HA2032 Corporate & Financial Accounting: Takeover Decision Making

This report provides an analysis of corporate takeovers and their effects on consolidation accounting, using the scenario of JKY Limited acquiring FAB Limited. It differentiates between equity and consolidation accounting, highlighting key methodologies and relevant accounting standards like AASB 10, AASB 3, AASB 127, and AASB 101. The report addresses the treatment of intra-group transactions and the impact of non-controlling interest (NCI) disclosure requirements on the consolidation process. It includes practical examples and journal entries to illustrate the accounting treatments, such as the elimination of unrealized profits from intra-group inventory sales and the presentation of NCI in consolidated financial statements. The analysis emphasizes the importance of proper accounting for consolidated accounts and the separate disclosure needs for non-controlling interests.

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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CORPORATE AND FINANCIAL ACCOUNTING
Executive Summary:
This report has been prepared in order to have a clear knowledge of the various
aspects of accounting, which is regarded to be acquirement of the companies that are
smaller in nature and the scenario in this case is JKY Limited acquiring FAB Limited. It
can be concluded that there are significant changes in treatment of accounts while
dealing with consolidated accounts and non-controlling interest with respect to several
standards of accounting. Different types of recognizing and measuring principles are
used during the analysis made to identify the distinctions between equity accounting
and consolidation accounting when smaller firms are acquired by large organizations.
Noteworthy differences between the consolidated financial statements of both the firms
are observed when intra-group transactions are treated. Lastly, it can be estimated that
separate need of the non-controlling interest for disclosure of reporting means of the
consolidated financial statements exerts significant on consolidation process as a
whole.

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Table of Contents
Introduction........................................................................................................................3
Response Part A:...............................................................................................................3
Response Part B................................................................................................................4
Response Part C...............................................................................................................6
Conclusion:........................................................................................................................8
References:........................................................................................................................9

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CORPORATE AND FINANCIAL ACCOUNTING
Introduction
This report has been prepared in order to have a clear knowledge of the various
aspects of accounting, which is regarded to be acquirement of the companies that are
smaller in nature and the scenario in this case is JKY Limited acquiring FAB Limited. In
the initial part of the paper, a proper differentiation would be given in accordance to the
key methodologies in equity and consolidated accounting with the help of proper
instances. The next part of the paper will try to address the significant principles related
to the transactions that are intra-group in nature and the workings that would be made
with the help of practical instances. The report at the end will explain the effect of the
provisions and the declarations related to the interests that are non-controlling by
maintaining in another item at the time of consolidation.
Response Part A:
The case study on the basis of which the report has to be prepared has
highlighted that the management of JKY Limited are in confusion with relation to the
acquisition process that they would undertake in order to acquire FAB Limited. The
equity and the consolidation process have been the two sorts of processes that can be
utilized in instances when two enterprises are within the agreement of a joint venture.
The choice of making use of one of the key processes is totally dependent on the
method that are used by the management of the companies in order to publish their
statement of balance sheet and income statement. This process depicts the fact that the
concerned accounting processes have their unique characteristics within the
methodology and all of these have been explained in the following paragraphs.
Consolidation Process
It is seen that the liabilities and the assets that are within a joint venture are
maintained within the statement of balance sheet in the process of consolidated
accounting process and the values are maintained in the amount up to which the
company maintains its involvement within the acquisition process. When the liabilities
and the assets are valued (Barth 2018), the firm needs to show all the income and
expenditure at the time of acquisition and they are added within the statement of
balance sheet and income statement. “Paragraph B86 of AASB 10” cites that the
consolidated financial statements are associated and for instances they are costs,
assets, equity, liabilities, cash flows and liabilities of the bigger company with their
auxiliary companies. Furthermore, it is seen that the process of off-setting eradicates
the carriage value of the investments that are done by the bigger company over their
auxiliaries and the percentage of the equity that is captured by the parent company
auxiliaries (Beck, Glendening and Hogan 2016). It is even seen that the process of
consolidated accounting undertakes the adjustments of elimination and this has the goal
of off-setting the transactions that are made inter-organizational so that the values of
double accounting can be avoided at the level of consolidation.
It is seen that “Paragraph B88 of AASB 10”, points out the needs of the
requirement of the various item lines of the financial reports within which the costs and
the earnings lf the auxiliaries are on the basis of the realized amounts of the liability and

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assets in the consolidated financial report at the time of making the acquisition
(Martínez‐Ferrero, Garcia‐Sanchez and Cuadrado‐Ballesteros 2015). Hence, it can be
seen that the units are assessed over the fair values during the time of acquirement.
“Paragraph 32 of AASB 3” has highlighted a specific term with respect to the
identification of goodwill. The company that is making the acquisition has to identify the
goodwill at the time of acquirement by understanding the one that is bigger of the two.
a. The average of:
 The transmission of the gauged consideration in relation to AASB 3
demanding for fair value at the date of acquirement
 The value of the non-controlling interest within the one who is being
acquired is measured on the basis of the standard.
 The partnership business is concluded in various phases and they have
been the actual value of the interest held equity previously by the bigger
company over the smaller company at the value that is fair at the date of
acquirement (Cañibano 2017).
b. The recognizable net asset amount attained and the forecasted liabilities
measured in accordance to the standard.
For instance, it is seen that JKY Limited initiated a business on May 1st 2018, in
which an investment of $15 million was undertaken. The journal entry for the same is:
Bank Account…………………………………………………$15,000,000
To Shareholders’ Equity………………………………………………….$15,000,000
Within a year it is seen that JKY Limited made $5 million in order to attain the
FAB Limited shares and the journal entry is as follows:
Investments in FAB Shares…………………………….$5,000,000
To bank Account………………………………………………..$5,000,000
Hence, it is seen that the balance in cash for JKY Limited is seen to be $5 million
and the balance of asset is $15 million. Therefore the FAB Limited books of account
shows:
Asset
Assets JKY Limited FAB Limited Consolidated
Bank $7,500,000 $7,500,000 $15,000,000
FAB Limited
Investment
$5,000,000 - -
Equity of the
Shareholders
$15,000,000 $5,000,000 $15,000,000

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Response Part B
During the time of the financial time period, it is seen that most of the legal items
within an economic environment requires undertaking transactions among each others.
For the purpose of calculating the consolidated accounts, the effect of all the
transactions among the units among the companies is completely eradicated during the
time when the bigger company has only a section of the equity that has been issued.
“paragraph 29 of AASB 127” in this respect are in need of a balance that is intra-group,
incomes and costs and the transactions that are to be eradicated fully. The
circumstances related to such transactions are inclusive of:
 Fee payment of the management to a group member
 Members of a group paid the dividend payment
 Inventory sale done intra-group
 Sale of non-current asset done intra-group
 Loans that are intra-group
The adjustments related to consolidation that are related to the transactions that
are intra-group removes these transactions with the help of the setback of the real
entries of accounting undertaken for the purpose of identification of the transactions for
a renowned legal enterprise (Christensen, Liu and Maffett 2017).
As per the current case study, it is seen that JKY Limited has bought the
inventories from an auxiliary that is owned partially. From the group’s viewpoint, it is
impossible to realize the profit till the inventory sale done to the outside parties. Hence,
any kind of profits that are unrealized are in need of eradication from the consolidated
accounts. The revenues that are not realized are undertaken from the sold inventory in
the group for generating revenues, which it maintains at the conclusion of the time
period. It has been stated in “Paragraph 25 of AASB 1127” that the losses and the
profits that comes out from the transactions made intra group are identified in the assets
for instance the inventory and non-current assets are completely removed (Dye 2017).
In accordance to the case study, the subsidiaries that are owned partially has
sold off the inventory to JKY Limited and it is estimated that a markup is regarded as
sales. At the time when JKY Limited sells off the markups to the external parties, this is
seen to be precise for the group point of transaction. Till the time the products are sold
by JKY Limited to the outsiders, the revenue that is generated by the subsidiary on the
sale of inventory to JKY would create a profit that will be unrealized and therefore the
profit of the group will increase at a vast pace. This makes the eradication of the
unrealized profit compulsory. An example can be given that it has been projected that
JKY Limited has bought an inventory from their subsidiary at $17,500 and this has been
maintained till the end of the year. Another projection is made that auxiliary gains a
margin of 25% and therefore the inventory balance profit sums up to $3,500. Hence,
from the perspective of the group, there has been overestimation of the consolidated
revenue by $3,500 and therefore the adjustment shown below has to be made.
Consolidated Profit Account…………………………$3,500
To Consolidated Inventory Account…………………………………$3,500

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It is seen that the auxiliary company sells off a product with an interest that is
non-controlling to the members; there is a requirement of deducting the overall profit
that has been unrealized. This creates the issue regarding the revenue that needs to be
disclosed for the interest that is non-controlling. The initial process is to allocate not a
section of the profits that are unrecognized to the interests that are non-controlling and
the values for the non-controlling interests, which shows the eligibility to the reserves
and the share capital that is related to the subsidiary company.
An example can be taken where it is projected that JKY Limited has 75% interest
on L Limited and 80% in M Limited. With the financial year, L sells products having a
cost of $60,000 for $90,000 to M Limited and from this M Limited sells 50% of the
purchased product. At the time when the JKY Limited would construct their consolidated
financial report, the profits that are non-recognized within the inventories have to be
eradicated. The revenue transfer from L Limited to M Limited is undertaken at %40,000
and the group expenses are $25,000. Hence, the profit of the intra-group has to be
removed from the inventories is $10,000. With the incorporation of the first process,
since JKY has 80% interest and non-controlling interest is 20% and therefore the value
of non-controlling interest will be $2,000.
Response Part C
Impact of NCI disclosure need as a separate item in the consolidation method
“Paragraph 27 of AASB 127” cites that consolidated financial statements are in
need of a presentation of the non-controlling interests to be separate from the guardian
company equity in the statement of balance sheet. It is seen that interest that is non-
controlling is a section of equity in auxiliary, which has not been linked indirectly or
indirectly to the parent organization. The standard discussed earlier has been
supportive in enhanced reporting and accounting for the interests that are non-
controlling within the financial report. It is seen that there has been a distinctive
disclosure of the non-controlling interests in the process of consolidation and as per
“Paragraph 106 (a) of AASB 101” the transformations that needs to be reconciled in the
equity of the shareholder’s in order to highlight the changes in the non-controlling
interest and parent company (Flower 2016). It is essential to recognize the label the
non-controlling interests in a separate manner. The key factor behind the disclosure
separately is to make sure that the further clarifications to the shareholders of the group
in accordance to their claim over the net assets of the consolidated group. Furthermore,
there exists a fair explanation when one of the companies have indirect or direct interest
that are non-controlling.
The equitable transactions are known to be the variations in the interest of
ownership of a parent company within the auxiliary, which does not occur when the
parent company has lost power over their auxiliary. If the section of the equity that the
interests that are non-controlling takes certain transformations, the difference in the
interest rate is shown with the help of the adjustments in the non-controlling and
controlling carrying value interests (Hoyle, Schaefer and Doupnik 2015). Furthermore,
the adjustments of the non-controlling interest and the fair consideration of payment is
to be identified properly and they are related to the shareholders of the parent company.

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Transformations required ensure proper disclosure of the consolidated financial
statements
For the purpose of proper disclosure of the consolidated financial reports, there
are various transformations that are needed that have been addressed in AASB 101.
There is no requirement of constructing the consolidated financial reports on the day of
disclosure and adjustments need to be taken for explaining the impact of key
transactions happening among the subsidiary dates and the financial statement of the
parent company (Johnston and Petacchi 2017).
The impairment losses related to the assets that are associated needs to be
realized, which can be recognized from the losses that are intra-group. Furthermore, the
transactions that is associated to the income and the costs of the intra-group have to be
removed as well. In this manner it can be stated that the consolidated financial reports
are required to connect with all the items of the subsidiary and the parent organization
(Leuz and Wysocki 2015).
The company is therefore requited to understand the overall earnings to the
parent owners and on the interest that is non-controlling even in case the treatment has
the impact of improper balance associated to the interest that is non-controlling.
Furthermore, the profit and loss share of any auxiliary has pending aggregate
preference shares, the same needs to be assessed by the company after undertaking
the adjustments for the dividends of those shares irrespective of the disclosure of
dividend (Loughran and McDonald 2016).
Impact of the necessary alterations on the disclosure needs in the annual report
In preparation of separate financial statements as per Paragraph 10 of AASB
127” an organisation should keep account of the investments done in joint projects,
associated and holdings either as per AASB 9 or at cost. Therefore, relaxation has been
given to the consolidated financial statement preparation. Consequently, if there is lack
of reliability in the information that came into light during any release of financial
statements then it is essential to reveal any relevant policies of accounting along with
methods of measurements used to create the consolidated financial statements. Hence,
it is necessary to reveal all the features and degree of limitations ascending from the
requirement of the regulations on the discretion of the subordinate in transmitting the
developed consolidated financial statement to the parent either via repayment of
advances, loans and cash dividends.
Apart from this, in the end of the reporting year the subsidiaries need to furnish
their financial statements during the preparation of consolidated financial statements.
On the other hand, if the situation comes when parent organisation’s date of reporting
does not tally with the date of its subsidiary pertinent revelations ought to be made
concerning the same. Moreover, in a subsidiary if the share of voting rights, direct or
indirect, acquired by the parent organization is below 50 percent then the characteristics
of the innate relationship between the subsidiary and the parent organization need to be
disclosed. Therefore, during the time of preparation of consolidated financial statements
the influence of reporting means disclosure is observed.

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Conclusion:
From the above made analysis, it can be concluded that there are significant
changes in treatment of accounts while dealing with consolidated accounts and non-
controlling interest with respect to several standards of accounting. Different types of
recognizing and measuring principles are used during the analysis made to identify the
distinctions between equity accounting and consolidation accounting when smaller firms
are acquired by large organizations. Noteworthy differences between the consolidated
financial statements of both the firms are observed when intra-group transactions are
treated. Lastly, it can be estimated that separate need of the non-controlling interest for
disclosure of reporting means of the consolidated financial statements exerts significant
on consolidation process as a whole.

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