This report discusses the consolidation process in corporate accounting and its impact on acquiring companies. It covers the methods of accounting, treatment of unrealized profit, and disclosure requirements for non-controlling interest. The report provides examples and explanations to help understand the concepts.
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Running head: Corporate Accounting Corporate Accounting Name of the Student Name of the University Author Note
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1 Corporate Accounting Executive Summary The report show about the consolidation process how it help the company at the time of the acquiring the company. It show about the transaction happen between the parent and subsidiary company and also how to deal with the unrealised profit and also the accounting and the disclosure which is to be done by the company in regards of thee non-controlling interest
3 Corporate Accounting Introduction The company have to prepare its account so that it can able to show financial information to the stakeholder of the company so this responsibility is been carried out with the help of corporate accounting. The accounti8ng know all the procedure whichhastobefollowedbythecompanyinordertoprovidealltheuseful information to the stakeholder of the company (D'Amicoet al., 2016). This report shows about the company JKY limited who want to acquire FAB Limited. It show about the different method which company use for the purpose of accounting and also it show transaction related to the intra purchase and sale and it finish the discussion with the concept of non-controlling interest (Aasb.gov.au 2019). Section A It can be seen from the data which is been provided that JKY Limited have some interest in FAB Limited so as a result it want to get the company. The company JKY Limited has confusion about which method would be appropriate in regards of theaccountingofconsolidationsitcanchooseanymethodwhichitseems appropriate in regards of the acquisitions. Either it can go for the equity method or the consolidation method. Each method is a bit different from another and each one have their own importanceand drawback so it’s the company which have to decide the same about the method which should be selected by the company in order to complete the acquisitions (Aasb.gov.au 2019).. The details of the methods listed below: Equity Accounting Method Equity Accounting Method is one of the most used method in regards of the consolidation as in this the company can able to record the investment profit only which they have got from the subsidiary company. The company should record the same in the profit and loss account of the company and also should show the size of theinvestmentwhichitowninthesubsidiarycompany(Hoyle,Schaeferand Doupnik 2015). The accounting standard suggest that when the company acquire the investment than it should record it in value it have got the asset and if it see an reduction or appreciation than as per the nature it should record the same in the income statement of the company. It should do the valuation of the goodwill at the time of acquisition and should record it as interest acquired as it should not be recorded in any other value (Aasb.gov.au 2019).. To clear the above point an example can be given as JKY Limited has 25% share upon the FAB Limited for $40000, after some time the company found that , FAB Limited is able to earn $80000 as net income and $30000 as dividend. So JKY will recognize the purchase as The amount of dividend which JKY Limited will get is $7500 so the entry will be
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4 Corporate Accounting The amount of profit it will get is $20000 so the entry will be Consolidation Method of Accounting This method is very popular in the accounting for the acquisition as in this the company have to record the asset and liability in related to the percentage the company hold in the joint venture as it can only record the value compare to the percentage of the joint venture. At the time the company have done the acquisitions it should show all the details of the income and expenses which is been incur in regards of the valuation of the asset and liabilities of the company. Combination of the financial transaction of both parent and subsidiary company together able to make the consolidated financial statement as it should record all the items of both company (Lee and Parker 2014). This method drawback is that it does not take considerationabouttheparentcompanyinvestmentinthesubsidiaryorthe subsidiary which hold some sort of share in the parent company. This method also stops the intra group transaction so it able to make the accounting more easy for the company and also the financial user can able to understand the transaction more easily and effectively. As per the different accounting standard it say that the company should able to recognise all the income and expenses which are of the subsidiary company which can affect the asset and liabilities should taken care at the time of acquisition of the company. The standard also state about the valuation of the goodwill which the company should record the same in the financial statement of the company (Aasb.gov.au 2019).. So it says it have to select the one which is higher of the two limits as: A – The aggregate of Transfer which is been based upon the standard in related the fair value of acquisitions The basic of the non-controlling interest as per the standard The total fair value of the equity interest in the subsidiary of the parent company at the time of acquisition. B -The asset and liability which is been acquired as per the specific standard. So an example can teach it more easily as the company JKY Limited started its business on 1stJune 2018., in which it invested $30 million. So it will pass the entry as
5 Corporate Accounting So after that the company have invested $20 million to get the share of FAB Limited so it will pass the entry as As per the book of FAB Limited is been concern it will pass the journal as Section B The entity which is similar should not do any transaction in regards of the economy in the organization structure. To make a fair and proper consolidationthe company have to remove all the transaction which have occur in between the parent and the subsidiary company so that it can able to make a proper amount of the consolidated statement. As per the accounting standard, the company have to remove all the things from the accounts as it have to remove all the intra group transaction and also the income and expenses which are been spend upon the same (Müller 2014). The intra group transaction can be any transaction in between the parent company andthesubsidiary company sothat it should removeall the transaction which has any connection with both the company. The company is having many transaction in regards of the subsidiary so it have to do an reverse entry so that it can able to do null and void all the entry which arebeendoneinbetweentheparentcompanyandthesubsidiarycompany (Aasb.gov.au 2019).. The data which is been provided can clear the thing that the company JKY Ltd have made some sort of purchase of inventory form its subsidiary company so the inventory which is been purchase by the company is also have sort of profit which is been charged by the subsidiary company upon the JKY Limited(Robinsonet al., 2015). The company is unable to make it as an income as it does not have done the sale deal with the external party so there is no sale have occur so the company is unable to record as an income in their financial accounts. As per the accounting standard it say that an consolidated statement should be from any unrealised profit so the company have purchased the inventory so it have to remove the unrealised profit which is been associated in the inventory and show remove the same form the consolidated financial statement. To make it more simple the accounting standard said that if there is any gain or loss from the transaction between the parent and the subsidiary company so it should directly to be recorded as an non-current asset in the financial statement of the company and should removed all the part of purchase it have in the inventory of the company. From the above points this can clearly say that as the subsidiary have sold some amount of the inventory so that part of inventory must be having the profit which the company charges as no company sale their product without adding the profit percentage upon it so the inventory which JKY Ltd have purchase also contain the amount of profit in it. It is fair to add the portion of profit if the company JKY
6 Corporate Accounting Limited could have able to generated cash for the part of inventory which they have purchase from the subsidiary and also add a good sign to the group profit of the company but as the case suggest it does not able to enter into agreement of the sale of the inventory which it got from the subsidiary company. As the company have not able to sale but the subsidiary have recorded the profit which they have earn form the parent company as a result the overall group profit have an unrealised profit in its which is not a good sign for the company overall profit. As due to the subsidiary the company overall profit is been overstated and it show an increase value so this can do fraud with the company financial user as they are not aware about the overstated profit by the company. So this above point can be more clear with an proper example as it can be seen that the company have purchased the good so let assume the amount was $50000 which they does not able to sale in the current period and a result it able to show in the end of the year. The subsidiary company holds a 50% profit in the goods they have sold to the JKY Limited so the profit which the subsidiary company could able to earn is $16667 (50/150* $50000). So this clear that the group profit of the company is been overstated by $16667 so the company have to make an proper adjustment entry in regard to eliminate the part of profit so the entry will be Consolidated Profit AccountDr$16667 To Consolidated Inventory Account$16667 So this entry rectifies the error which was done by the subsidiary company in regards of the unrealised profit for the firm. So it show that each company should remove the unrealised profit which they have earn so it show also what is to be done in regards of the unrealised gain related to the non-controlling interest of the company. To record the gain there can be various method as the company can able to record the gain in the non-controlling interest so that it will null and void all the profit which the company is able to get from the selling of their product. Otherwise they can able to go for that they does not record any amount of the profit so that it will not affect the overall profit of the group and the non-controlling should be there in the capital and reserve which the company get from the acquiring the subsidiary company. Section C Effects of the NCI disclosure requirement in regards to the separate item in the process of consolidation: Thecompanyshoulddothepresentationofthenon-controllingasset differently and separately in regards of the interest which they have earn form the equity which they hold in the parent company. The company which is acquiring the other company cannot able to record anything related to the Non-controlling Interest as it is directly related to the equity of the subsidiary company so this should not be recorded in the financial statement of the parent company (Aasb.gov.au 2019).. This section of the standard help the parent company to get more knowledge about how they should record each kind of interest which they are able to get from its subsidiary company and also able to know how they should report in the consolidated financial statement so that there is not error of accounting is been done by the parent company. As the consolidated statement is been concern it show that the entity shouldreportnon-controllinginterestdifferentlyasitshouldalsotakeinto consideration about the subsidiary interest as it hold some amount of equity in the
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7 Corporate Accounting parent company so it should report the same in regards of the prescribed standard. The company should able to know the amount which is to be recorded by them in non-controllinginterest.Thisseparatepresentationisbeenprescribedbythe account standard so that it can able to make the consolidation accounting simple and as the adjustment are very easy and proper notes is been given for all the entry so this help them to give a proper understanding of the financial statement to the stakeholders of the company and also to the investors which own some sort of interest in the group business of the company (Aasb.gov.au 2019). The parent company hold some sort of power upon the subsidiary company as it able to control the management and the business of the subsidiary so it been called as equity transaction it means the ownership which the parent company have upon the subsidiary company. This principle is not there if the parent company does not able full control over the business of subsidiary company. So if the holding power is been changed it means that is some sort of change which have came in the equity which the parent company holds in the subsidiary company so it should reported as it will affect the controlling and non-controlling interest as it is been done by the company so this should be immediately recorded as the shareholder in regards of the parent company. Effects of the change upon the disclosure in the annual report: As per the accounting standard an company should the investment which they done or invested in the joint venture as in cost, it should give proper details of all the transaction which have happen in regards of the consolidation of the financial statement of the company. It should show all the important accounting principles and policy which they used and also the judgement and the estimation which they have done in some point so that the user can get a transparent information about the process of the consolidation. Company should disclose all the material information and the nature of the transaction in regards of the subsidiary company in their annual report. As per the accounting standard each company should have same accounting year ending so that an proper analysis can be take place in the two but if there is difference in both date that it should be recorded and proper justification should be given as when there is such a change in the accounting date of both the parent as well as subsidiary company. As per the rule an company should hold a prescribed percentage upon the subsidiary company so if the company is not able to meet the said criteria that it should disclose it in the annual report so that the financial user can be aware of the pare t company holding in the subsidiary company and able to take thier decision accordingly. Conclusion The above have concluded as how the consolidation method is to be carried by the company and it show about the different methods which can be used by the company in regards of the consolidated accounts. It also show about the intra transaction affect upon the consolidated financial statement and how the company should able to eliminate the unrealised profit from the firm , it also show about the non-controlling interest and how it should be disclosed by the company in their annual report.
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