Corporate Takeover Decision Making and Effects on Consolidated Accounting

The report addresses the differences in methodology of equity and consolidation accounting in event of acquisition of one firm by larger. All the accounting treatments concerning the acquisition have been explained and descried with reference to different AASB.

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 addresses the differences in methodology of equity and consolidation accounting
in event of acquisition of one firm by larger. All the accounting treatments concerning the
acquisition have been explained and descried with reference to different AASB. When
reference to the two methods of accounting, it can be concluded that there is considerable
differences in both the methods. Regarding the intra group transactions, it is required to
eliminate all the effects of components of financial statements in preparing consolidated
financial statements. In addition to this, disclosure requirement of NCI impacts the process of
consolidation as it helps in more fair presentation of the items in the consolidated financial
statement.

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
Table of Contents
Introduction:...............................................................................................................................4
Answer to Part A:.......................................................................................................................4
Identifying the key differences in methodology between consolidated accounting and equity
accounting:.................................................................................................................................4
Answer to Part B:.......................................................................................................................6
Explanation of treatment of intra group transactions:................................................................6
Answer to Part C:.......................................................................................................................8
Discussion of the effect of the NCI disclosure requirements in the consolidation process as
separate item:.............................................................................................................................8
Identifying the changes required to be made for correctly stating the consolidated financial
statement:...................................................................................................................................9
Evaluating the effect of disclosure requirement in the consolidated financial statement:.......10
Conclusion:..............................................................................................................................11

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
Introduction:
The report is prepared to gain an understanding of the several accounting aspects in
relation to the acquisition of smaller company by JKY Limited. Analysis of different
accounting aspects is based on the case study provided where JKY limited is proposing to
takeover one company named FAB Limited. The report intends to evaluate the best
acquisition strategy by outlining the key differences between the proposed methods of
acquiring the business. The intra group transactions and the accounting treatment have also
been outlined. Furthermore, the disclosure requirement of non controlling interest in the
process of consolidation is also evaluated with reference to the particular accounting
standard.
Answer to Part A:
Identifying the key differences in methodology between consolidated accounting and
equity accounting:
This section seeks to evaluate the key differences in the methodology between the
equity accounting that is the acquisition of FAB Limited by acquiring the equity shares and
thereby acquiring significant influence and direct purchasing. The acquisition method under
the AASB 9 requires the entity to determine the date of acquisition, measure and recognize
the goodwill and the identifiable assets acquired, any non controlling interest and liabilities
assumed. Under the consolidated accounting, the financial results of the parent and subsidiary
entities are combined together. Consolidated financial statements combine the financial items
such as equity, liabilities, assets, cash flow and expenses of the subsidiary with the parent

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
(Iasplus.com 2019). The measurement principle under consolidated accounting is that the
identifiable assets and liabilities should be measured by the acquirer at the fair value at the
date of acquisition. In accordance with the AASB financial instruments, classification of the
assets and liabilities that are measured at fair value through loss or profit or at amortized cost.
In addition to this, the lease contracts should be classified as operating or financial lease
according to AASB 117 (Aasb.gov.au 2019). Unless, any other basis of measurement is
required by the Australian accounting standard, measurement of all the other components of
non controlling interest shall be done at fair value at the date of acquisition. Furthermore,
JKY limited is required to recognize the identifiable liabilities and any acquire non
controlling interest and assets, separately from goodwill. The principle of measurement and
recognition under the AASB 3 provides limited exception and such exception are limited o
recognition of contingent liabilities, employee benefits, income tax, assets held for sale, share
based payment transactions and reacquired rights (Aasb.gov.au 2019). In addition to this, the
provisional amount required for the business combination might be adjusted by JKY limited
after the acquisition date.
Suppose, JKY limited issues 50000 shares to acquire all the shares of FAB limited on
31st march, 2019. For under acquisition method, this transaction will be accounted with FAB
limited becoming the 100% owned subsidiary of JKY limited. Under, such method,
consolidated financial statements would be produced.
In the equity method, JKY limited should have holdings between 20% and 50% and
under such method, there can be difference in the carrying value of different components of
financial statements. JKY limited would have significant influence over FAB limited if it has
20% or more voting rights and there would be material transaction between both the entities.
The initial recognition of investment under equity method of accounting is that the
investment is that the recognition of investment is done at cost and to recognize the share of

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
profit and loss of investor at the date of acquisition, the carrying amount is increased or
decreased (Stein and Cuadrado 2016). The procedures that are appropriate for equity method
application are similar to the procedures of consolidation described in the standard ASSB 10.
As defined by AASB 3, the loses or gains resulting from downstream or upstream
transactions that involves assets do not constitute part of business and such losses or gains are
recognized in the financial statement to the extent of the unrelated interest of investors
(Bianchi et al. 2016). Moreover, the income recognized based on distribution received might
not be considered as an adequate measure of the income. This is so because JKY limited has
significant influence over FAB, the former has an interest in the performance of joint venture
and consequently on return on investment. Under the equity method, the financial statements
of joint venture are prepared at different date from that of entity and the adjustments shall be
made for the effects of considerable events or transactions that occur between the date of
financial statement of entity and the date (Aasb.gov.au 2019). In this method, for
determining the existence of objective evidence about the impairment of its net investment in
the joint venture, JKY Limited would apply the impairment requirement as per AASB 9.
Answer to Part B:
Explanation of treatment of intra group transactions:
According to the paragraph 20 and 21 of AASB 127 consolidated and separate
financial statement, the intra group transactions, along with balances, income and expenses
will be eliminated completely. It is required that a parent entity under the single entity
concept should eliminate all the intra group liabilities and assets, cash flow, expenses and
income in full. Any loss or profits resulting from the intra group transactions which are

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
recognized in assets such as fixed assets and inventories are completely eliminated.
Impairment might be indicated by impairment loss that requires to be recognized in the
consolidated financial statement. Any amount of unrealized loss resulting from the intra
group transactions is required to be eliminated completely unless it is not possible to recover
the cost. Unless the cost cannot be completely eliminated, any amounts of unrealized loss that
are deducted in arriving at the assets carrying amount arising from the intra group
transactions are also eliminated (Aasb.gov.au 2019). Furthermore, any intra group
arrangements affecting classification, tax effects and intra group loses are some of the
common practical issues that are eliminated.
This can be explained with the help of hypothetical example. Suppose the parent
company acquired a property item at a cost of $ 200 million and it is estimated that the
estimated economic life of such asset is twenty years and the residual value is standing at
zero. The accumulated depreciation is recorded at $ 80 million with the carrying value of
assets at the date to be $ 180 million. Suppose, if the property is sold at a loss of $ 20 million
and the property cost is recorded at $ 160 million. Such intra group sale has incurred a loss
and it is required by the parent entity to consider whether the recoverable amount of asset is
lower than its adjusted carrying value.
In the given case, the profit generated by the subsidiary company that is FAB limited
for providing professional services and selling off their inventories to the parent company
should be deducted from the total amount of reported profits from subsidiary company.
The non controlling interest is that equity ownership proportion that is not attributable
to the parent company either directly or indirectly. An entity combines the financial statement
of subsidiaries and parent line by line by adding together the items of financial statements.
For presenting the financial information as a single entity, it is required to identify the non

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
controlling interest in the loss or profits of consolidated subsidiaries. The proportion of
changes in equity and that of profit and loss which are allocated to the parent, then in such
events, determination of non controlling interest is done on the basis of present interest of
ownership and such treatment should not reflect the conversion of potential voting rights
(Ding et al. 2013).
Each component of comprehensive ownership and profit and loss are attributable to
the owners of non controlling interest and parent company. Even if the non controlling
interest shows a deficit balance, then total comprehensive income is attributable to the owners
of non controlling interest and parent company. Therefore, before the application of
amendment, any profit and loss should not be restated by entity for reporting periods.
While preparing the consolidated financial statements in accordance with the ASB
127, the proportion of profit and loss allocated to the non controlling interest and parent
company and the proportion allocated using equity method that accounts for investment are
determined solely on the basis of interest of present ownership. Such treatment does not
reflect conversion of potential rights unless the application of paragraph B 90 of AASB 10
consolidated financial statements (Iasplus.com 2019).
Answer to Part C:
Discussion of the effect of the NCI disclosure requirements in the consolidation process
as separate item:
The paragraph 27 of AASB 127 Consolidated and separate financial statements
requires that the non controlling interest shall be presented separately from the equity of the
owners of parents in the consolidated statement of financial position. Non controlling interest
is that portion of the equity in subsidiary which is neither directly nor indirectly to the parent.

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
The reporting and accounting for non controlling interest in the consolidated financial
statement is improved by the AASB 127 consolidated and separate financial statement. When
the non controlling interest is presented separately in the consolidation process, there should
be reconciliation of changes in the equity of shareholder that outlines the changes attributable
to the non controlling interest and parent respectively. Such separate amount of non
controlling interest shall be clearly labeled and identified. Such separate presentation of the
non controlling item is done to provide additional clarification the common shareholders of
consolidated entity concerning their claim on the consolidated entity net assets. Furthermore,
there is a fair presentation when one of the entities has indirect or direct control financial
interest (Black 2016).
Equity transactions are the changes in ownership interest of parents in a subsidiary
that does not arise in event of parent losing control of the subsidiary. When there is change in
the proportion of the equity held by non controlling interest, then the changes in the relative
interest of subsidiary is reflected by making adjustments in the carrying amount of non
controlling and controlling interests (Aasb.gov.au 2019). In addition to this, there is direct
recognition of arising of any difference between the amount by which adjustment of non
controlling interest is done and payment of fair value of consideration is done and they are
attributable to the parent’s owner.
Identifying the changes required to be made for correctly stating the consolidated
financial statement:
In order to state the statement of consolidated financial statements correctly, it is
required to make some changes that are described in the following paragraph. The
consolidated financial statement should be prepared at the same reporting date and the
adjustments should be made for presenting the effects o significant event or transactions that

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
occur between the dates of parent and subsidiary financial statements. The carrying amount
of investment of the parent in the subsidiary should be offset and portion of equity of each
subsidiary belonging to parent should also be eliminated (Saudagaran and Meek 2013).
There should be recognition of the impairment loss in the related assets that might be
indicated by the intra group losses. In addition to this, there should be complete elimination
of the transactions, intra group balances, expenses and income. Such consolidated financial
statements should combine all the items of equities, liabilities, assets, cash flows and
expenses of the subsidiaries with that of parent. In addition to this, the temporary differences
arising from profit and loss elimination resulting from transactions of intra group is
applicable under AASB 112 Income tax. It should be ensured that there is uniformity within
the accounting policies of group by making appropriate adjustments to the financial
statements of the member of group when preparing the consolidated financial statements in
the event when group member uses accounting policies other than adopted for some
transactions in the consolidated financial statement (Hodgson et al. 2014).
The total comprehensive income shall be attributable by the entity to the non
controlling interest and parent owner even if such treatment has the consequence of having
negative balance of non controlling interest. Moreover, the share of loss or profit in event of
subsidiary having outstanding cumulative preference shares should be computed by entity
after making adjustments for dividends on such shares irrespective of declaration of
dividends or not (Osadchy et al. 2018).
Evaluating the effect of disclosure requirement in the consolidated financial statement:
Preparation of consolidated financial statement for parent has been relaxed as per
paragraph 10 of AASB 127 of the consolidated. If the information resulting from any
disclosure is not material, it is not required by entity to provide specific disclosure. The

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
significant accounting policies comprising of the relevant accounting policies and
measurement basis for preparing the financial statements should be disclosed. When
preparing consolidated financial statements, it is required to disclose the extent and nature of
any significant restrictions that results from requirement of regulations on the subsidiary
ability to transfer to the parent either by way of making advances, repaying loans and cash
dividends (Angwin and Meadows 2015). In addition to this, while preparing the consolidated
financial statements, there should be a disclosure of end of reporting period of subsidiary
financial statements and if there is difference in the date of reporting, the reason explaining
the same should be disclosed. When the parent company does not own more than half of the
voting power either directly or directly, then on such event, it is required to make disclosure
about the nature of relationship between subsidiary and parent (Aasb.gov.au 2019).
Therefore, it can be seen that the disclosure requirements are affected when there is
preparation of consolidated financial statement.
Conclusion:
From the analysis of the above addressed facets concerning consolidation accounting
and non controlling interest, it can be inferred that there exist considerable difference in the
accounting treatment with reference to different accounting standards. When explaining the
difference in methodology of equity and consolidation accounting in event of acquisition of
one firm by another, it has been seen that the recognition and the measurement and principle
are different. In addition to this, the treatment of intra group transactions makes considerable
differences in the consolidated financial statements of both the entities. The disclosure
requirement concerning non controlling interest as separate item impacts the process of
consolidation.

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
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