Advanced Financial Accounting: Investment in Shares and AASB Standards

This report addresses the accounting treatment of share investments and share-based payments, focusing on the application of AASB 9 and AASB 10. The report begins with a memorandum to the CEO of Wakefield Ltd, analyzing the implications of investing in Hobson Ltd's shares, considering different levels of ownership and control. It explains how the degree of shareholding determines the accounting treatment, distinguishing between financial investments and investments that establish a holding-subsidiary relationship. The report then delves into the accounting for share-based payments as per AASB 2, highlighting the increasing use of share-based payment systems in modern businesses and their impact on financial reporting. The report also provides references to relevant accounting standards and literature, offering a comprehensive overview of the topic and practical guidance for financial professionals. The analysis covers the recognition, measurement, and presentation of financial assets and consolidation requirements, ensuring compliance with accounting standards.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Answer to question 1:......................................................................................................................2
Answer to question 2:......................................................................................................................5
References and bibliography:..........................................................................................................6

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Answer to question 1:
MEMORANDUM
Date: 17 September 2019
To: Angela Kirk, CEO of Wakefield Ltd
From: [Name, Designation]
Subject: Accounting treatment of investment in shares of companies
Introduction:
This memorandum is prepared to explain necessary accounting treatments for investment
in shares of companies in the financial books of accounts, and statutory requirements as per
accounting standards AASB9 and AASB10.
Investment in shares and degree of control:
Business organizations are always aiming at maximizing their wealth. With the increase
in volume of business and achievement of their short-term objectives, business organizations
intend to expand their business through various ways. Generic rout of business expansion is to
invest in capital asset and capitalizing surplus funds and reserves. Another way of business
expansion is to acquire a substantial controlling interest through acquisition of shares of an
existing company. It may always not happen that the target company will be a profitable
company. Sometimes, to gain a tax benefit, a loss making company can also be acquired by a

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profit making company. Companies may also invest in shares of another company by spending
their excess funds for earning a significant dividend income from there.
Now, number of shareholding or the proportionate of share holding to the total number of
share of the company determines the degree of control of the acquiring company. If an ordinary
share has a single voting right and more than fifty percent of total number of shares of the target
company is held by the investing company, then the investing company is considered to be the
holding company and the investee company is considered to be a subsidiary company. Therefore,
the degree of control over the management of the target company, determines the holding
subsidiary relationship. Identification and establishment of such a holding subsidiary relationship
is important for initial and subsequent accounting treatment for investment is shares.
Accounting treatment for investment in shares:
Objectives of investment in shares can be classified into two categories, one is for
earning a significant dividend income from such an investment and the other is to gain control
over the assets of a target company. Investment in shares with an intention of earning income
over the period can be treated as a financial investment only, and hence, the shares acquired for
such purpose can be considered a financial asset. As per accounting standard AASB9, such an
investment needs to be recognized in the financial books of accounts at their acquisition cost and
subsequently it must be restated to the market value or fair value periodically. Earnings in the
form of dividend from such investment should be shown as other revenues or incomes in the
financial statement of the company.
On the other hand, if the investment in shares of the target company establishes a holding
subsidiary relationship, then it must be treated as per the accounting standard AASB10. AASB

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10 requires preparation and presentation of consolidated financial statements for the financial
performance and financial position of the company including the financial performance and
financial position of the target company. In this case, all the assets and liabilities of the target
company must be clubbed with the assets and liabilities of the parent company. In doing so,
effects of intercompany transactions must be eliminated with a proper consolidation entry.
Analysis of the case study and recommendation:
Hobson Ltd is a profit making company and having growth potential in their revenues. If
only 5% or less than 50% of the shares of the Hobson Ltd is acquired then, the company can earn
only a dividend income in future, but it cannot get the control over the management of the
Hobson Ltd. If more than 50% of the issued shares of the Hobson Ltd are acquired, then the
company can gain a controlling interest and control over the assets of the Hobson Ltd, which
may give them better earning opportunity and a better financial position.
Conclusion:
From the above discussion, it can be concluded that, if investment in shares of a target
company establishes a holding company relationship then the investment must be treated as per
the provision of AASB10, otherwise, such investment can be treated as a financial assets and
accounted for as per the guidelines of AASB9.

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Answer to question 2:
AASB2 deals with the share-based payments. Share-based payment system is a type of
transaction where the payments for purchase of inventory or acquisition of assets are made by
issue of shares of the company. In modern business era, it is gaining more popularity as it gives
the business organization a source of finance (AASB, 2016). When a company is having a fund
crisis but having some need for purchase of inventory or acquisition of asset, share-based
payment system can be used for financing such transactions. Share-based payment of expenses
and purchases are increasing in modern revolutionary businesses (Kieso, Weygandt & Warfield,
2019). Hence, it is important to have a proper knowledge of accounting treatments for such a
transaction. IFRS2 deals with the reporting requirements and presentation of information relating
to share based payments. From IFRS2 the disclosure requirements and statutory requirements
relating to the presentation of such transaction in the financial statement can be learned. Another
journal “The FASB Simplifies the Accounting for Share-Based Payments” by Nichols,
Betancourt & Scott, can also be cited for gaining knowledge on accounting treatments for share-
based payments.

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References and bibliography:
AASB, C. A. S. (2016). Consolidated Financial Statements.
Bond, D., Govendir, B., & Wells, P. (2016). An evaluation of asset impairment decisions by
Australian firms and whether this was impacted by AASB 136.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting. John Wiley &
Sons.
Nichols, N., Betancourt, L., & Scott, I. (2017). The FASB Simplifies the Accounting for Share‐
Based Payments. Journal of Corporate Accounting & Finance, 28(4), 8-19.
Qu, X., Percy, M., Stewart, J., & Hu, F. (2018). Executive stock option vesting conditions,
corporate governance and CEO attributes: evidence from Australia. Accounting &
Finance, 58(2), 503-533.
Standard, I. A. (2015). Presentation of Financial Statements. Balance Sheet, 54, 80A.