Corporate and Financial Accounting: Consolidation Report

This report provides a detailed analysis of corporate and financial accounting principles, focusing on business combinations, consolidation accounting, and equity accounting. It examines the application of Australian Accounting Standards Board (AASB) standards, including AASB 3, AASB 10, and AASB 128, to various scenarios. The report explores the differences between consolidation and equity accounting, the treatment of intragroup transactions, and the disclosure requirements for non-controlling interests (NCI). It includes examples to illustrate the concepts and concludes with recommendations. The report is based on an assignment for the HA2032 Corporate and Financial Accounting course at Holmes Institute, focusing on corporate takeover decision-making and its effects on consolidation accounting.

Running head: Corporate and financial accounting
Corporate And Financial Accounting

Corporate and financial accounting 1
Executive Summary
AASB 3 Business Combinations was formulated with an aim to improve the comparability,
relevance and reliability of the data provided by a company in its financial records in the
context of a business combination and its impact. AASB 10 Consolidated Financial
Statements was formulated with an objective to present and prepare the consolidated
financial statements when one or more entities are controlled by an entity. AASB 128
Investments in Associates and Joint Ventures advice the accounting methods for investing in
associates along with setting the need for implementation of equity methods while accounting
for investments in joint ventures and associates. This report explains the concepts of
business combinations, various acquisition methods, non-controlling interests and intragroup
transactions along with the use of applicable accounting standards to various case studies.

Corporate and financial accounting 2
Contents
Introduction...........................................................................................................................................................3
Part A....................................................................................................................................................................3
Part B....................................................................................................................................................................5
Part C.................................................................................................................................................................... 8
Recommendations/Conclusion........................................................................................................................11
References.........................................................................................................................................................12

Corporate and financial accounting 3
Introduction
This report deliberates upon the various issues including business combinations, acquisition
methods, intragroup transactions and non-controlling interests through the application of
various accounting standards. Part A explains the difference between Consolidation
Accounting and Equity Accounting in reference to AASB 3 Business Combinations, AASB 10
Consolidated Financial Statements and AASB 128 Investments in Associates. Part B explains
the treatment of intragroup transactions through AASB 127 Consolidated and Separate
Financial Statements and AASB 10 Consolidated Financial Statements. Part C determines
the impact of NCI disclosure requirements as a distinct item in the process of consolidation
with reference to AASB 127 Consolidated and Separate Financial Statements and AASB 101
Presentation of financial statements.
Part A
The key differences between consolidation accounting and equity accounting using AASB 10
Consolidated Financial Statements, AASB 3 Business Combinations and AASB 128
Investments in Associates and Joint Ventures are as follows:
The term Consolidation pertains to aggregation. As per AASB 10, the financial records of a
group in which equity, income, assets, liabilities, cash and expenses of a parent and its
subsidiaries are presented as a single entity. A single set of financial statements are prepared
in this regard. It also involves the combination of financial records of all the individual
companies in a group by adopting the line by line method. It combines similar items of assets,
equity, income, liabilities, expenses and cash flows of the companies in a group( Australian
Accounting Standards Board, 2015a).
It shows the overall financial performance of a group. It is presented if they are a single
economic entity. However, it does not involve the adjustments in the accounts of the
companies. The Consolidated Financial Statements are an extra set of financial statements.
They are prepared in a consolidated worksheet (Vašek and Gluzová, 2014).
Particulars A Ltd
(Separate
Financial
statement )
B
Ltd(Separate
Financial
statement )
Group
(Consolidated
Financial
statement )
Land 150000 + 120000 = 270000
Inventory 50000 + 20000 = 70000
Total Assets 200000 140000 340000

Corporate and financial accounting 4
Borrowings (80000) + (30000) = (110000)
Net Assets 120000 110000 230000
The equity method is used by the companies to evaluate the profits earned through their
investments in another company. The companies report the earned income on their
investments in their income statements.The reported value is dependent upon the share of
the firm in assets of the company. The reported value is proportionate to the total investments
in equity. AASB 128 Investments in Associates and Joint Ventures explains the concept of
equity accounting. The equity method recognizes the investment in an associate or joint
venture at its cost. The carrying amount is adjusted to analyze investor's share in the profit or
loss of the investee subsequent to the acquisition date (Australian Accounting Standards
Board, 2015b).
The share of the investor in the profit and loss of investee is known as the profit and loss of
investor. The distributions which are received from the investee decrease the carrying amount
of investments.However, the acknowledgment of income on the basis of distribution is not an
appropriate measure for income received by the investor as the distribution has a little or no
relation to the performance of the joint and associated venture( Grossi, 2014). It can be
explained with the help of an example.
If JKY Ltd has 50% controlling interest over FAB Ltd, JKY Ltd would record its investments at
50% of the revenues, assets, liabilities and expenses of FAB Ltd. So, if JKY Ltd has a total
revenue of $100 Million and FAB Ltd has a revenue of $40 Million, then JKY Ltd shall have a
total revenue of $120 Million. Those who the consolidation method of accounting debate that
it provides a more precise and comprehensive record as the true performance of a joint
venture is revealed. It allows each of the firms to analyze their operational effectiveness in the
context of production, shipping costs and the profits.
As per AASB 3 Business Combinations, a business combination is a common control
combination if the combining companies are regulated by one party before and after the
combinations. Moreover, the common control should be permanent (Australian Accounting
Standards Board, 2014). A business combination may be formulated as a result of a parent
entity relationship in which the acquirer is termed as a parent and acquiree is a subsidiary.
The acquirer implements this standard in its consolidated financial statements.It comprises of
the interest of acquirer in the acquiree in its separate financial statements which is
represented by its investment in the subordinate company (CPA Australia, 2015).

Corporate and financial accounting 5
Part B
The intragroup transactions and balances comprising of expenses, income and dividends
should be eliminated in full as per AASB 127 Consolidated and Separate Financial
Statements. The profits and losses arising from the intragroup transactions which are
recognized in fixed assets and inventory are fully eliminated. The intragroup losses might
denote an impairment requiring recognition in the consolidated financial statements. If the
financial statements of a subsidiary used for the preparation of consolidated financial
statements are prepared on a date which varies from that of financial statements of the parent
company, then adjustments would be made regarding the significant transactions occurring
between the two dates (Australian Accounting Standards Board, 2015d).
The difference amongst the end of reporting periods of subsidiary and parent should not
exceed three months. The term of reporting periods along with the interval between the two
shall be similar for all the periods.The preparation of consolidated financial statements should
be formulated by utilizing the same accounting policies for similar transactions and events
occurring in the same situations. The expenses and income of the subsidiaries should be
encompassed in the consolidated financial statements from the date of acquisition as
described in AASB 3.
The value of income and expenses of the subsidiary shall be derived from that of liabilities
and assets recognized in the consolidated financial statements of the parent at the date of
acquisition. For example, the expenses incurred on account of deprecation in the
consolidated financial statements after the date of acquisition shall be derived from the fair
value of associated assets in the consolidated financial records at the date of acquisition.
The profits and losses and other elements of the income are attributable to the parent entity
and to the non-controlling interests (Nobes and Stadler, 2015).
Here the non-controlling interest means a minority interest and a position of equity ownership
in a subsidiary which is not attributable to the parent company. In this case, the parent
company has a controlling interest of more than 50% but less than 100%. So as a result, the
financial results of the subsidiary are consolidated with those of the parent entity.
Furthermore, as per AASB 10 Consolidated Financial Statements, the parent company shows
the non-controlling interest in the consolidated financial statements in the equity of the parent
entity. In the context of this case, where a partially owned subsidiary has provided
professional services and transferred inventory at a profit to the parent entity JKY Ltd , then
this transaction is required to be treated in the same way as any other transaction occurring in
the parent entity in the normal course of business at an arm’s length price(Di Carlo, 2014).
It can be explained with the help of an example. The parent company holds 60% of the
interest in the subsidiary and the subsidiary reports an annual profit of $100,000 which
includes the profits derived from the sale of inventory and providing professional services to
the parent company. The parent company JKY Ltd shall debit the Intercorporate Investment
for $60,000(60% of $100,000) and credit the Investment revenue for $60,000. In this regard,
the transaction which is to be adjusted in the consolidated financial statements should be
identified in advance for the preparation of consolidated financial statements.

Corporate and financial accounting 6
These transactions may comprise of transfers of assets and rendering of services along with
accounts payable, receivable and sale transactions occurring between the parent company
and subsidiary. It is crucial to note here that the intercorporate sales arising from the transfers
of inventory as in this case taking place amongst the parent and its subsidiary should be
adjusted. The transfers of inventory shall be identified and the retained earnings shall be
debited and the consolidated ending inventory shall be credited pertaining for the value of
transfers. For example, if an inventory worth $50,000 was transferred from the subsidiary to
the parent, then the consolidated statements shall record $50,000 debit to retained earnings
and $50,000 credit to consolidated inventory.
Moreover, these transactions shall influence the calculation of non-controlling Interest (NCI)
in the subsidiary's annual profit in the following manner. As per AASB 10, the profits and
losses along with the total income shall be allocated amongst parent and non –controlling
interests. The profits attributable to the non-controlling Interest (NCI) is determined as
realized profit of subsidiary *the percentage of NCI. The realizable profit is calculated as the
profit of subsidiary – unrealized profits. The total income pertaining to the NCI is calculated as
Profit attributable to NCI+ other comprehensive income *NCI% (Benson et al.,2015).
Particulars Amount(in $)
Profit of partially owned subsidiary 100,000
Unrealized profit from the sale of goods (10,000)
Unrealized profit from providing
professional services
(20,000)
Realization of profits from the sale of
goods
10,000
Realized profits 80,000
The profit share of NCI(80,000*25%) 20,000
Here it has been assumed that JKY Ltd has acquired 75% of the shares of the partially owned
subsidiary. Hence the share of NCI is 25%. The total comprehensive income attributable to
NCI is as follows :

Corporate and financial accounting 7
Particulars Amount(in $)
The profit share of NCI (80,000*25%) 20,000
Another comprehensive income share
(100*25%)
25
Total comprehensive income share 20,025

Corporate and financial accounting 8
Part C
As per AASB 127 Consolidated and Separate Financial Statements and AASB 101
Presentation of Financial Statements, with regards to the disclosure requirements of NCI as a
distinct item in the consolidation process, the materiality should be evaluated by the parent
entity on the basis of its consolidated financial records. The parent entity should determine
both qualitative aspects such as the nature of subsidiary and qualitative aspects like the size
of a subsidiary. As per the disclosure requirements, the parent entity shall reveal the
information which assists the users of consolidated financial statements to comprehend the
structure of the group. It should also enable them to understand the stake of non-controlling
interests in the activities of the group along with the cash flows (Australian Accounting
Standards Board, 2015c).
The parent entity shall disclose the material NCI of each of its subsidiaries separately in the
consolidation process. The disclosure requirements shall be met by the parent entity by
revealing the disaggregated data from the values included in the consolidated financial
statements of the parent entity. It should be done in the context of subsidiaries having a non-
controlling interest material to the parent entity. In this context, the reporting entity shall apply
its judgment for considering the amount of disaggregation of this data if the parent entity
presenting the data about the subsidiary having a substantial controlling interest (Nobes,
2014).
The required information should be presented on the basis of the subsidiary with the
investees. Furthermore, it also necessitates in accomplishing the requirements of disclosure
to segregate the information to be presented about the individual subsidiaries which have a
substantial non-controlling interest within the group. The parent entity shall also reveal the
summarized balance sheet and other financial statements about the liabilities, assets, profits,
losses and cash flows of its subsidiaries which assist the users to contemplate about the
subsidiaries having the non-controlling interests in the activities of the group along with the
cash flows (Alayemi,2015).
Moreover, with regards to the allocation of other comprehensive profit to the NCI, the parent
entity should categorize and evaluate those profits in the consolidated financial statements on
the basis of their economic substantiality. As a result, these profits shall be accordingly
classified as non-controlling interests in the financial statements of a parent entity. If these
profits do not possess the characteristics of materiality, then they would not be classified as
non-controlling interests. In such cases, the parent entity shall categorize the comprehensive
profit as a profit-sharing arrangement instead as a no controlling interest (Ignatowski and
Zatoń, 2015).
With regards to the valuation of assets, AASB 101 Presentation of Financial Statements
states that the entity should measure the fair value of assets and liabilities as per AASB 13
Fair Value Measurement.The fair value measurement considers the ability of the participants
in the market to utilize the assets at their best. Also, if any financial asset is reclassified out of
the category of amortized cost measurement so it is evaluated at its fair value through profit
or loss and any profits arising from the differences between the earlier amortized costs of the

Corporate and financial accounting 9
financial assets and their fair value should be at the reclassification date (Sotti, Rinaldi and
Gavana, 2015).

Corporate and financial accounting 10
So, in this case, the assets of the subsidiary should be recorded at fair value in the
consolidated financial statements. AASB 127 Consolidated and Separate Financial
Statements, states that the NCI should be reported as a distinct item to the equity of owner
and other comprehensive income should be allocated to NCI. The non –controlling interests
are categorized as the group's equity. It requires the allotment of the group's capital into the
interests related to the parent company and its stockholders along with the non-controlling
interests. The allotment of the equity capital of subsidiaries is related to the allotment of their
total comprehensive income( EY,2015).
Thus the classification of non-controlling interests as equity affects the measures of financial
performance along with the equity of the whole group. In this regard, the other comprehensive
profit comprises of revenues and gains precluded from the net income as per the income
statement. The revenue and gains included in the other comprehensive income pertain to the
unrealized income (Australian Accounting Standards Board, 2017). It can be explained with
the help of an example
Balance Sheet of XYZ Ltd.
Particulars Amount (in $)
Assets
Cash 20000
Inventory 70000
Short term investments 10000
Total Assets 100,000
Liabilities
Current Liabilities 100,000
Long term Liabilities 100,000
Total Liabilities (A) 200,000

Corporate and financial accounting 11
Shareholder’s Equity
Common Shares 600,000
Retained Earnings 150,000
Accumulated Other Comprehensive
Income
50,000
Total Shareholder’s Equity (B) 800,000
Total Liabilities and Shareholder’s
Equity(A+B)
1,000,000
Furthermore, the impact of disclosure requirements of NCI on the annual report of the parent
entity is it shall help the users of consolidated financial statements to comprehend the
composition of the group along with the interest which the non-controlling interests are having
in the activities of the group along with the cash flows. It shall also assist them in evaluating
the nature and intensity of restrictions on the capability of the parent firm to access, utilize and
fulfill the liabilities of the group. They would be able to analyze the nature and
transformations in the risk related to the interest of the parent company in the consolidated
financial statements (KPMG,2017).
Moreover, the stakeholders would also be informed about the results of changes in the
ownership of the parent entity in its subsidiary which does not lead to a loss of control. They
would be able to know the situation pertaining to the loss of control in a subsidiary by a parent
entity during the reporting period. Additionally, according to AASB12 Disclosure of Interests in
Other Entities, the parent entity shall disclose the non-controlling interest for each of its
subordinate companies which are to be considered substantial for the parent entity. The
information to be disclosed should relate to the name of the subsidiary along with the main
place of conducting business and country in which it is incorporated (in case the country of
incorporation differs from the principal place of conducting the business of the subsidiary)
(Gluzová, 2016).
The other details to be disclosed are the percentage of ownership stake held by the non-
controlling interests along with the percentage of voting rights held by the non-controlling
interests. It shall also disclose the allocation of gains or losses to the non-controlling interests
of the subsidiary throughout the reporting period. The non-controlling interests of the
subsidiary which are accumulated by the end of the reporting period shall also be disclosed
by a parent entity along with its brief financial data.Besides this, the entity shall also mention