Financial Accounting And Reporting Assesment

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

FINANCIAL ACCOUNTING AND REPORTING2
From: Ms. Samantha Cole
Direct Manager
HJF Limited
40 Collins Street, Melbourne, VIC 3000.
To: King Edward ([e-mail])
CEO of Tom Limited
Date: 2nd January, 2020
Subject: Accounting Issues: Business combination and consolidated financial statements
Respected Sir,
I have gone through your e mail explaining the accounting issues related to intra
group transactions and related to different types of investment. I am writing you to provide a
detailed analysis of the accounting issues you have presented and at the same time would like
to thank you for choosing us and providing the opportunity to assist the board of directors in
their decision making process. For your convenience, I would be addressing each of the
issues separately which is discussed below.
The first issue is related to the elimination of intra group transactions prior to
preparing the consolidated financial statement. The question is why such transactions are
recorded as it is required to omit and therefore, does not make any logic. In the consolidation
procedures, as per paragraph B 86 of AASB10 of the consolidated financial statement, it is
required to fully eliminate the intra liabilities and assets, cash flows, expenses and income
associated to the transactions between group entities. In addition to this, it is also required to

FINANCIAL ACCOUNTING AND REPORTING3
completely eliminate the losses and profits resulting from any intragroup transactions. The
intragroup losses are required to be eliminated because such transaction might indicate
impairment and this is to be recognized in the consolidated financial statement (Aasb.gov.au
2020). The accounting treatment in relation to the intra group transaction as per the
accounting standard requires the intra group transactions to be absolutely eliminated. It is
important to eliminate the losses and profits arising from such transactions so that any
unrealized loss and profits are eliminated completely.
I will try to make the treatment of intra group transaction very clear to you with the
help of an example. When goods are sold by the group entity to another, then the profits
made on sales are recognized by the selling entity. From the viewpoint of selling company,
the profit recognized has not earned yet and would not be earned until the goods are sold
somewhere outside the group. Such unrealized profit on closing inventories is supposed to be
eliminated from the profit of the group in the event of consolidation. In addition to this, such
closing inventories should be recorded at cost. There is elimination of all the profits earned
on the transaction in the event of selling of the goods to a subsidiary by the parent entity.
Such treatment is done regardless of percentage of shares which the parent entity holds
(Chychyla et al. 2019). Therefore, it is required to completely eliminate the intra group
transactions in the preparation of consolidated financial statements.
The second issue is regarding the accounting of different types of investments where
you have asked to summarize the difference between different percentages held of another
entity. A parent entity of any subsidiary company may be one of several owners or the sole
owner. Any holding or parent company holding 100% of another entity implies that the
company owns 100% of the subsidiary. When the total amount of stocks held is less than
50%, it is required to have consolidated reporting by forming parent subsidiary relationship.
The parent company holding certain percentage of other entity that is known as subsidiary