Financial and Accounting Reporting | Letter

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

FINANCIAL AND ACCOUNTING REPORTING
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Letter
King Edwards ([e-mail])
Manager
510 William Street, Melbourne, VIC 3000
Date: 10.1.2020
Subject: Issus in Consolidation Treatments
As per the mail which we received, the business of Tom ltd is having problems
addressing the treatments in consolidated items which need to be presented in the financial
statements. This letter would be addressing all the issues which you have highlighted in the
mail forwarded. I would be pointing out relevant accounting standards which are applicable
to the situation which you are facing while preparing financial reports. The issues which you
have forwarded are discussed below with probable course of actions which can be made for
making necessary adjustments.
Issue 1:
The business of Tom Ltd has engaged in numerous intra business transactions which
need to be appropriately reported in the financial statements along with proper disclosures.
The mail shows that the accounts team is of the opinion that the intra group transactions of
the business needs to be eliminated before the financial statements are prepared in
consolidated form (Issakova et al. 2017). The first thing is to understand the relevance of
intragroup transactions which basically refers to transactions which takes place between
subsidiary companies and holding company. These transactions are internal in nature which
is one of the reasons that the same should not be included in the financial reports of a
business. As per the provisions of “Para 20 of AASB 127”, all intragroup balances for a

FINANCIAL AND ACCOUNTING REPORTING
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business which includes transactions, income and expenses needs to be eliminated from the
books of accounts in a complete manner (Aasb.gov.au. 2020). The intragroup transactions
need to be eliminated so that there is no double posting of the same transaction in both the
books of subsidiary and holding company. This would be affecting the profits which is
generated by the business in a direct manner and thereby misrepresent the financial position
of the business and affect the transparency principle of the business (Beuselinck and Deloof
2014.). Therefore, it can be said that your accounts team is correct in eliminating the
intragroup transactions completely from the books of accounts of the business (Lubbe,
Modack and Watson 2014). This would ensure that the accounting treatments of different
consolidated transactions are appropriately. In addition it is also advisable that you look after
the disclosure requirements for the transactions of intragroup transactions. A note needs to be
provided in the notes to accounts section. This would ensure that the management of the
company has provided proper disclosures in the books of accounts of the business.
Issue 2
The second issue which you have highlighted in the mail is regarding accounting for
investments which is made by a business in case of consolidation form of account. The query
which you have raised is related to the accounting for investment of different percentage in a
subsidiary company and for the same purpose accounting standard needs to be referred. The
accounting for investments in subsidiaries is covered in AASB 127 for the purpose of proper
accounting of the transactions (Elmassri, Harris and Carter 2016). As per the provisions of
“Para 38 of AASB 127”, any investment which is made by a business in its subsidiary needs
to account for the investments in either costs or in accordance with the provisions which is
stated in AASB 139 (Aasb.gov.au. 2020). The management of the company needs to be
account for each category of investments and proper disclosures needs to be provided in this
respect for maintaining transparency in the financial statements of a business.