HA2032 - Corporate Takeover: Decision Making & Consolidation Effects

This report provides a comprehensive analysis of the accounting implications of a corporate takeover, specifically focusing on the acquisition of FAB Ltd by JKY Ltd. It contrasts consolidation and equity accounting methods, highlighting key differences in asset and liability recognition, goodwill calculation, and the treatment of profits. The report also examines intra-group transactions, emphasizing the elimination of unrealized profits in consolidated financial statements and the impact on non-controlling interests. Furthermore, it discusses the disclosure requirements for non-controlling interests as a separate item in the consolidation process, emphasizing the importance of transparent reporting to stakeholders.

Running head: CORPORATE AND FINANCIAL ACCOUNTING
Corporate Takeover Decision Making and the Effects on Consolidation Accounting
Student Name:
Student Number:
Session Number:

1CORPORATE AND FINANCIAL ACCOUNTING
Executive summary:
The purpose of this project is to obtain a logical synopsis of the varying book-
keeping features included in "acquisition" of a small company, "FAB Ltd" by "JKY
Ltd". During the period of examining the dissimilarities between "consolidation book-
keeping" and "equity book-keeping" while an organisation "acquires" a small
business, there are different types of calculations and recognition of "principles".
Furthermore, the evaluation of "intra group transactions" deals with the noteworthy
dissimilarities in the "consolidated financial statements" of both businesses. Finally, it
has been analysed that the declarations require existence of "non-controlling
interests" as a typical item in the "consolidated financial statements" has impact on
the all-inclusive "consolidation processes.

2CORPORATE AND FINANCIAL ACCOUNTING
Table of Contents
Introduction:..................................................................................................................3
Part A Response:..........................................................................................................3
Part B Response:..........................................................................................................5
Part C Response:.........................................................................................................6
Conclusion:...................................................................................................................8
References:..................................................................................................................9

3CORPORATE AND FINANCIAL ACCOUNTING
Introduction:
The aim of this paper is to obtain a systematic synopsis of the varying book-
keeping features incorporated with the "acquisition" of a small company, "FAB Ltd"
by "JKY Ltd". The first part of this paper would provide the dissimilarities between the
primary methodological dissimilarities between "consolidation book-keeping" and
"equity book-keeping" with appropriate examples. The second part would be
focusing on the key proposals of "intra group transactions" and their analysis by
using treated examples. Finally, the study would be highlighting the impact of
revelations involved with the "non-controlling interests" in the form of a specific item
in the methodology of "consolidations".
Part A Response:
From the provided testament, it has been identified that in order to gain "FAB
Ltd", the authorities of "JKY Ltd" is in a dilemma with regards to the selection of the
"acquisition" policies. The system of "consolidation" and the system of "equity" are
"two" varieties of the "acquisition" systems utilised while "two" organisations are
taking part in a joint project (Agrawal and Cooper 2017). The selection of applying
any one of these is dependent on the way the operating statement and the "balance
sheet statement" of the organisation "report" the cooperation. It prominently shows
that those "two" "book-keeping" methods have significant dissimilarities in
"techniques", it is depicted below-
As stated in the "consolidation method of accounting", "assets and liabilities"
of joint project recorded in the "balance sheet statement" of a business depending on
the proportion of participation of the organisation maintains in the venture (Atanasov
and Black 2016). At the time of computing "assets and liabilities", the organisation
would take into account every all the expense and income from the "acquisition" and
those are going to be included in the profit and loss statement and "balance sheet
statement". According to "Paragraph B86 of AASB 10", the combined financial
statements are connected in a manner like- items of "equity", "assets", "liabilities",
cash flow, income and expense of the "parent" organisation with their auxiliaries
(Aasb.gov.au 2019). In addition, the system nullifies or eliminates the undermined
value of the "investment" of the "parent" in all the auxiliaries and the portion of the
"equity" kept by the auxiliaries of the "parent" organisation. Furthermore, the
combined "book-keeping" system works on the removal of the adjustments with the
purpose to nullify "inter-organisation transactions" so as to remove "double counting"
of value at the combined part.
The "Paragraph B88 of AASB 10" conveys the calculation requirements of the
varying classifications of items of the income statements, in this the income and
expenses of the auxiliaries are based on the "assets and liabilities" amount earned in
the combined "financial statements" at the time of "acquisition". Hence, these items
are computed at "fair values" during the period of "acquisition". The "Paragraph 32 of
AASB 3", depicts a particular situation in terms of "goodwill" recognition. The
"claimant" has to recognise "goodwill" at the "acquisition" period as the higher of the
"two" explained below:
a. The aggregate of-

4CORPORATE AND FINANCIAL ACCOUNTING
 The practice of "consideration" gauged related to the "AASB 3" requiring "fair
value" during the period of "acquisition".
 The "non-controlling interest" value in the "acquiree" gauged according to the
standard.
 In a business combination accomplished in parts, the "fair value" of the "equity
interest" kept earlier in the "acquiree" by the claimer at the "fair value" of the
"acquisition" time.
b. The sum of the identifiable "assets" amount gained and the anticipated "liabilities"
gauged in obedience with the codes (Aasb.gov.au 2019). For example, it is
anticipated that "JKY Ltd" initiated its business on "1st May, 2018", owing to this "$20
million" were invested. The "journal entry" recorded is shown below:
The following year "JKY LTD" again invested "$10 million" to "acquire" most of
the shares of "FAB Ltd". The "journal entry" registered is discussed below;
Thus, the cash "equity" of "JKY Ltd" sums to "$10 million", when "asset
equity" is "$20 million". In the "books" of "FAB Ltd", the "transaction" is depicted
below:
At the end of the period, the "consolidated statement" would be showing the
following:
As per the "equity book-keeping process ", it is used for the evaluation of the
"profits" gained from the joint projects in other companies (Fuchs et al., 2016). The
company declares the income obtained from the joint project on the "operating
statements", it is based on the "equity" "joint project" sum. As per the " Paragraph 10
of AASB 128", the joint project is to be recognised at cost in the beginning phase and
there is increase in deduction in the shifting value for recognition of the shares of
"profit or loss" of the stakeholder after the duration of the "acquisition" (Aasb.gov.au
2019). For "goodwill" recognition, the "fair value" of the "equity interests" of the
"acquiree" is used during the period of "acquisition", rather than the "fair value" of the
transferred "equity interests" during the period of "acquisition" regarding "Paragraph
33 of AASB 3" (Aasb.gov.au 2019). For example, it is expected that "JKY Ltd"

5CORPORATE AND FINANCIAL ACCOUNTING
"acquired" "30%" shares of "FAB Ltd" for "$50,000" and the later has "reported" an
aggregate of "$100,000" as income and "$50,000" as dividends. When "JKY Ltd"
would perform the purchasing method, the "transaction" would be recorded at price
in the following manner:
As "JKY Ltd" would earn bonus of "$15,000", there would be deprecation in
the "investment account".
Finally, "JKY Ltd" would record the aggregate of "profit" of "FAB Ltd" as a
raise in the "investment account".
Part B Response:
At the time of the "financial period", it is noticeable for particular legal parts
within an "economic" business for "transacting" with each other. With respect to
preparing "consolidated accounts", the impact of every "transaction" between the
parts within the organisation is eliminated fully, even at the time the "parent"
business retains only a part of the issued "equity" (Caskey and Laux 2016). Based
on this "Paragraph 29 of AASB 127" requires "intra-group equities", "transactions",
expenses and income to be eliminated completely (Legislation.gov.au 2019). Certain
instances of "intra-group transactions" mainly associate the following-
 Management charges payment to a representative of the "group".
 Dividend payments to the "members" of the "group".
 "Intra-group" inventory selling.
 "Intra-group" "non-current assets" selling.
 "Intra-group" loans.
The "consolidation" adjustments associated with "intra-group" "transactions"
eliminate these kind of "transactions", through reversals of the actual "book-keeping"
entries made for recognition of the "transactions" in particular legal organisations
(Christ and Burritt 2017).
It has been identified from the provided testament, that "JKY Ltd" has
purchased inventory from "one" of its partially owned auxiliary. From the viewpoint of
the group, it is not suitable to "realise" "revenue" until they sale the inventory to the
"outside group". Therefore, any "unrealised" "profits" require to be removed from the
"consolidated accounts" (Kothari 2019). "Unrealised profits" happens from inventory
sold within the "group" for gaining "profit", which it keeps at the closure of the period.

6CORPORATE AND FINANCIAL ACCOUNTING
"Paragraph 25 of AASB 127", states that the "profits or losses" occurring from "intra-
group transactions" recognised in "assets" like- "non-current assets" and inventory
are eliminated fully.
In the provided study, the partially owned auxiliary has shifted inventory to
"JKY Ltd" and it is expected that the sale incorporates a "mark-up". While "JKY Ltd"
sells the identical commodity to the outside parties, it is appropriate in the terms of
"group transaction" level (Maas, K., Schaltegger, S. and Crutzen, N., 2016).
However, unless the items are disposed of to the outside parties by "JKY Ltd", the
"profit" that the auxiliary has "realised" on inventory sold on "JKY Ltd" would lead to
"unrealised profit" and therefore, the "group profit" would be extended inaccurately. It
authenticates the elimination of "unrealised profit". Suppose, it is anticipated that
"JKY Ltd" has purchased inventory from its auxiliary at "$12,500", it is kept at the
closure of the duration. Additional anticipation is made that the auxiliary obtains
"25%" extra hence, it earned a "profit" on inventory "equity" of "$2,500" [25/125 x
$12,500]. Therefore, from the viewpoint of the "group", there is overemphasis on
"consolidated profit" by "$2,500", for it the following adjustment entry is performed-
Consolidated Profit Account......................................Dr $2,500
To Consolidated Inventory Account $2,500
While the auxiliary sells the commodities with "non-controlling interest" to the
"group", there is the need to remove the full "unrealised profit" (Ntim 2016). It raises
the query that regarding the "profit" to be "reported" for "non-controlling interests".
The first path is to allot to the "non-controlling interests" the part of the share of
unrecognised "profit". Thus, the entire "profit" in the selling parts are removed.
Another path is to allot no portion of unrecognised "profit" to "non-controlling
interests" and the amount of "non-controlling interests" cites authentication "share
capital" and "reserves" associated with the auxiliary (Nwidobie 2016).
Suppose, it is expected that "JKY Ltd" possesses "80%" shares in "D Ltd" and
"75%" shares in "E Ltd". In an accounting session, "D Ltd" sells items valuing
"$70,000" for "$100,000" to "E Ltd"; out of which "E Ltd" only sells "50%" of the
items. While "JKY Ltd" would be calculating their "consolidated" "income statements"
the unrecognised "profit" in inventory has to be eliminated. The transferring of "profit"
from "D Ltd" to "E Ltd" is performed at "$50,000" and the "group" expenditure would
be "$35,000". Thus, the "intra-group profit" to be removed from inventory is
"$15,000". By opting the first path, as "JKY Ltd" owns "80%" share in "JKY Ltd" and
"20%" share in "non-controlling interest", the proportion of "non-controlling interest"
would be "$3000" [$15,000 x 20%].
Part C Response:
Effects of NCI disclosure requirement as a separate item in the process of
consolidation:

7CORPORATE AND FINANCIAL ACCOUNTING
It is evident from "Paragraph 27 of AASB 127" that noticeable and
"consolidated" "operating statements" need noteworthy presentation of "non-
controlling interest" from the "equity" of the "parent" company in the "balance sheet
statement" (Aasb.gov.au 2019). "Non-controlling interest" is the part of "equity" in
auxiliary, which might not be regarded "directly or indirectly" to the "parent"
organisation. The above standard has been useful in improving "book-keeping" and
"reporting" for "non-controlling interest" in the "financial statements". At the time
there is noticeable "reporting" of "non-controlling interest" in the "consolidation"
process, the varieties have to be incorporated in the shareholders "equity" giving the
adjustments in "parent" firm and "non-controlling interest" cooperatively, with respect
to "Paragraph 106(a) of AASB 101" (Aasb.gov.au 2019). It is important to cite and
identify the significant "non-controlling interest" amount properly. The major reason
behind this noteworthy presentation is to ensure additional justifications to the
stakeholders of the "consolidated group" owing to its affirmation on the aggregate of
"assets" of the group (Schneider 2015). Furthermore, there is significant definition
when "one" of the organisations "direct or indirect" "non-controlling financial interest".
"Equity transactions" could be explained as the contrasts in "ownership
interest" of "parent" firm in an auxiliary, it would not happen while the "parent"
organisation "loses" hold over the auxiliary. If the portion of "equity" which the "non-
controlling interest" keeps changes, the variations in the specific auxiliary "interest" is
presented by conducting adjustments in the shifting values of "controlling" and "non-
controlling interests". Along with this, the adjustments of "non-controlling interests"
and "fair value" of considerable payment is to be recognised right away and those
are credited to the stakeholders of the "parent" organisation.
Changes needed to ensure the accurate representation of the consolidated financial
statements:
For precise representation of the "consolidated" "financial statements", certain
changes are required as cited in "AASB 101". There is no need for preparing the
"consolidated" "operating statements" at the identical period of "reporting" and
adjustments are required for pointing out the impacts on the major "incidents or
"transactions" occurring between the "dates" of the auxiliary and the "parent"
"financial statements". The shifting values of "investment" made by the "parent" in
the auxiliary needs to be nullified and the part of "equity" of every auxiliary, that the
"parent" keeps needs to be eliminated (Warren and Jones 2018).
The impairment "loses" of the associated "assets" have to be "realised", it
could be identified from "intra-group loses". Moreover, the "transactions relating to
the "intra-group" income, expenses and balances have to be removed. These
"consolidated" "income statements" needs to combine different items of cash flows,
"assets", "liabilities" and expenses of both the "parent" company and its auxiliaries.
Furthermore, the basic differences happening from removing of "profit and loss"
leading to "intra-group transactions" is viable in obedience with "AASB 112". It needs
to be assured that the "book-keeping" policies of the "group" have to be authentic by
making vital adjustments to the "operating statements" of the "group" members at
the time of preparing the "consolidated" "income statements" in situations while a
member of the "group" utilises different "book-keeping" strategies for a particular
"transaction" (Watson 2015).

8CORPORATE AND FINANCIAL ACCOUNTING
The company is needed to create the comprehensive and extended income to
the "parent" firm and the "non-controlling interests", even when the evaluation has
the problem of having unwanted "equity" relating to the "non-controlling interests". In
addition, the part of "profit and loss" while an auxiliary noticeable sum of alternative
shares, it needs to be calculated by the organisation after conducting adjustments for
dividends on those shares regarding dividend declarations.
Effects of the required changes on the disclosure requirements in the annual report:
According to "Paragraph 10 of AASB 127", while an organisation prepares
significant "operating statements", it needs to "report" for "investments" made in joint
projects, associated with auxiliaries either at cost or as stated in "AASB 9"
(Aasb.gov.au 2019). Thus, there has been relaxation in the development of the
"consolidated" "operating statements". With regards to, the information appearing
from any revelations points shortage in relevancy, it is vital to show the legitimate
"book-keeping" policies along with the computation bases needed to prepare the
"consolidated" "financial statements". Therefore, the "consolidated" "operating
statements" have to be developed by disclosing the kind and "level" of any important
restrictions appearing from the needs of regulations on the ability of the auxiliary in
transferring to the "parent" either through repayment of loans, "advances" and
dividends in cash.
Along with this, at the time of making the "consolidated" "income statements",
the "financial statements" of the auxiliaries at the end of the "reporting" duration are
required and in the happening of; the "reporting" period of the "parent" business and
its auxiliaries are not balanced, feasible revelations need to be prepared regarding
this topic. Furthermore, if the "parent" business owns lower than "50%" of "voting
rights" in an auxiliary, be that "direct or indirect", disclosures are necessary to be
made regarding to the kind and of relation "built-in" between the "parent" company
and the auxiliary (Yang and Lee 2016). Hence, it could be stated that, there is impact
of declaration requirements at the time of preparing the "consolidated" "income
statements".
Conclusion:
With respect to the above discussion, it could be stated that there are
noteworthy modifications in "book-keeping" analysis of "non-controlling interests"
and "consolidation accounting" with respect to various "book-keeping" grades. At the
time of assessing the differences between "consolidation book-keeping" and "equity
book-keeping" while an organisation "acquires" a smaller firm, there are different
kinds of computations and recognition regulations. Moreover, the analysis of "intra-
group transactions" endeavours into significant differences in the "consolidated"
"operating statements" of both the businesses. Finally, it has been examined that the
revelation requires the crucial "non-controlling interests" as a noticeable item in the
"consolidated" "profit and loss statements" has impact on the all-inclusive
"consolidation" process.

9CORPORATE AND FINANCIAL ACCOUNTING
References:
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf [Accessed 28
May 2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB128_08-11.pdf [Accessed
28 May 2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Accessed 28
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 28 May 2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed
28 May 2019].
Agrawal, A. and Cooper, T., 2017. Corporate governance consequences of
accounting scandals: Evidence from top management, CFO and auditor
turnover. Quarterly Journal of Finance, 7(01), p.1650014.
Atanasov, V.A. and Black, B.S., 2016. Shock-based causal inference in corporate
finance and accounting research. Critical Finance Review, 5, pp.207-304.
Bergmann, A., Grossi, G., Rauskala, I. and Fuchs, S., 2016. Consolidation in the
public sector: methods and approaches in Organisation for Economic Co-operation
and Development countries. International Review of Administrative Sciences, 82(4),
pp.763-783.
Caskey, J. and Laux, V., 2016. Corporate governance, accounting conservatism,
and manipulation. Management Science, 63(2), pp.424-437.
Christ, K.L. and Burritt, R.L., 2017. Water management accounting: A framework for
corporate practice. Journal of cleaner production, 152, pp.379-386.
Kothari, S.P., 2019. Accounting Information in Corporate Governance: Implications
for Standard Setting. The Accounting Review, 94(2), pp.357-361.
Legislation.gov.au., 2019. AASB 127 - Consolidated and Separate Financial
Statements - July 2004. [online] Available at:
https://www.legislation.gov.au/Details/F2009C01112 [Accessed 28 May 2019].
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability
assessment, management accounting, control, and reporting. Journal of Cleaner
Production, 136, pp.237-248.

10CORPORATE AND FINANCIAL ACCOUNTING
Ntim, C.G., 2016. Corporate governance, corporate health accounting, and firm
value: The case of HIV/AIDS disclosures in Sub-Saharan Africa. The International
Journal of Accounting, 51(2), pp.155-216.
Nwidobie, B.M., 2016. Post-consolidation cash reserve volatility, bank credits and
economic growth in Nigeria. International Journal of Critical Accounting, 8(2),
pp.179-191.
Schneider, A., 2015. Reflexivity in sustainability accounting and management:
Transcending the economic focus of corporate sustainability. Journal of Business
Ethics, 127(3), pp.525-536.
Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Watson, L., 2015. Corporate social responsibility research in accounting. Journal of
Accounting Literature, 34, pp.1-16.
Yang, J.G. and Lee, J.Z.H., 2016. Important Aspects of the New Consolidation
Accounting Standards. Taxes, 94, p.27.
Zhao, P. and Ru, Y., 2016, August. Investee’s Net Profits Adjustment in Balance
Sheet Consolidation: for the Reasons of Internal Tractions. In 2016 International
Conference on Humanity, Education and Social Science. Atlantis Press.