ACCM4300 Financial Accounting and Reporting 2: Consolidated Financials

This report addresses accounting issues related to business combinations and consolidated financial statements, as presented in a case study for ACCM4300 Financial Accounting and Reporting 2. The report, prepared by a graduate accountant at PWC Ltd, analyzes four specific issues concerning parent-subsidiary relationships and the necessity of preparing consolidated financial statements, guided by AASB 10. The analysis assesses control based on power over the investee, rights to returns, and the ability to influence returns. The report examines scenarios involving Tom Ltd, Toots Ltd, Jerry Ltd, Tyke Ltd, Toodles Ltd, Beep Ltd, and Looney Ltd, determining whether consolidated financial statements are required in each case. The findings highlight the importance of shareholding percentages, management control, and the influence of other shareholders in determining the existence of a parent-subsidiary relationship. The report concludes by providing recommendations based on the application of AASB 10 to each issue, offering a detailed understanding of accounting for business combinations and consolidated financial reporting.

Running head: FINANCIAL ACCOUNTING AND REPORTING 2
Financial Accounting and Reporting 2
Name of the Student
Name of the University
Author’s Note

1FINANCIAL ACCOUNTING AND REPORTING 2
MEMO
To: Ms Samantha Cole
From: Accounting Team
Date: 03.09.2019
Subject: Accounting Issues in Business Combination and Consolidated Financial Statement
The main purpose of this memo is to resolve the accounting issues in the areas of business
combination and consolidated financial statements while taking into consideration the
analysis as well as evaluation of the four issues raised by Mr King Edwards. It needs to be
mentioned that the relevant Australian Accounting Standards have a crucial role to play in
this whole analysis regarding business combination and consolidated financial statements.
It can be seen from the provided four issues that the main condition is the determination of
the existence of parent-subsidiary relationships and whether there is any need for the
preparation of consolidated financial statements under AASB 10. This indicates towards the
fact that the most relevant Australian accounting standard in these issues is AASB 10
Consolidated Financial Statements. The main objective of AASB 10 is the establishment of
principles in order to present and prepare consolidated financial statement when an entity has
control over one or more other entities (legislation.gov.au 2019). There are certain principles
in AASB 10 that require to be utilized for the analysis and evaluation of each of the provided
issues and these principles are related to the assessment of control (legislation.gov.au 2019).
These are mentioned below:
B2. In order to ascertain whether it has control over an investee, an investor needs to assess
whether it has the following:
a. Power over the investee;

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b. Rights, or exposure to adjustable returns from the participation with the investee; and
c. The capability of utilizing its power over the investee in order to affect the investor’s
return amount (legislation.gov.au 2019).
B3. It is needed to take into consideration the following aspects since these many assist in the
ascertainment process:
a. The purpose as well as design of the investee;
b. Mentioning of the relevant activities and the processes to make decision about these
relevant activities;
c. Determination of the fact that whether investor’s rights provide it with the current
capability for providing direction to the relevant activities;
d. Determination of the fact that whether the investor is exposed or has rights to the
variable returns from its participation with the investee;
e. Determining whether the investor possesses the capability of using its powers over the
investee in order to affect the amount of return for investors (legislation.gov.au 2019).
B4. It is needed for an investor to take into consideration the nature of its relationship with
the other parties at the time of the assessment of the control of an investee.
The following discussion shows the determination of the existence of parent-subsidy
relationship and the need for the preparation of consolidated financial statements under
AASB 10 for each of the provided issue.
Issue 1
It can be seen from the provided information on issue 1 that both Tom Ltd as well as Toots
Ltd hold 50% of the shares of Jerry Ltd; and all these companies are involved in the mining
business. It is agreed by Tom Ltd that the management of Jerry Ltd should come from Toots
Ltd due to the presence of the expertise of Bob Gates, its managing director. For providing

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expertise, a management fee is provided to Toots Ltd. It indicates that 50% of the shares of
Jerry Ltd is held by both Tom Ltd and Tools Ltd and Tools Ltd is truly directing Jerry Ltd
since it has the required management expertise. In this particular situation, Jerry Ltd cannot
be considered as a subsidiary company of either Tom Ltd or Tools Ltd. At the same time, not
the one investors has possessed the power over Jerry Ltd because of the fact that neither
investor has the right to allow it along with providing direction to the relevant activities of
Jerry Ltd (Bisogno, Santis and Tommasetti 2015). Even though Toots Ltd allowed by Tom
Ltd to manage the investee, it can intervene at any point of time and can challenge the
arrangement of the management. Since none of the investors acquires above 50% of the
shares of Jerry Ltd, they do not have the power. In the presence of these aspects, there is not
any requirement for the preparation of any consolidated financial statements (Perera and
Chand 2015).
Issue 2
According to the provided scenario of case 2, 35% of the interest of Tyke Ltd has recently
been acquired by Tom Ltd and Tyke Ltd has discovered large deposit of iron ore. Four of the
directors of Tom Ltd have been elected in the Board of Tyke Ltd which has a total of six
members due to the fact that Tom Ltd has widespread knowledge as well as experience in the
mining industry. The whole situation indicates towards the aspect that Tom Ltd is presently
able in the election of majority numbers of the directors of Tyke Ltd; and the huge expertise
of Tom Ltd in the mining industry is the major reason for this. For this reason, this does not
give it the power over Tyke Ltd (Schleimer and Pedersen 2013). There is not any information
that can suggest the fact that the rest 65% shareholders of Tyke Ltd could not be gathered and
modify the management of Tyke Ltd. Tom Ltd does not have any power over Tyke Ltd. In
the presence of all these aspects, there is not any need for the management of Tom Ltd to
prepare the consolidated financial statements (Howieson 2013).

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Issue 3
It can be seen from the information in issue 3 that 30% of the shares of Toodles Ltd is held by
Tom Ltd and there are other shareholders who are from mixed background. On an average,
each of the rest of the shareholders holds 10% of shares in Toodles Ltd. Tom Ltd has
appointed four among the seven directors of Toodles Ltd and three of the other shareholders
having interest in the management of Toodles Ltd have appointed rest of the three directors.
Most of the remaining shareholders of Toodles Ltd reside outside Australia and seldom
attend the meeting of the boards. They only visit when they have other business to attend in
Australia when the company holds the board meetings. Thus, it can be comprehend from the
above scenario that Tom Ltd holds 30% interest in Toodles Ltd and the remaining
shareholders hold an average of 10% of the interest in the company. Two significant aspects
that need to be considered regarding these investors that majority pterion of them lives
outside Australia and the annual general meetings is not attended by majority portion of
them. There is a greater need for making judgment regarding the existence of control in case
an investors obtains less than 50% shareholding in the investee. This aspect makes it
necessary to inspect the possible activities of other shareholders in Toodles Ltd (Statements
2014).
However, in the case of Toodles Ltd, there are certain factors that make it difficult to make
decision on the existence of parent-subsidiary relationship. The first fact is that other
shareholders who come from mixed background and only three of these shareholders are
needed to combine in order to gain the similar voting power as Tom Ltd; this aspect weakens
the probability for Tom Ltd to get the control over Toodles Ltd. The second fact is that most
of the shareholders of Toodles Ltd live outside Australia and this aspect diminishes the
possibility of them getting together for taking control over Toodles Ltd. However, they can
do so by giving proxies to each other (Grossi 2014). The third fact is that the annual general

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meetings of Toodles Ltd has been witnessing low attendance by the other shareholders.
However, this aspect can be changed in case these other shareholders become displeased the
management of Tom Ltd. The fourth aspect is that other shareholders are interested in
managing Toodles Ltd and this is clear from their role in appointing other three directors
which is one less than Tom Ltd. However, in case they become dissatisfied with the
management of Tom Ltd, they can heavily involve in the management process (Moerman and
van der Laan 2015). For this reason, Tom Ltd is not the parent company of Toodles Ltd due
to the absence of adequate power for directing the relevant activities of Toodles Ltd. This it is
not needed to prepare consolidated financial statements.
Issue 4
As per the provided information in issue 4, 80% shares of Beep Ltd is owned by Tom Ltd and
Beep Ltd owns 100% shares of Looney Ltd. Australian Accounting Standards have been
followed by all these three companies, but the shares of Beep Ltd is not trades while debt
instruments ate publicly traded. It implies that majority portion of the interest of Beep Ltd is
owned by Tom Ltd (Knapp 2013). Tom Ltd has the ability to use its power over Beep Ltd to
affect the return of the investors. In the presence of these reasons, Tom Ltd is the parent
company of Beep Ltd and it is needed to prepare the consolidated financial statements (Ruhl
and Smith 2013).

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References
Bisogno, M., Santis, S. and 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), pp.311-324.
Grossi, G., 2014. Consolidated financial statements in the public sector. In Public sector
accounting (pp. 63-76). Routledge.
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), pp.29-42.
Knapp, J., 2013. A Reconsideration of Consolidation Accounting Requirements and Pre‐
acquisition Dividends. Australian Accounting Review, 23(3), pp.190-207.
Legislation.gov.au. 2019. AASB 10 - Consolidated Financial Statements - July 2015 .
[online] Available at: https://www.legislation.gov.au/Details/F2018C00317 [Accessed 3 Aug.
2019].
Moerman, L.C. and van der Laan, S.L., 2015. Silencing the noise: Asbestos liabilities,
accounting and strategic bankruptcy. Critical Perspectives on Accounting, 27, pp.118-128.
Perera, D. and Chand, P., 2015. Issues in the adoption of international financial reporting
standards (IFRS) for small and medium-sized enterprises (SMES). Advances in
accounting, 31(1), pp.165-178.
Ruhl, J.M. and Smith, O.M., 2013. The Accounting Entity, Relevance, and Faithful
Representation: Linking Financial Statement Notes to the FASB and IASB Conceptual
Frameworks. Issues in Accounting Education, 28(4), pp.1009-1025.

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Schleimer, S.C. and Pedersen, T., 2013. The driving forces of subsidiary absorptive
capacity. Journal of Management Studies, 50(4), pp.646-672.
Statements, A.F., 2014. Directors’ Report and Audited Financial Statements. Balance
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