Corporate and Financial Reporting: Analysis of Business Acquisitions

This report delves into the complexities of corporate and financial reporting, specifically focusing on business acquisitions and consolidations. It examines the accounting treatments involved in acquisitions, including the selection between consolidated and equity methods, with detailed examples of journal entries. The report explores intragroup transactions, emphasizing the treatment of unrealized profits and the necessary adjustments to ensure accurate financial reporting. Furthermore, it addresses the impact of disclosures related to non-controlling interests in consolidated financial statements, providing insights into the presentation and compliance requirements. The analysis covers key aspects such as the recognition and measurement of unrealized revenue, intercompany transactions, and the disclosure requirements for parent companies when preparing consolidated financial statements, making it a comprehensive resource for understanding financial reporting in the context of business acquisitions.

Running head: CORPORATE AND FINANCIAL REPORTING
Corporate and Financial Reporting
Name of the Student:
Name of the University:
Author’s Note

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Executive Summary
The main objective behind this assessment is to analyse the accounting treatments
which takes place when a business acquires another business. The discussion below
shows the presentation and compliance requirements which is necessary for preparing
the consolidated financial statement of the business. The assessment would also be
dealing with the treatment of unrealised profits and how the same are represented in the
annual reports of the business. The assessment mentions the recognition and
measurement criteria of unrealise revenue. The assessment would also be dealing with
intragroup transactions and also with disclosure requirements which the parent
company must adhere to while preparing the consolidated financial statements.

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Table of Contents
Introduction........................................................................................................................3
Consolidated and Equity Method of Accounting................................................................3
Intragroup Transactions.....................................................................................................5
Impact of Disclosures of Non-controlling Interest in Consolidated Financial Statement. .7
Conclusion.........................................................................................................................8
Reference..........................................................................................................................9

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Introduction
The main purpose of the assessment is to conduct a detailed analysis on the
topic of acquisition and takeovers in which major businesses are engaged in modern
era. The assessment considers the various accounting treatments and disclosures
which are required to be portrayed in the annual report when a business acquisition
takes place. The assessment represents the case of acquisition which was undertaken
by JKY ltd of the business of FAB ltd. The assessment would be subdivided into three
parts. The first part would deal with different methods which are available in particular
the consolidation accounting and equity accounting along with proper examples relating
to the same (Robinson et al. 2015). The second part would deal with intragroup
transactions which forms an important part of consolidation would be shown with proper
examples representing the same. The last part would be dealing with disclosures which
a business need to show for treatment of non-controlling interest in the consolidated
financial statements which is prepared by the business.
Consolidated and Equity Method of Accounting
In case of Business takeover or merger, one of the key consideration which the
management of the acquirer company needs to select appropriate acquisition strategy
which is to be followed by the business. In the case provided, the management of JKY
ltd needs to select an appropriate strategy for acquiring the business of FAB ltd. The
options which are available to the management is either consolidated accounting
method or equity accounting method for the purpose of reporting the same in the
financial reports which is prepared by the business (Müller 2014). The method which is
to be selected would be determined from the way financial reports demonstrate the
partnership. It is a known fact that the difference which is present is in the methodology
which is followed by respective businesses.
Consolidation method of accounting:
The consolidated method of accounting is a process of accounting which
effectively measures the assets and liabilities of the subsidiary business and the same
is shown in a combined manner in the balance sheet of the acquirer company. The
consolidated method of accounting effectively organizes the assets and liabilities of the
subsidiary company and record the same in the financial statement of its own. The
provisions which are stated under Paragraph B86 of AASB 10”, show that the items
which are mainly equity, assets, liabilities, cash flows, income and expenses of the
acquirer company for the purpose of reporting and the same is combined with the
values which are shown in the balance sheet of the subsidiary company. The method
also offsets any investments values which might be there between the parent company
and the subsidiary company. In addition to this, intercompany transactions are not
considered while preparing the consolidated financial statements of the business. This
is done so that there is no double counting situation thereby ensuring that the
consolidated financial statement which is prepared is showing accurate view of the
financial information of both the companies.

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The provisions of “Paragraph B88 of AASB 10” covers the measurement criteria which
is to be followed for different items which are presented in the financial statements of
the business. The income and expenses of the subsidiary is based on the amount which
is received for the assets and liabilities realised at the date of acquisition of the
business. The provisions of “Paragraph 32 of AASB 3” provides an explanation relating
to goodwill recognition of the business (Aasb.gov.au. 2019). The criteria which is to be
followed are based on the higher of the two figure which is shown below:
a. The aggregate of the two:
 The transfer of consideration estimated s per the guidelines of AASB 3 which
requires fair value at the acquisition date.
 The value of the non-controlling interest of the subsidiary as per the requirements
of the standard
 In case of business combination established in stages, the fair value of the equity
interest held in past in the subsidiary by the parent company at the fair value of
the acquisition date
b. The assets and the liabilities at their net figures which are estimated complying to
the requirements of the standard.
Examples
An example is considered of JKY ltd which started its operations on first of May
2018 and had invested a capital of $ 20 million. For such a transaction, the journal entry
which would be passed is shown below:
In a period of 1 year, the management of JKY ltd invested another $10 million for
acquiring the shares of FAB ltd. In such a case as well, the Journal entry which would
be followed is shown below:
The balance of cash which should be present in the business of JKY ltd would be
at $ 10 millions but the balance sheet would represent $ 20 millions in total asset of the
business. The transaction would be represented in the books of FAB ltd as follows:
The consolidated financial statement would be presented in the following manner
as shown below

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Equity accounting method
The method which is used for analysing the profits from investments is known to be
equity method. The income which is made by the management of the company in the
income statement and the same would be based on the equity size of the business. The
provisions of “Paragraph 10 of AASB 128” states that the investments should be
measured at cost initially and any increase of decrease in values of carrying value
would be adjusted from the profit and loss statement of the business. In case of
recognition of goodwill value, the fair value of the equity interest of the acquiree is used
at the date of acquisition. This is covered under the provisions of “Paragraph 33 of
AASB 3” (Aasb.gov.au 2019).
Examples
An example can be provided of JKY ltd where the business acquires 30% shares
of FAB ltd for $ 50,000. The management of FAB has reported a profit of $ 100,000 and
a dividend of $ 50,000. The transaction would be recorded for the purchase of shares of
the business of FAB ltd is shown below:
For dividend received by JKY ltd of $ 15,000 would be recorded as follows in
terms of journal entry:
The net profit of the business of FAB ltd would be recorded as follows:
Intragroup Transactions
In a consolidated business where the parent and subsidiary company are engaged in
the same line of work then it is common to engaged in intragroup transactions with each
other. In order to demonstrate a proper consolidated financial statement, the all
transactions must be treated appropriately in the financial statements. Some of the
transactions which are between parent and subsidiary company are offset while

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preparing the consolidated financial statement of the business. The provisions of,
“Paragraph 29 of AASB 127” covers intragroup transaction and the section states that
income and expenses between parent and subsidiary company needs to be cancelled
out while reporting the same in the annual reports (Aasb.gov.au. 2019). Some examples
of intragroup transactions are listed below:
 Payment of Management fee to a member of the group
 Dividend payments to members of the group
 Intra-group inventory sale
 Intra-group non-current asset sale
 Intra-group loans
The adjustments which are made in the consolidated financial statements should
be in a manner that actual accounting entries are reversed so that the same cancels out
the transactions which are provided in the consolidated annual report of the business.
The case which is shown represent a purchase agreement which was
established between JKY Ltd and one of its subsidiaries which was partially owned. The
purchase was made for inventory. Th revenue can only be recognised in case of
inventory when the same is actually sold to an external party by the subsidiary
business. This results in generation of unrealised profits which must not be shown in the
consolidated books of accounts (Cîrstea 2014). The case shows that unrealised profits
are created when sales is made within the group and actual sale is not made to an
external party. The provisions of “Paragraph 25 of AASB 127” states that in case of
intragroup transaction unrealised profits would be shown in the balance sheet under the
head of non-current assets while at the same time inventory value is eliminated
(Aasb.gov.au. 2019).
The case which provided in the assessment shows that JKY ltd has purchased
inventory from a partially owned subsidiary. The sale which is made can be assumed to
be carrying some element of profit. When JKY ltd sells the inventory to final customer
then the profits can be established and the unrealised profits can then be settled. Until
then the management of partially owned subsidiary should record the same as
unrealised profits in the financial statements. For the purpose of clarity, lets assume that
JKY ltd purchased the inventory at a price of $ 14,000 and the mark up which was set
by the partially owned subsidiary was 40%. Thus, the profit from the sale of inventory
can be estimated to be $ 4,000 (14,000*40/140). Therefore, from the point of view of
business, the profits are overstated and appropriate adjustments would be necessary to
cancel out the unrealised profits of the business. The journal entry which would be
passed for making the adjustment of $ 4,000is shown below:
Consolidated Profit Account......................................Dr $4,000
To Consolidated Inventory Account $4,000
The above journal entry would make the appropriate changes in the consolidated
financial statements and eradicate the unrealised profits. The profits which are which
are to be shown in the non-controlling interest of the business would be treated
differently. One of the approach is that the non-controlling interest would be assigned a

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proportionate share of unrealised profits. In this way, the entire profits in the selling
entity is eliminated. The second alternative approach is that no portion of unrealised
profits would be shown in the non-controlling interests and the figure of non-controlling
interest depicts entitlement of share capital and reserves associated with the subsidiary.
An assumption can be made that JKY LTD has 80% interest in D ltd and 75%
interest in E ltd. D ltd made sales of good to E ltd for $ 100,000. The original cost of
product was $ 70,000 and the same product was sold by E ltd. The sales were made for
half of the products. When the parent company i.e. JKY ltd prepares the consolidated
financial statements, unrealised profits needs to be eradicated so that proper valuation
of the inventory is shown. The transfer of profit from D Limited to E Limited is made at
$50,000 and the group cost would be $35,000. Therefore, the intra-group profit to be
removed from inventories is $15,000. Here, the application of the first method would
reveal the non-controlling interest of the business to be 20% and the same would be $
3,000 ($ 15,000*20%).
Impact of Disclosures of Non-controlling Interest in Consolidated Financial
Statement
The provisions of “Paragraph 27 of AASB 127” clearly shows that separate
consolidated financial statement shows separate presentation of the non-controlling
interest from the equity of the parent company which is presented in the balance sheet
of the business. The non-controlling interest can be referred to as a part of the equity of
the business of subsidiary company and the same is attributed to the parent company at
the time of consolidation of the business. The standard which is stated above has made
reporting requirements for non-controlling interest much easier. The adjustments which
are made due to incorporation of non-controlling interest are shown in the equity
balances of the parent company. The changes need to be reconciled in the
consolidated financial statements as per the provisions which is stated under
“Paragraph 106 (a) of AASB 101” (Aasb.gov.au 2019). The non-controlling interest
amount need to be identified appropriately. In addition to this, separate presentation of
the non-controlling interest would also ensure that proper explanation is provided to the
shareholders of the business who have a claim on the net assets of the business
(Hoyle, Schaefer and Doupnik 2015). In addition to this, the provisions which are stated
in AASB 101 also requires full and faithful disclosure of the financial information in the
consolidated statements.
Equity transactions could be assessed as a variation in ownership interest of
parent firm in a subsidiary, which does not take place when the parent firm loses control
over the subsidiary. If there is a change in the proportion of equity that is held by non-
controlling interest than the proportion changes altogether and necessary adjustments
need to be made in the carrying values of controlling and non-controlling interest of a
business (Palea 2013). The non-controlling interest along with fair value of
consideration is also recognised for the subsidiary business and the same is attributable
to the parent company which is engaged in consolidation.
Changes needed to ensure the accurate representation of the consolidated
financial statements:

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The representation of the financial statement would be depending on the
provisions which are stated under AASB 101. The adjustments which are required to be
made for appropriate presentation of the financial statements would concentrate on
main account treatments. The investments which is made by parent company in the
subsidiary needs to be adjusted or offset and part of equity of the subsidiary needs to
be eliminated. In addition to this, if there are any unrealised profits, then the same also
needs to be eliminated. Any impairment losses for the assets which are to be realised
need to be identified as intragroup losses. While all income and expense need to be
settled between the parent and subsidiary company. There is also a requirement of
keeping the accounting policies of the business same between the parent and
subsidiary company. The treatment of non-controlling interest needs to be properly
done by the business and the same needs to be shown in comprehensive income
statement prepared by the business. In addition, any profit or loss in relation to
subsidiary’s outstanding cumulative preference shares needs to be calculated.
Effects of the required changes on the disclosure requirements
The provisions of “Paragraph 10 of AASB 127”, when a parent company
prepares a consolidated financial statement then it need to account for investments
made in joint ventures which may be at cost or as per AASB 9. Therefore, there exist a
relaxation in accounting policies. However, proper disclosures still need to be presented
in the annual report. The consolidated financial statements have to be developed in
such a manner that the same discloses the nature and degree of any important
limitations arising from the need of regulations on the ability of the subsidiary in
transferring to the parent either through repayment of loans, advances and dividends in
cash.
It is also required for the parent company to disclose the proportion of holdings
that the company has in the subsidiary company. If the parent company does not hold
50% or more of the voting rights than the same must also be disclosed in the
consolidated financial statements.
Conclusion
The above discussion effectively shows the difference in treatments under
consolidation method and equity method and also shows relevance of the accounting
standards in providing appropriate treatment relating to the same. In addition to this, the
treatment of non-controlling interest in a consolidated financial statement would be
analysed so that appropriate treatment and disclosures are provided in the consolidated
financial statements of the business. Moreover, the disclosure requirements for entire
consolidation is discussed above along with situation where unrealised profits arises in
case of intragroup transactions.

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Reference
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf [Accessed 3 May
2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB128_08-11.pdf [Accessed 3
May 2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Accessed 3 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 3 May 2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed 3
May 2019].
Cîrstea, A., 2014. The need for public sector consolidated financial
statements. Procedia Economics and Finance, 15, pp.1289-1296.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Müller, V.O., 2014. The impact of IFRS adoption on the quality of consolidated financial
reporting. Procedia-Social and Behavioral Sciences, 109, pp.976-982.
Palea, V., 2013. IAS/IFRS and financial reporting quality: Lessons from the European
experience. China Journal of Accounting Research, 6(4), pp.247-263.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.

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