Corporate Takeover Decision Making and the Effects on Consolidation Accounting

Running head: CORPORATE AND FINANCIAL ACCOUNTING
Corporate Takeover Decision Making and the Effects on Consolidation Accounting
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1CORPORATE AND FINANCIAL ACCOUNTING
Executive Summary:
The report intends to obtain a critical insight of the different accounting aspects
associated with acquisition of a smaller organisation, FAB Limited by JKY Limited. At
the time of analysing the differences between consolidation accounting and equity
accounting when an organisation acquires a smaller firm, there are different
measurement and recognition principles. Moreover, the treatment of intra-group
transactions undertakes significant differences in the consolidated financial
statements of both organisations. Finally, it has been evaluated that the disclosure
requirements requiring non-controlling interest as a separate item in the consolidated
financial statements has impact on the overall consolidation process.

2CORPORATE AND FINANCIAL ACCOUNTING
Table of Contents
Introduction:..................................................................................................................3
Part A Response:..........................................................................................................3
Part B Response:..........................................................................................................5
Part C Response:.........................................................................................................6
Conclusion:...................................................................................................................8
Reference List:..............................................................................................................9

3CORPORATE AND FINANCIAL ACCOUNTING
Introduction:
The objective of the report is to obtain a critical insight of the different
accounting aspects associated with acquisition of a smaller organisation, FAB
Limited by JKY Limited. The first section of the paper would provide a distinction
between the major methodological differences in consolidation accounting and equity
accounting with appropriate examples. The second section would highlight the key
principles of intra-group transactions and their treatment by using worked examples.
Finally, the report would shed light on the impact of the disclosures associated with
the non-controlling interests in the form of a separate item in the process of
consolidation.
Part A Response:
From the provided case study, it has been identified that in order to take over
FAB Limited, the management of JKY Limited is in a dilemma regarding the selection
of the acquisition strategy. The consolidation method and the equity method are two
kinds of accounting methods utilised when two organisations are portions of a joint
venture (Atanasov and Black 2016). The selection of using any one method depends
on the way the income statement and the balance sheet statement of the
organisation report the partnerships. This clearly implies that these two accounting
methods have significant differences in methodology, which are elaborated as
follows:
Consolidation method of accounting:
According to this method of accounting, assets and liabilities of a joint venture
are recorded on the balance sheet statement of an organisation in proportion of the
percentage of involvement the organisation maintains in the venture (Balakrishnan,
Watts and Zuo 2016). At the time of computing assets and liabilities, the organisation
would list all its expenses and income from the acquisition and they are included on
the income statement and the balance sheet statement. According to “Paragraph
B86 of AASB 10”, the consolidated financial statements are combined like items of
equity, assets, liabilities, cash flows, income and expenses of the parent organisation
with those of its subsidiaries (Aasb.gov.au 2019). In addition, the method offsets or
eliminates the carrying value of the investment of the parent in each subsidiary and
the portion of equity held by the subsidiaries of the parent organisation. Furthermore,
the consolidated accounting method makes elimination adjustment with the objective
to offset intercompany transactions in order to avoid double counting of values at the
consolidated level.
“Paragraph B88 of AASB 10” sets out the measurement requirements of the
different line items of the financial statements, in which income and expenses of the
subsidiary are based on asset and liability amounts realised in the consolidated
financial statements at the date of acquisition. Thus, these items are measured at
fair values at the date of acquisition. “Paragraph 32 of AASB 3” lays out a particular
criterion in terms of goodwill recognition. The acquirer has to recognise goodwill at
the acquisition date as the higher of the two below:
a. The aggregate of:-