Differences between Consolidation Accounting and Equity Accounting

This study outlines the core differences in the methodology between Consolidation Accounting and Equity Accounting. It also discusses key principles of AASB 127 Consolidated and Separate Financial Statements and AASB 10 Consolidated Financial Statements, treatment of intra-group transactions, and the impact of NCI disclosure requirement.

Corporate and Financial Accounting

Executive Summary
A non-controlling interest (NCI) has also the name of minority interest, in which shareholder
has the ownership of not more than 50% outstanding shares and does not have supervision on
decisions. AASB 127 asserts that non-controlling interest are ascertained on a separate basis
from the ownership interest of parent in them. It comprises amount of non-controlling interest on
date of acquisition along with the equity changes from the date of combination. The prevailing
study aims to outline core differences in the methodology between Consolidation Accounting
and Equity Accounting. Further key principles of AASB 127 Consolidated and Separate
Financial Statements and AASB 10 Consolidated Financial Statements, treatment of intra-group
transactions, and the impact of the NCI disclosure requirement being a separate item in the
consolidation process has been discussed in detail manner.

Table of Contents
Introduction......................................................................................................................................4
Part A...............................................................................................................................................4
Part B...............................................................................................................................................5
Part C...............................................................................................................................................7
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

INTRODUCTION
The present study emphasizes on the critical evaluation and analysis of key differences in the
methodology between Consolidation Accounting and Equity Accounting, along with relating
practices and principals. Further, examples have been provided to support the response. Along
with this the study also covers key principles related with case issues, regarding the explanation
of the ways by which treatment of intra-group transactions should be done. The study also
emphasizes on the changes required to ensure appropriate disclosure in consolidated financial
statements, and its impact on the annual report. Along with this, the report provides discussion
relating to the impacts of NCI disclosure requirement as a separate item within the consolidation
process.
PART A
In the present case scenario, JKY Ltd aiming to takeover FAB Ltd, being an ASX listed entity
working in similar industry. As a qualified CPA, it can be stated that if an acquirer purchases
another company, they are required to record the event by making use of the acquisition method
and the approach that commands a set of steps for the recording of acquisitions. This involves
steps such as measurement of any acquired of the tangibles, any acquired intangibles, the
consideration amount that is payable to the seller as well as goodwill or revenue made on
transaction (Standard, 2015).
Consolidating the financial statement is engaged with the combination of the income statement
as well as balance sheet of the firm to make up one statement. On the other hand, the equity
method does not mix up the statement accounts, but it does the accounting meant for the
investment as an asset, in addition to the accounts for the received income from the
subsidiary(Hussey & Ong, 2017) . In the purchase method of accounting, the subsidiary and
parent are shown on a single set of integrated financial statement. However, in the equity method
of accounting, the financial statement of parent comprises an investment line in the subsidiary
which is similar to the ownership of the net assets share of subsidiary. Most of the processes
suitable for the equity method application are same as the consolidated process as stated under
the AASB 128(Dagwell, Wines, & Lambert, 2015). In a situation of a method of measurement,

the equity method is stated as an accrual process extension in the historical cost system. Further,
recognition of the revenue related to the investee as an investor does the recording of profits or
losses rather than just when the dividends are paid by investor (Gobbo, 2018).
In case of acquisition method acquired asset and liabilities will be recognized at fair value
method and goodwill will be ascertained in accordance with the consideration paid to seller.
Further, recording of non-controlling interest is done at fair value on the date of acquisition.
However, as per the provision of AASB 128 Investment and associates and Joint ventures, if
shares are purchased than equity method will be applied in which carrying amount of investment
is minimized or maximized for the recognition of the investee’s profit or loss aftermath of the
acquisition date. Adjustments are being made in accordance with changes held in the
proportionate interest of investor. In present case as JKY Ltd is proposing to take over FAB Ltd.
than it is appropriate for the company to apply acquisition method as it will provide better
presentation of transaction relating to acquisition to the users of financial statement as well as
other stakeholders.
Statement presenting ascertainment of goodwill on acquisition of FAB Ltd.
Net fair value of identifiable assets and liabilities
acquired
(A) $ XXX
Revaluation of assets (B) $ XXX
Consideration transferred (C) $ XXX
Goodwill (C-B-A) $ XXX
Journal Entries relating to acquisition
Sr. No. Particular
1 Inventory A/c Dr
To Deferred Tax liability A/c
To Business combination valuation reserve A/c

2 Plant A/c Dr
To Deferred Tax liability A/c
To Business combination valuation reserve A/c
3. Patent A/c Dr
To Deferred tax liability A/C
To Business combination valuation reserve
5 Goodwill A/C Dr.
To Business combination valuation reserve A/c
PART B
As per the provision of AASB 127 consolidated and separate financial statement, Intra-group
transaction can be referred as the commercial or financial transactions that are engaged with two
companies of the similar group at the same time that is intercompany transactions taking place
when one entity unit is engaged in a transaction another unit of similar entity. However, such
transaction can take place foe a range of rationales; they generally take place as a consequence of
the common business relationship that is existed between entity units.
Intragroup transactions inclusive of income, expenditures as well as dividends are required to be
treated as eliminated as full. Further, the resultant P&L from the intragroup transactions been
realized in assets like fixes assets and stock, are required to be eliminated in full. However, the
intragroup losses might reflect an impairment that needs recognition within the consolidated
financial statements (Schwarzbichler, Steiner & Turnheim, 2018). Moreover, the application of

AASB 112 Income Taxes is done to the short-term differences that take place from the resultant
profits and losses elimination from the intragroup transactions.
It can be said that, in the given case, the NCI are required to be presented with the financial
position’s consolidated statement in equity, separated from the owner’s equity of the JKY Ltd
parent company. It can be stated that profits/losses and every element of other detailed income
are subjected to the parent owners and to the NCI. Generally, intra group transactions are only
supposed to be the element of the consolidation procedure as they are eliminated at the time of
consolidation(Kayis-Kumar, 2015). The most general example is the issue of sale invoice for the
service supply. The corporate issue invoice will do the recognition of a receivable in the balance
sheet as well as the revenue from the income statement sales while the purchasing
company will possess an expenditure on the P&L statement and the payable
on the balance sheet. On the date of closing, the consolidated balance sheet
will comprise an asset as well as liability occurring from a reciprocal
transaction that is not existed in the group(Welc, 2017).
In accordance with provision stated in AASB 10 Consolidated Financial
Statement , if a subsidiary sold inventory to the parent company and the
intercompany profit or loss takes place, then allievation of the same might be subjected to the
controlling as well as no controlling interest on a proportionate basis. In such cases, the P&L
amount being alleviated from the consolidated asset’s carrying amount is not impacted by the
presence of non-controlling interest within the subsidiary(Gluzová, 2016). However, the
calculation of gain or loss is impacted by the non-controlling interest carrying amount in the
previous subsidiary. The NCI been employed in the calculation of profit and loss must no count
any made adjustments to the non-controlling interest. Formerly recorded adjustment of non-
controlling interest carrying amount must be eliminated as same as wherein they were originally
recorded, i.e. by credit recording of parent equity(Nwogugu, 2015).
Recording of non-controlling interest is done in the parent company (JKY Ltd) balance sheet’s
equity sector, being separate from its personal equity. The non-controlling accounting interest
accounting treatment can be explained by an example, assuming that a company A acquires 75%
of the of the B’s company outstanding shares, as A has the ownership of over 50 % of the B, then
A will do consolidation of the financial statement of B on its own. Further, the 25% of the B’s

equity that is not owned by A, of which recording is done the balance sheet of A as a NCI. To
this mote, the allocation of consolidated net income to the parent company and the NCI to their
ownership percentage proportionately that is 75% to A and 25% to the non-controlling interests.
The degree by which assets as well as liabilities are been attributable to the NCI holder, investors
will further be well-positioned to create the individual opinion in regards with the impact of NCI
on several financial statement ratios and items.
PART C
The part of the equity of the subsidy that is not possessed by a parent is called as NCI. As per the
AASB 127 non- controlling interest in a subsidiary is a group of investors that possess share
which are not possessed by the parent company. In case 90% of the shares are possessed by the
parent company within subsidiary the remaining 10% will be possess by non-controlling interest
(Gluzová 2016). For making the consolidated financial statement, parent financial reports and its
subsidiaries are combined by an entity line by line and in addition which includes the items of
liabilities, assets, income, expenses as well as equity (Assor, Feinberg, Kanat-Maymon and
Kaplan, 2018). Further, it has been specified in para3 of ASB 127 that an organization is require
to ascertain non-controlling interest and recognize same separately within equity. Further, profit
and loss relating to same is also required to be accounted separately. The changes in parent’s
proportion of controlling interest is to be recognized as equity transactions unless the same
results in loss of control.
It has been provided in para 31 of AASB 127 that in case non-controlling interest’s carrying
amount is adjusted in order to represent change in relevant interest in subsidiary than the
different is adjusted and fair value is recognized by attributing the same with non-controlling
interest accounted in financial statement. In present case JKY Ltd will require to make changes
and disclose the same as provided in provision of AASB 127.
Preparers of financial report are required to comply with the options provided in AASB 3
relating to two techniques for computing the NCI. For combination of every business the
acquirer should compute NCI in the acquire fair value in addition with goodwill, or else the

proportionate share of NCI of acquire particular net assets not including goodwill (Cheng, Lin,
Lu, and Wei, 2017).
However it describes that for any combination of business, acquirer has various options to use
for measuring NCI. Following are the techniques that are provided by the NCI for the
measurement of goodwill (Demirel, 2017).
 the full goodwill method- in which if the measurement of NCI is based on the
subsidiary’s fair value, they the amount which is showcasing the NCI share of
goodwill would be owed and computed to the NCI, as both parent as well as NCI
will be owed a share of goodwill and by which exact goodwill on attainment will
be identified. Moreover it is done as per the entity concept of consolidation
(Anafiah, Diyanty, and Wardhani, 2017).
 The partial goodwill method in which no goodwill is owned to the NCI
Non-controlling interests in the activities of group and cash flows
All the subsidiaries must be disclosed by the entity that are connected with the non-controlling
interests as well as which are significant for the reporting entity. It must consist subsidiary name,
main location of the company of the subsidiary, the amount of ownership interest that is hold by
NCI, the amount of voting rights that are carried by NCI, in case if it is not similar to the amount
of ownership interests that is carried on, during the period of reporting the profits and losses that
are owed to NCI of the subsidiary are recognized in financial statement. Further, at the reporting
period end NCI of the subsidiary that is build-up as well as it must also include all over
reviewed financial information concerning subsidiary (Boyd, and Solarino, 2016).
Paragraphs 12 and 21 of AASB 127
For every subsidiary having NCI and for most significant reporting entity, a business enterprise
must disclose bonuses that are payable to the NCI as well as overall reviewed financial facts
regarding liabilities, profits, assets, cash flow and losses of the subsidiary that helps the
consumers to realize the interest which NCI have in the group actions and cash flows. All the
Connecting facts must be disclosed like, non-current assets, current liabilities, non-current
liabilities, current assets, total comprehensive income and its income as well as losses.

AASB 101 Presentations of Financial Statements
The major objective of AASB 101 is to set the source for the common representation of financial
report for assuring comparability with both the entity’s financial statement of preceding periods
as well as the financial statements of additional entities.
Key reporting requirements to be followed by JKY Ltd.
For fulfilling the objectives the information that must be disclosed about the entity are its
liabilities, assets, expenses, profits, income and losses, cash flow and other changes in equity if
any. Financial statements aims to generate information related to the financial performance, its
financial position as well as cash flows of an entity that is important for lots of users in making
financial decisions (Potter, Pinnuck, Tanewski, and Wright, 2019).
Information that must be fairly presented and should be in fulfilment with IFRSs (paras. 15–24)
as well as it must be according to the identified principal of the financial report. Fair presentation
must be achieved in the above manner. In very rare situations the fulfilment is not attained
therefore management must state the statement that is not fulfilled and its reasons of non-
fulfilment and apart from this various adjustments must be made for meeting the requirements
administration must review the situation where the entity is a going distress and further
statements must be made according to evaluation (Saha, Morris, and Kang 2019).
CONCLUSION
On the basis of above analysis, concluding statement can be made that, taking over of a company
operating the similar entity requires the purchasing entity to measure all their tangibles and non-
tangibles while consider all their related good will and transactional earnings. In addition, there
are some of the key difference present in both consolidated and equity accounting but most of the
processes being appropriate for the equity method application are same as the consolidated
process as stated under the AASB. Thus, it can also be stated that intra-group transactions are
required to be eliminated in full, and the NCI shall be reflected within the consolidated financial
statement, it is because all of the residual economic interest holders have an interest in equity in
the consolidated entity.

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