Corporate Takeover Decision Making and Effects on Consolidated Accounting
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This report explores the effects of corporate takeover decision making on consolidated accounting, including key differences between equity accounting and consolidated accounting, treatment of intra group transactions, and NCI disclosure requirements.
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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
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CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED ACCOUNTING Executive summary: The report is prepared to account for the differences between the consolidated accounting and accounting using the specific examples. The disclosure requirement of non controlling interest is also explained by accounting for the changes that is made in the consolidated financial statements. Moreover, the impact of intra group transactions on non controlling interest is explained and all such explanation is done by referring to the different Australian accounting standard board. All the explanation regarding business combination, intra group transactions, non controlling interest and corporate group is done by referring to the given case study of JKY limited and FAB limited.
CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED ACCOUNTING Table of Contents Introduction:..................................................................................................................3 Answer to Part A:..........................................................................................................3 Keydifferencesinmethodologybetweenequityaccountingandconsolidated accounting:...................................................................................................................3 Answer to Part B:..........................................................................................................3 Identifying the treatment of the intra group transactions:.............................................3 Answer to Part C:..........................................................................................................3 DiscussingtheNCIdisclosurerequirementseffectsasaseparateitemin consolidation process:..................................................................................................3 Identifying the changes for ensuring that the consolidated financial statements are recorded correctly:........................................................................................................4 Evaluating how the disclosure requirement would be affected by making desired changes:.......................................................................................................................4 Conclusion:...................................................................................................................4 References list:.............................................................................................................4
CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED ACCOUNTING Introduction: Thereportdemonstratestheunderstandingofthekeytopicssuchas acquisition method, business combination, intra group transactions, corporate group and non controlling interest.Such explanation has been done by referring to the case of JKY limited which is proposing to acquire a small company FAB limited. JKY Limited is planning to determine the best acquisition strategy by choosing between the acquisitions by shares by exercising significant influence and by using the strategy of direct purchase. For assessing which of the option would be best suited, itisrequiredtodemonstratethedifferencesbetweenequityaccountingand consolidation accounting. In addition to this, the computation of annual profit of subsidiaryonthenoncontrollinginterestbyaccountingfortheintragroup transactions is also presented. All the accounting treatments have been done with reference to the Australian accounting standard board. Reference to the accounting standard helps in gaining a better understanding of the accounting treatments and accounting concepts with respect to consolidation (Chychylaet al.2019). Answer to Part A: Key differences in methodology between equity accounting and consolidated accounting: Equity accounting is the method of accounting that is used for investments when significant investment is held by the investors over the investee. In such situation, investor does not exercise full control. If JKY limited acquires FAB limited by exercising significant influence over FAB limited, this would indicate that the JKY limited would have power to operate in the operating and financial policy decisions of FAB limited but it does not have control over the policies. In the event of significant influence, entity would be considered to have significant influence when 20% or more the voting power of the investee is held by the entity directly or indirectly (Maas et al.2016). JKY would not be able to exercise significant influence has less than 20% of the voting power of FAB limited. Under the method of equity, the investment in an associate or joint venture is initially recognized at cost and the share of profit or loss for investor is recognized after the date of acquisition by increasing or decreasing the carrying amount. The share of investor in the profit and loss of investee is recognized in the profit or loss of investor and the carrying amount of investment is reduced by the distribution that is provided by investee. Recording o such transactions are done in accordance with the AASB 128 Investment in associates and joint venture (Aasb.gov.au 2019). The financial statement of joint venture are prepared at the date that is different from that used by entity by making all adjustments by accounting for the effects of significant transactions that occur between the date of financial statement of entity and the given date. Consolidation accounting is the method of accounting where all the financial results of the subsidiary companies should be combined with the financial result of parent company. This method can be used by JKY limited as they are seeking to acquire the shares of FAB limited by exercising significantly influence. However, JKY would not be able to exercise full control over FAB limited. The consolidated financial statements are prepared on the basis of the financial statements of parent entity and
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CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED ACCOUNTING the entire subsidiary that is owned by parent entity. Preparation of consolidated financial statements is done using reverse acquisition strategy in accordance with the paragraph B21 of AASB 3 Business combination (Aasb.gov.au 2019). The reverse acquisition is issued which is described in the notes to financial statements and under the name of legal parent company. All the liabilities and assets of legal subsidiary that is measured and recognized at the pre combinations of their carrying amount are reflected in the consolidated financial statements. It also includes equity balances and retained earnings of subsidiary before the business combination. This can be explained with the help of an example. Suppose JKY limited buy 30% of the shares in $ 1 million FAB Company with an expense of $ 300000. This $ 300000 is reported as an acquisition of asset in the balance sheet. However, if JKY limited has control over JKY limited, then it is required to prepare consolidated financial statements. In such situation, the expense, assets and income of FAB limited would be added to the parent company that is JKY limited. For instance, if JKY limited generates $ 200000 and subsidiary brings in $ 160000, then the total reported income under consolidation accounting would be $ 360000. Answer to Part B: Identifying the treatment of the intra group transactions: Thefinancialstatementsofsubsidiariesandparententityusedinthe preparation of consolidated financial statements should be prepared at the same date. When the parent is different from subsidiary at the reporting date, for the purpose of consolidation, the subsidiary is required to prepare additional financial statements at the same date for which the financial statements is prepared by subsidiary.Suchtreatmentsaredoneunlessitisimpracticabletodoso. Presentation of non controlling interest should be done in the consolidated financial statements under the equity in the statement of financial position separately from the equity of owner of the parent (Armstronget al. 2015). Thenoncontrollinginterestispresentedbyparentcompanyinthe consolidated statements of financial position within the equity that is separate from the equity of parent. The financial information presented in the consolidated financial statements presents the information about the group as single economic entity. In such situation, there is complete elimination of carrying amount of investment of parent in each subsidiary. There is identification of non controlling interest in the consolidatedsubsidiariesprofitandloss.Inadditiontothis,thereisseparate identification of net assets of consolidated subsidiaries in the non controlling interest (De Waegenaeret al.2019). The transactions and intra group balances including dividends, expenses and income are eliminated completely. Any intra group transactions resulting profits and loss that are recognized in the assets such as fixed assets and inventory are eliminated completely in accordance with the paragraph 21 of AASB 127 of the consolidated and separate financial statements.An impairment that requires getting recognized in the consolidated financial statements is indicated by the intra group losses. Any temporary differences arising from the profit and loss elimination due to intergroup transactions is applicable under AASB 112 Income tax (Aasb.gov.au
CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED ACCOUNTING 2019). Therefore, from the analysis of treatment of intra group transactions between the subsidiary and parent company, it has been ascertained that any loss or gain arising from such transactions would be eliminated in full. Hence, selling of inventory and professional services by FAB limited to JKY limited and the profit resulting from such transactions should be eliminated completely after the business combination. In addition to this, preparation of consolidated financial statements using the subsidiary financial statements at a date that is different from the date of financial statements of parent entity, in such situation for the all significant transactions there shouldbeadjustmentmadeaccordingtotheparagraph22ofAASB127 Consolidated and Separate Financial Statements.As defined in AASB 3, from the date of acquisition, the expense and income of subsidiary are included in the consolidated financial statements (Aasb.gov.au 2019). The valuation of liabilities sand assets that is recognized in the consolidated financial statement of parent at the acquisition date forms the basis of expenses and income of subsidiary. This can be explained with the help of example, say FAB limited hasa receivable to pay to JKY limited of amount $ 500 and JKY limited has a payable of amount $ 500 million to FAB limited. These two transactions are related to the same items and hence they should be eliminated by crediting receivables and debiting payables. Answer to Part C: Discussing the NCI disclosure requirements effects as a separate item in consolidation process: The consolidated financial statements for the parent entity are prepared in accordance with the requirement of AASB 127 Consolidated and Separate Financial Statements (Aasb.gov.au 2019). Any change in ownership of parent in subsidiary that does not result in the control loss is accounted for equity transactions. In the preparation of consolidated financial statements, it is required to show the effects of change in the ownership interest of parent in subsidiary that do not result in control loss on the equity that is attributable to parent company. There should be complete disclosure of the extent and nature of any restrictions on the subsidiary ability to transferfundsinformofloanrepayment,loanadvancesandcashdividends. Investment should be recognized by attributing to the portion of profit and loss that is retained in the subsidiary at the fair value (Hoyleet al.2018). The reconciliation of equity shareholder outlining the changes for the non controlling interest and parent entity should be done when there is a separate presentation of non controlling interest in the prices of consolidation. It is essential to clearlylabelandidentifytheamountthatispresentedseparatelyforthenon controlling interest. This helps in providing clarification to the common shareholders about the claim by the consolidated entity on the net assets of entity. Any change in the ownership interest of parent not arising due to the loosing of control by parent in a subsidiary is recorded under equity transactions. Any change in subsidiary relative interestbecauseofchangeinequityproportionofnoncontrollinginterestare accounted for by making adjustments in the controlling and non controlling interest carrying amount (Legislation.gov.au 2019). Furthermore, any difference arising from
CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED ACCOUNTING considering the fair value and the adjustments of non controlling interest amount is recognized directly and are attributable to the owner of parent entity. Identifying the changes for ensuring that the consolidated financial statements are recorded correctly: For ensuring that the consolidated financial statement are recorded correctly, it is required to account that the changes should be made in an appropriate manner in accordance with the requirement of AASB 101 of the presentation of financial statements (Aasb.gov.au 2019). Preparation of the consolidated financial statements should be done at the same date and all the adjustments should be made by accounting for the effect of significant transactions or event that occur between the financial statements of subsidiary and parent entity. Any investment by parent in subsidiary should be offset in terms of its carrying value and there should be elimination of equity that is belonging to each of the subsidiaries (Roychowdhuryet al2019). In addition to this, there should be complete elimination of losses or profit arising from intra group transactions. The accounting policies employed by the group should have consistency by making appropriate and proper adjustments in the consolidatedfinancialstatements(Hendersonetal.2015).Furthermore,entity shouldalsocomputetheprofitandlosssharefortheoutstandingcumulative preference shares owned by entity. Such computation should be done by making adjustments for dividends irrespective of the fact that dividend payment has been done or not. Deferred tax assets should not be classified as current assets when there is a separate classification of current and noncurrent assets and liabilities in the stamen of financial position of entity. Judgment should be made about the additional items on the basis of assessment of assets functions, liquidity and nature of assets along with timing, nature and amount of liabilities (Legislation.gov.au 2019). Evaluatinghowthedisclosurerequirementwouldbeaffectedbymaking desired changes: The disclosure of significant accounting policies is affected by accounting for the changes in ensuring that the consolidated financial statements are recorded correctly. The basis of measurements and recognition that is used in preparing the financial statements should be disclosed. Entity is not required to make specific disclosure about any transactions if the information relating to the disclosure does notseemtohavematerialimpact.Thenatureofpoliciesandoperationsis considered by entity that is expected to be disclosed by the users of financial statement. In addition to this, it is required by the entity to disclose the judgment made in determining whether the entity is controlled by parent according to the AASB 12 disclosure of interest in other entities (Aasb.gov.au 2019). For the fair presentation of the consolidated financial statements, entity is required to make additional disclosure that it complies with the specific requirements of the Australian standard.Thereisadditionaldisclosurerequirementofdisclosingthefinancial statementsofsubsidiaryattheendofreportingperiodwhenpreparingthe consolidated financial statements. The existence of any difference at the end of reportingperiodbetweentheadjustedfiguresafterbusinesscombinationand financial statements of subsidiary should be explained by giving proper reason for the same. The nature of relationship between subsidiary and parent should be
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CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED ACCOUNTING indentified and disclosed when parent company either directly or indirectly does not own the voting power (Warren and Jones 2018). The accounting policies cannot be rectifiedbyentityeitherbytheusedaccountingpoliciesdisclosureorany explanatorymaterial.Theoptionofprovidingadditionaldisclosureshouldbe consideredbyentitywhencomplyingwiththeAustralianaccountingstandard requirements that is not sufficient for the users to understand the impact of particular events, conditions of the financial performance and position of entity. Conclusion: From the analysis of the concept of consolidated and equity accounting, it has been found that there exist difference between the accounting treatment between these two methodologies. Such explanation has been done in accordance with the requirements of the relevant and applicable accounting standards. The basis of measurementandrecognitionoftheassetsandliabilitiesafterthebusiness combination is done at the historical cost. Moreover, any transactions between the subsidiaryandparentcompanycreatinglossorprofitshouldbecompletely eliminated when preparing the consolidated financial statements. It is required by JKY limited to take into consideration and account for all the difference between equity method such as acquiring shares by exercising significant influence and consolidation accounting.
CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED ACCOUNTING References list: Aasb.gov.au.,2019.[online]Availableat: https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf[Accessed28 May 2019]. Aasb.gov.au.,2019.[online]Availableat: https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf[Accessed 28 May 2019]. Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate governance,incentives,andtaxavoidance.JournalofAccountingand Economics,60(1), pp.1-17. Chychyla,R.,Leone,A.J.andMinutti-Meza,M.,2019.Complexityoffinancial reportingstandardsandaccountingexpertise.JournalofAccountingand Economics,67(1), pp.226-253. De Waegenaere, A., Sansing, R. and Wielhouwer, J.L., 2015. Financial accounting effectsoftaxaggressiveness:Contractingandmeasurement.Contemporary Accounting Research,32(1), pp.223-242. Edwards, A., Schwab, C. and Shevlin, T., 2015. Financial constraints and cash tax savings.The Accounting Review,91(3), pp.859-881. Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015.Issues in financial accounting. Pearson Higher Education AU. Hoyle, J.B., Schaefer, T.F. and Doupnik, T.S., 2018.Fundamentals of advanced accounting. McGraw-Hill Education. 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.AASB10-ConsolidatedFinancialStatements-July 2015.[online]Availableat:https://www.legislation.gov.au/Details/F2018C00317 [Accessed 28 May 2019]. Legislation.gov.au.,2019.AASB127-ConsolidatedandSeparateFinancial Statements-March2008.[online]Availableat: https://www.legislation.gov.au/Details/F2011C00949 [Accessed 28 May 2019]. Legislation.gov.au., 2019.AASB 128 - Investments in Associates and Joint Ventures -August2015.[online]Availableat: https://www.legislation.gov.au/Details/F2019C00416 [Accessed 28 May 2019]. Leuz,C.,2018.Evidence-basedpolicymaking:promise,challengesand opportunitiesforaccountingandfinancialmarketsresearch.Accountingand Business Research,48(5), pp.582-608. Li, K.K. and Sloan, R.G., 2017. Has goodwill accounting gone bad?.Review of Accounting Studies,22(2), pp.964-1003. Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment, management accounting, control, and reporting.Journal of Cleaner Production,136, pp.237-248.
CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED ACCOUNTING Nilsson, F. and Stockenstrand, A.K., 2015. Financial accounting and management control.The tensions and conflicts between uniformity and uniqueness. Springer, Cham. Roychowdhury, S., Shroff, N. and Verdi, R.S., 2019. The effects of financial reporting and disclosure on corporate investment: A review.Available at SSRN 3364582.’ Wagenhofer, A., 2015. Usefulness and implications for financial accounting.The Routledge companion to financial accounting theory, p.341. Warren, C. and Jones, J., 2018.Corporate financial accounting. Cengage Learning. Zhang,J.andNiu,L.,2019,May.ResearchontheTransitionfromFinancial Accounting to Management Accounting Under the Background of Big Data. In1st International Conference on Business, Economics, Management Science (BEMS 2019). Atlantis Press.