Corporate and Financial Accounting: Consolidation Accounting Report

This report critically examines the accounting factors involved in a corporate takeover scenario, specifically the acquisition of FAB Ltd by JKY Ltd. It delves into the differences between consolidation accounting and equity accounting, highlighting their impact on decision-making. The report emphasizes the importance of considering intra-group transactions and their treatment in financial reporting. Furthermore, it addresses the disclosure requirements for non-controlling interests, providing a comprehensive understanding of the key aspects of accounting for corporate takeovers. The report uses AASB standards and provides examples to illustrate the concepts. The report is structured into three parts, covering consolidation versus equity methods, intra-group transactions, and non-controlling interest disclosure, respectively, to offer a detailed overview of the crucial considerations in financial accounting for corporate takeovers.

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

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Executive Summary
This report involves in the critical discussion on the required accounting factors that
need to be taken into consideration in the takeover of FAB Ltd by JKY Ltd. The outcome
of the report shows that the management of JKY Ltd needs to consider the differences
between the methods of consolidation accounting and equity accounting at the time of
making the decisions. It is also needed to consider the intra-group transaction’s effects.

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

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Introduction
The main objective of this report is to discuss about certain crucial aspects
regarding the acquisition of FAB Ltd by JKY Ltd while both of these companies operate
in the same industry. There are three parts in the report. First part outlines the key
differences in methodology between Consolidation Accounting and Equity Accounting.
Second part discusses the key principles on how intra-group transactions need to be
treated in the presence of proper examples. The third part is about the disclosure of
non-controlling interests.
Part A Response
As per the given scenario, the management of JKY Ltd is going through a
dilemma regarding the adoption of the appropriate strategy for taking over the business
of FAB Ltd due to the presence of two major method of acquisition; they are
Consolidation Method and Equity Method. The nature of reporting of the balance sheet
as well as income statement in the partnership is considered as the key determinant of
the selection of either of the two above-mentioned strategies. There are some
differences between the methodologies of these two methods.
Consolidation Method – The major requirement of this method is that the proportion of
involvement of the partners in the partnership business needs to be considered as the
base for recording the assets and liabilities in the balance sheet. It is needed to record
all the acquisition related incomes and expenses in the income statement and balance
sheet; and it is needed to calculate the values of the assets and liabilities. According to
the AASB 10, Paragraph B86, the main elements of the consolidated income
statements and balance sheet are the income, expenses, equity, assets and liabilities of
the parent company as well as the subsidiary firms (aasb.gov.au 2019). According to
the requirement of this consolidation method, it is needed to ensure the full elimination
of the carrying value of the investments in the parent and subsidiary company while the
proportion of the subsidiary’s equity capital held by the parent firm also needs to be
eliminated. It requires the elimination adjustments entries for the removal of
intercompany transactions for the removal of the chances of double counting of values
in the consolidation process (Young 2013).
It is noteworthy to discuss about the aspect that there are certain specific
requirements that need to be adhered to for the financial measurement of different
financial statements’ items at the date of acquisition; and the companies are needed to
use the fair value measurement base for this valuation purpose; the total process needs
to be followed in accordance with the accounting standards of AASB 10. AASB 10,
Paragraph 32 mentions the goodwill recognition procedure at the time of the goodwill
recognition by the acquirer at the acquisition date (aasb.gov.au 2019). The acquirer is
needed to consider the higher of these below two conditions:
a. The aggregate of the following:

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o The transfer value which is predicted on the basis of fair value accounting at
acquisition date as per AASB 3,
o The predicted valuation of non-controlling interest by the acquiree; and,
o The fair value of equity interest of the acquirer that the acquirer has acquired at
the date of acquisition in the stage of complete business combination.
b. The acquirer’s identified net assets and predicted liabilities’ net value in the presence
of the required accounting standard (Oloye and Osuma 2015).
For example, it is assumed that $20,000,000 has been invested by JKY Ltd on
01/05/2018 in order to start the business and below in the journal.
Again on 01/05/2019, JKY Ltd invested another $10,000,000 for the acquisition
of FAB Ltd and below in the journal for this transaction.
It leads to the asset balance and cash balance of JKY Ltd worth $20,000,000 and
$10,000,000 respectively and below in the journal.
Below is the consolidated statement of these companies at the end of the
accounting period.
Equity Method – Wide use of this equity method can be seen in the analysis of the
investment’s profit from other companies. It is needed to disclose the income from
investment in the income statement by considering the size of the investment as the
base (Serdar Dinc and Erel 2013). AASB 128, Paragraph 10 states that the
investments need to be recognized at cost value initially; and it is also needed to
recognize the fluctuations in the carrying value of the investments. AASB 3, Paragraph
33 requires the use of fair value for the purpose of goodwill recognition at the date of
acquisition (Singh 2013).

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In an illustration, the assumption is taken that there is an acquisition of the 30
percent of shares of FAB Ltd by the management of JKY Ltd. The reported net profit
and dividend of FAB Ltd are $10,000 and $50,000 respectively. This transaction need to
be recorded at cost. Below is the journal.
Due to the receiver of the investment by the company, the extent of the reduction
of investment account is by $15,000.
Lastly, the net profit of FAB Ltd would be recorded by JKY Ltd as the increase in
the investment account.
Part B Response
The presence of inherent difference can be seen between the companies in
order to conduct their transactions. The requirement is the complete removal of the
transitional effects between these two companies in order to prepare the consolidated
accounts. AASB 127, Paragraph 3 puts the obligation for the total elimination of the
intra-group transactions requirements such as incomes, expenses and balances
(aasb.gov.au 2019). There are certain transactions that can be considered as the
examples of the intra-group transactions. Some of them are sale of intra-group
inventory, loans at the intra-group basis, sales of intra-group non-current assets,
dividend payment on intra-group basis, intra-group payment of management transaction
fees and others. The effects of these transactions can be eliminated with the help of
consolidation adjustments through the original entry transaction reversal with the aim to
recognize the transactions (Locorotondo, Dewaelheyns and Van Hulle 2014).
It can be noted from the given scenario that a transaction to buy inventory
occurred in JKY Ltd and the company purchased the inventory from its partially
possessed subsidiary company. In this process, until JKY Ltd sales all of the inventories
to any external customers, there is not any possibility of the revenue realization. Thus it
needs to be made sure that there is not any unrealized profit in the consolidated
financial statements. According to AASB 127, Paragraph 25, it is needed to completely
eliminate the inventory related any profit or loss along with the profit or loss from any
current assets in the intra-group transactions (aasb.gov.au 2019).

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It can be seen from the given case study that JKY Ltd has sold inventory from
one subsidiary company which is partly owned and a mark-up is included in the sale
which makes the sales accurate in terms of group transactions when JKY Ltd tries to
sell the same inventory to any external customer. It is needed to consider the profit as
the unrealized profit until JKY Ltd become able in selling the inventory to external
customers which leads to the increase in the profit of the group. Thus, it is required to
fully eliminate the unrealized profit (Viñals et al. 2013).
For example, it is assumed that JKY Ltd has bought inventory worth $12,500
from one of its subsidiaries and the profit margin of the subsidiary is 20%. It leads to the
profit of $2,500 ($12,500 × 20%) that creates the overstatement of profit by this same
amount. Below is the required journal.
Consolidated Profit a/c……….Dr.
To Consolidated Inventory a/c
$2,500
$2500
The group is required to eliminate the unrealized profit that occurred from the
sale of the inventory to one of the subsidiaries in the presence of non-controlling
interest. It leads to profit uncertainty which is reported by the group for the non-
controlling interest. As per the fist method, the unrecognized profit needs to be assigned
to the non-controlling interest by using the unrecognized profit percentage as the base.
As per the second method, no profit needs to be assigned to the non-controlling interest
by the group (Ferran and Ho 2014).
In an illustration, the assumption has been taken that both the 80 percent and 70
percent interest of A Limited and B Limited respectively are acquired by JKY Ltd. A
Limited was involved in selling goods to B Limited for $10,000 whose actual cost was
$70,000. B Limited sold 50% of the purchased goods from A Limited. The unrealized
profit associated with this transaction needs to be eliminated by JKY Ltd. It is required
for A Limited to transfer $50,000 worth of profit to B Limited. The cost of the company is
$35,000. In this total process, the responsibility of JKY Ltd is to disregard the profit
worth $15,000 from the inventory related transaction. For this reason, $3000 that is
$15,000 × 20/100 is the percentage of the non-controlling interest (Vernimmen et al.
2014).
Part C Response
Effects of NCI Disclosure – At the time of the preparation and presentation of the
financial statements, the major responsibility on the management of the parent
company is to ensure the fact that the financial information of the non-controlling
interests are presented separately from that of the parent company’s financial
statements (aasb.gov.au 2019). Non-controlling is a portion of the equity of the
subsidiary which does not have any attribution towards the parent company. The
standard of AASB 127 have provided major assistance to improve the accounting and
reporting of the non-controlling interests. The main requirement in this situation is to
show and merge the changes in the financial information of both the parent company
and the subsidiary companies and this needs to be done through adhering with the
standards of AASB 101 (aasb.gov.au 2019). In this way, the values of the non-

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controlling interest can be properly identified and the shareholders can get major clarity
on the claims regarding net assets in the consolidation process (Flower 2018).
Equity transactions can be considered as the dissimilarity of the interest of the
ownership in the parent company and this aspect does not take place in the absence of
the control of parent company on the subsidiaries. For this reason, there is a
requirement of conducting the needed adjustments in both the controlling as well as
non-controlling related carrying value when it is clear that there are changes in the
equity held by the non-controlling interest. After that, it is needed to directly recognize
the adjustments related to fair value and non-controlling interest in the presence of the
fact that they have major attribution towards the firm’s shareholders (Flower 2018).
Changes that is required – There are some key changes in the accounting standard of
AASB 101 for the appropriate representation of the consolidated financial statements of
the companies (aasb.gov.au 2019). It states that it is not needed to prepare the
separate financial statements at the reporting date. It needs to be mentioned that there
are certain financial adjustments that assist the users in demonstrating the main
transaction related impacts in the financial reporting dates of the parent company and
its subsidiary companies; and thus, these adjustments must be there.
There is a major requirement for the realization of the losses of impairment
associated with the identifiable assets. At the same time, it is also required to eliminate
the transactions that have connection with the intra-group balances, incomes and
expenses. According to AASB 112, it is required to consider the application of
provisional differences from the elimination of profit or loss through the help of the
appropriate adjustments in the parent company’s financial statements (aasb.gov.au
2019). In addition, it is required to maintain the uniformity in the application of the
accounting rules, regulation and policies in the consolidated financial statements
(Dunbar and Laing 2017).
The requirements of the companies is to ensure major attribution in the parent
company’s and its subsidiary companies’ total comprehensive income; and even in the
presence of any kind of negative impact of these certain accounting transactions of the
non-controlling interest, this major attribution needs to be continued. In this process, the
managements of the firms must correctly calculate the share of profit or loss in the
presence of outstanding cumulative preference share in one subsidiary company of the
parent company. It is needed for the companies to calculate this after considering the
required adjustments in those share related dividends (Dunbar and Laing 2017).
Implications of these Changes – One of the major requirements of the accountants of
both the parent company and the sub diary companies is to select the cost value of the
investments at the time of their recognition and measurement in the financial statements
and the accountants are required to consider the rules and regulations of the standards
of AASB 127 (aasb.gov.au 2019). This leads to the correct development of the financial
statements of the firms. At the same time, this aspect needs to be made sure that there
is the disclosure of the correct accounting policies and bases of measurement in the
presence of adequate materiality in the financial information as a result of inappropriate
disclosure. For this reason, the managements of the companies should develop the

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consolidated financial statements through effective disclosure of nature of any
uncertainty occurred from the requirements of regulations.
In addition, while preparing the parent company’s consolidated financial
statements, it is required for the parent company to ensure the aspects that the financial
statements of the subsidiary company are presented at the accounting period’s end.
This particular aspect ensures that all essential financial disclosures of the subsidiary
companies are there when the date of accounting year ending of the parent company
and the subsidiary companies are different. There are many instances when the parent
company does not have more than 50% voting right in one of its subsidiaries. In the
presence of this aspect, it is required for the parent company to make appropriate
disclosure of the nature of relationship between the parent company and the subsidiary.
Hence, it needs to be mentioned that all these aspects together influence the process to
prepare as well as present the financial statements of the parent companies (Carey,
Knechel and Tanewski 2013).
Conclusion
It can be seen from the above discussion that there are certain key differences
between the methodologies of the consolidation method of accounting and equity
method of accounting; and it is needed for the management of JKY Ltd to consider
these differences while adopting the strategy to take over FAB Ltd. The above
discussion also indicates towards the essential aspect that it is needed for the parent
companies to take into consideration the variations between different intra-group
transactions in case of the consolidated financial statements. According to the above
discussion, separate disclosure is needed to be made by the parent company on the
financial information of the non-controlling interests due to the fact that it has certain
major effects on the consolidated financial statements.

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May 2019].
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May 2019].
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