Corporate and Financial Accounting: Takeover Decision Making Effects

This report provides a comprehensive analysis of corporate takeover decision-making and its effects on consolidation accounting. It begins with an executive summary outlining the key findings and then delves into the methods of direct purchase and share acquisition, comparing and contrasting them with consolidation and equity accounting. The report explores the application of relevant AASB standards (AASB 3, AASB 10, AASB 127, and AASB 101) in the context of corporate takeovers, discussing intragroup transactions and their impact on financial statements, including the treatment of unrealized profits from intercompany sales. The report concludes with a discussion of the checklist needed to ensure all relevant details are provided in the financial statements. It emphasizes the importance of fair presentation, proper classification of assets and liabilities, and appropriate disclosures, offering valuable insights into the practical application of accounting principles in corporate takeover scenarios.

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Executive Summary
A study was conducted, based on three given scenarios, for an understanding of the take-over
effects when corporates execute one. As part of the study, various methods like direct
purchase and share acquisition was analyzed along with equity accounting and consolidation
accounting. Another study was done to understand whether the profit resulting from the sale
of inventory to the parent firm would be deducted from the subsidiary or not and in what way
would it influence the non-controlling interest. Lastly, the changes or the check-list needed
for preparing the consolidated financial statement was discussed. It was concluded that the
direct purchase turned out to be a better option and the profit from the sale of the inventory
would be deducted from the subsidiary’s reported profit. In terms of AASB, the provisions
given under 127 and 101 would be applicable for the consolidated financial statement.

Table of Contents
Executive Summary...................................................................................................................2
Introduction................................................................................................................................4
Part A.........................................................................................................................................4
Direct Purchase / Acquisition method:..................................................................................4
Stock or Share Acquisition:...................................................................................................4
Difference between Consolidation Accounting and Equity Accounting...............................5
Part B..........................................................................................................................................6
Intragroup transactions and balances.....................................................................................6
Part C..........................................................................................................................................8

General presentation of the financial statements:..................................................................8
Statement of the financial position:........................................................................................8
Profit or Loss Statement:........................................................................................................9
Entities of Investment:...........................................................................................................9
AASB 127:.............................................................................................................................9
AASB 101............................................................................................................................10
Conclusion................................................................................................................................10
Reference:................................................................................................................................11

Introduction
An analysis would be done under corporate and financial accounting for an understanding of
the corporate takeover decision making as well as the effects of consolidated accounting. The
analysis would primarily consist of understanding the principles of direct purchase and share
acquisition along with consolidation accounting and equity method. Apart from that, the
various AASB provisions that are related to take-over would also be studied to figure in what
way are these related while preparing the consolidated annual report. The standards, as
applicable for the case studies provided, would be AASB 3, AASB 128, AASB 10, AASB
127 and AASB 101.
Part A
Direct Purchase / Acquisition method:
This method is applied when an acquirer decides to buy another company by following the
GAAP (Generally Accepted Accounting Principles) process. For this, various steps need to
be followed in order to complete the acquisition. These are:
 An exact account of the tangible assets acquired along with complete details of the
liabilities involved.
 An account of the interests, that are non-controlling, concerning the business that
would be acquired.
 The consideration amount for the seller (Bragg 2019).
 Have a clear idea of the goodwill or the gain as a result of the acquisition.
The above steps may not be possible to complete in time so that the same could be adequately
accounted for in a particular accounting period. In case of any delay, it would be appropriate
to consider the best value for a particular accounting period.
Stock or Share Acquisition:
In this format of take-over, the acquirer acquires the stocks directly from the shareholders
who are selling. Once the stocks are bought, both the assets as well as the potential liabilities
are transferred to the acquirer. Here, the acquirer is just getting into the shoes of the previous
owner.
During the acquisition of stocks, everything that is part of the balance sheet is transferred.
The writing-off of the stock could be a viable option. Two things could be crucial while

considering stock buying. The first is the financial debt and the other one is the legal risk
(Corporate Finance Institute 2019). Both these factors could be crucial in determining the
purchase price of the shares.
Difference between Consolidation Accounting and Equity Accounting
Consolidation Accounting:
This form of accounting is the process in which the financial details, of several subsidiary
companies (if applicable), are combined in order to have a consolidated financial result of the
parent organization. Consolidation accounting is considered when a parent company owns
more than half of the shares of another company (Bragg 2019). The following steps are
involved in the process of consolidation accounting process:
 Recording the inter-company loans.
 Charging of the organization over-head.
 Verification of payable accounts.
 Adequate allocation of payroll expenses.
 Proper adjusting of the entities.
 Adequate investigation of the assets, liabilities as well as the equity account balances.
 Review of the financial details concerning subsidiary as well as the parent financial
details.
 Elimination of inter-company transaction.
 Recording of the income tax liability.
 Closure of the subsidiary as well as the parent company books (Bragg 2019).
Equity method:
This method of accounting is applied for reporting the investment of an organization in
another set-up. This method can be applied only when the investor has considerable control
over the investee especially in terms of financial decisions (Corporate Finance Institute
2019). In case there is no substantial influence, the investor should opt for the cost method of
accounting.
Out of stock or share acquisition and direct purchase, the latter would be the right choice for
JKY Ltd. to acquire FAB Ltd. Going by the accounting standard of AASB 3, it focuses on
improving the comparability and the relevance of the information provided in the financial
statement of a business (Aasb.gov.au 2019). This standard is applicable for a transaction or

any event that concerns the combination of business. AASB 128 is a standard that deals with
accounting where a purchaser has considerable influence over the buyer (Johnwiley.com.au
2019). However, it would be full control. In this case, this standard will not be of much help
since the takeover is not happening as per the equity approach. AASB 10 would be of
relevance in this case since it deals with the preparation of financial when an organization
control another (or multiple businesses) (Aasb.gov.au 2019). This standard would be
applicable both before and after the takeover.
Part B
Intragroup transactions and balances
An intra-group transaction can be termed as transactions that take place between the
companies of a group. These transactions are usually removed from the consolidated account.
This is done to ensure that the net income of the parent company does not get inflated along
with those of the companies in the group.
The purpose of consolidation is to ensure that the financial status or a group of companies is
represented in such a way as if it was a single company. This is an unavoidable obligation on
the parent company that controls the rest of the other companies (Cimaglobal.com 2019). The
scope of consolidation includes the parent company along with the rest of the companies in
which the parent has got a minimum of 20 per cent voting right. There can be a lot of reasons
for such kind of transactions. However, these take place as a result of the usual business
relation existing between the different units of an entity that could be:
 The parent as well as the subsidiary.
 Two subsidiaries.
 One entity.
 Two divisions or two departments.
It is a common practice for organizations that have become integrated to transfer inventory
within the various units of the consolidation. Whereas, a plant asset might get transferred
between the units of an organization so that the advantage can be shared across the various
lines of products. From the perspective of consolidation, a transaction would be considered as
unrealized since the parties involved are related. For this reason, the statement of
consolidation is not supposed to have anything that might be related to intra group balance
(Financialaccountingcoach.blogspot.com 2019). Transactions that have happened outside of

the group are to be reported. This ensures that the double consideration of assets and
liabilities is avoided that might otherwise happen as a result of double counting through
transactions among the group members. Therefore, all balances related to the intra group
need to be eliminated.
At times, a company might be acquired based on the probability that it might trade regularly.
Therefore, it makes sense to bring in such companies into the group so that there can be a
secured and controlled supply of services as well as goods (Sigma Conso 2019). In such a
situation, each company would record the transaction as per own choice. But, when these
become a part of a consolidated statement, adjustments would be needed so that things appear
as a single economic entity.
As per the case study, the partially owned subsidiary sold inventory to JKY Ltd. at a profit
and reduced the inventory. JYK recorded the purchase and it increased its inventory. The
group impact is that the inventory migrates from one company to the other but ultimately
remain within the same group. Therefore, there is hardly any change (Library.croneri.co.uk
2019).
Now, no company would let go of the profit when it is selling something no matter how less
the profit might be. The partially owned subsidiary earned its profit on the transaction
however it still remains within the group. This profit would be considered as an unrealized
one and so would not be recognized. Next JKY Ltd. held the inventory at the price it paid for
the purchase. So, at the group level, there is an element of profit involved.
Based on the above, the board should clarify to the CFO that the profit should be deducted
from the subsidiary’s reported profit for the sale of the inventory.
As per the financial accounting standards, there is a very specific way of reporting the non-
controlling interests (NCI) calculation in the annual profit of subsidiaries. These have been
adequately elaborated in AASB 3 (Aasb.gov.au 2019). Details regarding the same can be
found in the ‘recognition principle’ section as given under how to recognize and measure the
non-controlling interests. The ‘measurement principle’ would also have to be referred to. The
important sections would be B44, B45, and B46 of Appendix B concerning AASB 3.
Likewise, the provisions for the parent company have been discussed in AASB 10 under the
heading ‘Returns’ para 15 and 16, ‘Non-controlling interests’ para 22, 23, 24, B94 andB95,
‘Protective Rights’ para B28 (b), ‘Potential Voting Rights’ para B89, ‘Changes in Proportion’

para B96, ‘Loss of control’ B98 (a)(ii) and ‘Transition’ para C4 (a) (b) (c) and C5
(Aasb.gov.au 2019).
Part C
The changes or the checklist that must be considered to ensure that all the relevant details are
provided in the financial statement would be:
General presentation of the financial statements:
First of all, it must be ensured that the financial position, performance and the details of the
cash flows are properly are appropriately elaborated in the financial statement. In order to
ensure that the representation of the facts is correct and fair, it is very important to properly
understand the effects of the transaction being reported along with the other associated events
and conditions (Vernimmen.com 2019). These should also be in accordance with the criteria
that have been defined for determining asset, liability, income, and expense as set out in the
ASSB / IFRS. Also, depending on the need, additional disclosures can also be a part of a
financial presentation so that the representation is fair.
In terms of the structure and the content, it must be ensured that the statement clearly
indicates the financial position of the entity with respect to a particular period especially in
terms of profit and loss (Vernimmen.com 2019). Any change in the equity must also be
provided along with any relevant note that might be related to the accounting policies that are
in practice and other related information.
Unless it is permitted in the IFRS, information must be presented in a comparative way. It is
recommended that both the narrative and the descriptive style should be used. It would be a
good practice to retain and classify the items in the statement from one period to the next.
Statement of the financial position:
For each category of property, plant, and equipment, the statement must have the gross
amount and the accumulated depreciation both at the beginning as well as the end of the
period. Assets must be classified as either ‘held for sale’ and must be placed under an
appropriate group. The relevant details concerning the acquisitions especially through
business combinations must be included (Vernimmen.com 2019). Any increase or decrease
as a result of re-valuation must be mentioned without fail (Vernimmen.com 2019).
The intangible assets and the goodwill must be appropriately disclosed in the statement. In
case it is internally generated, it must be declared as so. Optional information that can be

disclosed would be any intangible amortised asset that might still be in use (Vernimmen.com
2019). There could also be a description of an intangible asset that may not have been
recognized as an asset due to a mismatch of the recognition criteria. The disclosure
concerning the investment property must be appropriate.
The information must be disclosed that is related to associates or joint arrangements. Here,
information must be revealed that would help to understand the nature of the associated risk.
The interest in other entities must be considered too along with a description of their
influence on the financial performance, position, and flow of cash (Vernimmen.com 2019).
There should also be disaggregate and aggregate disclosures so that there is no probability of
information being misinterpreted. Any and all significant assumptions and judgments should
be outlined in the report so that it can be clearly understood whether any entity is having any
influence on another entity or not (and to what extent).
Profit or Loss Statement:
The profit and loss declaration of the organization must be in terms of the amount for each of
the various categories. The revenue arising from sale as well as the exchange of goods or
services must be included based on the category (Home.kpmg 2019).
Entities of Investment:
Based on the provided scenario. This would be a very important aspect in the consolidated
financial statement for the annual report of JKY Ltd. The ASSB and the IFRS provisions
must be strictly followed to ensure that there is no gap. AASB 127 and ASSB 101 in this
regard would be the preferred standards that would be followed based on the details provided
(Home.kpmg 2019).
AASB 127:
This standard specifically deals with consolidated as well as separate financial statements.
This standard is applicable when any entity is required to prepare the financial report as per
Part 2M.3 as provided in the Corporation Act. This applies for the reporting of general
purpose financial statement. The scope of this applies to a group of entities that are under the
control of a parent. It does not deal with any method applicable for an accounting of
combination of business (Aasb.gov.au, 2019). It is also not concerned with the effects of
consolidation that includes goodwill due to the combination of business. This standard would
be applicable to describe the accounting for investment in subsidiaries. This would apply for

both an associate and a jointly controlled entity when the entity is elected or it is the
requirement of the local regulations to come up with a separate financial report.
In the case of AASB 127, the control is recognized when the parent company either directly
or indirectly (through subsidiaries) owns more than 50 per cent of the voting power. The
control would also be applicable when the parent owns 50% or less through voting power by
virtue of an understanding with other stake holders (Aasb.gov.au, 2019). Even the power to
influence the operating, as well as the financial policies, would grant control. The financial
reports of the parent as well as the subsidiaries would be combined line by line. This is done
by summing up the assets, liabilities, expenses as well as revenues. Thus, the consolidated
report is presented in a way that seems to be a single economic entity.
AASB 101
This happens to be the most overlooked accounting standard. This is a key standard that lays
down quite a few principles related to disclosure. The prime aspects of this standard are:
 Inclusion of four primary reports in the financial statement.
 Notes for supporting the primary reports.
 Third balance sheet for a retrospective re-statement.
 Additional disclosures in case the disclosure requisitions are not sufficient enough.
Conclusion
Upon analyzing the data and information in connection with take-over decisions that
corporates go for and the consequent effect on account consolidation, as was provided in the
three case studies, it was found that in the case of the first scenario the acquisition Method
was the most appropriate. For arriving at this conclusion, both the direct purchase as well as
the share acquisition was studied. Also, the consolidation accounting and equity method were
analysed.
In the second scenario, the aspect of intra group transaction and balance was studied in order
to understand whether the profit would be deducted from the profit reported by the subsidiary
against the sale of inventory to the parent entity or not and it was found that the deduction
was to be carried out. The finding was based on the various AASB standards that were
applicable. Lastly, for the finalization of the consolidated financial statement, the various
aspects necessary were discussed so that the report is an appropriate one. For this, the
provisions of AASB 127 and 101 were analysed.

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