HA2032 Corporate Accounting: Consolidation Accounting and Takeover

This report delves into the intricacies of corporate accounting, focusing on consolidation processes during company takeovers, using the case of JKY Limited's acquisition of FAB Limited. It examines different accounting methods, including the equity and consolidation methods, highlighting their respective applications and drawbacks. The report further discusses the treatment of intra-group transactions, particularly unrealized profits arising from inventory sales between parent and subsidiary companies, and emphasizes the importance of eliminating these profits to ensure accurate consolidated financial statements. Additionally, it addresses the disclosure requirements for non-controlling interests (NCI) and their impact on the consolidation process, emphasizing the need for separate and distinct presentation of NCI in financial statements. The report also highlights the importance of adhering to accounting standards to provide stakeholders with reliable and transparent financial information.

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 show about the consolidation process how it help the company at the time
of the acquiring the company. It show about the transaction happen between the
parent and subsidiary company and also how to deal with the unrealised profit and
also the accounting and the disclosure which is to be done by the company in
regards of thee non-controlling interest

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Corporate Accounting
Table of Contents
Introduction...................................................................................................................3
Section A.......................................................................................................................3
Section B.......................................................................................................................5
Section C......................................................................................................................6
Conclusion....................................................................................................................7
References...................................................................................................................9

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Corporate Accounting
Introduction
The company have to prepare its account so that it can able to show financial
information to the stakeholder of the company so this responsibility is been carried
out with the help of corporate accounting. The accounti8ng know all the procedure
which has to be followed by the company in order to provide all the useful
information to the stakeholder of the company (D'Amico et al., 2016). This report
shows about the company JKY limited who want to acquire FAB Limited. It show
about the different method which company use for the purpose of accounting and
also it show transaction related to the intra purchase and sale and it finish the
discussion with the concept of non-controlling interest (Aasb.gov.au 2019).
Section A
It can be seen from the data which is been provided that JKY Limited have
some interest in FAB Limited so as a result it want to get the company. The company
JKY Limited has confusion about which method would be appropriate in regards of
the accounting of consolidation s it can choose any method which it seems
appropriate in regards of the acquisitions. Either it can go for the equity method or
the consolidation method. Each method is a bit different from another and each one
have their own importance and drawback so it’s the company which have to decide
the same about the method which should be selected by the company in order to
complete the acquisitions (Aasb.gov.au 2019).. The details of the methods listed
below:
Equity Accounting Method
Equity Accounting Method is one of the most used method in regards of the
consolidation as in this the company can able to record the investment profit only
which they have got from the subsidiary company. The company should record the
same in the profit and loss account of the company and also should show the size of
the investment which it own in the subsidiary company (Hoyle, Schaefer and
Doupnik 2015). The accounting standard suggest that when the company acquire
the investment than it should record it in value it have got the asset and if it see an
reduction or appreciation than as per the nature it should record the same in the
income statement of the company. It should do the valuation of the goodwill at the
time of acquisition and should record it as interest acquired as it should not be
recorded in any other value (Aasb.gov.au 2019)..
To clear the above point an example can be given as JKY Limited has 25% share
upon the FAB Limited for $40000, after some time the company found that , FAB
Limited is able to earn $80000 as net income and $30000 as dividend. So JKY will
recognize the purchase as
The amount of dividend which JKY Limited will get is $7500 so the entry will be

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Corporate Accounting
The amount of profit it will get is $20000 so the entry will be
Consolidation Method of Accounting
This method is very popular in the accounting for the acquisition as in this the
company have to record the asset and liability in related to the percentage the
company hold in the joint venture as it can only record the value compare to the
percentage of the joint venture. At the time the company have done the acquisitions
it should show all the details of the income and expenses which is been incur in
regards of the valuation of the asset and liabilities of the company. Combination of
the financial transaction of both parent and subsidiary company together able to
make the consolidated financial statement as it should record all the items of both
company (Lee and Parker 2014). This method drawback is that it does not take
consideration about the parent company investment in the subsidiary or the
subsidiary which hold some sort of share in the parent company. This method also
stops the intra group transaction so it able to make the accounting more easy for the
company and also the financial user can able to understand the transaction more
easily and effectively.
As per the different accounting standard it say that the company should able
to recognise all the income and expenses which are of the subsidiary company
which can affect the asset and liabilities should taken care at the time of acquisition
of the company. The standard also state about the valuation of the goodwill which
the company should record the same in the financial statement of the company
(Aasb.gov.au 2019).. So it says it have to select the one which is higher of the two
limits as:
A – The aggregate of
 Transfer which is been based upon the standard in related the fair value of
acquisitions
 The basic of the non-controlling interest as per the standard
 The total fair value of the equity interest in the subsidiary of the parent
company at the time of acquisition.
B -The asset and liability which is been acquired as per the specific standard.
So an example can teach it more easily as the company JKY Limited started its
business on 1st June 2018., in which it invested $30 million. So it will pass the entry
as

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So after that the company have invested $20 million to get the share of FAB Limited
so it will pass the entry as
As per the book of FAB Limited is been concern it will pass the journal as
Section B
The entity which is similar should not do any transaction in regards of the
economy in the organization structure. To make a fair and proper consolidation the
company have to remove all the transaction which have occur in between the parent
and the subsidiary company so that it can able to make a proper amount of the
consolidated statement. As per the accounting standard, the company have to
remove all the things from the accounts as it have to remove all the intra group
transaction and also the income and expenses which are been spend upon the same
(Müller 2014). The intra group transaction can be any transaction in between the
parent company and the subsidiary company so that it should remove all the
transaction which has any connection with both the company.
The company is having many transaction in regards of the subsidiary so it
have to do an reverse entry so that it can able to do null and void all the entry which
are been done in between the parent company and the subsidiary company
(Aasb.gov.au 2019)..
The data which is been provided can clear the thing that the company JKY Ltd
have made some sort of purchase of inventory form its subsidiary company so the
inventory which is been purchase by the company is also have sort of profit which is
been charged by the subsidiary company upon the JKY Limited (Robinson et al.,
2015). The company is unable to make it as an income as it does not have done the
sale deal with the external party so there is no sale have occur so the company is
unable to record as an income in their financial accounts. As per the accounting
standard it say that an consolidated statement should be from any unrealised profit
so the company have purchased the inventory so it have to remove the unrealised
profit which is been associated in the inventory and show remove the same form the
consolidated financial statement. To make it more simple the accounting standard
said that if there is any gain or loss from the transaction between the parent and the
subsidiary company so it should directly to be recorded as an non-current asset in
the financial statement of the company and should removed all the part of purchase
it have in the inventory of the company.
From the above points this can clearly say that as the subsidiary have sold
some amount of the inventory so that part of inventory must be having the profit
which the company charges as no company sale their product without adding the
profit percentage upon it so the inventory which JKY Ltd have purchase also contain
the amount of profit in it. It is fair to add the portion of profit if the company JKY

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Limited could have able to generated cash for the part of inventory which they have
purchase from the subsidiary and also add a good sign to the group profit of the
company but as the case suggest it does not able to enter into agreement of the sale
of the inventory which it got from the subsidiary company. As the company have not
able to sale but the subsidiary have recorded the profit which they have earn form
the parent company as a result the overall group profit have an unrealised profit in its
which is not a good sign for the company overall profit. As due to the subsidiary the
company overall profit is been overstated and it show an increase value so this can
do fraud with the company financial user as they are not aware about the overstated
profit by the company. So this above point can be more clear with an proper example
as it can be seen that the company have purchased the good so let assume the
amount was $50000 which they does not able to sale in the current period and a
result it able to show in the end of the year. The subsidiary company holds a 50%
profit in the goods they have sold to the JKY Limited so the profit which the
subsidiary company could able to earn is $16667 (50/150* $50000). So this clear
that the group profit of the company is been overstated by $16667 so the company
have to make an proper adjustment entry in regard to eliminate the part of profit so
the entry will be
Consolidated Profit Account Dr $16667
To Consolidated Inventory Account $16667
So this entry rectifies the error which was done by the subsidiary company in regards
of the unrealised profit for the firm. So it show that each company should remove the
unrealised profit which they have earn so it show also what is to be done in regards
of the unrealised gain related to the non-controlling interest of the company. To
record the gain there can be various method as the company can able to record the
gain in the non-controlling interest so that it will null and void all the profit which the
company is able to get from the selling of their product. Otherwise they can able to
go for that they does not record any amount of the profit so that it will not affect the
overall profit of the group and the non-controlling should be there in the capital and
reserve which the company get from the acquiring the subsidiary company.
Section C
Effects of the NCI disclosure requirement in regards to the separate item in the
process of consolidation:
The company should do the presentation of the non-controlling asset
differently and separately in regards of the interest which they have earn form the
equity which they hold in the parent company. The company which is acquiring the
other company cannot able to record anything related to the Non-controlling Interest
as it is directly related to the equity of the subsidiary company so this should not be
recorded in the financial statement of the parent company (Aasb.gov.au 2019).. This
section of the standard help the parent company to get more knowledge about how
they should record each kind of interest which they are able to get from its subsidiary
company and also able to know how they should report in the consolidated financial
statement so that there is not error of accounting is been done by the parent
company. As the consolidated statement is been concern it show that the entity
should report non-controlling interest differently as it should also take into
consideration about the subsidiary interest as it hold some amount of equity in the

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parent company so it should report the same in regards of the prescribed standard.
The company should able to know the amount which is to be recorded by them in
non-controlling interest. This separate presentation is been prescribed by the
account standard so that it can able to make the consolidation accounting simple
and as the adjustment are very easy and proper notes is been given for all the entry
so this help them to give a proper understanding of the financial statement to the
stakeholders of the company and also to the investors which own some sort of
interest in the group business of the company (Aasb.gov.au 2019).
The parent company hold some sort of power upon the subsidiary company
as it able to control the management and the business of the subsidiary so it been
called as equity transaction it means the ownership which the parent company have
upon the subsidiary company. This principle is not there if the parent company does
not able full control over the business of subsidiary company. So if the holding power
is been changed it means that is some sort of change which have came in the equity
which the parent company holds in the subsidiary company so it should reported as
it will affect the controlling and non-controlling interest as it is been done by the
company so this should be immediately recorded as the shareholder in regards of
the parent company.
Effects of the change upon the disclosure in the annual report:
As per the accounting standard an company should the investment which they
done or invested in the joint venture as in cost, it should give proper details of all the
transaction which have happen in regards of the consolidation of the financial
statement of the company. It should show all the important accounting principles and
policy which they used and also the judgement and the estimation which they have
done in some point so that the user can get a transparent information about the
process of the consolidation. Company should disclose all the material information
and the nature of the transaction in regards of the subsidiary company in their annual
report.
As per the accounting standard each company should have same accounting
year ending so that an proper analysis can be take place in the two but if there is
difference in both date that it should be recorded and proper justification should be
given as when there is such a change in the accounting date of both the parent as
well as subsidiary company. As per the rule an company should hold a prescribed
percentage upon the subsidiary company so if the company is not able to meet the
said criteria that it should disclose it in the annual report so that the financial user
can be aware of the pare t company holding in the subsidiary company and able to
take thier decision accordingly.
Conclusion
The above have concluded as how the consolidation method is to be carried
by the company and it show about the different methods which can be used by the
company in regards of the consolidated accounts. It also show about the intra
transaction affect upon the consolidated financial statement and how the company
should able to eliminate the unrealised profit from the firm , it also show about the
non-controlling interest and how it should be disclosed by the company in their
annual report.

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References
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https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Accessed 30
May 2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB127_08-
11_COMPjan15_07-15.pdf [Accessed 30 May 2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed
30 May 2019].
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Accounting)(pp. 27-51). Routledge.
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financial reporting. Procedia-Social and Behavioral Sciences, 109, pp.976-982.
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