University Accounting Memo: Consolidation Technical Aspects for CBA

This memo, prepared for the Board of Directors of Commonwealth Bank of Australia (CBA), addresses the technical aspects of consolidation accounting. It explains the need for consolidated financial statements, the inclusion of policies on corporate governance, audit committees, sustainability, and solvency. The memo also details the accounting treatment of goodwill on acquisition and impairment, referencing the 2019 Annual Report of CBA. Furthermore, it discusses other relevant matters, such as assumptions and judgments related to control, voting rights, and the determination of agent or principal, providing crucial information related to acquisition and consolidation. The memo aims to help the board understand the financial reports of the group.

Company Accounting
Name of the Student
Name of the University
Author’s Note

MEMO
To: The Board of Directors of Commonwealth Bank of Australia
From: The Accountants
Date: 18.08.2019
Subject: Explanation on the Technical Aspects of Consolidation
The main aim of this memo is to shed lights in certain technical aspects of consolidation.
Consolidation refers to the process to combine the financial results of many subsidiary firms
into the joint results of the parent company. The use of this method can be seen when a parent
entity retains more than 50% of the shares of another entity (La Rosa et al.2013). The
following discussion discusses about certain aspects of consolidation accounting in the
financial accounting of Commonwealth Bank of Australia (Commonwealth Bank).
Need for the Parent Entity to Prepare Consolidated Financial Statements
According to the 2019 Annual Report of Commonwealth Bank, the bank has published
consolidated as well as standalone financial statements of the Group and the Bank
respectively for the financial year 2019. The main components of these financial statements
are income statement, statement of comprehensive income, balance sheet, statement of
change in equity and statement of cash flows (asx.com.au 2019). The parent entity that is
Commonwealth Bank had to prepare these consolidated financial statements in spite of the
fact that the subsidiary entities are separate legal entities and have their own rights and there
are certain reasons for this (aasb.gov.au 2019). A business that possesses more than 50% of
the outstanding voting common stock of another business organization is known as the parent
company; and the corporation that the parent company acquires and controls is known as the
subsidiary company (La Rosa et al.2013). In case of Commonwealth Bank, the bank itself

and its subsidiary companies uphold their individual accounting data as well as information
and they have their own financial reporting practice (legislation.gov.au 2019). However, in
the presence of the fact that a central management of Commonwealth Bank controls the
parent entity as well as subsidiary entities and both the parent and subsidiary entities are
related to each other, the requirement for Commonwealth Bank is the preparation of one set
of financial statements and these statements are called the consolidated financial statements
(aasb.gov.au 2019). These consolidated financial statements consolidate the financial reports
of the entity with the financial reports of the subsidiaries and shows the parent and its
subsidiaries as a single company (Picker et al.2019). The same aspect can be seen in case of
Commonwealth Bank as the bank has shown the financial statements of the parent entity and
subsidiary companies (legislation.gov.au 2019). One crucial aspect is that Commonwealth
Bank possesses more than 50% of the outstanding voting common stocks of its subsidiaries
which is another reason to prepare consolidated financial statements by the bank
(Christensen, Cottrell and Baker 2013).
Inclusion of Policies on Corporate Governance, Audit Committee, Sustainability and
Solvency in the Financial Statement
As per the 2019 Annual Report of Commonwealth Bank, it has disclosed the information
related to corporate governance, audit committee, sustainability and solvency in separate
parts in the annual report (asx.com.au 2019). There is a separate section in the 2019 Annual
Report of Commonwealth Bank named “Corporate Governance” and the bank has included
all the information related to corporate governance in that section (asx.com.au 2019). The
major parts under this section are the bank’s commitment towards corporate governance,
details on board of directors and executive leadership team, commitment towards corporate
governance, the adopted corporate governance framework, stakeholder engagement and
others (asx.com.au 2019). These aspects cover all the necessary dimensions of corporate

governance. After that, Commonwealth Bank has mentioned about the audit committee under
the corporate governance framework and this framework takes into consideration the review
of independent assurance and services including internal audit, external audit and other ad-
hoc independent assurance and advice (Milojević, Vukoje and Mihajlović2013). As per the
Audit Committee Chairman, it is the responsibility of the Audit Committee to ensure the
external reporting of financial information along with framework of internal control
framework and environment, the internal auditors and internal audit functions, external
auditors and the conjunction of the bank’s risk management framework with the Audit
Committee (asx.com.au 2019). Apart from corporate governance and audit committee,
Commonwealth Bank has taken into consideration one major issue in sustainability which is
climate change (Budding, Grossi and Tagesson2014). The bank has reported its undertaken
approaches to address the issue of climate change under the section of Risk Management. In
order to ensure fair, responsible and sustainable business, Commonwealth Bank has adopted
the sustainability frameworks like The United Nations Sustainable Development Goals,
United Nations Global Compact and Global Reporting Initiatives (GRI) (asx.com.au 2019).
In addition, Commonwealth Bank has provided all the financial information related to current
and non-current debts, current liabilities and capital adequacy information which can be used
for analysing its solvency position (Gray2014).
Goodwill on Acquisition and Impairment
Goodwill is considered as a crucial aspect for the businesses in the processes of business
acquisition and business combination. According to the 2019 Annual Report of
Commonwealth Bank, the bank has provided all the details about their goodwill and
impairment loss under Note 6.1 of the financial statements; the name of this section is
“Intangible Assets” that starts from the page 181 of 2019 Annual Report (asx.com.au 2019).
The 2019 Annual report of Commonwealth Bank states that the bank has acquired two

companies in the year of 2018; they are Aussie Home Loans and eChoice. It needs to be
mentioned that there was no occurrence of any goodwill from the acquisition of eChoice.
However, the acquisition of Aussie Home Loans led to the generation of additional goodwill
of $446 million (asx.com.au 2019). This is a crucial aspect that the Board of Directors of
Commonwealth Bank needs to take into consideration. Another crucial aspect in the financial
reporting of Commonwealth Bank is the impairment of goodwill (Hoyle, Schaefer and
Doupnik2015). It is evident from the 2019 Annual Report of Commonwealth Bank that the
bank has certain policies for assessing goodwill impairment. In order to assess the
impairment of goodwill and other assets that have indistinct useful lives, the carrying
amounts of the cash-generating units are compared to the recoverable amounts (asx.com.au
2019). The bank ascertains the recoverable value on the basis of fair value after the deduction
of cost to sell by utilizing earnings multiple that has applicability to the kind of business in
which the bank is involved. It can be seen from the 2019 Annual Report of Commonwealth
Bank that there has not been impairment of any goodwill in the financial year of 2019 (Gray,
Coenenberg and Gordon 2013).
Other Relevant Matters
Apart from the above, there are certain other aspects in the financial statements of
Commonwealth Bank that the Board of Directors is needed to take into consideration to
understand the financial reports of the group. As per the 2019 Annual Report of
Commonwealth Bank, the banks has used certain assumptions and judgments regarding
different aspects of consolidation which are control and voting rights and agent or principal
(asx.com.au 2019). As per the accounting judgement and assumptions used for determination
of control and voting rights, holding more than 50% of the rights of an employee means that
the Group has total control over the entity. There is an involvement of significant judgments
where the Group either holds more than 50% of the voting rights but has no control over the

entity, or where the Group is deemed to have control on an entity in spite of holding less than
50% of the voting rights (asx.com.au 2019). In case of the determination of agent or
principal, the Group is considered to have power over an investment fund when it holds either
the responsible entity and/or the fund’s manager function. It has been determined by the
management of the Commonwealth Bank that the Group acts as a principal and have control
over a fund when it is not possible to easily remove it as a manager by the investors
(Bryer2013). These are certain crucial information related to acquisition that the Board needs
to take into account.

References
Aasb.gov.au. 2019. Consolidated Financial Statements. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB10_07-15_COMPdec17_01-18.pdf
[Accessed 6 Sep. 2019].
Asx.com.au. 2019. 2019 Annual Report: Commonwealth Bank. [online] Available at:
https://www.asx.com.au/asxpdf/20190807/pdf/4478gfnrpfs2k8.pdf [Accessed 6 Sep. 2019].
Bryer, R., 2013. Americanism and financial accounting theory–Part 2: The ‘modern business
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Budding, T., Grossi, G. and Tagesson, T. eds., 2014. Public sector accounting. Routledge.
Christensen, T., Cottrell, D. and Baker, R., 2013. Advanced financial accounting. McGraw-
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Gray, S.J. ed., 2014. International accounting and transnational decisions. Butterworth-
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Gray, S.J., Coenenberg, A. and Gordon, P., 2013. International Group Accounting (RLE
Accounting): Issues in European Harmonization. Routledge.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
La Rosa, M., Dumas, M., Uba, R. and Dijkman, R., 2013. Business process model merging:
An approach to business process consolidation. ACM Transactions on Software Engineering
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Legislation.gov.au. 2019. Corporations Act 2001 . [online] Available at:
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Milojević, I., Vukoje, A. and Mihajlović, M., 2013. Accounting consolidation of the balance
by the acquisition method. Economics of Agriculture, 60(297-2016-3534), pp.237-252.’
Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L.,
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