Financial Accounting and Reporting (ACCM4300) Assessment 3 Report

This report addresses accounting issues related to business combinations and consolidated financial statements, as presented in an email from the CEO of Tom Ltd. The report, prepared by a team of graduate accountants, clarifies the treatment of unrealized profits from intercompany sales, emphasizing the elimination of such profits in consolidation regardless of ownership percentage. It further explains the nuances of accounting for different investment percentages, differentiating between parent and subsidiary entities, and clarifying the concept of minority interest. The report details the implications of shareholding percentages on consolidated tax returns and the ability to offset profits and losses within a group. The assignment is a letter format and a video presentation summarizing the key issues. This analysis is supported by relevant accounting standards, offering practical insights for decision-making and understanding complex financial accounting principles.

FINANCIAL ACCOUNTING
AND REPORTING

 Samantha: Hello, Mr Edwards! How have you been?
 Mr. King Edwards: Hello Samantha. I am good and it was pleasure to receive your
response against the accounting issues faced by us in the absence of our chief
financial officer. I really appreciate your assistance at such short notice.
 Samantha: Well, that’s my job and I really thank you for choosing us to rely on the
accounting suggestions and help you with the decision making process.
 Mr. King Edwards: Shall we discuss on the matters I presented you over the e mail.
 Samantha: The e mail I received regarding some of the accounting issues related to
the consolidated financial statements and business combination.

 Samantha: I will address your query here regarding the treatment of such
transactions. My advice would align by making reference to the relevant
accounting standards as sought and mentioned by the discussion in the mail
forwarded by you.
 Mr. King Edwards: Sure, that would be relevant and helpful to assist the board
of directors in understanding the concepts and making decision.

 Samantha: The example explains about the selling of goods between the entities of any
group. The selling entity make records of the profits made on sales, when the goods are
sold by one entity to another. 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. Such treatment is done regardless of percentage of shares which the
parent entity holds.
 Mr. King Edwards: Oh, I see. That was indeed a simple explanation put forward by you
and was easy to understand.
 Samantha: Thank You! The next issue raised was related to the accounting of different
types of investments. You asked us to provide a summary of the differences between the
different percentages of the shares held by one entity in other that is the subsidiary entity.

 Mr. King Edwards: Yes please. I do not even have the knowledge about the
existence of difference between the accounting treatments of different
percentages of shareholding.
 Samantha: That’s ok. Take it easy. I would like to make a detailed clarification
on this confusion between the shareholdings.
 Mr. King Edwards: Alright.
 Samantha: Firstly, I would like to explain the meaning of subsidiary and parent
entity in this regard. An entity holding certain percentage of shares of other
entity is known as the parent entity and the other entity is the subsidiary entity.
The company holding less than 50% of the shares of the subsidiary company
that is holding either 1% or 20% makes the parent company representing
minority interest.

Minority interest is also known as non-controlling interest and a company having
minority interest implies that such shareholders do not exert control over the voting
rights and have little say in the decision making of the company.
 Therefore, company holding 1% or 20% of the shares of the subsidiary company
have minority interest in the subsidiary company. If the parent company holds
100% stock of the firm, it is known as wholly owned subsidiary and affiliate is the
company where other company is holding minority share of the stocks. In the
event of any parent company holding either 80% or more that 80% of the shares of
voting rights for any subsidiary, a consolidated tax return can be submitted by the
entity for taking the advantage of offsetting the profits earned by one of the
subsidiary with the losses of other subsidiary.

 Mr. King Edwards: Thank you so much Samantha for assisting us and addressing the
accounting issues. I hope that would make board of directors very clear of the
confusion.
 Samantha: You are welcome, Edward.