Corporate Takeover Decision Making and Effects on Consolidated Accounting

This report explores the decision-making process and effects of corporate takeovers on consolidated accounting. It discusses the differences between equity and consolidation accounting, treatment of intra-group transactions, and changes in preparing consolidated financial statements. The report also highlights the importance of disclosure requirements and the impact 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 elucidates the understanding and knowledge of the difference accounting
concepts by focusing on the facts retrieved from the given case study. The report is
divided into three sections with each of them focusing on the difference concepts
involve in the acquisition of one firm by another. In the given case study, JKY limited
is proposing to acquire a small company FAB limited either by way of direct
purchasing or by acquiring shares and exercising significant influence. One of the
sections presents the differences between tge equity and consolidation accounting
with other section emphasizing on the treatment of the intra group transactions
between the parent and subsidiary. The later section of the report depicts an
analysis on the disclosure requiring of non controlling interest and the changes hat is
essential when preparing 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 between equity accounting and consolidated
accounting methodology:..............................................................................................4
Answer to Part B:..........................................................................................................5
Explaining the treatment of intra group transaction by discussing the key principles:.5
Answer to Part C:..........................................................................................................6
Identifying the changes for ensuring the correct recording of the consolidated
financial statements:.....................................................................................................6
Determining the impact of changes on the disclosure requirement in the annual
report of company:........................................................................................................7
Discussing the effect of the disclosure requirement non controlling interest as a
separate item in the consolidation process:.................................................................8
Conclusion:...................................................................................................................8
References list:.............................................................................................................9

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
Introduction:
The paper demonstrate the study that is undertaken to understand the
concepts of the topics such as business combination, corporate groups, non
controlling interest, intra group transactions and acquisition method by making a
detailed use of the relevant accounting standards. All the explanation of the concepts
has been done by referring to the case study depicting the proposal of the
acquisition of one firm by another. In this regard, the explanation of the consolidation
and equity accounting is demonstrated by outlining the differences in the accounting
treatments. In addition to this, the evaluation of the intra group transactions and the
disclosure of non controlling interest are also presented.
Answer to Part A:
Identifying the key differences between equity accounting and consolidated
accounting methodology:
This particular section of the report demonstrates an understanding of the
differences between consolidation and equity accounting by providing relevant
examples. The explanation of the differences between these two methods of
accounting is done with reference to the acquisition of FAB Limited by JKY limited by
way of direct purchasing or acquiring shares by exercising significant influence.
Equity accounting is the method under which the recording of the investment
is initially done at the cost by identification of any capital reserve and goodwill at the
time of acquisition. Adjustment to the carrying amount is and thereafter is the share
of the net assets of the investee in the investors (Cooper 2017). Acquiring the shares
by exercising significant influence does not govern the power to govern operating
and financial policies of an enterprise. Investor is considered to have significant
influence if it holds 20% or more the voting power of investee either directly or
indirectly. On other hand, investor is considered not to have significant influence
when it holds less than 20% of the voting power either directly or indirectly. As per
AASB 128 Investment in associates and joint venture, the statement of profit and
loss of the investors records the share of profit and loss of investee (Aasb.gov.au
2019). While preparing the financial statements, all the adjustments relating to the
significant accounting transactions should be made.
Consolidation accounting on other hand is a type of investment accounting
that helps in the consolidation of the financial statement of the majority of the
ownership investment. In this method, investor possesses an effective control over
the subsidiary. Under this method of accounting, the balances of subsidiary are
combined with that of parent entity. The investment in subsidiary is reported as an
asset in the parent company whilst the equivalent equity that is owned by the parent
is reported to the subsidiary (Legislation.gov.au 2019). Under the consolidated

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
financial statement, all the liabilities and assets of legal subsidiaries is measured and
recognized at the carrying value before business combination.
While selecting the method of accounting for the company, it is required to
look at the control that company has in influencing other company. It is
recommended to the firms to have equity accounting when they have significant
influence over other company that is they have 20% or more of the voting power.
Therefore, when JKY limited is acquiring the shares of FAB limited by exercising
significant influence, then they should choose the equity method. On other hand, it is
suggested to JKY limited to consolidate the financial statements when they own
more than 50% share of the company.
In order to gain an understanding of the accounting treatments relating to the
transactions sunder both the method of accounting, a numerical example can be
presented. Suppose, JKY limited is acquiring 30% of the shares of FAB limited of
amount $ 1 million. This comprise of total investment made by the company of $
300000. In such case, the investment can be represented as the assets on the
investors account. However, if JKY limited has control over FAB limited, then they
can prepare consolidated accounting where the assets, income and liabilities of both
the companies are combined together. The total reporting income under
consolidation accounting would be $ 500000 if $ 300000 is generated by JKY limited
and $ 200000 is generated by FAB limited.
Answer to Part B:
Explaining the treatment of intra group transaction by discussing the key
principles:
In this section, the treatment of the profit or loss arising from the transactions
between parent entity and subsidiary is accounted for by conducting the detailed use
of relevant accounting standard. The consolidated financial statements and the
financial statements of subsidiary and parent for its incorporation in the former
should be done as on the same date. According to the paragraph 22 of ASSB 127
Consolidated and separate financial statements, for the effects of all the significant
transactions between the date of parent’s financial statement and that date on which
consolidated financial statement is prepared, it is required for the entity to make the
adjustments (Aasb.gov.au 2019). The carrying amount of investment in parent in
each subsidiary along with the portion of parent’s equity in subsidiary should be
offset. It is required by the paragraph B 86 of AASB 10 consolidated financial
statement to eliminate the intra group liabilities, assets, expenses, dividends, equity,
income and cash flow relating to the transactions completely (Aasb.gov.au 2019). In
addition to this, there is also a complete elimination of losses and profits resulting
from intra group transactions that are recognized in assets such as fixed assets and
inventories. Impairment might be indicated by some intra group losses that are
required to be recognized in the consolidated financial statements. Furthermore, in
the event of elimination of the profit and losses of the intra group transactions that

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
lead to occurrence of temporary differences that is applicable under AASB 112
Income tax (Aasb.gov.au 2019).
Under the consolidated financial statement, the identification of non controlling
interest is done by the parent entity within the equity. In such situation, there is a
complete elimination of the carrying amount of investors in each of the subsidiary
along with the identification of statement of profit and loss in the consolidated
subsidiaries (Nielsen and Roslender 2015). In addition to this, there is separate
identification of the net assets of the consolidated subsidiaries.
From the facts given in the case study, where the subsidiary is selling
inventories and professional services to the parent company generate profit.
Therefore, the profits generated by the subsidiary company from such activities
should be eliminated completely when preparing the consolidated financial
statements. All the profit and loss attributable along with the comprehensive income
components are attributed to the non controlling interest and owner of parent. In
addition to this, attribution of the total comprehensive income is done to the non
controlling interest and to the owner of parent even this result into deficit balance for
the non controlling interest. For reflecting the changes in the subsidiary relative
interest, adjustments are made to the carrying amount of controlling as well as non
controlling interest. The amount by which the adjustments is made to the non
controlling interest or receiving or making the payment of the fair value that is
considered is directly recognized in the equity (Legislation.gov.au 2019).
In the event of preparation of consolidated financial statements using the
financial statements of subsidiaries, it is required to make the adjustments for all the
significant events and transactions according to the paragraph 22 of AASB 127
Consolidated and Separate Financial Statement. Moreover, according to AASB 3
business combination, at the date of acquisition, income statement should include all
the income and expenses of subsidiary (Aasb.gov.au 2019).
Answer to Part C:
Identifying the changes for ensuring the correct recording of the consolidated
financial statements:
The consolidated financial statement is the combination of the items of the
financial statement of both parent and subsidiary. It presents the relevant information
by disclosing additional information about the subsidiaries different business
activities along with disclosing subsidiaries. While preparing the financial statements,
an entity combines the financial statements of all the subsidiaries and parent line by
line by adding up together the items of liabilities, assets, expenses and income. It is
required by the entity to take into account the following steps when presenting the
financial information in the consolidated financial statements about the group as
single economic entity according to the paragraph 18 of the ASSB 127 consolidated
and separate financial statements (Aasb.gov.au 2019).
In the first step, the portion of parent’s equity in each of the subsidiaries and
the carrying amount of investment of parent are eliminated. The next step requires to

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
the non controlling interest in the profit and loss of consolidated subsidiaries for the
reporting period. In addition to this, there is a separate identification of net controlling
interest of the consolidated subsidiaries concerning net assets from the ownership
interest of the parent in them (Jones 2015). The non controlling assets in the net
assets consist of the share of changes in equity of the non controlling interest since
the date of business combination. The calculation of the amount of non controlling
interest at the date of original combination is done according to AASB 3 business
combination. In the event of existence of potential voting rights, the allocation of
changes in equity and the proportion of the profit and loss are done to the parent
entity. Determination of non controlling interest is done on the basis of present
interest of the ownership and the conversion of potential voting rights and possible
exercise is not reflected by the non controlling interest (Legislation.gov.au 2019).
The financial statements of subsidiaries and parent that is used in the
preparation of the consolidated financial statements shall be prepared on the same
date. In the case, when the financial statement of subsidiaries and that of parent that
are used in the preparation of consolidated financial statement are prepared on
different date, then it is required to make the adjustments for the effects of events or
significant transactions occurring between the date of preparation of the financial
statement of parent and that date according to the paragraph 23 of the AASB 127
consolidated and separate financial statements (Aasb.gov.au 2019). There shall no
more than three months differences between the reporting period of subsidiary and
that of parent entity between the ends of reporting period. Furthermore, preparation
of the consolidated financial statements should be done using uniform accounting
policies for the like events and transactions in similar circumstances. From the date
of acquisition, the expenses and income of subsidiary are included in the
consolidated financial statements according to AASB 3 of business combination
(Aasb.gov.au 2019). The valuation of liabilities and assets recognized in the
consolidated financial statements of parent should form the basis of expense and
income of subsidiary.
Determining the impact of changes on the disclosure requirement in the
annual report of company:
In order to ensure that there is a correct recording of the consolidated financial
statements, it is considered essential to account for the changes in an appropriate
and adequate manner as per the accounting standard AASB 101 presentation of the
separate financial statements (Legislation.gov.au 2019). Preparation of the
consolidated financial statements is done by considering all the events and
significant transactions that takes place between the subsidiary and parent entity.
There should also be consistency between the accounting policies by making
required adjustments when preparing the consolidated financial statements. In
addition to this, for any accumulated preference shares that is outstanding, it is
required to compute the share of profit and loss. It is required take into account the
dividend factor for the computation of the share of profit and loss irrespective of the
fact that the payment of dividend has been done or not (Legislation.gov.au 2019).
Furthermore, the classification of the deferred tax assets is to be done as current
assets when there is a separate classification of noncurrent and current liabilities and
assets in the financial statements o the entity.

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
Discussing the effect of the disclosure requirement non controlling interest as
a separate item in the consolidation process:
The non controlling interest of the parent is presented in the consolidated
financial statement within the equity that is separate from the equity of the owners of
parent. The profit and loss and the components of comprehensive income of the
reporting entity is attributable to the non controlling interest and owner of parent.
Determination of the proportion of profit and loss allocated to the non controlling
interest and parent is done on the basis of interests of present ownership. When the
disclosure requirement of non controlling interest is presented as the separate item
in the process of consolidation, them the basis of measurements and recognition
should also be disclosed. It is required by AASB 12 to make a disclosure about the
judgment made by entity in determining the parent control power in subsidiary. Entity
is not required to make specific disclosure when it is found that there is no materiality
in the information disclosed. It is also required to make particular disclosure about
the statement of profit and loss, statement of comprehensive income and statement
of changes in equity when preparing the consolidated financial statements according
to AASB 101 Presentation of the financial statements. The equity transactions
accounts for any alteration in the parent ownership interest in the subsidiary,
however, there is no loss of control due to such alterations. Hence, adjustments
should be made in the carrying amount of controlling and non controlling interest for
reflecting the changes in subsidiary relative interest.
In order to compile the particular requirements of the standards for fairly
presenting the financial statements, it is essential to make additional disclosure. The
difference presented by making adjustments to the financial statements figures after
the business combination; it is required to provide proper explanation and
justification. However, the rectification of the accounting policies cannot be done by
the disclosure of accounting policies or using any explanatory material.
Conclusion:
From the detailed explanation of the facts about the two methodology of
accounting, it is ascertained that there exist considerable differences between equity
and consolidation accounting. The firm intending to acquire other firm using either of
these two options depends upon the control power that Parent Company has on
subsidiary. It has also been found that the preparation of consolidated financial
statement requires elimination of all the losses and profit arising from intra group
transactions. While addressing the impact of all the required changes to be made on
the disclosure requirements has also been addressed and it is deduced that there
are several changes that is accounted when preparing such statements.

CORPORATE TAKEOVER DECISION MAKING AND EFFECTS ON CONSOLIDATED
ACCOUNTING
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