Business Restructuring and Acquisition: Accounting Standards and Methods

This report discusses the various aspects of business restructuring and acquisition, including the methods of acquisition, accounting for parent and subsidiary companies, and disclosure requirements. It also addresses the issues related to unrealized profit. The report focuses on the Australian Accounting Standards and their implications for companies involved in business restructuring and acquisition.

Corporate Accounting

Executive Summary
The given report emphasizes on various aspects related with the business restructuring of the
company by the way of takeover of another company. Australian Accounting Standard 3, 127,
and 128 deals with the business restructuring of the company. It contains the several aspects
related with the method of acquisition, accounting for parent company and subsidiary or joint
venture Company, and the disclosure requirement by the company in the financial statement.
This study also contains the issues regarding the unrealized profit by the company.

Table of Contents
Introduction......................................................................................................................................4
Part A...............................................................................................................................................4
Part B...............................................................................................................................................6
Part C...............................................................................................................................................8
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

INTRODUCTION
The company can make its business restructuring by way of acquisition of shares or interest in
other company. For the maximization of the profit or requirement of the company, sometimes the
company makes the strategy to make the agreement to the takeover of other company by giving
the value of assets and liabilities. Australia, the Australian Accounting Standard Board prescribes
the method of acquisition and its accounting in the books of accounts for the Acquirer Company
as well as Seller Company. The present study revolves around the method of acquisition,
accounting for the company, intra group transaction, and several disclosure requirements as per
the accounting standard of Australia.
PART A
The present case is related to the acquisition of the other company, named as FAB Ltd by JKY
Ltd. Since there are two methods which can be applied by the company while making the
acquisition strategy. Application of the acquisition strategy depends on several factors. With this
aspect, in this case, one of the directors of JKY Ltd arguing to apply the purchase or acquisition
method as an acquisition strategy. The supportive argument given by the director is that FBC
Ltd, is the listed entity and by acquisition, strategy company can exercise whole control over
another company. On the other hand, another director arguing to use the significant influence as
the best option of acquisition. In this strategy fully control over the FAB Ltd cannot be exercised
by the JKY ltd.
In Australia, the Australian Accounting Standard Board issued Standard, which contains about
the method of business structuring. According to Accounting Standard 3 of Australia, a company

can make the control over other entity due to the business acquisition, which assists in a
combination of a different entity into sole reporting entity (Taylor, Richardson, and Taplin,
2015). Further, the definition of significant influence is prescribed under the Australian
Accounting Standard 128, which states that, if the company obtains 20% or more than 20%
power of voting in another company, then it is considered as that first company acquire the
significant influence right over the other company although full control is not acquired by the
significant influence method. On the other hand, in the purchase method company obtain the
100% control over the other company (Standard, 2015).
By considering both strategies, it is advisable to JKY ltd, to use the purchase or acquisition
method as a business strategy. Since the FAB ltd is the listed entity and operating in the same
industry. Therefore it is beneficial for a company to acquire the full control over the FAB ltd by
application of the acquisition method.
Further, key differences between the equity method of accounting and the consolidation method
of accounting are prescribed below –
 Australian Accounting Standard 10 deals with the consolidation method of accounting.
At the time of consolidation of the accounts, assets, liabilities, income, expenses, and
cash flows of companies combined along with the accounts of subsidiaries. In the
accounts of the parent company, the carrying amount of investment must be
counterbalanced with the associated part of the equity in each subsidiary. Further,
intragroup items such as assets, liabilities, income, expenses, or cash flows associated
with the activities carried among the companies of the group should be removed (Saha,
Morris, and Kang, 2019). Further, Australian Accounting Standard 128 says that, if the

company acquires significant influence over the other company, then at the cost amount,
investment is recorded initially. Further, on the basis of share in the profit or loss, the
carrying amount of investment adjusted accordingly (Malone, Tarca, and Wee, 2016).
 As per the consolidation method, a proportionate amount of assets, liabilities, income,
expenses is recognized as share capital held with a minority interest. On the other hand,
as per the equity method, the company which acquires the significant influence, combines
its books of accounts up to the acquisition of the control, consisting of reserves and
surplus, and equity share capital (Tran, 2015).
The numerical example of a consolidated method and equity method is given below –
If a company acquire 25% shares in a company, valuing of one Million. As per the equity
method, in the balance sheet, 25% of the one million, is recognized by the company which
250000. Further, Investor Company also recognizes the profit in the share of Investee
Company. For example, if the company declares 400000 as a profit, then the profit
recognized by Investor Company is 25% of the 400000, which are 100000. Further, the value
of the asset also enhanced by the amount of 100000.
On the other hand, if the company acquires whole control, then in such case 100% profit is
recognized by the investor company. For example, the profit of Investee Company is 400000,
and the profit of Investor Company is 600000, then in such a case, the total profit of Investor
Company is 1000000.

PART B
The given problem is related to the intragroup transaction. In this problem, it is stated that the
partially owned subsidiary company provided the professional services and also sold the
inventory to the parent company JKY Ltd. The issue is whether the profit on the sale of
inventory and providing the services to the parent company is deducted along with the impact on
non-controlling interest during computation of the year profit of the subsidiary company.
The activities among the group of companies considered as intragroup activities, which must not
be recognized in the consolidated financial statement (Zhou, Birt, and Rankin, 2015). Australia
Accounting Standard 127 deals with the intragroup transaction, which states that income,
expenses, and dividend connected with the intragroup transaction should be eliminated in full
(Craswell, 2016). If any profit is generated on the sale of asset (inventory or fixed assets), are
eliminated in whole. Further, Australian Accounting Standard 10, also states that profit generated
from the intragroup transaction should be removed while making the consolidated financial
accounts (Chapple, 2018).
There may be a case that Parent Company sold its goods to a subsidiary company and vice versa.
On the basis of this, intragroup transactions are bifurcated into two categories, such as
downstream activity and Upstream Activity. If the parent company sales its inventory to a
subsidiary company, then it is regarded as a downstream transaction, and in this case, profit is
generated by the parent company (Khoo, Durand, and Rath, 2017). Thus, while preparation of
the consolidated financial statement, intercompany revenue and cost of sales because of the
intragroup activity must be removed from the consolidated profit and loss account, similarly, in
the balance sheet also intragroup items such as debtors, creditors, and others should be
eliminated (Elhawary, and West, 2015).

On the other hand, if the subsidiary company sales its goods or assets to the parent company,
then it is considered as upstream activity (Chapple, 2018). In this case, profit is generated by the
subsidiary company. At the time of consolidation of the financial statements items which belongs
to the intragroup transactions such as revenue, cost of sales, debtors, and creditors should be
eliminated. Along with this, if the company sold full inventory, then all profit is realized, and
there is no requirement on the elimination of the unrealized profit (Standard, 2015).
Moreover, the above description can be understood by example in a better way. For example,
ABC ltd Company acquires the 35% share of one million company, named as XYZ Ltd. XYZ
company sold its goods to ABC ltd for 60000, whose cost is 40000. The total profit earned by
XYZ Ltd is 20000, that is 33.33% on the sale price. If the ABC ltd did not sell the inventory of
amount 15000, then it included the unrealized profit, which is 15000*33.33% = 5000. Therefore
the proportion of the unrealized profit for ABC Ltd is 5000*40, which is 2000.
PART C
The given problem is related to the finalization of the consolidated financial statement.
According to the Australian Accounting Standard 127, Non-Controlling interest should be
presented as a distinct item of the equity of the owner. The accounting standard prescribes the
guidelines and procedures for the method of accounting related to the non-controlling interest,
which is stated in paragraph B94-B96. As per the paragraph B94, in the profit or loss statement,
a company must allocate the profit or loss to the minority group as well as ownership of the
parent company (Perera, and Chand, 2015). In the same way, income related to the
comprehensive profit should also be allocated to the minority group and ownership of the parent
company. It is allocated even if the result shows the loss balance in the non-controlling interest.

Further, in case if the subsidiary company possess the preference shares, and are obtained by the
minority group, then as per the paragraph B95, the company should compute the income or loss
only after the adjustment of the amount of dividend (Maroun, 2015). This adjustment is required
by the company even if the dividend is declared or not declares on the preference shares of the
company. Further, if the financial statement of the subsidiary company is used for the
consolidated financial statement of a specific date, which are not similar to the date of
consolidated financial statement, then it is compulsory for the company to make proper
disclosures regarding the date of period of financial statement of the subsidiary company and the
justification for the use of different period (Vander Bauwhede & et al. 2015).
As per the Australian Accounting Standard 101, presentation of the financial statement, a
company should disclose the income or loss, or any other comprehensive income in the part of
the profit or loss and some of the total comprehensive income. Further, if the separate income
statement is made by the company, then in such case it is not required by the company to present
income statement along with the comprehensive income statement (Wagenhofer, 2016) again.
Along with the income statement, and comprehensive income statement, the company should
also disclose income or loss for the period directly allocated to non-controlling interest and
owners of the parent company. Further, in the comprehensive income statement, the share of
non-controlling interest and the share of interest of the owner of the parent also disclosed by the
company. Apart from this, the disclosure requirement also stated in the Australian Accounting
Standard 12, which states that, company should make all disclosures by which the user of the
financial statement can analyze the composition of the group, and interest reflected by the
minority group in the transactions of the group . Further, in the cash flow and activities of group,
interest obtained by the minority group, company is required to made the disclosure of each

subsidiary that held non-controlling interest significant for the reporting company and also show
the name of the subsidiary company, main business place of the subsidiary company, share of
ownership obtained by non-controlling interest, voting percentage acquired by the non-
controlling interest and many other related aspects.
Apart from the above aspect, at the time of consolidation of the financial accounts, it is required
by the company to make some changes, by which the financial statements depict the true picture.
Some changes are prescribed as below –
 Policies of the accounting method should be followed by the company consistent. It is
compulsory for the parent company and subsidiary company to comply with the uniform
accounting policies for similar activities, or events. If the policies of accounting followed
by the company are not consistent with the parent company and subsidiary company, then
an essential adjustment should be made while preparing the consolidated financial
statement. All income and expenses, from the date of acquisition, should be taken into
accounts of the consolidated financial statement. Further, up to the date of cessation of
the control over the subsidiary company, all income and expenses are considered while
making the consolidated financial statement.
 The period of accounting followed by the subsidiary company and parent company must
be the same. If there is any difference in the accounting period of the subsidiary company
and parent company, then a necessary adjustment should be made at the time of
consolidation of the financial accounts, and the period of accounting should be similar
with the followed by the parent company. Although the difference in the period of
accounting should not be more than three months in any case.

CONCLUSION
On the basis of the above analysis, it has been observed that the Australian Accounting Standard
Board approved the method of accounting at the time of takeover of any company. The standard
describes the norms and rules of takeover and the requirement of the disclosure in the financial
statement of the company. Further, it has also been observed that the company can apply the
purchase or acquisition method and equity method as per its strategy. Along with this, the
company should eliminate unrealized profit in its inventory, by which the profit of the group
cannot be overstated.

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