Corporate and Financial Accounting: Fundamentals of Business Combination Methodologies, Acquisition Methods, and Intragroup Transactions

This report aims to explain the various fundamentals of business combination methodologies, acquisition methods along with intragroup transactions with regards to non-controlling interests with the help of applicable accounting standards to various case studies mentioned hereunder.

Running head: Corporate and financial accounting
Corporate and financial accounting

Corporate and financial accounting 1
Executive Summary
This report aims to explain the various fundamentals of business combination methodologies,
acquisition methods along with intragroup transactions with regards to non-controlling
interests with the help of applicable accounting standards to various case studies mentioned
hereunder. In this regard, AASB 3 Business Combinations was developed with the intent to
enhance the relevance, consistency and comparability of information provided by the
company in its consolidated financial statements.AASB 10 Consolidated Financial Statements
was articulated with the aim to present and prepare the combined financial statements while
one or more subsidiaries are managed by the company. AASB 128 Investments in Associates
and Joint Ventures suggest the accounting methodologies in order to invest in associates
along with setting the necessity for applying the methods of equity along with accounting for
investments in joint ventures and associates.

Corporate and financial accounting 2
Contents
Introduction...........................................................................................................................................................3
Part A....................................................................................................................................................................3
Part B....................................................................................................................................................................5
Part C.................................................................................................................................................................... 8
Recommendations/Conclusion........................................................................................................................10
References.........................................................................................................................................................11

Corporate and financial accounting 3
Introduction
This report discusses the issues relating to business combinations, intragroup transactions,
methods of acquisitions along with non-controlling interests by applying various accounting
methods. Part A discusses the difference between the Equity Accounting and Consolidated
Accounting by applying AASB 3 Business Combinations, AASB 128 Investment in Associates
and AASB 10 Consolidated Financial Statements. Part B deliberates upon the treatment of
intragroup transactions by applying AASB 10 Consolidated Financial Statements and AASB
127 Consolidated and Separate Financial Statements. Part C explains the influence of
requirements with regards to NCI disclosure as a separate item in the procedure of
consolidation in the context of AASB 101 Presentation of financial statements and AASB 127
Consolidated and Separate Financial Statements.
Part A
The major differences between equity and consolidated accounting with reference to AASB 3
Business Combinations, AASB 10 Consolidated Financial Statements and AASB 128
Investments in Associates and Joint Ventures are as follows:
The term Consolidation connotes combination. According to AASB 10 in consolidation
accounting, the income, equity, assets, cash, liabilities and expenses of a parent company
and its subordinate companies are stated as one entity in fiscal records of the group. A set of
financial records are prepared in this context. Additionally, the financial records of all the
subordinate companies are consolidated in a group by applying the line by line methodology.
This method combines the like items of income, equity, assets, liabilities, expenses and cash
flows of all the corporations in a group (Australian Accounting Standards Board, 2018a).
It reveals the entire economic performance of the group. The fiscal performance of a group is
illustrated as if it is a single economic entity. But the adjustments in the accounts of
companies are not involved in it. These are an additional set of financial statements and are
prepared in a combined worksheet (Müller, 2014).
Particulars X Ltd
(Separate
Financial
statement )
Y
Ltd(Separate
Financial
statement )
Group
(Consolidated
Financial
statement )
Land 200000 + 200000 = 400000
Inventory 500000 + 200000 = 700000
Total Assets 700000 400000 1100000
Borrowings (70000) + (40000) = (110000)

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Net Assets 630000 360000 990000
The equity method is applied by the companies for assessing the income earned through their
investments in other company. The profits earned on the amount invested are reported by the
company in their income statements.The reported income depends upon the firm's share in
the assets of the company. It is proportional to the net investments in equity. On the other
hand, AASB 128 Investments in Associates and Joint Ventures describe the fundamentals of
equity accounting. In the equity method, the investments are realized at their cost. Thus the
carrying amount of the investment is modified to assess the share of investors in the profit or
loss of investee following the date of acquisition (Demir and Bahadir, 2014).
The carrying amount on investments is reduced due to the receipt of distributions from
investee. The share of the investors in profits and gains of the investee is known as income or
loss of investors. But the treatment of income according to the distribution is not considered to
be a suitable method for the profits earned by the investors. It is so because the distribution
has no connection with the performance of joint or associate venture (Australian Accounting
Standards Board, 2018b).This can be explained with the help of an example.
If JKY Ltd controls over 50% of FAB Ltd, then it is obvious that it has recorded the number of
its investments at 50% of the assets, revenues, expenses and liabilities of FAB Ltd. If JKY Ltd
has an overall revenue of $200 Million and FAB Ltd has a revenue of $ 40 Million, then JKY
Ltd has a total revenue of $220 Million. The supporters of the consolidation method of
accounting argue that it reveals the true performance of joint ventures as a more clear and
comprehensive record is illustrated in it. It shows the operational efficiency of each of its firms
with regards to shipping costs, production and gains.
According to AASB 3 Business Combinations, in a business combination, the combined
companies are controlled by a single party prior and post the combination. Furthermore, there
should be a permanent common control. The business combinations may also be developed
due to the relationship of a parent entity.In this relationship, the acquirer is named as a parent
and acquire as a subsidiary. The investments in the subsidiary companies involve the stake of
the acquirer in the acquiree in their distinct financial statements (Australian Accounting
Standards Board, 2015a).

Corporate and financial accounting 5
Part B
AASB 127 Consolidated and Separate Financial Statements suggest that the intragroup
balances and transactions consisting of income, dividends and expenses should be fully
removed. The incomes and losses arising due to intragroup transactions realized in assets
and stock should be removed fully. The losses incurred in intragroup transactions might
connote impairment which should be stated in the consolidated financial statements. In case
the financial statements of subordinate companies are prepared on the date which is different
from the date of preparation of financial statements of the parent company, then the
significant transactions occurring between the two dates should be adjusted
accordingly( Australian Accounting Standards Board, 2015b).
The variations in the reporting periods of parent and subsidiary should not be more than 3
months. Their time period along with the break between the two shall be the same for all the
periods. The consolidated statements shall be prepared by applying the same procedures of
accounting for like transactions which occur in similar situations. Thus the revenues and
expenses of the subsidiaries shall be encompassed in the combined financial statements
from the acquisition date as stated in AASB 3.
The assessment of expenses and income shall be calculated on the basis of realized
assessment of liabilities and assets in the combined financial records of the holding company
as on the date of acquisition. It can be clarified with the help of an illustration. The value of
deprecation in the consolidated financial statements shall be calculated on the basis of the
fair value of assets at the date of acquisition. Thus the incomes and gains and other
associated components of the income in consolidated financial statements are associated
with the parent entity and to the non-controlling interests (Bugeja, Czernkowski and Moran,
2015).
In this context, the non-controlling interests pertain to the interest held by minorities and a
position of ownership of equity which is unrelated to the holding company. The holding
company holds a stake of more than 50% and less than 100 % in normal circumstances. So,
consequently, the financial statements of the subordinate company are consolidated with
those of the parent company. Moreover, in accordance with AASB10 Consolidated Financial
Statements, equity of the parent company is shown as a non-controlling interest in the
consolidated financial statement of the subordinate company. In this case, where
professional services have been rendered by a partially owned subsidiary along with
transferring the stock at a profit to the parent company JKY Ltd , then the commercial
transaction should be treated in a similar manner as any other transaction which has occurred
in the parent entity at an arm’s length price (Maas, Schaltegger and Crutzen, 2016) .
This can be described with the help of an example. 60% interest has been held by the holding
company in a subordinate company and a profit of $100,000 has been reported by the
subsidiary including the profit earned on the sale of stock and rendering professional services
to the parent company. In that case, Intercorporate Investment a/c shall be debited by
$60,000 (i.e. 60% of $100,000) by JKY Ltd. And the Investment Revenue a/c shall be credited
by $60,000. In this context, the transactions which are to be adjusted in the combined
financial statements shall be tracked in advance in order to prepare the combined financial
records (Picker et al., 2016).

Corporate and financial accounting 6
These may include the transfer of assets and providing services along with the occurrence of
accounts receivable, payable and sales amongst the holding and subsidiary companies. So,
there should be an adjustment of intercorporate sales arising due to the transfer of
inventory.There should be a tacking of transfers of inventory in this regard. The consolidate
ending inventory shall be credited and retained earnings shall be debited in relation to the
value of transfers. If inventory valuing to $50,000 is transferred from subsidiary to the holding
company, then $50,000 shall be debited to retained earnings and $50,000 shall be credited to
consolidated inventory.
These transactions shall affect the valuation of non-controlling interest in the annual profit of
the subordinate company in the following way. According to AASB10, the incomes and losses
along with the total earnings shall be distributed between the holding company and the no
controlling interests.The profits relating to non –controlling interests can be determined as a
subsidiary's realized profit * proportion of NCI. The realized profit can be measured as the
subsidiary’s profit –unrealized profit. The income related to NCI can be measured as Profit
relating to NCI+ Other compressive income *NCI (Teixeira, 2014)
Particulars Amount(in $)
Profit of partially owned subsidiary 50,000
Unrealized profit from the sale of goods (10,000)
Unrealized profit from providing
professional services
(20,000)
Realization of profits from the sale of
goods
10,000
Realized profits 30,000
The profit share of NCI(30,000*25%) 7500

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It has been presumed that 75% shares of partially owned subsidiary have been acquired by
JKY Ltd. Thus the NCI is 25%. The other comprehensive income relating to NCI can be
calculated as follows:
Particulars Amount(in $)
The profit share of NCI (30,000*25%) 7500
Another comprehensive income share
(100*25%)
25
Total comprehensive income share 7525

Corporate and financial accounting 8
Part C
In the context of requirements of disclosure of NCI as a separate item in the process of
consolidation and in accordance with AASB 127 Consolidated and Separate Financial
Statements and AASB 101 Presentation of Financial Statements, the substantiality shall be
assessed on the basis of combined financial records of holding company. The holding
company shall evaluate the quantitative aspects like the size of the subsidiary and qualitative
aspects like nature of the subsidiary. According to the requirements of disclosure, the
information useful for the stakeholders of combined fiscal records shall be revealed by the
holding company to understand the framework of the group. It should also help them to
comprehend the value of non-controlling interests in the activities of the group along with the
cash inflows (Bolibok, 2014).
The material NCI of every subsidiary shall be disclosed by the holding company in the
combined fiscal records .The requirements of disclosure shall be compiled by the parent
entity through an illustration of disaggregated information from the measurements
encompassed in the combined fiscal reports of the parent entity. This should be executed with
reference to the subsidiaries which are having non-controlling interests substantial to the
parent entity. The necessary information shall be presented on the basis of subsidiaries held
by the investees. It also requires the achievement of disclosure requirements in order to sort
the information provided about the subordinate companies having a material non-controlling
interest in the group( Haas, 2014).
Additionally, the parent company shall illustrate the abridged balance sheet along with other
financial statements thereby assisting the users to comprehend the nature of non –controlling
interest of the subsidiaries in the activities of the group besides the cash inflows. In the
context of allotment of other comprehensive profits to NCI, the profits shall be categorized
and evaluated by the parent entity in the combined fiscal reports depending upon the
economic sustainability of the project. These profits have been categorized as non-controlling
interests in the fiscal reports of the holding company. However, if the nature of these profits is
not material, then these are not termed as non-controlling interests.
The parent company shall classify such profits as an arrangement of profit sharing rather than
a non-controlling interest. In the context of valuation of assets, AASB 101 Presentations of
Financial Statements describe that the fair value of assets and liabilities should be measured
in accordance with AASB 13 Fair Value Measurement (Australian Accounting Standards
Board, 2015c). If any of the financial assets are re -categorized out of the class of amortized
cost measurement, then it is evaluated at the fair value at profit or loss. Any profits rising out
of the differentiation between earlier amortized costs of the fair value and the fiscal assets
must be at the reclassified date (Australian Accounting Standards Board, 2018c).
As per AASB 127 Consolidated and Separate Financial Statements, the NCI should be
stated as a distinct item to the owner's equity and other comprehensive income should be
apportioned to NCI. The NCI should be classified as the equity of the group. It requires the
allocation of the capital of the entire group to the stake pertaining to the holding company
along with its stockholders and the non-controlling interests. The allocation of the equity of
subsidiaries relates to disbursement of the entire compressive income (Chambers, 2014).

Corporate and financial accounting 9
So, the categorization of equity as non-controlling interests creates an impact on the financial
performance criteria along with the equity capital of the entire group. In this context, the other
comprehensive income may consist of profits and gains excluded from the net income
according to the income statement.Thus the income and losses counted in the other
comprehensive income are related to unrealized income. The following working example has
explained this fundamental in a better way:
Balance Sheet of XYZ Ltd.
Particulars Amount (in $)
Assets
Cash 10000
Inventory 80000
Short term investments 20000
Total Assets 110,000
Liabilities
Current Liabilities 300,000
Long term Liabilities 400,000
Total Liabilities (A) 700,000
Shareholder’s Equity
Common Shares 500,000
Retained Earnings 250,000

Corporate and financial accounting 10
Accumulated Other Comprehensive
Income
100,000
Total Shareholder’s Equity (B) 850,000
Total Liabilities and Shareholder’s
Equity(A+B)
15,50,000
The disclosure requirements of NCI creates a positive impact on the annual report of the
holding company as it shall assist the stakeholders to apprehend the arrangement of the
group along with the stake of non-controlling interest in the group’s commercial transactions
along with the cash flows. It shall also help in evaluating the extent and nature of limitations
on the ability of the firm to use, access and realize the liabilities of the group. They shall be
capable of evaluating the changes and nature of risk associated with the interests of the
holding company in the combined fiscal reports (Gardini and Grossi, 2014).
Furthermore, the stakeholders would be informed about the consequences of the changes in
ownership of the parent company in the subordinate company provided it shall not lead to
loss of control.They would be capable of analyzing the situation related to loss of control in
the subsidiary by the holding company throughout the reporting period. In addition to this,
AASB 12 Disclosure of Interests in Other Entities, the substantial non-controlling interests
held by the parent entity for every subordinate company should be revealed in the
consolidated fiscal reports. It shall also contain the name of the subsidiaries, main place of
conducting business and the country of constitution (where the country of incorporation varies
from the place of conducting business with regards to a subsidiary) (Australian Accounting
Standards Board, 2017).
It shall also include allotment of profits and losses to the non-controlling interests of the
subordinate companies during the period of reporting. The accumulated non-controlling
interests of the subsidiary by the end of the reporting period shall be revealed by the holding
company along with its financial performance reports. The entity shall also state the clauses
of a contract requiring the parent entity or its subordinate companies to provide fiscal services
in the combined financial statements (De Villiers, Rinaldi and Unerman, 2014).
Recommendations/Conclusion
This can be concluded by stating the fact that the requirements of disclosure of subsidiaries
with material NCI have been implemented recently. With the help of the evaluation of the
report, the parent entities can be guided on how to treat the NCI in consolidated financial
statements. Even in cases, when the information about the NCI of subsidiaries is included by
parent entity with the accomplishment of high disclosure index in the entire procedure but
sometimes the value of information is beyond comparison. Hence, it is suggested that more
clarifications in this context should be included by AASB thereby assisting in undisputed
interpretations of the requirements stated by AASB.

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Corporate and financial accounting 12
References
Australian Accounting Standards Board (2015a) AASB 3 Business Combinations [online].
Available from: https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf
[Accessed 27th May 2019].
Australian Accounting Standards Board (2015b) AASB 127 - Separate Financial Statements
[online]. Available from: https://www.aasb.gov.au/admin/file/content105/c9/AASB127_08-
15.pdf [Accessed 27th May 2019].
Australian Accounting Standards Board (2015c) AASB 13 Fair Value Measurement [online].
Available from: https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf
[Accessed 27th May 2019].
Australian Accounting Standards Board (2017) AASB 12 Disclosure of Interests in Other
Entities [online]. Available from:
https://www.aasb.gov.au/admin/file/content105/c9/AASB12_08-15_COMPfeb17_01-
17.pdf[Accessed 27th May 2019].
Australian Accounting Standards Board (2018a) AASB 10 - Consolidated Financial
Statements [online]. Available from:
https://www.aasb.gov.au/admin/file/content105/c9/AASB10_07-15_COMPdec17_01-18.pdf
[Accessed 27th May 2019].
Australian Accounting Standards Board (2018b) AASB 128 - Investments in Associates and
Joint Ventures [online]. Available from:
https://www.aasb.gov.au/admin/file/content105/c9/AASB128_08-15_FP_COMPdec17_01-
18.pdf [Accessed 27th May 2019].
Australian Accounting Standards Board (2018c) AASB 101 Presentation of Financial
Statements [online]. Available from:
https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15_FP_COMPdec17_01-
18.pdf [Accessed 27th May 2019].
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1067.

Corporate and financial accounting 13
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