Holmes Institute HA2032: Corporate Takeover and Consolidation Effects

This report delves into the complexities of corporate takeovers and their impact on consolidation accounting. It begins by contrasting consolidation and equity accounting methods, highlighting the key differences in their application and the implications for financial reporting. The report then exa...Read More

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

1CORPORATE AND FINANCIAL ACCOUNTING
Executive Summary
There are three parts of the report. The first part states that the presence of major
accounting principles leads to the difference in the methods of consolidation accounting
and equity accounting. The second part shows that the companies are required to
consider differences in the intra-group transactions in the consolidated financial
statements of the same firms. The third part shows that there is major impact of these
disclosures on the consolidated financial statements.

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Table of Contents
Introduction........................................................................................................................3
Response to Part A............................................................................................................3
Response to Part B............................................................................................................5
Response to Part C...........................................................................................................6
Conclusion.........................................................................................................................8
References.........................................................................................................................9

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Introduction
This report intends to discuss about different acquisition related aspects from the
provided scenario of the acquisition of FAB Limited by JKY Limited. Discussion about
the prime differences between the methods of consolidation accounting and equity
accounting in consolidation is the main aim of the first part of the report. Analysis of the
major principles of the intra group transactions in the presence of proper application is
the aim of the second part of the report. Analysis of the effects of non-controlling
interest related disclosures are the aim of the last part of the report.
Response to Part A
There are two methods of joint venture or acquisition; they are the equity method
and consolidation method. Selection of either of these methods depends on the
reporting of income statement and balance sheet in the partnership. The presence of
certain difference in the methodology of these two methods can be seen and they are
discussed below.
Consolidation Method – Under this particular method, it is needed to record the assets
and liabilities in the company’s balance sheet on the basis of the involvement
percentage maintained by the partners in the partnership (Milojević, Vukoje and
Mihajlović 2013). All the acquisition related incomes and expenses are recorded and
they need to be reported in the income statement as well as balance sheet while
undertaking the calculation of the assets and liabilities. The process of business take
over should take into account certain important economic substances which are assets,
liabilities, income, expenses and equity of the parent company and its subsidiaries and
this piece of information is available in AASB 10(aasb.gov.au 2019). This consolidation
method demands the whole elimination of the investment’s carrying value of the parent
and subsidiary company along with the portion of the equity capital of the subsidiary
held by the parent company. Elimination adjustments entries need to be conducted in
this method for the elimination of the intercompany transactions with the aim to
eliminate the scope of double counting of the values in consolidation.
It is needed for the parent companies to adopt the strategy to measure the
financial statements’ line items. Moreover, the parent companies are needed to take
into account the assets, liabilities, incomes and expenses at the date at which they were
acquired (Ratiu and Tudor 2013). Companies can access this information in the
standards of AASB 10. Paragraph 32 of AASB 10 provides the particular process for
goodwill recognition where the acquirer is required to make goodwill recognition at the
date of acquisition between the higher of the below two conditions (aasb.gov.au 2019).
A. It is needed to take into consideration the following condition’s aggregate –
 The transfer consideration which has been estimated where it is needed to use
fair value at the date when it was acquired as per AASB 3;
 The acquiree’s gauged valued of non-controlling interest; and.

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 In the completed business combination stage, the acquiree’s equity interest’s fair
value in the past acquired by the acquirer at the date of acquisition at fair value.
B. The net value of the acquirer’s identified assets and gauged liabilities in accordance
with the appropriate accounting standard (aasb.gov.au 2019).
This can be explained through an example. As per the assumption, JKY Limited
invested $20,000,000 on 1st May, 2018 for commencing a business and the journal is as
below:
On 1st May, 2019 the company further $10,000,000 invested with the aim to
acquire the shares of FAB Limited and the journal is shown below:
Thus, the cash balance of JKY Limited is $10,000,000 and the asset balance is
$20,000,000. The journal is shown below:
Below is the consolidated statement:
Equity Accounting Method – Business organizations use to utilize this particular
method in order to analyze the profit from investments from different companies. As per
this method, the companies must ensure the disclosure of investment income in the
income statement on the basis of the equity investment’s size (Weil, Schipper and
Francis 2013). The managements of the parent companies have the obligation to
ensure the fact that they would take into account the cost price at the investment
recognition’s early phase and the standards of AASB 10 have put this obligation on the
parent companies’ managements. Moreover, it is required for the managements of the
parent companies to provide assurance on the aspects that they would also consider
the use of fair value measurement base in the goodwill recognition process at the date
when it was acquired and this information can be seen in AASB 3 (aasb.gov.au 2019).

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An example can be considered in this regard. JKY Limited has acquired 30%
share in FAB Limited for $50,000. FAB Limited has reported net profit and dividend of
$10,000 and $50,000. Cost value needs to be considered for recording this transaction
(Custodio 2014). It is shown below:
Investment would be massively reduces because of the receivable of dividend
worth $15,000 by JKY Limited.
JKY Limited would record the net profit as the increase in the investment
account.
Response to Part B
It is considered that the difference between legal entities is inherent for
conducting transition between them. For the preparation of the consolidated accounts, it
is needed to fully remove the effects of the transactions between the companies. Total
exclusion of this substance should be ensured from the financial dealings regarding
intra-group. These substances are income, expenses and others which are connected
to intra-group transactions and this information can be seen in AASB 127(aasb.gov.au
2019). Some crucial examples of the intra group transactions are intra-group sales of
inventory, intra-group loans, intra-group non-current asset sales, payment of intra-group
dividend and payment of intra-group management fees. Consolidation adjustments lead
to the removal of the effects of these transactions by the reverse of the original
accounting entries for recognizing the transaction in different legal entities (Barth 2013).
It can be seen from the provided case that JKY Limited is involved in purchasing
inventories from one of his subsidiaries that is partially owned by the company and it is
not possible to realize the revenue unless JKY Limited sells the goods to external
customers (Cirstea and CIiolomic 2014). For this, it is needed to remove any unrealized
profit from the consolidated statements. Moreover, there is a major necessity of the
exclusion of inventory related profit or loss occurred from intra-group dealings and this
information can be obtained from AASB 127 (aasb.gov.au 2019).

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The provided scenario states that JKY Limited has purchased inventory from one
of its partly owned subsidies and the inclusion of a mark-up is assumed in the sale of
inventory which indicates towards the accuracy of the sales as per the transactions. It
needs to be mentioned that the profit would be regarded as unrealized profit until the
inventory is sold by JKY Limited to outside customers and this unrealized profit
extensively increase the company’s profit which indicates towards the necessity of
eliminating unrealized profit (Carey, Potter and Tanewski 2014).
In an example, the assumption is that JKY Limited has purchased inventory from
one of its subsidiaries for $12,500 and the subsidiary has earned a margin of 25%.
Thus, the profit is $2,500 that is $12,500 × 25/100. For this reason, the group’s profit
would be overstated by an amount of $2,500 and it is needed to pass the following
adjustment:
Consolidated Profit a/c……….Dr.
To Consolidated Inventory a/c
$2,500
$2500
It is needed for the group for the removal of the total unrealized profit arising from
the sale of goods to the subsidiaries with non-controlling interest. This creates
uncertainty regarding the profit that the group needs to report for the non-controlling
interest. One approach is that the group should assign the profit to the non-controlling
interest based on the unrecognized profit’s percentage. This leads to the removal of the
total profit. Another approach is that the group should not assign any percentage of the
unrealized profit to the non-controlling interest (Grossi 2014).
According to another instances, the assumption is that JKY Limited has 80%
interest of M Limited and 75% interest of N Limited. M Limited has sold goods cost
$70,000 to N Limited for $10,000 in a particular period. From this, 50% of the goods
have been sold by N Limited. Thus, it is needed for JKY Limited to undertake the
elimination of the unrealized profit at the time of the preparation of consolidated financial
statement. A profit worth $50,000 would be transferred to N Limited by M Limited and
the cost of the group would be $35,000. Thus, JKY Limited is required to remove an
intra-group profit of $15,000 from the inventories. On the basis of the first approach,
$3,000 that is $15,000 × 20/100 would be the non-controlling interest proportion
because of the fact that JKY Limited owns 80% of FAB Limited’s interest and 20% of
non-controlling interest (Grossi 2014).
Response to Part C
Effects of NCI Disclosure – There is a necessity of providing assurance on the specific
fact that the parent company would ensure that they do not present the financial
aspects of the non-controlling interests along with its own equity balance in the
statement of financial position and this information can be obtained from AASB 127
(aasb.gov.au 2019). It is necessary to consider the non-controlling interest in the same
manner as the subsidiary companies’ equity due to the presence of its direct or indirect
attribution towards the parent organization. AASB 127 has majorly helped in enhancing
the accounting as well as reporting of non-controlling interest. The managements of the

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parent organization must ensure that the alterations in the shareholder’s equity is
properly reconciled so that it can become able in showing the changes brought in the
non-controlling interest as well as the parent organization and this information can be
seen in AASB 101 (aasb.gov.au 2019). This leads to the identification of the separate
non-controlling interest’s amounts and values. This process helps in providing additional
clarification to the shareholders of the consolidated company on their net assets related
claims (Tran 2015).
Equity transactions are the variation of the ownership interest in the parent firm. It
is needed to conduct required adjustments in the carrying value of the controlling and
non-controlling interests in case a change can be seen in the portion of the equity that
the non-controlling interests hold. Moreover, the non-controlling interest and fair value
adjustments are needed to be recognized directly because of their attribution towards
the shareholders of the parent firm (Bazley, Hancock and Robinson 2014).
Needed Changes for the Precise Representation of Consolidated Financial
Statements – The presence of certain changes can be seen in AASB 101 in order to
accurately represent the consolidated financial statements and there is no need of the
preparation of consolidated financial statements at the same date of reporting
(aasb.gov.au 2019). Adjustments are needed for demonstrating the main event’s or
transaction’s effects between the parent firm’s and its subsidiary’s dates of the financial
statements. The carrying value of the investment needs to be offset in the parent firm
and subsidiary and parent hold also needs to be eliminated (Berk et al. 2013).
The impairment losses connected with the identifiable assets from the intra-group
losses needs to be realized. After that, the transactions having association with the
intra-group income, expenses and balances need to be removed. The consolidated
financial statements must have the combination of the assets, liabilities, incomes,
expenses and cash flows of the parent firm and their subsidiaries. AASB 112 shows the
need of applying the temporary difference from the profit or loss removal from the
transactions of intra-group (aasb.gov.au 2019). There must be the presence of
consistency in the accounting policies and procedures of the parent company with the
assistance of correct adjustments in the financial statements of the parent company.
Thus, uniformity needs to be maintained when a member of the group uses different
accounting policies for certain crucial types of accounting transactions.
It is needed for the companies to majorly attribute towards the total
comprehensive income of the parent firm along with its subsidiary companies and it
needs to be continued even there is possible adverse consequence from the specific
accounting transactions of the non-controlling interest. At the same time, it is needed for
the companies to undertake the correct calculation of the share of profit or loss when
there is the presence of outstanding cumulative preference shares by one of the parent
company’s subsidiaries. This computation needs to be done after making the necessary
adjustments in the dividends of those shares while taking into consideration of the
dividend declaration by the companies (Berk et al. 2013).
Impact of the Needed Changes on the Disclosure Requirements of Annual Report
– Paragraph 10 of AASB 127 indicates towards the crucial requirement of considering

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the investments, subsidiaries and others associates at cost value as per AASB 9 at the
time of undertaking the separate financial statements presentation by the companies
(aasb.gov.au 2019). Financial statements can be appropriately developed as well as
presented in this manner. After that, it is required to be ensured that the appropriate
accounting policies as well as measurement bases are disclosed on the basis of the use
of consolidated financial statements when lack of materiality can be seen in information
due to any crucial financial disclosure. In the presence of this, it is needed for the
business organizations to prepare the consolidated financial statements by ensuring the
disclosure of the nature and degree of any doubt developed from the regulation
requirements based on the ability of the subsidiaries for transferring to the parent firm
through the repayment of loans, advances or cash dividends.
At the same time, at the time of the preparation of the consolidated financial
statements of the firms, the parent companies are needed to ensure the presence of the
financial statements of their subsidiary companies at the year end. This is needed for
ensuring the disclosure of crucial accounting aspects when the year end of the parent
firm and its subsidiaries are not same. At the same time, when a parent firm has less
than 50% of the voting right in one of its subsidiaries, the parent company must make
the disclosure on the relationship with that subsidiary. This disclosure can be direct or
indirect. Thus, it can be seen from the above discussion that the requirements of
disclosures has major impact on the preparation as well as presentation of the financial
statements.
Conclusion
The above discussion indicates onwards the crucial fact that the methods of
consolidation accounting and equity accounting are different from each other since
there are different accounting standards involved with these two methods. The
companies are needed to take into account different measurement and recognition
principles for the analysis of the differences between the above-discussed methods of
accounting. It can also be seen from the above discussion that is the presence of
certain differences in the intra-group transactions in the consolidated financial
statements. The above discussion also shows that the parent companies are needed to
separately consider the disclosure of non-controlling interests in the consolidated
financial statements since it has effects on the consolidation.

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References
Aasb.gov.au., 2019. Business Combinations. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf [Accessed 26 May
2019].
Aasb.gov.au., 2019. Consolidated Financial Statements. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Accessed 26
May 2019].
Aasb.gov.au., 2019. Investments in Associates and Joint Ventures. [online] Available
at: https://www.aasb.gov.au/admin/file/content105/c9/AASB128_08-11.pdf [Accessed
26 May 2019].
Aasb.gov.au., 2019. Presentation of Financial Statements. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed 26
May 2019].
Aasb.gov.au., 2019. Separate Financial Statements. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB127_08-11_COMPjan15_07-
15.pdf [Accessed 26 May 2019].
Barth, M.E., 2013. Measurement in financial reporting: The need for
concepts. Accounting Horizons, 28(2), pp.331-352.
Bazley, M., Hancock, P. and Robinson, P., 2014. Contemporary Accounting PDF.
Cengage Learning Australia.
Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V. and Finch, N.,
2013. Fundamentals of corporate finance. Pearson Higher Education AU.
Carey, P., Potter, B. and Tanewski, G., 2014. Application of the Reporting Entity
Concept in A ustralia. Abacus, 50(4), pp.460-489.
CÎRSTEA, A. and CIOLOMIC, I.A., 2014. Public Sector Consolidated Financial Statements–
Area and Methods. AMIS 2014, p.594.
Custodio, C., 2014. Mergers and acquisitions accounting and the diversification
discount. The Journal of Finance, 69(1), pp.219-240.
Grossi, G., 2014. Consolidated financial statements in the public sector. In Public sector
accounting (pp. 63-76). Routledge.
Milojević, I., Vukoje, A. and Mihajlović, M., 2013. Accounting consolidation of the
balance by the acquisition method. Economics of Agriculture, 60(297-2016-3534),
p.237.

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Ratiu, R.V. and Tudor, A.T., 2013. The Classification of Goodwill-An essential
accounting analysis. Review of Economic Studies and Research Virgil Madgearu, 6(2),
p.137.
Tran, A., 2015. Can taxable income be estimated from financial reports of listed
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