Corporate and Financial Accounting: Consolidated Financial Statements

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Corporate and Financial Accounting
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Executive summary:
Under this report, it has been seen different types of AASB within the holding company
and how the company made their financial accounts or statement by following the rules
and norms according to the AASB in order to present its consolidated financial
statements. The consolidated accounts are the combination of two companies’ accounts
in a single document due to the JKY Ltd company took over the business of FAB ltd
Company business, also discussed on the profit earned by the FAB Ltd for the sold of
inventory to its holding company.
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Contents
Executive summary:.........................................................................................................2
Introduction...................................................................................................................... 4
Part A: Discuss the suitable method for the preparation of consolidated financial
statements........................................................................................................................5
Part B: Provide the effect of NCI in the Subsidiary company and discuss on the profit
made by the Subsidiary company from the sale of inventory...........................................7
Part C: Finalizing the consolidated accounts in the books of holding company...............9
Conclusion..................................................................................................................... 10
References.....................................................................................................................11
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Introduction
In this brief, there is a discussion made on the company JKY Ltd in reference to various
Australian Accounting Standard Board (AASB). The overall reports mainly consist of the
point over the acquisition of FAB Ltd Company by the JKY Ltd Company. The part that
contains in this brief is divided into three parts and each part is linked with one another
that help in understanding each part clear so the parental company can be easily made
its consolidated financial statement. In this report also included non-controlling interest
(NCI) and the effects of it within the company in order to run business. Therefore to
understand all AASB with both companies needs to work out on this brief.
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Part A: Discuss the suitable method for the preparation of consolidated financial
statements.
In this part, the board of member of JKY Ltd wants to discuss on the topic of takeover
another company named FAB Ltd. The FAB Ltd Company is an ASX listed company so
it helps in understanding that takeover of this company is benefited to the parent
company (JKY Ltd). To understand this AASB 3 is helpful in understanding the
business combination (two businesses are merged as a single).
First of all the parent company i.e. JKY Ltd Company identify the business which it
wants to take over another business is similar to its parent business or not. But here
both company businesses are the same as both are reelected to the same industry.
When the company takeover another company business then the parent company
should recognize the following points in reference to AASB 3 (Australian Accounting
Standards Board).
Recognition principles of both companies (parent and it is subsidiary)
From the date of acquisition of a business, the parent company should recognize
the goodwill of the company separately.
When the company JKY Ltd acquired the business of FAB Ltd Company, it should
identify he all assets and liabilities that come with the acquisition of a business that such
assets and liabilities are meet the requirement of the accounting standard for the
purpose of preparation and presentation of financial statement of the company. In order
to qualify the recognition method as a part of the method of acquisition, those assets
and liabilities are acquired by the holding company must be the part of the same
company as exchanged in terms of business combination transactions instead of
separately transactions. In a takeover of the business, it creates a relationship between
two companies as one company (who acquire the business of another) is the parent or
holding company while the other company who is acquiring is termed as a subsidiary.
According to AASB 128, it said that the one company invests its business entirely in the
business of another in order to give the right to use its assets for their business activity.
As per the AASB 128, a joint venture is a party to the contract made between them that
have jointly control over the business of new business i.e. after the merger of one
company with another. When the parent company starts to prepare its consolidated
financial statements with its new company that was acquired through the acquisition
method must be combined all the assets and liabilities of the subsidiary company only
those who are same or similar in nature with its parental or holding company. Now it is
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the responsibility of its parental company to prepare a consolidated financial statement
that shows both company statuses (Dunbar, and Laing, 2017). There is a basic
difference between the two methods of accounting like consolidated and equity. The
difference is that in equity method investor of the company held an ability to influence
over the investee without having total control over between the holding and subsidiary
company. But in the method of consolidated, investors have full control and ability to
influence the company invested. Example of the two methods of accounting,
Equity method:
If the parent company purchases 30% from other company at $ 500,000. At the end of
the year, the subsidiary company showed a net income of $ 100,000 and a dividend of $
50,000
If the parent company purchased such assets it records such assets as an investment
under the head of the investment account and for this the entry is
Investment A/c Dr. 500,000
Cash A/c Cr. 500,000
Now the parent company receive a dividend of $ 15,000 (on $50,000) and record this as
a reduction in the investment account of the company due to the money is received
through their investee.
Cash dr. 15,000
Investment cr. 15,000
In a consolidated accounting method, it can be referred to as a combination of both
company financial statements.
Let the XYZ company is a parent company that holds the business of its one new
subsidiary company named ABC. This company needs to pay royalty charge or other
fees to its parental company. Now when the company (parental) start prepared its
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financial statement must conclude the financial statement of its subsidiary for the
purpose of shoving a clear image of the entire business entity (Hoyle, et. al., 2018).
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Part B: Provide the effect of NCI in the Subsidiary company and discuss on the
profit made by the Subsidiary company from the sale of inventory.
When the company like JKY Ltd, bought another company like FAB Ltd which is
subsidiary of JKY Ltd Company and the parental company uses GAAP principles, it is
necessary to record the transactions by the user of the method of acquisition. This will
include steps of the process in which the assets and liabilities are to be recorded (Hadi,
2015).
1. Measure any tangible assets and liabilities:
It is necessary for the company that company should record the value of tangible assets
and liabilities at fair market value as from the acquisition date of the company and this
market value is provided by an outside part known as the third party. But on the other
hand, there is an exception of this in case of lease and insurance contract. In this case,
these were recorded as the date of inception (Acharya, et. al., 2017).
2. Measure any intangible assets and liabilities:
By the uses of GAAP, most of the intangible assets are not recorded as an asset. This
type of intangible his is the more difficult one because of the subsidiary company may
not record many assets and liabilities in its financial statement. Assets and liabilities
also need to record at FMV (Fair market value) from the date of acquire.
3. Measuring the amount of non-controlling interest:
On the date of acquisition, the subsidiary company (FAB Ltd) record the non-controlling
interest in its books of accounts at a fair or real value. Such value is taken from the
market value of the stock of the subsidiary company. This was one of the dates when
the parental company takes control of its subsidiary. The money paid to the subsidiary
company is minimum price than the capital paid by the parental company in order to buy
a new business because of non-control that was associated with this.
4. Measuring the amount of consideration paid:
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There is or bar on the parental company, it is own choice that the company paid in cash
or in kind as suitable for the company. In-kind means issuing any share, debt or stock.
This is also measuring fair value from the date of acquisition (Shoup, 2017).
5. Measuring of goodwill:
As all steps are completed now the holding company needs to pay money to its
subsidiary company for the company goodwill if any.
The consideration paid + non-controlling interest – Identifiable assets acquired
+ Identifiable liabilities acquired
Intra-group transactions:
It included the two companies’ transactions of the same group. To understand this
type of transaction an example is taken that help in gaining the knowledge of this
type. Issue of an invoice for the sale for the purpose of supplying of services is the
most common example. The reason being that the company issuing an invoice for
the purpose of the business of another included in its balance sheet as a trade
receivable and in the income statement as revenue while the other company shows
it as expenses in the income statement and payable in balance sheet respectively.
Here it is advised to the holding company the profit that was earned by the
subsidiary company through the sale of inventory at profit to its parental company
should deduct the amount by the profit price because of as the company is
purchased or takeover by another company then its subsidiary company cannot
make any type of profit from its holding company.
The NCI of the company is affected by the profit of the subsidiary company in the
following terms.
 As the company (parental) paid the amount of capital which his less per share
amount affect the subsidiary company profit due to minimum amount is recorded.
 Record the amount at a fair price even when the price is paid relatively high in
relation to the company goodwill (Potter, et. al., 2019).
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Part C: Finalizing the consolidated accounts in the books of holding company.
The AASB 127 is related to the preparation of consolidated and separated financial
accounts of the company. The application of this standard are as following:
Every company is required to make its financial reports. The purpose of preparing for
making financial reports is to report each other.
Here the holding company i.e. JKY Ltd made its financial statements or reports for the
period of 30th June 20X8. It is clear for the parental company that when the time of
being the preparation of financial state met started it should include the financial
statement of its subsidiary company. The combination of both financial reports at one
place called consolidated financial statements. As per the NCI, it requires to show the
owner’s equity separately. If the company having any other type of profit then it should
be distributed among its subsidiary company in their respective proportion. If the
statement it is provided that the company financial accountant already provided
information about the assets recorded mount on the historic value. It is a requirement by
the accounting standard that the company fixed assets always recorded on the historic
value instead of FMV (fair market value). The reason being that the company should
evaluate how much depreciation is proved till the last date of the balance sheet
(Gluzová, 2016). A historic cost is the measurement of asset value in the accounting of
the company balance sheet as the long term assets of the company based on the real
or actual or historic cost. The consolidated financial statement of the company requires
to change the effect of the NCI in its statement which is being prepared at the time of
and of year for the purpose of correctly showed the financial position of the company.
The other requirement of changes are required in the company consolidated financial
statement is changed in consolidation principles, accounting policies and measurement
base of the assets. From the balance sheet, various types of both account receivable
and account payable balances are to be eliminated. The eliminated amounts are related
to the amount which is showed by the conmp0any to or from holding company to its
subsidiary company. When the company (parental) start to prepare its consolidated
financial statement then it must be aware of the thing that both companies should use
the same accounting method or process in which its overtaken business used. This will
help to be that the accounting to be recorded keep in minds the GAAP principles
suggested by the issuing board of accounting standard. All the accounts which are
related to the overtaken company like a reserve or retained earnings, the stock must be
removed from the consolidated financial statement of the company. When the
subsidiarity company is not fully or not wholly owned by its parental company then in
such case NCI (non-controlling interest) used by the subsidiary company. An additional
requirement which is shown in the company financial statements effect in the following
ways:
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 First is the present true and clear picture of the company.
 Enable investors to make their decision which is based on the company annual or
financial reports.
 Create transparency in the company activities that make the company goodwill great
(Handley, et. al.,).
The effect of NCI disclosure as a separate item in the process of consolidation.
 When the amount of NCI is shown clear then it ensures the financial statement of the
company true because of non-including of NCI part of the amount.
 It shows the actual or real amount based on fair value in the market of stock.
 Present the real money paid against the purchase of business which is less than the
amount of per share in the market.
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Conclusion
From the above all the part it has been concluded that the report was based on the
Australian Accounting Standards Board (AASB) within the JKY Ltd company which is
the holding or parental or acquirer company which acquire a new company named FAB
Ltd. in the first part shown the AASB 3 related with the business combination and AASB
128 with investment in joint venture. Under this analyzed that parental company uses
consolidated accounting method as the company takeover and all the activity of its
subsidiary be included in its main business. In the next part discus made on NCI and its
effect within the holding company. in the last part made the allocation of profit between
the given two companies.
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