HA2032 Corporate and Financial Accounting: Consolidation Assignment

This assignment delves into the intricacies of corporate accounting, specifically focusing on consolidation methods arising from corporate takeovers. It analyzes two primary methods: the equity method and the consolidated method, detailing their respective accounting procedures and practical applications. The assignment further examines the treatment of intra-group sales, emphasizing the elimination of unrealized profits to present an accurate financial picture. Finally, it addresses the importance of disclosing non-controlling interest (NCI) in consolidated financial statements. The report provides examples and journal entries to illustrate the concepts, demonstrating the practical application of accounting standards in real-world scenarios. The analysis is framed within the context of a hypothetical company, JKY Limited, taking over FAB Limited, to elucidate the accounting implications of such a transaction.

Running head: Corporate Accounting
Corporate Accounting
Name of the Student
Name of the University
Author Note

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Corporate Accounting
Executive Summary
The report is been based upon the concept of consolidation as it show how the
company JKY Limited is able to take over FAB Limited and the method in regards of
the consolidation. It also shows about the intra sale which is been occur in the
company and how it should able to remove the unrealised profit from the same. It
also show about the disclosure in regards of the non-controlling interest

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Corporate Accounting
Table of Contents
Introduction...................................................................................................................3
Answer in regards of Part A..........................................................................................3
Answer in regards of Part B..........................................................................................5
Answer in regards of Part C.........................................................................................6
Conclusion....................................................................................................................7
Reference.....................................................................................................................8

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Corporate Accounting
Introduction
Company usually to expand their business and resources do take over of the
other firms so that it add some more value to the firm and also them to diversify into
other business and it even help the to distribute the risk which is been involve in the
business (Ali, Akbar and Ormrod 2016). The report show the details that the
company JKY Limited is able to do the holding of FAB Limited by the help two
methods of the consolidation and also it help to know about the intra sales which
happen in the organization and also about the importance of the disclosure of non-
controlling interest in the company annual report (Cimini 2015).
Answer in regards of Part A
Consolidation help the company to do the acquisitions of the other firm but it
is very necessary for the company to follow all the accounting which is been made in
regards of the consolidation as JKY Ltd want to do the takeover of FAB Ltd so they
can do so and in regards of the accounting method they can choose among the
equity method and consolidation method as both method help the company to do the
accounting in regards of the consolidation (Kim, Shi and Zhou 2014). Each method
have some specific reason and also there is very big difference in the process of
accounting in both method so it is the choice of the company about which method
they want to use in order to carry the accounting for the consolidation.
Equity Method of Accounting
As the name suggest of the method equity which is directly related to the
investment which is being done by one company to another so as per this method is
being concern it help the company to record all the necessary entry in regard of the
consolidation as it suggest that the company should only record the part of income
which they able to earn from the investment which is being done in the subsidiary
company as it should record the only portion of income which it get from the
investment which is been done by the parent company in the subsidiary company
(Nobes and Stadler 2015). It say company should also record the investment as per
the cost spend to get the investment and if there is some changes in the value of
investment at the end of the year than it should charged in the income statement as
per the nature of the change. The valuation in regards of the goodwill should be
done upon the interest which is been acquire by the parent company and so the
same amount should recorded as the goodwill (Aasb.gov.au 2019).
As per the above discussion the above method is been clear let take an
practical example so that it can able to clear the remaining doubt of the above
method as JKY Limited holds 10% share of FAB Ltd for a sum of $10000 and it was
found on later that the subsidiary company is able to get good amount of business
and as a result it able to earn a sum of $100000 as revenue and $50000 as dividend.
The entry which will be passed by JKY Limited will be
The amount of dividend which the company will get is $5000 and the entry will be

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JKY Limited is entitled for $10000 as income from the revenue and the entry will be
So from the above explanation and the example of the equity method it is been clear
that how the company is able to do the accounting of the consolidation in regards of
the equity method of accounting.
Consolidated Method of Accounting
As the name suggest it is also an method for doing the accounting in regards
of the consolidation as in this method the company have to record the portion value
of the asset and liabilities in regards of the holding value of the company in the joint
venture. As it does not have to record whole asset and liabilities so the subsidiary
company it will record up to the interest which is there of the parent company in the
subsidiary company (Aasb.gov.au 2019). For example if the parent company hold
about 60% in the joint venture which is been formed between the parent company
and the subsidiary company than it have to record 60% value of the asset and
liabilities of the subsidiary company. So it is simple how much the company hold it
has to record the same in the accounting process. It also state that the company
should record the asset and liability but they are doing so they all have to show all
the expenses and income in regards of the joint venture and should also the needful
accounting of the same in financial statement of the company (Aasb.gov.au 2019).
As per the accounting norms and standard it say that the consolidated
statement must contain all the asset and liability of both the parent as well as
subsidiary company. So as per the method it suggest that the company should
eliminate all the portion of the investment which is been there in the subsidiary
company as it will not be there in the consolidated financial statement so it have to
remove the same and as per the subsidiary company is been consider it also have
eliminate the amount of the investment which they have done in the parent company
in the name of holding the equity shares so both should eliminate the amount which
is been done by both in to each other business so that a proper consolidation
statement can be made by the company (Aasb.gov.au 2019). As per the equity
method this method all suggest the valuation of the goodwill as it show some slab
and the company have to select the highest amount from the limit of the slab and
should record the same in the consolidated financial statement of the company.
From the above discussion it is been clear about the about how the
accounting is been done in regards of the consolidation method of accounting so let
take an example which will clear a more about the method as JKY started its
business in 1 June 2018 from the investment of $50 million. So it will pass the entry
as

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So after a span of one year it invested $30 million in FAB Limited so the related entry
will be
The entry which will be passed by FAB in their books will be
So this about how the company can able to do the accounting in regards of the
consolidated method of accounting and also show the journal entry which will be
passed by the same
Answer in regards of Part B
As per the norms of different accounting standard which is been related to the
consolidation say that in the consolidated financial statement company should not
record any amount which is been related to the intra group sale as the parent
company should remove all the transaction which has happen in between the two
parent company and the subsidiary company so it should not record any items which
are from the intra sale or purchase in the financial statement of the company
(Aasb.gov.au 2019). It should not record any sort of the income or the expenses
which is originally generated from the intra transaction between the parent and the
subsidiary company. Intra transaction are the items which is been done between the
two company as any amount of sale or any purchase will been carried internally in
both the company. The simplest way which the company can able to do in order to
eliminate all the intra transaction is that it should do the reversal entry so that all the
transaction will be eliminated automatically and as result the financial statement of
the company will be free from any sort of this kind of the transaction.
JKY Limited is able to have some sort of purchase of the inventory from its
subsidiary company and as a result of no agreement of the sale it does not able to
generate the required income from the inventory which is been purchased by it form
the subsidiary company (Aasb.gov.au 2019). So it is know by all that if some sale
transaction happen so the sale amount also includes a part of the business profit
which the company charges in their ordinary business practices so it is can be clear
that the subsidiary company must also have included the profit part upon the sale of
the inventory which they have done to the parent company. So their was no sale
done by the parent company so the inventory so it is been there in the end of
accounting year and also the profit which will be treated as unrealised amount of
profit as this profit is not be realised by the parent company so it should not include
some sort of profit in the financial statement of the company. So as per the
accounting standard it suggest that it if there some kind of gain or loss from the
transaction between the parent company and the subsidiary company so it should be

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removed and should be shown in the financial statement as non-current asset but
the company have to remove the overall inventory from the business.
The group profit of the company represents the profit which is been earned by
the subsidiary company and the parent company so as the subsidiary have sold the
amount of inventory so it must record it as a sale and as a result of this the amount
of profit is been included in the subsidiary profit and also in the group profit as the
subsidiary profit is been directly transfer to the group profit. As the parent company is
unable to make the profit into income so there is only book profit and no real profit so
this make the overall profit increase as a result the profit is been shown is not real so
the unrealised part of the profit should be removed from the same so that the real
amount of the profit can be able to be get from the group profit ( Aasb.gov.au 2019).
So to remove that an adjustment entry should be passed by the company so let take
an example about the entry which should be passed to rectify the mistake. For
example if the subsidiary company charges an profit of 40% upon the sale value and
the sale was made of $100000 so it have also included the profit part so the amount
of unrealised profit will be as (40/140)* $100000 = $ 28571. So it is the amount of the
unrealised profit so the entry which will be passed by the company to removed this is
Consolidated Profit Account Dr 28571
To Consolidated Inventory Account 28571.
So this entry will removed all the unrealised profit and will show the fair amount off
the group profit.
Answer in regards of Part C
Effects of NCI Disclosure related to the separate item in the process of
consolidation
Every subsidiary company some sort of non-controlling interest in regards of
the parent company so it should show them by doing the presentation separately in
regards of the consolidated financial statement as these will also help them to
minimize the complexity which is been there in regards of the non-controlling interest
of the company (Aasb.gov.au 2019). The parent company should eliminate non
controlling interest as it cannot record the same as it is been directly related to the
holding of the equity in the subsidiary company. This is been made so that the
company can able to change which have come in the non-controlling interest in
regards of the parent company and also this section show an details in regards of
the non-controlling interest and how it is been amended and developed by the
accounting standard. This is also helpful for the different user of the financial
statement as they can able to know all the details which are been there and act
accordingly as if they found out that the company is not able to give proper
disclosure they may their decision and if they found everything fine they may give
their decision as per the company (Aasb.gov.au 2019).
As the company hold the equity in the subsidiary company so this holding is
been termed as equity transaction and if some changes are about to come in the
equity transaction than it may happen that the company may lose its power upon the
subsidiary company so it should disclose all the matter in regard of the equity
transaction which is been there in the subsidiary so that an proper information can
be made from the disclosure in regards of the subsidiary company (Aasb.gov.au
2019).

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Changes in order to ensure the actual representation of the consolidated
financial statement
The consolidated statement should be made in such a way that it should able
to show all the related transaction which has happen in the both the parent as well
as the subsidiary company. It should ensure that all the intra transaction have been
eliminated by the company and also the parent company is able to remove the
investment which was there in the subsidiary company and also about the equity
holding which was help in the parent should also be eliminated so that it both does
not have any holding in the company (Aasb.gov.au 2019).
Effects of the changes upon the disclosure in the financial report
The company should show the amount which is been as investment in the
joint venture as in cost and also should disclose all the related information in the
financial report so that an proper understanding can happen in the company in
regards of the amount it has spend upon the investment in the joint venture. If the
accounting date of the parent and the subsidiary ddoes not match as both do their
accounting in different dates so the company should disclosed the same in the
financial report as the reason of such change and also the effects of the changes in
the financial statement. It should disclose all the nature and the estimation of the
transaction which they have taken which doing the consolidation accounting and also
proper discloser should be given in regards of the non-controlling interest of the
company (Aasb.gov.au 2019).
Conclusion
The above discussion show how to do the accounting in regards of the of the
consolidation account as the company want to acquire the FAB Limited so it show
the method from which the acquisition can be done and also so how to treat the
unrealised profit which is been there in the intra sale between the parent and the
subsidiary company. Lastly it shows how the company can able to disclose the
matter which is related to the non-controlling interest in the annual report.

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Reference
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