Corporate Accounting: Takeover Methods, Intra Group Transactions, Consolidated Financial Statements

This report discusses the takeover methods of JKY Ltd. for FAB Ltd., treatment of intra group transactions in the books of accounts, and preparation of consolidated financial statements as per AASB guidelines. It also explains the difference between purchase/acquisition method and acquiring substantial interest in the target company, and the methods of consolidation. The report emphasizes the importance of adhering to AASB guidelines for presenting unbiased financial statements.

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Corporate Accounting

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Executive Summary
The company JKY Ltd. wants to take over FAB Ltd. Its directors argued regarding
the way of takeover the company, as one of its directors wants to take over the
company by purchase/ acquisition method and another director was proposing to
take over the company by acquiring significant influence in JKY Ltd. The difference
between both the methods is very basic as there is only difference that is of
controlling interest between both the methods. Next agenda is regarding the
transaction of sale of inventory from subsidiary company to parent company and its
treatment in the books of parent company. Lastly the consolidated financial
statements of company are being organized as per the guidelines of AASB 127
where NCI need to be shown as a separate item under the equity capital head. All
the analysis is to be as per guidelines provided by AASB as applicable.

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Introduction:
This report aims at business combination of company JKY ltd. as it is about to take
over company FAB ltd. and they want to analyse the best method to take over the
company between purchase/ acquisition and by acquiring substantial interest in
company FAB Ltd. The next agenda is about recording the profit from sale of
inventory in the holding companies’ books of accounts and its effect on calculation of
non-controlling interest as it needs to be eliminated or shown in the books of
accounts. Lastly the company wants to prepare its consolidated books of accounts
and the changes that will be needed in the consolidated financial statements as the
subsidiary company recorded its assets on historical cost and they also need to
show NCI as separate item of owners’ equity and all the adjustments need to be
done as per the AASB requirements.

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Part A
In the board meeting of JKY Ltd the agenda was regarding the takeover of FAB Ltd.
the directors of the company have different opinion regarding the method of takeover
of FAB Ltd as one suggested to take over by purchase/acquisition method and
another wants to take over by acquiring the substantial interest in FAB Ltd. As per
AASB 3, Business Combination there are two methods to takeover any company as
one is purchase/acquisition method and another one is by acquiring substantial
control in the company. In purchase/ acquisition method the liabilities and assets are
assessed at their fair value and the difference amongst purchase consideration and
fair value of assets is recorded as goodwill\ share capital in the company’s books of
accounts (Robinson et al.,2015). As per AASB 10 Consolidated Financial
Statements if company wants to acquire substantial interest in the target company
then they need to acquire its share from its existing shareholders and this will be
recorded as investment in the parent companies’ books of accounts and target
Company needs to maintain their own books of accounts (Iatridis, 2010). The
company can take substantial interest in the target company by treating as its
associate or take the acquisition as a joint venture. In this method company have the
right to take part in the major decisions of the target company and needs to maintain
its consolidated financial statements. If company acquires the target company by
purchase/ acquisition method then they have tax benefits as the assets of the target
company will become part of the books of accounts of the parent company and the
parent company will get tax benefit from the depreciable assets of the target
company (Edwards, 2013). As per AASB 3 Business Combination there are two
ways to record the consolidation by equity method and by proportionate

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consolidation method. In proportionate consolidation method it is supposed that the
income and expenditure, assets and liabilities accrue in percentage to the share
capital held with the non-controlling interest or with minority interest. All the assets
and liabilities of the subsidiary company are shown in the books of accounts of the
parent company as parent company have substantial interest in the affairs of the
target company. In the equity method of account, the parent company accounts for
only and consolidate the books to the extent of its control in excess of the share
capital and reserve of the subsidiary company. The choice between the two methods
depends upon the company’s decision if company wants only to invest in the target
company then equity method is better and if the company wants to exercise
significant control over the board of target company then proportionate consolidation
method is better (Jones,2011). Under the consolidation method the subsidiary and
parent company are shown in the single set of books of accounts but in equity
method the parent company only shows the investment which it makes in the
subsidiary company.This is also known as one-line consolidation. The method can
be used is based on the parent’ company’s ownership and its degree of influence in
the subsidiary company.
We can illustrate the difference between two methods with help of an example:
Suppose you buys 50% stock of acompany at $ 300000 and the company in which
you had purchase shares has declared profit of $160000 your own profit for the year
is $ 250000.
Under Equity method: you need to report $300000 as an asset in your balance
sheet. Similarly, your profit for the year will be $250000+ 50% of $160000 =$330000.
Under proportionate Consolidation Method:
Your profit figure will be $250000+ $160000 = $410000

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Part B
In this case a partially owned subsidiary sold inventory at profit and provided
services to its parent company. The company wants to account this transaction in
the light of AASB 127 and wants to know its impact on non-controlling interest and
on companies consolidated financial statements (Doupnik and Perera,2011). As per
AASB 127 Consolidated and Separate Financial Statements the transactions
between holding and subsidiary company are called intra group transactions and if
any profit/ loss is derived out of these transactions then that is called as unrealised
profit/ loss and that unrealised profit/ loss need to be removed in full from the
consolidated financial statements. The unrealised profit/ loss means the profit/ loss
which is not actually earned but its presumed at its earned as the transactions
between holding and subsidiary are eliminated in full the same will be done will the
unrealised profit/ loss from those transactions (Van Greuninget al., 2011).It is the
liability of the directors of the company to follow up that the transactions regarding
intra group transfer are duly recorded and its treatment is properly done in the books
of accounts of the company or not.
The company can record the profit that is derived from the transaction if the
inventory is not lying in company’s stock at the end of the year that is on the date of
presenting financial statements (Howieson, 2013). In the current stage the inventory
is still held with the holding company at the time when balance sheet is prepared and
as per AASB 127 in the consolidated financial statements the entities are treated as
a group and the profit is not actually realised as the accounts are grouped together
and shown as a single set of books of accounts (Hoyle, et al., 2015). The transaction
between the group is treated as the transaction with self and no profit can be derived

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from self-transactions. Hence, the profit which is derived by the subsidiary company
from the parent company by selling inventory to the parent company and by
providing professional services to the parent company will be treated as unrealised
profit as in real the profit does not exist because the accounts of the subsidiary and
the parent company are grouped together. So, this unrealised profit will be
eliminated in the consolidated books of accounts of the company and will be
deducted from the subsidiaries reported profit. The reduction of group profit will be
assigned amongst the parent company and non-controlling interest in the ratio of
their interest. As per AASB 10 Consolidated Financial Statements, on consolidation
of financial statements the unrealised profit on closing inventory will be eliminated
from the group’s profit and the closing inventory of the group will be recorded at cost
in the consolidated financial statements (Edwards, 2013). If the company does not
properly follow the above-mentioned treatment then fines and penalties will be
imposed on the company and then company will be legally penalised.
The above point we will further explain with the help of an example:
FAB holds 60% interest in its subsidiary company. Subsidiary company sells
inventory to FAB Ltd for £15000 and makes profit of £3000 on the sale of inventory.
Here we assume that the inventory is still held in stock at the balance sheet date.
FAB needs to eliminate 100% of unrealised profit. Therefore, the inventory will be
recorded in the group’s balance sheet at £15000- £3000 = £12000 and the
consolidate income statement will show a reduction of £3000 in profit. This reduction
of group profit of £3000 will be allocated between parent company and non-
controlling interest in the ratio of 60:40.

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Part C
The company is now finalising the consolidated financial statements and AASB 127
requires that NCI is shown as a separate item of owners’ equity and other
comprehensive income is also allocated to NCI these are all as per the compliance
of AASB. As per AASB 127 Consolidated and Separate FinancialStatements, the
consolidated financial statements of the subsidiaries and parent company are
combined line by line as the assets are clubbed together and liabilities and
investments are clubbed together, the share capital comprises of equity capital
reserves and surplus and non-controlling interest.For presenting the consolidated
financial statements following steps are taken:
 The carrying amount of investment in each subsidiary and the parent’s equity
share are eliminated
 Minority interest in the profit and loss of subsidiaries for the reporting period
are identified (AASB, 2014).
Intra group balances and transaction that derive any unrealised profit or loss are
eliminated in full at the time of preparation of consolidated financial statements
(Iatridis, 2010). The financial statements of holding and subsidiaries are prepared on
the same reporting date. The consolidated financial statements are needed to be
organised using same accounting policies for the transaction of same nature. The
non-controlling interest shall be revealed as a separate item in the consolidated
balance sheet under the head equity and reserves. Consolidated financial
statements also form big part of the companies audited books as they show a clear
and fair view of the company’s financial position and net worth of the company
(Robinson and Henry et al., 2015).

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The statement of other comprehensive income is shown as separate from income
statement in the company’s books of accounts. The entity shall also present these
items in addition to the profit or loss and other comprehensive income sections, as
distribution of profit or loss and other comprehensive income for the period
1. Profit and loss for the period attributable to:
i) Owners of the parent
ii) Non-controlling interest
2. compressive income for the period attributable to
i) Owners of the parent
ii) Non-controlling interest (Flower, 2018).
These are the required steps that the company needs to take for making the
consolidated financial statements and for the presentation of company’s financial
statements unbiased. The company needs to adhere to the above-mentioned rules
to make sure that the financial statements are in compliance with the AASB
requirements for correct presentation of financial statements (AASB, 2014). If
company wants to change any of the above-mentioned criteria of presentation of
financial statement then the same needs a disclosure in the books of accounts
under the head notes to accounts as they ease the understanding of financial
statements with the help of working notes so that the reader of books of accounts will
not face any problem in knowing the company’s policies and rules of the company.
There need to be proper explanation for each and every single policy that company
is following to get a true and fair view of its financial statements. If the company fails
to follow the above-mentioned disclosure requirements then fines and penalties will
be imposed on the company (Nobes, 2014).

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The company needs to disclose in its books of account the accounting policies
followed by the company and by its subsidiaries as well if there is any change in the
accounting policies of both the subsidiary and the holding then the same needs to be
disclosed with proper explanation and because of that if there is any changes
needed in the consolidated financial statements than that is to be done as per the
AASB requirements. These are the necessary steps to be taken by the company for
the true and fair view of the consolidated financial statements of the company. The
company also need to disclose the percentage of holding in its subsidiaries in its
books of accounts (Fridson and Alvarez, 2011).
The disclosure of NCI as a separate item in the equity capital of the company will not
make any major change in the companies accounts because as per the
requirements of AASB companies need to show NCI as a separate item in the
company’s financial statements to present a true and fair view of company’s financial
position (Nobes, 2014). Other comprehensive income and its division between
parent and non-controlling interest also forms a major part in the reporting of the
company’s books of accounts as the company has to show the division as per the
requirements of AASB (AASB, 2014).
The company also need to clarify in the notes to accounts about the intercompany
transaction and hoe the treatment is done by the company regarding the same as
the transaction can be of current assets and non-current assets and any unrealised
profits and gains that are derived from these transactions are eliminated by full
(Fridson, and Alvarez,2011). The transaction nature does not affect its treatment the
sale/ purchase made by subsidiary to holding and the sale and purchase made by
holding to subsidiary has the same treatment because the books are consolidated
and both the companies are in the same group and there is no profit and loss

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between the grouped companies. The company need to fulfil properly its disclosure
requirements if the company fails to do so then fines and penalties will be imposed
on the company.
Non-controlling interest gets affected from each transaction between holding and
subsidiary as the holding portion is eliminated from the parent’s profit and loss and
the subsidiaries portion is element from non-controlling interest. The company needs
to disclose that the transactions between holding and subsidiary are duly addressed
and all the required changes are made in the books of accounts of the company as
per by laws of the company and as per the requirements of AASB (AASB, 2014).

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Conclusion:
The above discussion was regarding the business combination and the methods to
be used for accounting the consolidation as there are two methods equity method
and proportionate consolidation method the difference between two is about the
substantial interest of the holding company. The transactions between subsidiary
and holding company are intra group transactions and any profit/ loss resulting from
these transactions are removed from the books of accounts of the consolidated
financial statements. The proportion of deduction will be between the ratio of
substantial interest of holding and subsidiary. The company needs to show NCI as a
separate item in the equity capital head of balance sheet as per the requirement of
AASB and also the proportion of other comprehensive income between parent and
subsidiary is also need to be shown as separate from the income statement of the
company. If company fails to follow the above-mentioned requirements for
consolidation then fines and penalties will be imposed on the company. The
company has legal obligation to follow all the rules regarding consolidation of
financial statements.

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