Consolidation of Financial Statements of Macmahon Holdings Ltd, Mercantile Investment Company Ltd and Maca Ltd

This paper discusses the consolidation of financial statements of Macmahon Holdings Ltd, Mercantile Investment Company Ltd and Maca Ltd. It also compares and contrasts their practices with regard to disclosing their income and discusses certain issues regarding the current IFRS. Additionally, it discusses whether reporting of comprehensive income enhances information contained in financial statements information to be clear and useful to users.

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Introduction
The purpose of this paper is to discuss the consolidation of financial statements with
regard to three group of companies including Macmahon Holdings Ltd, Mercantile Investment
Company Ltd and Maca Ltd. This paper discusses how these entities report their comprehensive
income, and compares and contrasts their practices with regard to disclosing their income. The
paper also focusses on discussing if reporting of comprehensive income enhances information
contained in financial statements information to be clear and useful to users. The paper also
discusses certain issues regarding the current IFRS.
PART I:
a. The Companies’ Reporting of Comprehensive Income
According to the 2017 annual reports of Macmahon Holdings Ltd, Mercantile Investment
Company Ltd and Maca Ltd, comprehensive income has been appropriately and sufficiently
reported. For instance, Macmahon Holdings Ltd starts by reporting its revenue for the 2017
financial year and aggregates it to other income, giving a total amount of $366.490 Million in
revenue. It then subtracts the amount of its total expenses from this revenue figure, arriving at a
gross loss of $5.22 million. After making an adjustment of other income and expenses such as
tax, the company arrives at its total comprehensive loss for the year which amounted to $21.04
million (Macmahon Holdings Ltd 2018, pp. 56). Mercantile Investment Company Ltd and Maca
Ltd also follow a similar reporting structure in their comprehensive income for the financial year
2017. It can therefore concluded that the reporting of comprehensive income of the three
companies is in accordance to the GAAPs and IFRSs that are developed by IASB (Mercantile
Investment Company Ltd 2018, pp. 74).

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b. Comparison of the Reporting of the Companies with Regard to Disclosing
Comprehensive Income
i. Similarities
As discussed above, the three companies adopt a similar structure of reporting their
incomes for the financial year 2017. For instance, all of them start by reporting on their revenue
from operations and add other income to arrive at the gross revenue figure. Total operational
expenses are then deducted from the gross revenues to arrive at the firms’ gross profit or loss,
which is then subjected to other various deductions such as income tax expense in in order to
arrive at the net or total comprehensive profit/loss for the companies during the year then ended
(Macmahon Holdings Ltd 2018, pp. 56). Additionally, the three firms report on their basic as
well as diluted Earnings per share (EPS) for the financial year 2017. Furthermore, the three
companies have accompanied their income statements with disclosure notes that accompany the
statements, as required in the IFRS. The three firms also have a fiscal year ending on June 30
(Mercantile Investment Company Ltd 2018, pp. 74).
ii. Differences
Although the three companies have a similar reporting structure of their comprehensive
incomes, there is one key difference observed on their 2017 annual reports. For instance, while
Maca Ltd reports a net profit of $31.2 Million, Macmahon Holdings Ltd and Mercantile
Investment Company Ltd report a net loss of $21.04 Million and $5.11 Million respectively
(Macmahon Holdings Ltd 2018, pp. 56).
b. Whether the Reporting of Comprehensive Income Enables Financial
Information to be Clear

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According to the 2017 three companies’ annual reports, their reporting of comprehensive
income enables users to gain an understanding of financial information clearly. These disclosures
are used by investors and other interested stakeholders in gaining an understanding of the
financial performance of the companies for the year ended June 30, 2017. The notes
accompanying the statement of comprehensive income have played a major role in bringing
clarity to the users of such financial statements. For instance, according to note 1 in the 2017
annual report of Maca Ltd, income is measured at the fair market value of the consideration
obtained after considering trade discounts and volume rebates allowed. This helps in enhancing
clarity regarding the company’s reported revenues and other income (Maca Ltd 2018, pp. 45).
PART B:
a. A Discussion on Whether “Essential Financial Information Is Mostly Concealed By
Boilerplating and That Financial Information Is Most Commonly Presented Poorly”
As Highlighted By IASB
After doing a comprehensive research, it has been noted that information which is
considered essential and useful is often concealed by companies through Boilerplating, and due
to this, financial information is often presented poorly. Boilerplate disclosures are standardized
documents, procedures or methods. According to research, most of Australian companies are not
adopting the best practice of corporate governance (Tirole 2010, pp. 25). Most companies have
instead resorted to boilerplate disclosures and the information given in their financial statements
is meaningless, irrelevant and therefore not useful for key decision making by investors and
other interested stakeholders. Most of companies opt to provide only little details about the risks
affecting them. Furthermore, according to research, most companies indicate in their reports that

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they have a board of directors in which independent directors are outnumbered (Vernimmen,
Quiry, Dallocchio, Le Fur and Salvi 2014, pp. 56).
Research indicates that only forty five (45%) of companies operating in Australia comply
fully with best practices of corporate governance, as defined by International Financial Reporting
Standards (IFRS). For instance, it was found out in research that seven percent (7%) of
companies reported that the roles of chief executive and chairman were performed by same
person, a situation which significantly defies the principles laid out by the standards.
Furthermore, out of the 96% of companies which claimed to have formed an audit committee,
only 89% were found to have set up their committees in accordance to the prescribed
composition. According to IFRS, audit committees must be comprised of a minimum of three
members, and only non-executive directors should be compromised most of whom are
considered to be independent. Additionally, the chairman of audit committee must not serve a
similar role in the board (Hillier, Grinblatt and Titman 2011, pp. 51).
Research also finds out that most companies do not disclose information regarding the
systems put in place for reporting about management of risks as well as systems of internal
controls. Only a few provide full information on approaches used in identifying, monitoring,
managing and measuring risk. For companies which prepared these reports, it was not clear on
how the systems of risk management worked, and if the reports generated were reviewed or
audited (Kieso, Weygandt and Warfield 2010, pp. 45).
It has also been found out that most entities are not compliant with sustainability
disclosures. Most of them adopt an approach of minimal compliance, thus end up providing the
users and market with inadequate information which is irrelevant in decision making. Most

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companies in all industries were discovered to have significant weaknesses and deficiencies in
the quality of information disclosed in regard to factors of sustainability that have impacts on
their financial conditions (Hillier, Grinblatt and Titman 2011, pp. 51).
In conclusion, most companies are not providing adequate and useful financial data to
financial statements users. Research indicates that investors rely mainly on more detailed
financial disclosures in making key decisions regarding their financial investments. They use
information in these disclosures in assessing the risk of a firm and its financial viability
(Gapenski and Reiter 2008, pp. 14).
b. A Discussion on the Current Framework of IFRS with Regard to Operating Profit
and EBIT
According to research, the current framework of IFRS does not sufficiently give a clear
definition of operating profit and EBIT. Research points out that the framework has not clearly
defined operating profit and EBIT. Researchers have argued that operating the current definitions
of profit and EBIT are partly consequential to definitions of expenses and income as changes in
liabilities and assets which cause changes in equity, and partly due to presence of two concepts
of equity and profits, which are conflicting in the current IFRS framework (Epstein and
Jermakowicz 2010, pp. 21).
Using the definition of operating profit as changes in net assets, two perspectives can be
conceptualized. First, it is argued that there are no key differences in realized and unrealized
elements recognized in the equity changes. In such a case, changes in assets and liabilities which
can be measured objectively would be adequate for being recognized as income and expenses
(Iatridis and Rouvolis 2010, pp. 57). Secondly, operating profit can be understood as the changes

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which are recognized and realized in the account of retained earnings. This account is considered
different from reserves of revaluation and other adjustments for maintenance of capital. In such a
scenario, changes which can be measured objectively in assets and liabilities are not considered
adequate or sufficient for being recognized as operating income and expenses (Edwards 2013,
pp. 12).
The current conceptual framework of IFRS deals only with the financial reporting
objective as well as qualitative properties of useful and relevant financial information, and does
not therefore contain a sufficient definition of operating profit and EBIT.
c. How Current Framework of IASB Defines Profit or Loss and OCI and its
Usefulness in Meeting Stakeholder’s Needs
In accordance with IASB, profit/loss and OCI statement is primarily prepared for
showing the financial position of an entity in a manner that can be used widely by users in
assessing the entity’s net cash inflows in future. IASB defines profit or loss as all items of
income or expense, with exclusion of adjustments of reclassification, except those income items
or expense items that are recognized in OCI allowed by the IFRS (Peirson, Brown, Easton and
Howard 2014, pp. 29). Profit and loss therefore, are considered the main source from which
financial information is retrieved, regarding return made by an entity on its economic resources
during a given period of operations. IASB defines OCI as other items of revenues and expenses
and income that support a firm’s profit or loss, but are not generated from its operations ( Deegan
2013, pp. 45).
IASB currently defines profit or loss and OCI in a matter that meets the various
stakeholder’s needs. For instance, it gives the users of financial statements relevant information

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regarding changes in the resources of an entity, as well as its obligations. This assists users in
understanding the return that has been produced or generated by the entity on its economic
resources (Schroeder, Clark and Cathey 2009, pp. 18). Additionally, this is useful information for
users in making assessments of the future net cash flow prospects of a company. This definition
of profit, loss and OCI by IASB also helps stakeholders in determining the efficiency and
effectiveness of the management of an entity in discharging their roles and responsibilities as
regards use of firm’s resources. Users of this information therefore use it in deciding whether or
not they should provide the entity more resources (Brealey, Myers, Allen and Mohanty 2012, pp.
11).
This definition also helps stakeholders in getting a clear understanding on whether an
expense is incurred upon issuance of an instrument of equity by an entity, in exchange for some
services. This helps stakeholders in determining how share based payments should be treated.
For instance, upon acquisition of an asset in exchange for issuance of instruments of equity, an
entity must recognize the asset provided that the criteria of recognition is met (Weil, Schipper
and Francis 2013, pp. 23).
Conclusion
As discussed above, useful information is most commonly concealed by companies
through their use of Boilerplating practices. Due to this, financial information is in most cases
presented poorly. Additionally, the current framework of IFRS does not sufficiently define
operating profit as well as EBIT in a clear manner. According to IASB, the profit and loss and
OCI statement is primarily prepared for showing the financial position of an entity in a manner
that can be used widely by users in assessing the entity’s net cash inflows in future.

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