Corporate Takeover Decision Making and the Effects on Consolidation Accounting

This report discusses the accounting aspects of a corporate takeover and its effects on consolidation accounting. It explores the differences between consolidation and equity accounting, the treatment of intra-group transactions, and the impact of non-controlling interests on the consolidation process.

Running head: CORPORTATE AND FINANCIAL ACCOUNTING
Corporate Takeover Decision Making and the Effects on Consolidation Accounting
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Executive Summary:
This report talks about the accounting aspects which the company, JKY Limited
accepted for acquiring a smaller company known as FAB Limited. The first portion of
this study shows the contrasts between the "consolidation book-keeping" and "equity
book-keeping" is given. There is requirement in the substantial modifications as required
in the "book-keeping assessment" of "non-controlling interests" and the "consolidation"
"book-keeping" with "regards" to the grades of "book-keeping". It can be observed that
the differences between the consolidation and equity accounting are different in the
case of acquiring a smaller company. The assessment of the "intra-group transactions"
points out the "consolidated" "financial statements" of both businesses. There is a
requirement of the disclosures for the non-controlling interests which will impact on its
process.

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Table of Contents
Introduction:.......................................................................................................................3
Response to Part A:...........................................................................................................3
Response to Part B:...........................................................................................................5
Response to Part C:..........................................................................................................7
Conclusion:........................................................................................................................9
References:......................................................................................................................10

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Introduction:
This report talks about the accounting aspects which the company, JKY Limited
accepted for acquiring a smaller company known as FAB Limited. The first portion of
this study shows the contrasts between the "consolidation book-keeping" and "equity
book-keeping" is given. The second group of this report talks about the intra-group
transactions (Bisogno, Santis and Tommasetti 2015). In the second part the treatment
of intra-group transactions is also explained with some examples. The final section of
this paper depicts the effect of the revelations that are connected with the "non-
controlling interests" in terms of distinct commodity provided in the methodology of
"consolidation".
Response to Part A:
As provided in the testament, it is noticed that the administration of "JKY Limited"
is in a fix related to the selection of "acquisition" schemes for "FAB Limited". During the
merger of the two companies or the acquisitions of the two companies or the joint
venture of the two companies there are two accounting process which can be utilized.
They are "consolidation process" and "equity process". The method selection is totally
depends on the financial statements and balance sheet of the companies which are
going to be conjoined. It is seen that there prevails major differences between the two
accounting methods for the acquisitions. They are provided below:
Consolidation Method of Accounting:
As per the consolidation accounting method, the assets and liabilities of two
companies should be presented in the statement in terms of involvement of the
organisations in the partnerships of the two companies (De Vlaminck and Sarens 2015).
At the moment of assessment of the "assets and liabilities", the firm would analyse
every expenditure and earning "realised" from the "acquisitions" and is required to
record in the "operating statement" and "balance sheet" of the "profit and loss
statement" of the business. As per mentioned in the “Paragraph B86 of AASB 10”,the
consolidated financial statements include the items like assets, liabilities, income, cash
flows and expenses of the mother organizations with the subsidiaries. Moreover, the
method helps to eliminate carrying value of the investments of the mother company’s
subsidiaries of the main company.
As per mentioned in the “Paragraph B88 of AASB 10”states that the way of
measurement which requires the different line fo the financial statements where the
income and expenses of the subsidiaries which is on the basis of assets and liabilities
mentioned in the financial statements on the acquisition day (Szabó and Sørensen
2015). At the day of acquisitions the abovementioned items are to be measured in fair
values on the acquisition day. As mentioned in the “Paragraph 32 of AASB 3”in terms
of goodwill recognition lays out the particular criterion. The acquiring company has to

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realise the goodwill at the day of acquisition which will be chosen as the higher of the
two. They are provided below:
a. The aggregate of-
 As per stated in AASB 3 there is a considerable transfer gauged which is
measured in the fair value at the day of acquisition
 As per the standard non-controlling interest value in the acquiree gauged
 At the last satge of the business combination, the fair value of the interest
of equity which was held in the past with the acquiree by the acquirer at
the day of acquisition (Bohušová 2015).
b. The purchased total recognisable "assets and liabilities" that is anticipated to be
consistent as per the grades.
Suppose, it is estimated that "JKY Limited" began their trade on "1st May 2018", in which
"$20 million" were spent. The "journal entry" recorded is depicted below:
It is cited that, the following year "JKY Limited" invested "$10 million" to "acquire"
the stakes of "FAB Limited". The provided journal entry is given below:
According to the above table it could be noticed that the monetary equity of "JKY
Limited" shows "$10 million" and the "assets" equity pints out "$20 million". In the
"books of FAB Limited" the "journal entry" is passed is as follows:
At the closure of the session the "consolidated statement" would be stated as
follows:
Equity Accounting Method:

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This system is utilised for evaluating the "profits" earned from the ventures in
other firms. The income statement which is disclosed by the company in its financial
statements is based on the equity investment size. As per “Paragraph 10 of AASB
128”, the "investment" to be "realised" at price is at the beginning phase and there is a
change of the transferring worth for "realisation" of "profit or loss" of the shareholders
after the "acquisition". As stated in “Paragraph 33 of AASB 3”, the "realisation" of the
"goodwill", the "fair value" of the "equity interests" of the "acquiree" at the time of the
"acquisition" in the "fair value" of the shifted worth at the occasion of "acquisition" (Erel,
Jang and Weisbach 2015).
For instance, it is estimated that "JKY Limited" "acquired" "30%" of stakes of
"FAB Limited" for the sum of "$50,000" and the total earning would be "$100,000" and
"$50,000" bonuses. The buying of "JKY Limited" associates the "transaction" that would
be price and is registered as shown below:
It could be cited that "JKY Limited" would receive bonus of "$15,000" there would be
reduction in the "investment account". The journal is stated below:
The net profit of FAB Limited would be recorded by JKY Limited as a rise in the
investment account. The journal is provided below:
Response to Part B:
It is legal to transact between the two entities in a single financial period. In terms
of calculation of the consolidated accounts, all the transactions which are made
between the two entities and the estimation between the entities will be taken as a
whole and even when the company holds only a part of the issued equity (Biancone,
Secinaro and Brescia 2016). According to “Paragraph 29 of AASB 127” requires to
declare "intra-group balances", earning and expenditure "transactions" are to be
removed fully (Aasb.gov.au 2019). The "intra-group transactions" could involve:
 Reimbursement of the authorities to the "group" representatives.
 Reimbursement done on bonus to the representatives of the "group".

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 Stockpile disposing of "intra-group".
 "Non-current asset" disposal of "intra-group".
 Debts in the "intra-group".
The "consolidation" modifications incorporated with "intra-group transactions'
remove these "transactions" via turnabouts of the real "book-keeping entries" prepared
for identification of the "transactions" in recognisable legitimate businesses.
It could be observed that "JKY Limited" has purchased its stockpile from "one" of
their ancillary which is partly possessed. It can also be observed that till the time the
sale of inventory the company will not realize the revenue. So it will be not realised in
the financial statement of the company as the profit is not considerable from the
consolidated accounts. Unrealised profit like this which is sold among the group will be
in hold at the end of the period (Hadi 2015). As mentioned in the “Paragraph 25 of
AASB 127” explains that the profit or losses which is realised in the intra-group
transactions will come under assets part where it will be placed under the non-current
assets and inventory will be omitted(Aasb.gov.au 2019).
As stated in the case, the transactions which are made between JKY Limited and
its subsidiaries will be treated as the mark-up. When the sales made by the mother
company to the external customers, it is accurate in terms of transactions point
(Sukmadilaga, Pratama and Mulyani 2015). Until the profit realised by JKY Limited by
selling the goods, the profit realised by its subsidiaries will be treated as the unrealised
profit and as a whole the group profit will be boosted unduly. This is one of the primary
reasons why the omission of unrealised profit is so important. It is anticipated that "JKY
Limited" has bought stockpile from its auxiliaries at "$12,500" which is being retained at
the closure of the period. It is seen that the subsidiary went on to earn 25% profit from
the business and hence the amount stands to $2,500. From the viewpoint of "JKY
limited" there is an exaggeration of "consolidated profit" of "$2,500". The modification
entry made is:
"Consolidated Profit Account......................................Dr $2,500
To Consolidated Inventory Account $2,500"
When subsidiary went on to sale the goods with non-controlling interests to the
mother company need to eradicate the entire unrealised profit. This gives rise to the
questions about the profit for non-controlling interests. The whole profit which is realised
from the sales is eliminated. There is no presence of non-controlling interests which is
the reason for pin pointing share capital and reserves of the subsidiary.
It is anticipated that "JKY Limited" has "80%" and "70%" stakes in "D Limited"
and "E Limited" jointly. "D Limited" has sold commodities of "$70,000" to "E Limited" for
"$100,000". Furthermore, "E Limited" only disposed "50%" of commodities. When
making the "income statement" of "JKY Limited" would remove the unidentified "profit"
in stockpiles to be removed. The shifting of "profit" between "D Limited" and "E Limited"

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would be "$50,000" and the expense incurred by the "group" would be "$35,000"
(Kanapickienė and Grundienė 2015). The "intra-group" "profit' eliminated from
stockpiles would be "$15,000". As per the "first process" "JKY Limited" "realised"
"$3,000 ($15,000 x 20%)" in the portion of "non-controlling interest".
Response to Part C:
Effects of NCI disclosure requirement as a separate item in the process of
consolidation:
As cited in the “Paragraph 27 of AASB 127” the "consolidated statement" of the
"operating statement" of the organisation requires to be represented in a distinct "non-
controlling interests" from the "equity" of the "patent organisation" in the "balance sheet
statement" of the firm (Aasb.gov.au 2019). Non-controlling interests cannot be showed
directly or indirectly to the parent firm. The previously stated codes has assisted in
enhancing the book-keeping of "non-controlling interest" in the "income statement" of
the business. As mentioned in the “Paragraph 106 (a) of AASB 101” while the distinct
"reporting" is prepared for "non-controlling interests" in the system of "consolidation" the
variations required to be done in the investor's "equity" mentioning the adjustments in
"parent company" and "non-controlling interest" jointly. It is necessary to present the
distinct "non-controlling interests" precisely. The reason behind such separation is to
assure additional checking to the consolidated group as the claim made by them on the
net assets. It also implied that while the firms has "direct or indirect" "non-controlling
financial interests".
Transactions in equity can be termed as the variations in the ownership interests
of the mother company in its subsidiaries. It will not occur when the mother company
loses control over the subsidiaries. If the portion of "equity" of the "non-controlling
interest" varies, the changes in the respective auxiliary "interest" is represented by
performing modifications in the shifting worth of "controlling and non-controlling
interests". Besides these modifications of "non-controlling interests" and "fair value" of
"consolidation" reimbursement is to be identified (Kwok, 2017). These are mature to the
shareholders of the mother organisations.
Changes needed to ensure the accurate representation of the consolidated
financial statements:
For the purpose of representing the consolidated statement in the financial
statement of the company certain changes are needed in accordance with AASB
101.The preparation of the consolidated statement is not required in the same date of
reporting(Aasb.gov.au 2019). It is made for depicting the main transactions between
creating the financial statements of the subsidiary and the mother company
transactions. The carrying value from investments needs to be balanced which is spend
by the mother company on its subsidiaries and at the same time the part of each
subsidiary that is hold by the mother company need to be omitted.

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The damage "losses" that is recognised amid the "transactions" of the "intra-
group losses" would be "realised". The omission need to be done during the elimination
of the intra-group income, expenses and business. The consolidated statement of
the financial statements of both the mother and subsidiary companies need to combine
the cash flows, liabilities, assets and expenses. According to "AASB 112" there would
be an increase in occasional contrasts from the removal of "profit and losses" that would
direct towards "intra-group transactions". It is necessary to maintain that the accounting
policies which are adopted by the mother company need to be same with the
subsidiaries in the development of the financial statements of the company (Biaek-
Jaworska and Matusiewicz 2015).
It will not occur if the mother company losses control over the subsidiary
company. The part of equity changes which is occupied by the non-controlling interests
it can be seen a change in the subsidiary interests which is presented by the alterations
in the carrying value of the non-controlling interests and controlling interests. Alongside
the modifications of the "non-controlling interests" and "fair value" of the reimbursement
is to be "realised" precisely and they are shifted to the stakeholders of the "parent"
business. Additionally, the portion of "profit or loss" while any ancillary has "outstanding"
"aggregate" desired stakes, it requires to be computed by the firm after carrying out
modifications for bonuses on these stakes disregarding of bonus revelation.
Effects of the required changes on the disclosure requirements in the annual
report:
As per “Paragraph 10 of AASB 127”, while the firm represents the distinct
"income statements", it requires to involve the "investments" done in conformity with
joint projects either at price or as per "AASB 9" (Aasb.gov.au 2019). Some relaxation is
made in the preparation of the consolidated financial statement. The information which
arises from the disclosing risks the materiality; it is required to reveal the book-keeping
schemes which is stated in the computation basis that is utilised to make the
"consolidated" "operating statement" of the organisation. The "consolidated" "income
statement" of the firm would be created after declaring the kind and the level.
Restrictions are crucial which could appear from the capability of ancillary in shifting to
the "parent" either via the reimbursement of debts, proceeds and bonuses in "cash".
During the time of preparing the "consolidated" "operating statement" of the
organisation it involves the "income statement" of the auxiliaries at the closure of the
session. It also required the date of the parent organisations and also the subsidiaries
(Magnan, Menini and Parbonetti 2015). If the parent company holds the hold which is
less than 50% of the voting rights then the disclosures to be made directly or indirectly
and the treatment need to be done in accordance with the nature of relationships
between the mother company and the subsidiary company. Hence it can be stated that
there is a trace of impact of requirement for the disclosures during the preparation of the
consolidated financial statement.

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Conclusion:
According to the above discussion, there is requirement in the substantial
modifications as required in the "book-keeping assessment" of "non-controlling
interests" and the "consolidation" "book-keeping" with "regards" to the grades of "book-
keeping". It can be observed that the differences between the consolidation and equity
accounting are different in the case of acquiring a smaller company. The assessment of
the "intra-group transactions" points out the "consolidated" "financial statements" of both
businesses. There is a requirement of the disclosures for the non-controlling interests
which will impact on its process.

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