Financial Accounting Report: Investment Analysis & AASB Compliance

This report analyzes Hamilton Ltd's potential investment in Orange Ltd to gain access to patented technology, evaluating options like purchasing 35% or 80% of Orange Ltd's shares. It details the accounting treatment for each scenario under AASB standards, including consolidation requirements for majority ownership. Alternative strategies, such as purchasing all of Orange Ltd's output, are also considered. The report recommends acquiring 80% of Orange Ltd's shares for better control and access to the technology. Additionally, it identifies AASB 10 and AASB 107 as crucial standards for future professional practice, highlighting their relevance in acquisition analysis, goodwill valuation, consolidated financial statement preparation, and cash flow statement preparation. Desklib provides access to similar solved assignments and study resources for students.

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

1ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Answer to question 1:......................................................................................................................2
Answer to question 2:......................................................................................................................6
Sub part (a):.................................................................................................................................6
Sub part (b):.................................................................................................................................6
References and bibliography:..........................................................................................................7

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Answer to question 1:
MEMORANDUM
Date: 06 May 2019
To: The Management of Hamilton ltd
From: [Name], Accountant
Subject: Analysis of Investment opportunities in Orange Ltd
Introduction:
This memorandum is prepared to analyze the investment opportunities in Orange Ltd to
get control over the patented technology of Orange Ltd for an improved production system of
mobile phone components. It describes the ways of investment in which such access to the
technology can be get and the respective accounting treatments in the books of accounts for the
investments.
Proposed Investment Options to get access to the patented technology:
The company is unable to acquire the net assets of Orange Ltd, but there are two
proposed options, in which the control over the patented technology of Orange Ltd can be
availed. One is to purchase 35% of the issued shares of the company and the other is to purchase
80% of the issued shares of Orange Ltd. Each shares of the Orange Ltd carries a single voting
right. It implies, if 35% shares are purchased, the Hamilton Ltd will have 35% voting in the
general meeting in taking any important business decision, and if 80% of the shares purchased
then they will have 80% voting right in the annual general meeting.

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In the first case where the company purchases 35% of the shares of Orange Ltd, they
would be having a 35% voting right in the general meeting and would not have a full control
over the assets of the Orange ltd. They will not be the majority shareholders of the Orange Ltd.
Hence, they will not be able to get control over the patented technology of Orange Ltd.
In the second case where the 80% of the shares of Orange Ltd will be purchased, the
Hamilton Ltd would be a majority shareholder and would have 80% control over the decision
and assets of Orange Ltd. Hence, in this option the company can get access to the patented
technology of Orange Ltd.
Accounting treatment of the above investment options:
In the first case, where only 35% shares of the Orange Ltd will be acquired, it will be
shown as an investment in the books of accounts of the Hamilton Ltd. Amount paid for
acquisition of such shares will be shown as an investment in the balance sheet of the company.
The accounting entry for recording such a transaction would be a debit to the Investment in
shares of Orange Ltd and a subsequent credit to the cash or bank account from where the amount
would be paid. As per the guideline of AASB 127, in such a case the assets and liabilities cannot
be shown in the consolidated statement of financial position, only the amount paid for
acquisition of such shares can be shown as investment in the statement of financial position.
In the second case, where 80% shares of Orange Ltd will be purchased, the Hamilton Ltd
would be the majority shareholders, and hence, all the assets and liabilities of Orange Ltd will
have to be shown in the consolidated statement of financial position of Hamilton Ltd. In such a
case, initially the purchase of shares in Orange Ltd would be recorded as an investment by a
debit to the Investment in shares of Orange Ltd and a credit to the cash or bank account. At the

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yearend, various consolidation entries need to be passed to eliminate various intercompany
transactions and investment and all the liabilities and assets of the Orange Ltd would be clubbed
with the respective assets and liabilities of Hamilton Ltd. In this process, the value of goodwill or
the gain in purchase of shares are also needs to be computed based on the cost of acquisition and
net assets attributable to the holders of 80% shares of the Orange Ltd. As all the assets and
liabilities of the Orange Ltd would be added with the assets and liabilities of the Hamilton Ltd,
assets attributable to the minority shareholders are also needs to be computed and shown as the
no controlling interest in the balance sheet of Hamilton Ltd. If any intercompany transactions
take place during the year after the acquisition, elimination entries will have to be passed to
eliminate any unrealized profits or losses and intercompany outstanding. There are various
statutory requirement and guidelines, which needs to be complied with if the company is going
for this option.
Other Investment Options to avail the patented technology of Orange Ltd:
To gain an easy access to the patented technology held by the Orange ltd, the 100% net
assets of the company can be purchased, but the Hamilton Ltd is unable to acquire the 100% net
assets of Orange Ltd due to unavailability of fund. An 100% acquisition of net assets of the
Orange Ltd can create some benefit to the company as well as it can create unnecessary blockage
of capital due to non usability of other assets in manufacturing system of the Hamilton. Apart
from those two investment options as discussed above, Hamilton Ltd can enter into a contract
with the Orange Ltd to purchase all the output of Orange Ltd and not to sell those component to
any other external parties. They also can enter into a contract to produce all the components
required by the Hamilton Ltd to be manufactured by the Orange Ltd using their improved

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patented technology. As the company is unwilling to sell the technology or to license the
technology, they need to go for wither of these option to gain an access to the technology.
Conclusion:
From the above discussion, the potential investment options have been made clear, and
based on those, it can be recommended for the company to go for the second investment option
by acquiring 80% of the shares of Orange Ltd. It will give the company an 80% voting right and
a fair access to the patented technology held by the Orange ltd.

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Answer to question 2:
Sub part (a):
There are various accounting standard, which are issued by the AASB and amended time
to time by the AASB. Some of them are related to the accounting treatment of transaction and
some of them are related to the disclosure of those transaction. In my opinion AASB10
“Consolidated Financial Statement” and AASB107 “Statement of Cash Flow”, these two
accounting standards are important for future professional practices (aasb.gov.au, 2019).
Sub part (b):
If the requirements of those two accounting standards can be learned thoroughly then
following activities could be performed in practical.
 Acquisition Analysis
 Valuation of Goodwill
 Preparation of Consolidated Financial Statements
 Preparation of cash flow statement

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References and bibliography:
aasb.gov.au. (2019). Accounting standards. Retrieved from
https://www.aasb.gov.au/Pronouncements/Current-standards.aspx
Bisogno, M., Santis, S., & Tommasetti, A. (2015). Public-Sector consolidated financial
statements: An analysis of the comment letters on IPSASB’s exposure draft no.
49. International Journal of Public Administration, 38(4), 311-324.
Bolton, P., & Samama, F. (2013). Loyalty‐shares: Rewarding long‐term investors. Journal of
Applied Corporate Finance, 25(3), 86-97.
Clacher, I., De Ricquebourg, A. D., & Hodgson, A. (2013). The value relevance of direct cash
flows under International Financial Reporting Standards. Abacus, 49(3), 367-395.
Farshadfar, S., & Monem, R. (2013). Further evidence on the usefulness of direct method cash
flow components for forecasting future cash flows. The international journal of
accounting, 48(1), 111-133.
Howieson, B. (2013). Defining the Reporting Entity in the Not‐for‐Profit Public Sector:
Implementation Issues Associated with the Control Test. Australian Accounting
Review, 23(1), 29-42.
Kusuma, H. (2014). The Incremental Information Content of the Cash Flow Statement: An
Australian Empirical Investigation. International Journal of Business
Administration, 5(4), 90.

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Sinclair, R., Northcott, D., & Hooper, K. (2014). Can sector-specific standards enhance the
comparability of Third sector organisations' financial statements?. Third Sector
Review, 20(2), 27.
Zuzik, J., Weiss, R., Weiss, E., Mixtaj, L., & Király, A. (2015). Return on shares of steel
companies under the influence of mergers and acquisitions. Metalurgija, 54(1), 304-306.