Case Study: Consolidation Procedures for Moonraker Ltd, BAC301, 2019

This case study analyzes the consolidation procedures for Moonraker Ltd, focusing on a 33% ownership in Money Penny Ltd. The solution addresses the general concepts of consolidation, emphasizing the combination of financial statements and the importance of intercompany eliminations. It examines the criteria for control, as defined by AASB 10, and explains the significance of eliminating intercompany transactions to accurately reflect the financial performance of the consolidated entity. The analysis concludes that Moonraker Ltd has control over Money Penny Ltd, necessitating the consolidation of their financial statements due to Moonraker's influence over Money Penny's board of directors and decision-making processes. The document references relevant accounting standards and provides a comprehensive overview of consolidation principles.

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CONSOLIDATION

CONSOLIDATION 2
General concepts:
The process of consolidation goes in to combine the financials of one company with that
of the subsidiaries and then preparing the combined financials of the parent company.
This is the method which is used in accounting wherein the parent company owns more
than 50% of the shares of the other company. The process of consolidation involves the
following steps:
In case, the parent company is adding up the cash balance of the subsidiary with
its own, then any amount of the intercompany loan will have to be eliminated in
full. Also, in case, there is any interest expense, then again the same will have to
be eliminated in full.
In case, the parent company has charged any amount or a % of the overheads to
the subsidiary, then there would be a calculation of the overhead amount and the
same should be distributed amongst the subsidiaries.
In case, either the parent company or the subsidiary company has any amount of
payables due from one another, then the same will have to appropriately adjust in
the books of accounts.
In case, the parent company is following the policy of paying the employees,
salaries, using any common paymaster, then a proper method of allocation of
these expenses must be considered and kept in mind
Any amount of the adjusting entries for the recording of the revenues and the
expenses during the periods must be done.
All of the assets, liabilities and the equity accounts must be used adequately used
for the subsidiaries and in case the corporate parent is correct, then an adjustment
has to be made for the same.
The financials of both the companies, parent and the subsidiary will have to be
checked and in case, there is anything fishy, then the same must be cross checked
and the relevant adjustment be made.
There must be a review of the financials in the case of each subsidiary and the
unusual amounts should be adjusted accordingly.
In case there are any transactions between the parent and the subsidiary company,
then the same will have to be eliminated in full and their effect from the
consolidation will have to be eliminated.

CONSOLIDATION 3
The financials of the parent company will have to be cross checked and any
inaccurate amount should be adjusted accordingly.
If the company has earned any amount of profit, then the income tax liability will
have to be recorded on it. The same could be required to be done at the subsidiary
level ("The four FASB consolidation concepts: How would each affect financial
statements?” 2019).
The books of the subsidiary must be closed down.
The books of accounts of the parent company must also be closed down only
when there are no additional transactions that are required to be reported.
The consolidated financial statements are then printed and distributed
("Consolidation accounting — AccountingTools", 2019).
Criteria for control:
With regard to control, the requirements of AASB 10 states that an investor, irrespective of
the amount of the involvement of the company in the investee, would ascertain if the parent
has been controlling its investee or not.
An investor is stated to have a control on its investee when it is exposed to a certain amount
of the risks or has the rights to receive the returns from the investee, being involved in the
business of the investee ("Consolidated Financial Statements", 2019).
Hence an investor shall be stated to have its control over the investor if it has any of the
following:
 Power over the investee
 Right to receive returns from the business of the company
 Right over the business operations of the investee to the extent that the investor has
control over the changing of the returns from the investee company
An investor will have to take into account all of the above facts when it considers the
control over the investee. It will have to reassess all of the controls that it exercises over
the investee, if the above stated facts indicate that there are changes to one or more of the
above mentioned elements of controls. When there two or more investors that have
purchased the assets of the investee, then they must act together when it comes to
controlling the business activities of the investee. This is mainly due to the reason that no
one investor can control the business activities of the other investee without co-operation

CONSOLIDATION 4
of the other investor. Each one of the investor will have to account for the interest in the
investee as per the requirements of AASB 128, investments in associates and AASB 9
financial instruments and AASB 11 which relates with the joint arrangements.
With regard to the power of the investor, an investor shall have the power over the investee
when the investor would have the rights over the investee with regard to the current ability so
that it is able to direct all of the relevant activities of the investee. These are the activities
from which the investor shall obtain major returns.
Power arises from the rights. This indicates a direct control rights through the acquisition of
shares. In the other cases, the assessment of the power and the rights would be more complex
and tough and would need a consideration of more than one factor. The example of which is
the power which is due to one or more contractual arrangements.
An investor which has the ability to control the relevant activities over the investee would
still have the stated right, even if its rights have been exercised. The evidence with regard to
the direction over the relevant activities would help in the determination of the power of the
investor but such of the evidence is not sufficient when it comes to the determination of the
power over the investor ("AASB 10 - Consolidated Financial Statements - July 2015", 2019).
Importance of elimination:
The process of intercompany elimination refers to the process the following which the
transactions between the parent and the subsidiary companies in the group are completely
eliminated. The process of consolidation ends when the books of accounts of both of the
companies have been eliminated in full ("IFRS 10 CONSOLIDATED FINANCIAL
STATEMENTS", 2019).
The intercompany eliminations shows the results from the business operations without the
transactions between the subsidiaries. This process ensures that the transactions that are
entered into with the third party by the parent company are reported in the financial
statements. This ensures that all of the transactions entered into between the parent and the
subsidiary company are eliminated in full. It is important that the parent companies keep a
track of the intercompany transactions that are taking place within the companies. Software’s
could be of help for them. Any transaction is eliminated between the two companies through
the following of double entry system in which one account is debited and the other is
credited. The double entry system helps in the eliminations of the offsetting of the transaction

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of the counterpart so that the system of consolidation reverses the entry and this brings the
effect to 0.
The following are the different types of intercompany eliminations:
 Intercompany debt
 Intercompany revenue and expenses
 Intercompany sale of inventory ("Intercompany eliminations — AccountingTools",
2019).
In the nutshell, there is as such no pint in recording a payable and a receivable in the same
books of accounts. Hence, it is better that the transactions like these are eliminated in full.
Case analysis:
In the given case, the company has a 33% interest in the share capital and the rest of the share
capital or the voting rights of the company lies with the funders of the Money Penny limited,
which means that all of the voting rights are under Moonraker, either directly or indirectly,
since they have 3 out of 5 seats in Money Penny. Also, these 3 seats are under the board of
directors of the company. Moonraker takes all of the decisions of the company. This shows
that Moonraker has the control over the company. This is in light of the fact that an investor
shall be stated to have its control over the investor if it has any of the following:
 Power over the investee
 Right to receive returns from the business of the company
 Right over the business operations of the investee to the extent that the investor has
control over the changing of the returns from the investee company
And since Moonraker undertakes the majority of the decisions of the business of Money
Penny and assuming, it is entitled to receive returns, the financials of both the companies will
have to be consolidated.
Hence, the books of accounts of BAC investments would be consolidated with Money Penny
Limited.

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References:
AASB 10 - Consolidated Financial Statements - July 2015. (2019). Retrieved 2 October
2019, from https://www.legislation.gov.au/Details/F2018C00317
Consolidated Financial Statements. (2019). Retrieved 2 October 2019, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf
Consolidation accounting — AccountingTools. (2019). Retrieved 2 October 2019, from
https://www.accountingtools.com/articles/how-does-consolidation-accounting-
work.html
IFRS 10 CONSOLIDATED FINANCIAL STATEMENTS. (2019). Retrieved 2 October
2019, from https://www.cpaaustralia.com.au/-/media/corporate/allfiles/document/
professional-resources/ifrs-factsheets/factsheet-ifrs10-consolidated-financial-
statements.pdf?la=en&rev=b3bfd7428f0b4ec8bb4f4ab740c30180
Intercompany eliminations — AccountingTools. (2019). Retrieved 2 October 2019, from
https://www.accountingtools.com/articles/what-are-intercompany-eliminations.html
The four FASB consolidation concepts: How would each affect financial statements?. (2019).
Retrieved 2 October 2019, from
https://onlinelibrary.wiley.com/doi/pdf/10.1002/jcaf.3970060109