Problems regarding Business Combination and Consolidated Financial Statement

Running head: FINANCIAL ACCOUNTING AND REPORTING 2
Financial Accounting and Reporting 2
Name of the Student
Name of the University
Author’s Note

1FINANCIAL ACCOUNTING AND REPORTING 2
MEMO
To: Ms Samantha Cole
From: Accounting Team of PWC Ltd
Date:31/09/2019
Subject: Problems regarding Business Combination and Consolidated Financial Statement
This particular memorandum aims at providing solution to certain accounting issues related
to business combination and consolidated financial reports that can be noticed in four
independent situations provided by King Edwards, the CFO of Tom Ltd. At the starting of the
discussion, it is important to mention that the applicable accounting standards of Australia are
important in the analysis involves in ascertaining the presence of parent-subsidiary
association.
According to the provided four Independent situations, there are certain problems in the
determination of parent-subsidiary relationship which need to be fixed along with the
determination of the aspect that whether it is needed to develop consolidated financial
statements in compliance with AASB 10. AASB 10 Consolidated Financial Statements
provides the required principles and guidelines to the entities for guiding them in the
development of consolidated financial reports when a business organization has control over
another entity or more than one entity. It is needed to take into consideration the analysis of
certain sections of AASB 10 in order to analyse and evaluate the issues presented in the
provided situations. The following discussion provides the brief of these sections of AASB
10.
B2. For determining whether he/she has control over an investee, it is needed for an investor
to evaluate if it has the subsequent components:

2FINANCIAL ACCOUNTING AND REPORTING 2
a) Power over the investee.
b) Rights or exposure to participation’s adjustable returns with the investee. And,
c) The capability of utilizing its power over the investee with the aim to influence the
return of the investors (legislation.gov.au 2019).
B3. The requirement is to consider the following factors because these are essential for the
procedure to determine the status:
a) The investee’s purpose and design.
b) Revealing the relevant activities along with the relevant processes for making
decisions on the relevant activities (legislation.gov.au 2019).
c) Determining the aspect that whether rights of the investors provide them with the
present ability to give direction to direct the relevant activities.
d) Ascertaining the aspect that if the investor has the rights or is exposed to variable
returns from its contribution with the investee.
e) Ascertaining the aspect that whether the investor has the possession of the ability to
utilize its power over the investee with the aim to create influence on the return
amount for the investors (legislation.gov.au 2019).
B4. An investor is required to consider the nature of its association with other parties while
making the assessment of the controls over the investees(legislation.gov.au 2019).
The following discussion involves in ascertaining the fact that whether there is any presence
of parent-subsidiary relationship and if it is needed to prepare the consolidated financial
statements in accordance with AASB 10 for the four independent situations.
Issue 1
As per the provided information of this case, Tom Ltd and Toots Ltd hold 50% shares of
Jerry Ltd and these entities operate in the mining sector. Tom Ltd has agreed that Toots Ltd