Corporate Takeover Decision Making and Effects on Consolidated Accounting

The paper addresses the concepts of business combination, intra group transactions and corporate group when one company proposes to acquire another company. This paper focuses on the change in the requirements of the disclosure concerning non controlling interest and what changes are essential for the entity when preparing consolidated financial statements.

Running head: CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON
CONSOLIDATED ACCOUNTING
Corporate takeover decision making and the effects on consolidated
accounting
Name of the Student
Name of the University
Author Note

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
Executive summary:
The paper addresses the concepts of business combination, intra group transactions
and corporate group when one company proposes to acquire another company. This
paper focuses on the change in the requirements of the disclosure concerning non
controlling interest and what changes are essential for the entity when preparing
consolidated financial statements. There is an in depth explanation on the treatment
of intra group transactions between the parent entity and subsidiary. All the analysis
is based on the information provided in the case study where JKY limited proposing
to acquire FAB limited by acquisition methods and direct purchasing. Explanation of
all the accounting treatments relating to the case study is done by referring o the
relevant accounting standards of Australia.

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
Table of Contents
Introduction:..................................................................................................................3
Answer to Part A:..........................................................................................................3
Outlining the differences between the methods of equity accounting and
consolidated accounting:..............................................................................................3
Answer to Part B:..........................................................................................................3
Explaining the treatment of the intra group transaction accounting for the nin
controlling interest:........................................................................................................3
Answer to Part C:..........................................................................................................3
Identifying the changes for correctly stating the consolidated financial statements:. . .3
Evaluating the impact of required changes on the disclosure requirements on the
annual report:................................................................................................................4
Discussing the effect of the disclosure requirement on non controlling interest
separately in the consolidation process.......................................................................4
Conclusion:...................................................................................................................4
References list:.............................................................................................................4

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
Introduction:
The current paper is prepared for gaining an understanding of the corporate
group, business combination, intra group transactions, acquisition method and non
controlling interest by conducting an independent research by referring to the
relevant accounting standard. Analysis of all the facts has been done by evaluating
the case study where one firm is proposing to acquire another small firm. The case
study is about JKY limited that is proposing to acquire small firm FAB limited either
by way of direct purchasing that is the acquisition method or by acquiring shares and
exercising significant influence. In the current paper, difference between equity
accounting and consolidation accounting has been demonstrated for assessing
which strategy would be best to acquire FAB limited. Moreover, the accounting
treatment of non controlling interest and its impact on the disclosure requirement has
been presented.
Answer to Part A:
Outlining the differences between the methods of equity accounting and
consolidated accounting:
Under the equity accounting, significant investment is made by the investors
and it take over the investee business by exercising significant influence. However,
no full control is exercised by investors over the investee. JKY limited would be able
to operate the financial and operational policy decisions if the acquisition of FAB
limited is done by exercising influence but they would not have any control over the
policies. An investor would exercise significant influence when 20% or more of the
voting power of investee is held either indirectly or directly in the event of significant
influence. Therefore, JKY limited would not be able to exercise significant influence
when they have less than 20% of the voting power in FAB limited (Warren and Jones
2018).
Any investment in joint venture of associated under the method of equity
accounting is initially recorded at cost. It is after the acquisition date that the
recognition of investor’s share of loss or profit is done by increasing or decreasing
the carrying amount. Any profit or loss of investee is recorded in the statement of
profit and loss of investors and all such transactions are recorded according to the
requirement of AASB 128 Investment in associates and joint venture ( Aasb.gov.au
2019). All the effects related to the significant accounting transactions are adjusted
while preparing the financial statement that is prepared at different date from that of
entity.
Under the consolidation accounting, financial results of all the subsidiaries
company are combined with that of parent company and such financial statements
presents the financial position of overall group. According to the paragraph B21 of
AASB 3 Business combination, entity uses reverse acquisition strategy for preparing
the consolidated financial statements. Recognition and measurement of all the
assets and liabilities of legal subsidiaries is done at the carrying amount pre
combination and such values are represented in the consolidated financial

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
statements. It also comprises of retained earnings and equity balances of subsidiary
prior to the business combination (Legislation.gov.au 2019).
Explaining the accounting transactions with the help of an example would be
able to gain an understanding of the treatments. It is assumed that 40% of shares of
FAB limited are acquired by JKY limited of amount of $ 1 million. It also includes
expenses worth $ 400000. This amount is represented as assets on the balance
sheet of the assets side. Nevertheless, JKY limited would be required to prepare
consolidated financial statements if the entity has control over FAB limited. In such
situation, all the liabilities, assets and income of the FAB limited would be added to
the consolidated financial statements prepared by JKY limited. Suppose, if
subsidiary brings in $ 140000 and JKY limited generates $ 300000, then under
consolidation accounting, total reporting income would be $ 540000. Therefore, it
can be observed that there exist difference between accounting treatment under
equity accounting and consolidation accounting.
Answer to Part B:
Explaining the treatment of the intra group transaction accounting for the nin
controlling interest:
It is required by the parent entity to prepare the consolidated financial
statement at the same date as of entity. The additional financial statements are
required to be prepared by subsidiary when for the consolidation purpose; the parent
company is different from that of subsidiary and such statements are prepared at the
same date at which the subsidiary prepared the financial statements. Under the
consolidated financial statements, non controlling interest is presented separately
from that of owner of parent under the heading equity in the statement of financial
position (Roslender and Nielsen 2018).
The parent company identifies the non controlling interest within the equity
under the consolidated financial statements and this is presented separately from the
parent equity. The financial position of the group is presented as the single entity’s
financial performance as depicted from the consolidated financial statements. The
investors carrying amount of investment in each of their subsidiary is completely
eliminated in such situation. In addition to this, the non controlling interest is
identified in the profits and loss statements of consolidated subsidiaries
(Legislation.gov.au 2019). Furthermore, in the non controlling interest, the net assets
of the consolidated subsidiaries are identified separately.
With regard to the intra group transactions, there is complete elimination of
the items such as expenses, income and profit and loss according to the requirement
of the standard AASB 127 of the consolidated and separate financial statements.
The paragraph 21 of this standard also requires that any loss or profits resulting from
the recognition of the assets such as inventories or fixed assets should be eliminated
in full. Moreover, the intra group losses represent the impairment that should be
identified in the consolidated financial statements. Under the requirement of AASB
112 Income tax, it is essential to identify any temporary differences that arise from
elimination of any profit and loss that results from the intra group transactions.

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
It is therefore ascertained from the analysis of the accounting treatment of the intra
group transactions between subsidiary and parent company that there will be
absolute elimination of gain and loss associated with such transactions (Magnan et
al. 2015). Therefore, referring to the case study, the profit resulted from providing
professional services and selling of inventories to JKY limited by FAB limited is
absolutely eliminated from the consolidated financial statements after the business
combination.
In accordance with the requirement of paragraph 22 of AASB 127
Consolidated and Separate Financial Statement, adjustment should be done to all
the significant events and transactions when consolidated financial statements are
prepared using the subsidiary financial statements that is prepared at the date that is
different from parent entity’s financial statement. In addition to this, the consolidated
financial statements also include the expense and income of subsidiary at the date of
acquisition in accordance with AASB 3 business combination (Aasb.gov.au 2019).
Income and expenses of subsidiary is determined by the valuation of assets and
liabilities of the parent entity in the consolidated financial statements at the date of
acquisition.
The treatment of intra group transactions can be explained with the help of an
example. Suppose, JKY limited has to make some payable to FAB limited of amount
$ 600 and there is a receivable to be paid to JKY limited by FAB limited of amount of
$ 600. In such situation, there will be complete elimination of the transactions as per
the Australian accounting standard. Since, the same items form the basis of
transactions, elimination of such transactions between parent and subsidiary is done
by debiting payables and crediting receivables (Baker and Burlaud 2015).
Answer to Part C:
Identifying the changes for correctly stating the consolidated financial
statements:
The accounting standard “AASB 127 Consolidated and Separate Financial
Statements” requires the parent entity to prepare the consolidated financial
statements (Aasb.gov.au 2019). Equity transactions result from any changes in the
ownership of parent that does not have any impact on the control power in the
subsidiary. The impact of the change in ownership of parent entity in the subsidiary
is reflected in the consolidated financial statements when such ownership interest
does not result in loss of control that might be attributable to the parent company.
The nature and extent of any restrictions on the ability of subsidiary to transfer funds
in the form of cash dividends, loan advances and loan repayments should be
disclosed completely. In addition to this, recognition of investment should be done by
avocation some portion of profit and loss at the fair value and retained in the
subsidiary.
In the process of consolidation, when the non controlling interest is separately
presented, it is required to outline the changes for the parent entity as well as non
controlling interest in the event of reconciling the equity shareholder. Any amount
that is separately identified from the non controlling interest should be clearly
identified and labeled. With the help of separate presentation, the common

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
shareholders are provided with the additional clarification on the claim made on the
net assets or the liabilities of the consolidated entity. The equity transaction records
any change in parent ownership interest that do not arise when the parent lose
control in the subsidiary. It is essential to take into account any relative interest
change of subsidiary because of change in the non controlling interest proportion of
equity. In addition to this, it is required to directly account for the difference that
arises from the adjustments in the amount of non controlling interest and its fair
value and such amount is attributable directly to the ownership of parent entity
(Brown and Jones 2015).
Evaluating the impact of required changes on the disclosure requirements on
the annual report:
The accounting standard AASB 101 of the presentation of financial
statements requires the entity to account for any changes adequately and
appropriately for ensuring that the consolidated financial statements are recorded
correctly. The consolidated financial statements should be made by accounting for
all the significant transactions and events that takes place between the subsidiary
and parent entity with such statement being prepared at the same date as that of
entity. Equities of each of the subsidiaries should be eliminated along with offsetting
of the carrying value of investment of parent entity (Legislation.gov.au 2019). The
accounting policies adopted for preparing the consolidated financial statements
should be consistent by making proper adjustments. Moreover, the share of profit
and loss should also be computed for any outstanding accumulated preference
shares. For such computations, it is required to account for dividends regardless of
the fact that payment of dividend has been done or not. When the current and
noncurrent liabilities and assets are classified separately in the entity’s financial
statement, then it such situation classification of deferred tax assets should not be
done as current assets. Any additional items incorporated in the consolidated
financial statements should be adequately judged by assessing the liquidity,
functions of assets and nature of assets that takes into account nature, timing and
the liabilities amount (Caskey and Laux 2016).
Discussing the effect of the disclosure requirement on non controlling interest
separately in the consolidation process:
Accounting for any changes in the business combination impacts the
significant accounting policies disclosure and such disclosure is essential for
ensuring that the financial statements are correctly recorded. In addition to this, it is
also required to disclose recognition and basis of measurements. The judgment
made by the entity in determining the controlling power of parent in subsidiary in
accordance with the disclosure requirements of AASB 12 should also be disclosed. If
the information resulting from then disclosure is not material, then it is not required
by the entity to provide specific disclosure. When preparing the consolidated
financial statements, the standard AASB 101 of the presentation of the financial
statements requires particular disclosure to be disclosed in the statement of
comprehensive income, statement of profit and loss and in the statement of financial
position. Any changes in the ownership interest of subsidiary in the parent company
not resulting in the loss of control are accounted for equity transactions. Therefore,

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
for reflecting the changes in relative interest of subsidiary, adjustments should be
made in the carrying amount of controlling and non controlling interests.
Additional disclosure is also required to be made by compiling the specific
requirements of the standards of Australia for the fair presentation of the financial
statements. At the end of reporting period, it is required to make additional disclosure
about the financial statements of subsidiary in preparing the consolidated financial
statements. In addition to this, proper justification and explanation should be given
for the existing difference represented by adjusting the figures of the financial
statements and business combination. Furthermore, it is essential to identify and
make an adequate disclosure of the nature of relationship between parent and
subsidiary and in the event when parent entity does not own voting power in the
subsidiary either directly or indirectly. However, the entity cannot rectify the
accounting policies either by using any explanatory material and disclosure of any
accounting policies. The entity should also consider the option of providing
additional disclosure by complying with the requirements of Australian accounting
standard when the disclosure about the conditions, event and financial position of
the entity is not sufficient to be well understood by the users (Roslender and Nielsen
2018).
Conclusion:
It has been ascertained from the evaluation of the accounting standard that
provided an insight into the accounting treatments under consolidation and equity
accounting that there exist significant different between these two methods. The
treatment of the intra group transactions between parent and subsidiary entity while
preparing the consolidated financial statements has been determined by referring to
the relevant accounting standard requirements. The impact on the disclosure
requirements on the non controlling interest has also been addressed in the paper
for ensuing that the consolidated financial statements are correctly recorded.

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
References list:
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf [Accessed 29
May 2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed
29 May 2019].
Agrawal, A. and Cooper, T., 2017. Corporate governance consequences of
accounting scandals: Evidence from top management, CFO and auditor
turnover. Quarterly Journal of Finance, 7(01), p.1650014.
Baker, C.R. and Burlaud, A., 2015. The historical evolution from accounting theory to
conceptual framework in financial standards setting. The CPA Journal, 85(8), p.54.
Brown, R. and Jones, M., 2015. Mapping and exploring the topography of
contemporary financial accounting research. The British Accounting Review, 47(3),
pp.237-261.
Cascino, S., Clatworthy, M., Garcia Osma, B., Gassen, J. and Imam, S., 2017. The
Usefulness of Financial Accounting Information: Evidence from the Field.
Caskey, J. and Laux, V., 2016. Corporate governance, accounting conservatism,
and manipulation. Management Science, 63(2), pp.424-437.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial
accounting. Pearson Higher Education AU.
Kim, J.B., Li, L., Lu, L.Y. and Yu, Y., 2016. Financial statement comparability and
expected crash risk. Journal of Accounting and Economics, 61(2-3), pp.294-312.
Legislation.gov.au., 2019. AASB 10 - Consolidated Financial Statements - July
2015 . [online] Available at: https://www.legislation.gov.au/Details/F2018C00317
[Accessed 29 May 2019].
Legislation.gov.au., 2019. AASB 127 - Consolidated and Separate Financial
Statements - March 2008 . [online] Available at:
https://www.legislation.gov.au/Details/F2011C00949 [Accessed 29 May 2019].
Legislation.gov.au., 2019. AASB 128 - Investments in Associates and Joint Ventures
- August 2015 . [online] Available at:
https://www.legislation.gov.au/Details/F2019C00416 [Accessed 29 May 2019].
Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information
or confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-
591.
Roslender, R. and Nielsen, C., 2018. Accounting Through the Business
Model. Journal of Business Models, 6(2), pp.78-83.
van der Poll, H. and Mthiyane, Z.Z., 2018. The interdependence of risk management,
corporate governance and management accounting. Southern African Business
Review, 22(1).
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.