Corporate Takeover Decision Making and Effects on Consolidated Accounting

The report analyzes the effects of corporate takeover decision making on consolidated accounting, including differences between equity accounting and consolidated accounting, treatment of intra group transactions, and disclosure requirements on non controlling interest.

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 report is prepared for conducting an independent research on the facts such as
business combination, acquisition method, non controlling interest and intra group
transactions by making a detailed analysis of the relevant accounting standards.
Analysis of the concepts has been done by referring to the given case study where
one firm is proposing to take over other firm by way of direct purchasing or by
acquiring shares and exercising significant influence. The report is discussed into
three different sections. In first section, the differences between the methodology of
consolidation and equity accounting have been depicted and the second section
concentrates on evaluating the treatment of intra group transactions between parent
entity and subsidiary. The third section conducts an analysis into the disclosure
requirements on non controlling interest in the event of preparing consolidated
financial statements.

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
Evaluating the treatment of intra group transaction accounting and its impact on non
controlling interest:........................................................................................................3
Answer to Part C:..........................................................................................................3
Identifying the changes for correctly stating the consolidated financial statements:. . .3
Evaluating the affect of required changes on the disclosure requirements on the
annual report:................................................................................................................3
Discussing the effect of the non controlling interest disclosure requirement as a
separate item in the consolidation process:.................................................................3
Conclusion:...................................................................................................................4
References list:.............................................................................................................4

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
Introduction:
The current study is undertaken to conduct a research on several topics of
advanced financial accounting such as intra group transactions, business
combination, corporate groups, non controlling interest and acquisition method with a
detailed use of relevant accounting standard. All the concepts have been explained
by referring to the given case study of acquisition where JKY limited is intending to
acquire one small firm FAB limited. The objective of the paper is to address the best
acquisition strategy for JKY limited. The assessment is done between two method of
acquisition that is through direct purchase and the other is to buy some shares of
FAB limited by JKY limited and exercising significant influence (Lee et al. 2017). The
difference between equity and consolidation accounting has been outlined in the
report along with the treatment of the intra group transactions that occur between
subsidiary and parent entity. In addition to this, the effect of non controlling
disclosure requirement as the separate item in the process of consolidation is also
outlined.
Answer to Part A:
Outlining the differences between the methods of equity accounting and
consolidated accounting:
This section of the report conducts n analysis on the two methods of
accounting that is equity accounting and consolidation accounting for identifying the
differences between the methods of accounting. Equity accounting is the process of
treating the investment of the associate company and the investors under this
accounting make considerable amount of investment and exercise significant
influence that enable them in taking over the business of investee
(Legislation.gov.au 2019). Nevertheless, acquisition of the business does not
indicate that the investor would be having full control over the investee. If JKY is
acquiring the shares of FAB limited by exercising significant influence, then they can
operate the policy decisions concerning the financial and operations of company but
they will not have any control over the policy decisions.
When then investor hold 20% or more of the voting power either directly or
indirectly, then investor would be able to exercise significant influence. Therefore, if
JKY limited would have less than 20% of the voting power in FAB limited, then they
cannot exercise significant influence over FAB limited. Under the equity accounting
method, recognition of the investment in the joint venture is done at the cost initially.
The recognition of the share of profit and loss of investors is done by making
adjustments in the carrying amount after the acquisition date. According to the
accounting standard AASB 128 Investment in associates and joint venture, the profit
and loss that is generated by the occurrence of any transactions by the investee is
recorded in the profit and loss statement of investor (Aasb.gov.au 2019). The
investors make the adjustment to all the significant accounting transactions when the
financial statements are prepared at the date that is different from that of entity.

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
The financial position of the single entity under consolidation accounting is
represented by the combination of the parent entity with that of subsidiary entity. The
consolidated financial statements are prepared by the entity using the method of
reverse acquisition strategy according to the requirement of paragraph B21 of AASB
3 Business combination (Aasb.gov.au 2019). The carrying amount of liabilities and
assets of legal subsidiaries pre combination forms the basis of recognition and
measurement of such assets and liabilities which are then recorded in the
consolidated financial statements. In addition to this, the consolidated financial
statements also include the value of equity balances and retained earnings before
business combination.
The accounting treatment o equity accounting and consolidation accounting
can be explained with the help of example that would provide assistance in gaining
an understanding of these two types of accounting. Assume a situation, where 30%
of the shares of FAB limited would be acquired by JKY limited and the total amount
that would be invested by JKY limited of the amount $ 100000 million. Therefore, the
amount of investment made by JKY limited in FAB limited is $ 300000 with such
amount being represented as assets on the balance sheet of the entity. However,
JKY limited would prepare the consolidated financial statements when they have
control over FAB limited. Under such accounting, there would be adding up of all
liabilities and assets. Say, if the subsidiary gets in $ 200000 and parent company
generates an income of $ 6000000. Then the total income that would be reported
under consolidation accounting is $ 6200000.
Answer to Part B:
Evaluating the treatment of intra group transaction accounting and its impact
on non controlling interest:
In this section of the report, the effect of the calculation of non controlling
interest on the annual profit of subsidiary is demonstrated. The consolidated financial
statement s is prepared by combining the financial statements of parent and
subsidiary by adding up all the items together such as assets, liabilities, expenses
and equity. For the preparation of the consolidated financial statements, it is
essential to identify the non controlling interest in the profit of the consolidated
subsidiaries. In addition to this, there is a separate identification of the non
controlling interest in the consolidated subsidiaries net assets. At the date of
acquisition, the computation of the amount of the non controlling interest is done
according to the AASB 3. Identification of the controlling interest is done by the
parent company under the consolidated financial statements that is different from
that of the parent entity (Legislation.gov.au 2019).
The carrying amount of the investments of the subsidiaries is completely
eliminated by the investors when preparing the consolidated financial statements. In
addition to this, at the date of business combination, the share of changes of the non
controlling entity is also identified. Any form of intra group transactions occurring
between the parent entity and subsidiary is eliminated fully by the entity when

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
preparing the consolidated financial statements. All the profit and loss, expenses and
income arising from the intra group transactions or occurrence of the events is
completed eliminated according to the requirements of AASB 127 of the
consolidated and separate financial statements (Schaltegger and Burritt 2017). The
entity is also required to completely eliminate the profit and loss due to recognizing
the assets such as fixed assets or inventories as per paragraph 21 of AASB 127 of
the consolidated and separate financial statement (Aasb.gov.au 2019). Furthermore,
there should be identification of intra group losses that results from the impairment of
assets. Moreover, the temporary differences that result from the profit and loss of
intra group transactions is also required to be eliminated according to AASB 112
Income tax.
Therefore, from the analysis of the intra group transactions between the
parent entity and subsidiary, it has been ascertained that all the profits, loss,
expense and income would be eliminated in full. By referring to the facts presented
in the case study, it can be said that there will be elimination of all transactions
between JKY limited and FAB limited. The profit resulted from selling of inventory
and by providing professional services by FAB limited to JKY limited should be
eliminated completely after the business combination when preparing the
consolidated financial statements according to the relevant accounting standard (Lee
et al. 2016).
All the transactions and significant events should be adjusted when preparing
the consolidated financial statements using the information from the subsidiary
financial statements according to the requirement of paragraph 22 of AASB 127
Consolidated and Separate Financial Statement (Aasb.gov.au 2019). Any expenses
and income that is attributable to the subsidiary is included in the consolidated
financial statement and determination of such items is done by conducting the
valuation of liabilities and assets of parent entity in the consolidated financial
statements.
A numerical explained would assist in explaining the treatment of such intra
group transactions. Suppose, there is a receivable of amount $ 900 to be paid by
FAB limited to JKY limited and payable of amount $ 900 to be made by JKY limited
to FAB limited. Therefore, as per the requirements of AASB, it is essential to
eliminate the transactions that occurred between JKY limited and FAB limited.
Elimination of the intra group transactions between the JKY limited and FAB limited
is done by according to the accounting standards of Australia.
Answer to Part C:
Identifying the changes for correctly stating the consolidated financial
statements:
In this section, the changes is required to be made so that the consolidated
financial statements are recorded correctly is demonstrated. It is required by the
parent entity to prepare the consolidated financial statement according to the
requirement of AASB 127 Consolidated and Separate Financial Statements”. The
preparation of consolidated financial statements should be done by using uniform
accounting policies for any events and other particular transactions (Aasb.gov.au

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
2019). Usually, the consolidated financial statements include the consolidated
statement of profit and loss, consolidated balance sheet and any other explanatory
material forming an integral part thereof (Mishraand 2016). It is not essential that all
the notes appearing in the separate financial statement of subsidiary and parent
should be included in the consolidated financial statements.
The disclosure of only the notes of items that are material should be done and
the assessment of materiality is done in relation to the information that is contained
in the consolidated financial statements. The parent entity preparing the consolidated
financial statement should consolidate all the subsidiaries whether it is domestic or
foreign. In the event of consolidation, exclusion of subsidiary should be done when
the extended control by the investor over investee is temporary. In addition to this,
when the ability of subsidiary to transfer the funds to parent is impaired because of
operations under sever long term restrictions, then the subsidiary should be
excluded from consolidated financial statements. The controlling power of subsidiary
is not materially impacted by the transactions of equity that results from change in
the ownership of parent entity. The consolidated financial statements incorporate the
influence of the change in ownership of parent entity in subsidiary (Gluzová 2015).
Furthermore, any change in the non controlling interest that is proportion to the
equity should account for the relative change in the subsidiary.
Evaluating the affect of required changes on the disclosure requirements on
the annual report:
It is essential for the entity to account for any changes in the statements in an
adequate and appropriate manner according to the AASB 101 of the presentation of
financial statements. This is so because it will assist in preparing the consolidated
financial statements in a correct manner. When preparing the consolidated financial
statements, it is required to account for all the significant events and transactions of
the parent as well as subsidiary entity as such statements is prepared at the same
date as that of parent entity. There should be elimination of the equities of each of
the subsidiaries. This elimination is done in association with the offsetting of the
parent entity’s carrying value of investment. Entity is responsible for making proper
adjustments so that the changes are reflected in the accounting and such policies
should be consistent with the developed accounting policies. In addition to this, for
any outstanding accumulated cumulative preference shares, it is required to
compute the share of loss and profit. For the computation of profit and loss, entity is
required to perform the computation of dividend irrespective of the fact that dividend
has been paid or not. In the event of separate classification of noncurrent asset and
liabilities in the financial statement of entity, then deferred tax assets should not be
classified as current tax assets. Moreover, an adequate level of judgment should be
performed by the entity when incorporating any additional items in the consolidated
financial statements. Such judgment can be done by conducting an assessment of
the nature of assets, liquidity and function of assets by accounting for the timing,
nature and amount of liabilities (Brown and Jones 2015).

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
Discussing the effect of the non controlling interest disclosure requirement as
a separate item in the consolidation process:
The disclosure of the significant accounting policies are impacted by any
significant changes that is made in the business combination. For ensuring that the
consolidated financial statements are prepared correctly, it is essential to make such
disclosures. According to AASB 12, requires the entity to make judgment in the
subsidiary power. Entities are required to make the specific disclosure if the
information contained therein is not material. There should be particular disclosure
made by the entity in the statement of profit and loss, statement of comprehensive
income and in the statement of financial position according to the standard AASB
101 of the presentation of the financial statements (Aasb.gov.au 2019). Furthermore,
the equity transactions account for the changes in the ownership of aren’t company
in the subsidiary if such change in ownership do not result in losing control.
Therefore, it is essential to make the changes in the non controlling and controlling
interest carrying amount for accounting for any change in the relative interest of
subsidiary.
For presenting the financial statements in a fair manner, the specific
requirements as per the accosting standards should be compiled with some
additional disclosure. When preparing the consolidated financial statements at the
end of reporting period, the financial statements should incorporate the additional
disclosure. Moreover, it is also essential to identify the relationship between patent
and subsidiary entity for making some adequate and additional disclosure and this
happens when the voting power is not owned by the parent entity in subsidiary
directly and indirectly. However, entity should not any disclosure of accounting
policies and explanatory material cannot be used to rectify the accounting policies.
Conclusion:
The evaluation of the difference accounting concepts such as business
combination, intra group transactions and business combination have assisted in
providing an understanding of the difference accounting treatments relating to the
consolidation and equity accounting. From the analysis of the concepts of the
consolidation and equity accounting, it has been found that there exists difference
between these two concepts. The treatment of intra group transactions between the
parent and subsidiary entity would results in elimination of all the losses and profits
that arise between the occurrence of such significant events and transactions. In
addition to this, it is essential to make changes in the disclosure requirements so that
the recordings of the consolidated financial statements are done correctly.

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
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