Corporate and Finance Accounting

This document discusses the corporate takeover decision making process and its effects on consolidated accounting. It explains the concepts of consolidation accounting and equity accounting. It also covers intra-group transactions and disclosure requirements in corporate and finance accounting.

Running head: Corporate and Finance Accounting
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The corporate takeover decision making and the effects on a consolidated accounting
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Corporate and Finance Accounting 2
Executive summary
While carrying out merger and acquisition, companies can decide to either use
direct purchase or long-term term acquisition strategy. Depending on the strategy
chosen, the company can choose between consolidation accounting and equity
accounting (Segarra, 2019). The company should also be aware that in intra-group
transactions some business activities are excluded from the consolidated financial
documents. Companies have a responsibility for disclosing relevant information to the
users of accounting information. Finally, non-controlling interests are supposed to be
entered separately within the consolidated financial documents.

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Table of Contents
Executive summary...........................................................................................................2
Table of Contents..............................................................................................................3
Introduction........................................................................................................................4
Part A.................................................................................................................................4
Part B: Intra group transactions.........................................................................................5
Part C: disclosure requirements........................................................................................6
Disclosure information required.....................................................................................7
Non-controlling Interest (NCI).........................................................................................7
Non-controlling interests in group activities and cash flows..........................................8
Conclusion.........................................................................................................................8
References.........................................................................................................................9

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Introduction
Acquisition of shares of another company is one of the many ways through which
companies can increase their market shares. This paper discusses some of the key
concepts that need to be understood before carrying out the acquisition process. It also
highlights the standards that must be followed when carrying out acquisition. There are
two main methods of acquisition; these methods include the direct purchase and long
term acquisition (Zhou &Guillén, 2019). Consolidation and equity accounting are the
main accounting method used in the preparation of financial documents. When handling
intra-group transaction some transactions are eliminated and not included in
consolidated statements. Disclosure is usually very important as it provides users with
relevant information to enable them to make an informed decision.
Part A
Companies decide to carry out a merger, takeover or acquisition for many
reasons. One of these reasons is to enable them increase their market share, improve
profitability, reduce the level of competition in the market, improve their financial
muscles and also take advantage of economies of scale. Economies of scale is defined
as the benefits that a business gains as a result of large scale operation. There are two
main methods that JKY can use when carrying out their takeover. These methods are
direct purchase and use of long term strategy (Lee, Byun& Park, 2019). The former
method takes a longer period of time while the latter method is instant. Depending on
the method of acquisition that a company chooses to use, there are two methods of
accounting applicable in each case. These methods are consolidation accounting
method and equity accounting method.

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When a company acquires more than 50% of the shares of another company,
then the financials of the acquired company becomes part of the purchasers' financials.
In this case, the method of accounting applicable is consolidation accounting.
Consolidation accounting can, therefore, be defined as a method of accounting which is
used when a company acquires majority of the shares of another company.
Consolidated accounting is used because the company that has been acquired is
counted as part of the company that has acquired it. The company that has been
acquired is known subsidiary while the company that has acquired the other is known
as the parent company (Mazouz& Zhao, 2019). The statement prepared from
consolidated financial information is generally referred to as consolidated financial
statements. These combined statements contain a financial document of both the
parent companies and the company that has been acquired. The income earned, the
financial obligation not met, and liabilities accrued by the acquiredcompany, forms part
of the content to be included in the financial documents of the parent company.
To illustrate how the consolidated accounting method works, we will give an
example. Assuming that company JKY acquires 52% of the shares of FAB Limited and
JKY makes a profit of $120,000 and FAB Limited generates a profit of $30,000, the
reported income of the parent company will be record as a total income of $150,000.
On the other hand, when a company acquires less than half but more than a fifth
of the shares of another company, then the method of accounting used is called equity
method. We can, therefore, define equity accounting as a method of accounting that is
used when preparing the financial accounts for the holdings of a company that acquires
a minority of the stake of the other company. The company purchasing the minority

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shares is referred to as an investor (Dissanaike, Drobetz, Momtaz&Rocholl, 2018). An
investor invests by purchasing some of the shares of a company with an expectation of
making a profit.
If in case JKY limited acquires 30% of the share belonging to FAB limited, then,
in this scenario the company takes control of a minority of the shares which are less
than 50%. The 30% acquisition is recognized asone of the properties of the company in
the accounts of JKY limited. When FAB limited reports profit, JKY will record 30% of the
income as their income in their financial statements. If for example, FAB reports an
income of $300,000 at the end of the year, then JKY will record $30,000 as earning in
the income statement. The choice of the method of accounting to be used will depend
on the type of relationship that between two entities.
JKY can use any method of acquisition but my suggestion would be instant
acquisition of a majority of the shares of FAB. This will give them an opportunity to have
control over FAB.
Part B: Intra group transactions
In the preparation of intragroup accounts there are several guidelines which need
to be considered. Intragroup accounts are the accounts prepared when a parent
company acquires another company thus making the company that has been acquired
tobecome a subsidiary (Liu &Mulherin, 2018). Once acquisition has taken place, the
parent company becomes the dominant shareholder in the acquired company. The
parent company owns more than half of the total shares of the subsidiary company.
AASB 127 sets up standards to be followed when preparing and presenting

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consolidated financial documents for a number of firms which are under the
management of the parent entity and when preparing accounts of the investments
undertaken by the subsidiary.
The accounting regulation dictates that intragroup transactions should not be
considered when group accounts are being prepared. These intragroup transactions
include all the account payables, claims, income and expenditure that involve business
activities among entities that are part of a consolidation(Allen, Ramanna,
Roychowdhury, 2018). The regulation also highlights that gains and losses are not
supposed to form part of the intragroup accounts. For elimination to be granted, the
value involved should be large enough to cause a material difference.
Non-inclusion of the intragroup group transactions helps to simplify the work of the
preparer of financial documents. It also helps in the prevention of the challenges that
may result if the intragroup transactions are to be included in the financial documents.
Elimination is only applicable to entities which have been consolidated. Subsidiaries
which are not part of a consolidation should be included in the elimination. In the section
below this paper will discuss how unrealized profit in inventory, property plant and
equipment and unrealized losses are treated.
a. Unrealized profit in inventory
If JKY is composed of a group of entities and then sells goods to company B, then, the
profit made is recognized as the group’s profit. If incase the accounting year ends and
company B still holds the goods as inventory, then, in the accounts of the JKY, the profit

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will be recorded as not yet earned until they are sold outside the group. When
consolidation is done, the unrealized profit in inventory is eliminated.
b. Unrealized profit in property , plant and equipment
When there is profit that maybe unrealized when there is an intra-group transfer of asset
that will remain in the business for a long time such as a building, then, the unrealized
profit is discarded and should not form part of the consolidated financial documents
prepared. It is treated the same way as unrealized profit in inventory. Below is an
illustration of unrealized profit in inventory.
Example
Suppose JKY Limited hold 70% subsidiary of FAB limited. During 2018, JKY sold goods
whose cost was initially $ 100, 000 to FAB for $ 120,000. At 31st December 2018, FAB
continues to hold 50% of those goods as inventories. The amount of inventories held by
FAB is inclusive of an unrealized profit of $ 10,000. This profit is subject to elimination
without considering the any non-controlling cost that maybe there.
c. Unrealized losses
Intragroup losses that bring significant differences to the group’s accounts should not
form part of the consolidated financial documents.
In the scenario provided for the case of company JKY, the profit obtained from the sale
of inventory should not be deducted from the subsidiary’s reported profit
(Laux&Stocken, 2018). The profit should be completely eliminated. Also, the profit

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obtained from the provision professional services should equally not form part of the
report consolidated. All these are the requirements of the Australian Accounting and
Standards Boards that entity are bound to adhere to. Thus every entity is bound to
strictly follow the standards as stipulated by the regulator.
Part C: disclosure requirements
AASB 127 stipulates that some information is necessary and therefore entities
participating in acquisition should make it plain and known. Disclosure of information
helps different users of accounts in the evaluation of the nature and the risks that are
found in an entity and the effects of those risks in the financial performance of an entity.
Some of the users of the information found in the financial documents include the
shareholders, investors, managers, community, the government and the auditors. For
the above objective to be met, an entity is supposed to ensure thatthe assumptions
made in the determination of the type of joint arrangement in which it may have interest
in and the nature of the entity’s interest in another firm or arrangement is made known
(Berger, 2018). AASB also requires entities to give all the information on the interests
the entity may have in the subsidiaries, joint arrangement and associates and other
independent entities that are not under the control of the entity. An entity should also
meet the requirements that help in the determination of whether an organization
qualifies to be called an entity or not.
Entities should be cautious when preparing financial statements. They should
make sure that the financial documents provide all the important information required by
the users to help them make informed decision. Two much information or too little of

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information should be avoided as the two extremes are not helpful to the users.
Including a lot of unnecessary information may confuse the users of accounts. This is
because some of the users of the financial information do not the technical expertise of
interpreting financial information.
On the other hand, insufficient information may contribute to poor decision
making. This is because some important information may be omitted thus influencing
the quality of decision made. The standards on disclosure are applicable to several
entities. These entities include subsidiaries, entities that are operating as joint ventures,
associates and the entities that are not consolidated.
Disclosure information required
Organizations has an obligation of disclosing information that is sufficient enough
to enable those people who use consolidated financial documents in understanding
the building components of the company and its subsidiary and the interest the non-
controlling interests may be having in the group’s daily transaction and cash flows
(Smith, 2018). It also helps the users to analyze the results of the changes in the
ownership interests that may necessarily not make the entity to lose control. Situation
where there exists a parent company and its subsidiary, it is mandatory for the following
information to be disclosed in the financial statements of the group:
a. Terms and conditions of a contract that may require either party in a
consolidation, that is, the mother company or its subsidiaries to offer help
financially. Scenarios that may contribute to the reporting entity to make loss
should be disclosed.

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b. Any support given to the consolidated structure during the period of report
preparation and submission that is not covered in the contract agreement. The
amount or the type of support should be disclosed. The purpose also for the
support should also be clearly highlighted.
c. Intention to provide support to an organized consolidated entity. Intention also of
wanting to assist the body acquire financial support should also be disclosed.
d. Any financial or non-financial help that may have been provided in the period
prior to consolidation that may have led to control. The reasons and the
motivation for such an action should also be clearly bedisclosed.
Non-controlling Interest (NCI)
Non-controlling interest is that part of a subsidiary company that is not directly
under the possession of the mother company. We had initially indicated that an entity
becomes a subsidiary when majority of the entity’s share have been acquired by
another company. The minority of the shares that are not acquired by the parent
company forms the Non-controlling interest. They are generally referred as the Non-
controlling interests.
The Non-controlling interests are usually less than half of the shares held by an
entity. The method of handling NCI in the consolidated statements is dependent upon
the approach to consolidated statements. Non-controlling assets should not form part of
the consolidated financial documents. They are reported separately as being part of the
shareholders’ equity. There are two methods used when measuring the non-controlling
interests (Gumb, Dupuy, Baker & Blum, 2018). NCI can be measured at fair price or at

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proportionate share of the fair values of the assets less short term liabilities of the
subsidiary.
Non-controlling interests in group activities and cash flows
A reporting entity has a responsibility of disclosing information to all the subsidiaries
that have material non-controlling interests who may have interest in the transactions of
the company together with its money inflows. The following should be disclosed:
a. The name under which the subsidiary is registered
b. The country in which the subsidiary is incorporated and the location in which the
subsidiary is located.
c. The extent to which the non-controlling interest owns the subsidiary
d. In case the proportion of the right of the non-controlling interest is different from
the amount of ownership then it must be communicated to the required people.
e. The amount of gain as well as loss that is given to the non-controlling interests
when reporting is done.
f. The total amount of the non-controlling interests of the subsidiary by the time
reporting is done.
g. A detailed summary of the financial information of the subsidiaries.

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Conclusion
Acquisition is a very important aspect that helps in the growth of business. There
are several accounting standards and regulations which need to be adhered to before a
company can join in an acquisition (Palmrose, &Kinney, 2018). Some of these
regulation and standards include, those relating to the method for financial statements
preparation, how to handle intra-group transaction and how profit should be allocated.
There are also standards that govern the disclosure of information. It very important for
companies and professionals to stick to the accounting standards and regulations set so
as to always be in the right side of the law. Adherence to the standards will also ensure
that there is uniformity in the financial document prepared. This will further lead to
comparability of financial statements.

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References
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standards. Journal of Law, Finance & Accounting, Forthcoming.
Berger, T. M. M. (2018). IPSAS explained: A summary of international public sector
accounting standards. John Wiley & Sons.
Dissanaike, G., Drobetz, W., Momtaz, P. P., &Rocholl, J. (2018). How does the
Enforcement of Takeover Law Affect Corporate Acquisitions? An Inductive
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Gumb, B., Dupuy, P., Baker, C. R., & Blum, V. (2018).The impact of accounting
standards on hedging decisions. Accounting, Auditing & Accountability
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innovation. Journal of Accounting and Economics, 65(2-3), 221-236.
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Liu, T., &Mulherin, J. H. (2018). How has takeover competition changed over
time?. Journal of Corporate Finance, 49, 104-119.

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Mazouz, K., & Zhao, Y. (2019).CEO Incentives, Takeover Protection and Corporate
Innovation. British Journal of Management, 30(2), 494-515.
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Corporate Takeover of Everyday Life.
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