Facilitating Management of JKY Limited in Preparation of Consolidated Financial Statements

This report is focused on facilitating the management of JKY Limited in preparation of consolidated financial statements at the end of a financial year. It provides recommendations on consolidated accounting and equity accounting for business combinations. It also discusses the disclosure requirements for non-controlling interest.

CORPORATE AND FINANCIAL
ACCOUNTING

Executive summary
This report is focused on facilitating the management of JKY Limited in preparation of
consolidated financial statements at the end of a financial year. This report has identified that
there are various intra-group transactions that are required to be followed by JKY Limited
while recording transactions in relation to professional services and sale of stock. This report
has also provided recommendations to the management of the organization in relation to
consolidated accounting and equity accounting while making decisions in relation to a
business combination. Different non-controlling interest disclosure requirements provided by
AASB 127 and AASB 101 are provided in this report.

Contents
Executive summary......................................................................................................2
Introduction...................................................................................................................4
Consolidation v/s equity method...................................................................................5
Part B- Intra-group profits.............................................................................................7
Part C- NCI disclosure requirement.............................................................................9
Conclusion..................................................................................................................11
References.................................................................................................................12

Introduction
Strategic planning in the business organization is very essential as strategic planning helps in
the different aspects of business management. There might be various types of business
problems faced by the organization during the day-to-day operations as well as while making
long-term decisions for the organization. It is important for an organization to make sure that
strategic planning is used by management in finding a solution for these problems in order to
make sure that decision is in the best interest of shareholders (Robinson et.al, 2015).
Accounting is also one of the most important aspects of business organization and it is
important to follow accounting standards issued by the AASB. This report will be focused on
taking important decisions in business and using accounting standards issued by AASB to
recording search business decisions in the financial statements.

Consolidation v/s equity method
One of the easiest methods of diversification and growth in business operations is an
investment in other organizations. For example, if a business organization operating in
production industry wants to extend its business operations in warehousing market then it can
purchase a warehouse company. With this purchase management of the organization will be
able to acquire all the human resources as well as capital resources already developed by the
previous organization for warehousing purposes. The main focus of this segment of the report
would be on suggesting management of JKY Limited on whether to invest in other
organizations through equity method or consolidation method (Hadi, 2015).
Directors of JKY Limited has proposed a business venture to acquire a smaller company
called FAB Limited. One of the directors has argued that purchase/ acquisition/ consolidation
method will be more appropriate for this business acquisition and on the other hand some of
the directors are proposing to acquire business operations through equity accounting (Lara,
Osma and Penalva, 2016).
First of all, it is recommended that the acquisition of a business organization operating in a
similar industry for growth and development is a very good initiative on part of management.
This will definitely have a significant positive impact on the overall profitability and
productivity of the organization due to the generation of synergy benefits. On the other hand,
this decision will have a significant impact on the accounting process of business
organization i.e. JKY Limited.
According to the principles of AASB 3 and AASB 128, the method of accounting for
recording the acquisition of business organization through equity method and consolidation
method is totally different from each other. In the case of consolidation method management
of the organization is generally in the acquisition of more than 50% of share capital in the
company (Cîrstea, 2014). On the other hand in the case of the equity method, the ownership
rights in the equity shares of the proposed company lie between 20% and 50%.
According to the rules and regulations of provided in AASB 10 i.e. consolidated financial
statements, every business organization is required to make sure that financial position of the
acquired company is reflected in the balance sheet of acquiring company. Therefore the
management of the JKY Limited is required to make sure that Assets and liabilities required

in the process of investment in other organization are shown in the balance sheet and PL
account (Leitner-Hanetseder and Stockinger, 2014). According to the principles of AASB 10,
method of reflecting the position of a subsidiary in financial statements is totally different in
case of equity accounting and consolidation accounting. The difference in the accounting of
these methods is as follows-
Consolidation accounting- in case of consolidation accounting it is important that business
organization consolidated financial statements of both the organization. For example,
management has to represent current assets of their own organization as well as current assets
acquired through the purchase of FAB Limited (Grossi, 2014). Consolidated financial
statements will be prepared by the organization along with separate financial statements of
both entities.
Equity accounting- As it is already provided in the given scenario that management will be
acquiring significant influence over FAB Limited as their long term strategy in case of equity
accounting. Therefore during the initial stages management will not be in total control of the
organization as a percentage of shareholding will be between 20% and 50%. In this scenario,
management will be required to show investment in the organization under the head
"investment in joint venture" or associate.
Recommendation- It is recommended that the management of the organization should go for
equity accounting during the initial stages of operation. According to this method,
management should implement a long-term strategy in which only significant interest should
be acquired during the initial stages. This is a significant interest should be between 20 to
30% of share capital (CÎRSTEA and CIOLOMIC, 2014). If after 1 to 1.5 years, management
is of the opinion that this can be a profitable venture then they should acquire an organization
by investing more than 50% in aggregate. This will be the most productive and profitable
strategy for the company.

Part B- Intra-group profits
During a board meeting conducted in JKY Limited, it was identified that one of the
subsidiaries has provided professional services and sold inventory to JKY Limited which is a
parent company. CFO of this organization is seeking clarification with respect to the intra-
group transactions battery should be considered by the organization while preparation of
consolidated financial accounts.
First of all management of the organization should consider following to accounting
standards before initiating the process of accounting with respect to subsidiaries. AASB 127
and AASB 10 are the accounting standards that should be considered by the business
organization before starting the accounting process (Müller, 2014). Both of these accounting
standards have provided that management is required to prepare two types of financial
accounts at the end of every financial year if they have a significant interest in other
organizations. These accounts are separate financial accounts and consolidated financial
accounts. Separate financial accounts really show profitability generated from the parent
organization excluding investment done by the business organization in any other subsidiary,
joint venture or associate. On the other hand, the main purpose of the consolidated financial
statement is to incorporate the profitability and financial position of assets and liabilities of
subsidiaries at the end of the financial year.
There are certain rules and regulations that are required to be followed by a business
organization by preparation of consolidated financial accounts. It is important that financial
accounts including consolidated financial accounting showing true value and profitability of
business operations. there are various rules and regulations prescribed by AASB 10 i.e.
consolidated financial accounts that help business organizations to make sure that the actual
profit of business organizations is represented through a consolidated financial account
(Bisogno, Santis and Tommasetti, 2015). Following are some examples of the inter-group
transactions that are required to be handled in a specific manner according to the principles of
AASB 10.
Different closing date- There is a possibility that closing date for both the parent organization
and subsidiary organization is different from each other. For this purpose management of the
organization is required to make sure that consolidated financial statements are ending on the
same day date.

Transfer of stock- according to the principles of this accounting standard it is important that
management of the company does not recognize any kind of profit on transfer of stock made
by subsidiary to the Parent organization or vice versa. Both of these organizations are
considered as one in consolidated financial statements and profit cannot be recorded if a
particular organization is transferring stock from one department to another department.
Professional services- It is the general practice of any business organization to add profit to
professional services before providing services to any other organization. If a business
organization has provided other business organization with professional services and a profit
is included in the amount charged from such an organization (Wahlen, Baginski and
Bradshaw, 2014). In this scenario of both the organization are in the relationship of
subsidiary and Parent company then profit should be eliminated while preparation of
consolidated PL account. The principle discussed in above example i.e. transfer of stock will
follow in this scenario also.
On an overall conclusion, it is recommended to the management of JKY Limited that
management should not incorporate the profit charged by subsidiary Organization on
professional services and inventory that are sold to the parent company (Lopes and Lopes,
2019). Recording of profit on professional services and inventory will not be in line with the
applicable accounting standards in relation to consolidated financial statements and business
combinations.
Amount of profit deducted from the professional services and the stock would be decreased
by the share of the Parent company in the organization only. For example for the particular
business organization has an interest of 60% in its subsidiary and let us assumes that the
subsidiary has provided professional services costing $100000 and a profit of $20000
(Dabbicco, 2018). In such scenario profit of $8000 i.e. (20000*40% i.e. share of non-
controlling interest shareholders) will be recorded in PL account. Therefore it can be said that
the share of NCI shareholder will not be affected by this accounting treatment.

Part C- NCI disclosure requirement
Non-controlling interest (NCI) – NCI can be defined as the interest of minority
shareholders in the organization. For example, if a particular business organization has
purchased 60% of shareholders in a particular organization then other 40% of shareholders
will be considered as minority shareholders. Total interest of these shareholders will be
defined as a non-controlling interest in the organization (Gluzová, 2016). According to the
requirements of AASB 10, management of the organization is required to disclose the interest
of NCI shareholders separately in the balance sheet.
Historical costing versus fair value costing- One of the primary objectives of preparing
financial accounts to make sure that financial statements are showing the actual value of
business operations at the end of the financial year. For example, AASB has issued AASB
136 i.e. impairment of assets to make sure that impairment loss due to fluctuations in their
value market price of the non-current assets is recorded in PL account (DeFond et.al, 2018).
In addition to that fair value of accepting the end of the accounting period should be shown in
the balance sheet.
Subsidiary organization of JKY Limited has informed the company that Assets of the
subsidiary organization are recorded at historical cost rather than following the principle of
the fair value of accounting.
In this scenario management of the organization should make sure that all the assets including
the current assets and non-current assets should be recorded at their current value. Any
impairment or loss on current assets and noncurrent assets should be charged from profit and
loss account. This accounting principle should be followed in both separate accounts
prepared for subsidiary and consolidated financial statements prepared by JKY Limited.
Accounting Principles issued by the AASB is applicable on each and every business
organization operating in Australia and it is important that all of these organizations or follow
these principles (Amel-Zadeh, Barth and Landsman, 2017). Following Accounting Principles
will also help in presenting the actual value of a business which is very important for the
decision-making process undertaken by investors. In addition to that, there is also a
possibility that external auditor of the company will identify the non-compliance with
accounting standard and issue qualified opinion on financial statements which will
discourage investors to invest in the organization.

NCI disclosure requirements-
As it is already discussed that management of the parent company is required to disclose the
interest of non-controlling shareholders separately for maintaining accountability and clarity
in financial accounts. Following are some of the requirements that are required to be followed
by the parent company in preparation of consolidated financial accounts-
 Management of the organization is required to disclose the shareholding of the non-
controlling shareholders at the end of every financial year. In addition to that if a
particular shareholder is holding more than 20% of equity shares in the organization,
then such shareholder should be disclosed separately in notes to the financial account
(Picker et.al, 2016).
 Equity shares allocated to the non-controlling shareholders should be disclosed by the
organization separately (Kieso, Weygandt and Warfield, 2016). For example
management of the organization is required to disclose different component of equity
shareholders such as share capital, share premium, retained earnings and other
reserves separately that are attributable to non-controlling shareholders.
 Statement of changes in equity prepared by the organization should also disclose the
change in equity share held by non-controlling shareholders in the organization.
Disclosure will definitely help the business organization to identify the changes in the
non-controlling interest of shareholders (Narayanaswamy, 2017).
 At the end of financial year management of the organization is also required to
distribute and disclose the total profit generated by the organization attributable to
non-controlling interest and majority shareholders in the organization. This disclosure
is required to be made in the statement of profitability prepared by the organization at
the end of each year.
 Other comprehensive income or loss attributable to other non-controlling interest is
also required to be disclosed separately in the consolidated statement of
comprehensive income.
 In the statement of cash flow dividend paid by an organization to non-controlling
interest should be separately disclosed under the head "cash flow from financing
activities" (Henderson et.al, 2015).

 Purchase of non-controlling interest by majority shareholders in any financial year
should be disclosed separately in the statement of changes in equity and statement of
cash flow.
Management of JKY Limited is required to make sure that all the above-mentioned
disclosures are properly incorporated in consolidated financial statements prepared at the end
of every financial year in the future.

Conclusion
On an overall evaluation of this report, it can be said that it is very important for a business
organization to consider the rules and regulations in relation to AASB 10 i.e. consolidated
financial statements. The main focus of this report was to identify different aspects of this
accounting standard in order to facilitate JKY Limited to prepare CFS at the end of the
financial year. This report has evaluated that management should focus on the intra-group
transaction while the preparation of CFS as separate disclosure requirements is required with
respect to these transactions. In addition to that, it is also recommended that the equity
method of investment should be used by a business organization for purchasing FAB
Limited.

References
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