
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methods of epidemiology. Oxford University Press p 77-79.
Blayney, P., Kalyuga, S. & Sweller, J., 2015. Using cognitive load theory to tailor instruction to
levels of accounting students' expertise. Journal of Educational Technology & Society, 18(4),
p.199.
Christopher, J.R., Phillips, M.A. & Schertzer, S., 2015. An Exploratory Study of Color
Accounting: A New Way to Teach and Learn Accounting. Journal of Higher Education Theory
& Practice, 15(7)pp. 556.
Dopson, L.R. & Hayes, D.K., 2016. Managerial accounting for the hospitality industry. Wiley
Global Education pp.34-66.
Garvey, A.M., Esteban, L.P. & Angulo, J.A.G., 2017. The assimilation of complex accounting
concepts using the Cognitive Load Theory as a framework. Educade: revista de educación en
contabilidad, finanzas y administración de empresas, (8), pp.35-55.
Granof, M.H., Khumawala, S.B., Calabrese, T.D. &Smith, D.L., 2016. Government and Not-for-
Profit Accounting, Binder Ready Version: Concepts and Practices. John Wiley & Sonspp. 56.
Marshall, D., 2016. Accounting: what the numbers mean. McGraw-Hill Higher Education pp.43-
44
Oulasvirta, L., 2016. Accounting Principles. Global Encyclopedia of Public Administration,
Public Policy, and Governance, pp.1-9.

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Sabla, Y. and Mahmoud, M., 2017. Accounting for central and distributed zero liquid discharge
options in interplant water network design. Journal of cleaner production.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
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perspective. Routledge.
Smith, M., 2017. Research methods in accounting. Sage.
Yan, A. and Luo, Y., 2016. International Joint Ventures: Theory and Practice: Theory and
Practice. Routledge.
Zeff, S.A., 2016. Forging accounting principles in five countries: A history and an analysis of
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