HA2032 Corporate & Financial Accounting: Takeover Decision Analysis

This report analyzes the corporate takeover decision of JKY Ltd. regarding FAB Ltd., focusing on consolidation and equity accounting as per AASB standards. It evaluates the implications of intra-group transactions and non-controlling interest (NCI) disclosures, considering factors like ownership stake and financial statement presentation. The analysis covers the impact of consolidation versus equity accounting, the handling of intra-group transactions, and the proper reporting of NCI as per AASB 101. The report also discusses how financial statements inform resource allocation, investment decisions, and stakeholder understanding, emphasizing true and fair representation and global accounting standard convergence. This document is available on Desklib, a platform offering a range of study tools for students.

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
Table of Contents
Introduction.................................................................................................................................................. 2
Segment A................................................................................................................................................... 3
Segment B:.................................................................................................................................................. 6
Segment C................................................................................................................................................... 9
Conclusion................................................................................................................................................. 11
References................................................................................................................................................ 12

2CORPORATE AND FINANCIAL ACCOUNTING
Introduction
Accounting Standards are authoritative standards for financial reporting and specify how transactions and
other events are to be recognized, measured, presented and disclosed in financial statements of
companies. The AASB specifies rules and regulations regarding implementation of these standards from
time to time. AASB is an agency of the Australian Government which also works to facilitate the country’s
businesses and global economy. It also contributes to the Global Accounting Standards Framework.
The paper analyses three aspects in different segments.
1. Consolidated Accounting and Equity Accounting. AASB 10 discusses Consolidated Financial
Statements and AASB 128 discusses Investments in Associates and Joint Ventures. The segment
analyses calculations and reporting criterions in each scenario and its impact on books of parent
companies. In various accounting methods, how transactions are reported in the books of parent and
subsidiary company is discussed in this segment. What decision should JKY take i.e. whether to
purchase FAB Ltd. or invest in its shares and in what percentage etc. is analysed in its segment
considering controlling rights, reporting requirements and other aspects.
2. Intra group transaction of the company JKY Ltd. as per AASB 10 on Consolidation and AASB 127 on
Consolidated and Separate Financial Statements shall be considered in this segment. These standards
regulate preparation and presentation of financial statements in the books of both parent and subsidiary
companies.
3. Non-Controlling Interest (NCI) disclosure requirements as per requirement of AASB 101-Presentation
of Financial Statements. This standard is applicable to all entities. As per the applicability of this standard
how NCI should be reported in books is discussed.

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Segment A
JKY Limited desires to acquire FAB Limited. This company is listed in the Australian Securities Exchange
(ASX). This company records suitable profits in its treasury. The strategy is to increase the profits of the
company. The transaction shall be regulated by the ASX listing rules and AASB 128 which states
procedure of investments in associates and joint ventures. The guidelines as per AASB 128 are required
to be followed.
There are two possible options for attaining control over FAB Ltd.
1. Purchase and acquisition where there shall be direct purchase of the company as a whole.
2. Attaining the company shares wherein JKY shall become the major shareholder and be able to control
operations of FAB Ltd.
In both the cases, the company shall be able to maximize profits from FAB Ltd. In the below table we
shall discuss a special case of consolidation and equity accounting both as per the consequences.
Consolidation Accounting Equity Accounting
The process in which the information from a
parent company and its subsidiaries are
combined and treated as one source is
Consolidation Accounting. We shall consider the
financial statement of the parent company in
this. (Appelbaum et al. 2015)
Equity Accounting is a process of treating
investments in associate companies. When the
acquirer company holds a majority voting share
(20-50% or more), Equity accounting is
applicable.(Hoyle et al. 2018)
All the assets and liabilities are shown in the
books of the parent company. The parent
company has a significant control over the
subsidiary.
The entire financial statements are never
merged. The accounts are consolidated only to
the extent of its control/investment.
A single set of financial statements are
prepared. The holding company holds more
A line for investment in subsidiary is included.
It’s a one line consolidation. Applicable where

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than 50% share in such cases. (Armstrong et al.
2015).
holding company holds 20% or more shares.
If there is any change in primary ownership,
entire consolidation is changed. The new
acquirer prepares the consolidated statements.
If there is a change in the NCI shareholders,
there is no change in the consolidated books of
parent company.
In case of change of ownership, the company
has to reclassify to profit or loss the respective
proportion of profit or loss that had previously
been recognised in other comprehensive
income.
If decision is to acquire complete control of
operations etc, this method is recommended.
If decision is to only invest and earn returns and
not get involved with a company’s operations,
then equity accounting is recommended.
(Avetisyan and Hockerts 2017)
The company JKY should consider using the consolidation method which looks to be the best for
it. This method uses the purchase or acquisition method. Using this method, JKY Ltd. shall have total
control over the profits of FAB Ltd. As per the relevant AASB, it shall have to focus over numerous
aspects of financial reporting. Using consolidation method, the financials of FAB Ltd. shall merge with
JKY Ltd. and there are chances of goodwill increment for JKY Ltd. This will have two fold benefit of JKY
Ltd. Firstly, it shall have full control over operations and earnings of FAB Ltd. Secondly, any increase in
goodwill shall help build investor trust. There is a likelihood that investors may be keen on investing in
JKY Ltd. In the long run, the company should abide by true and fair reporting as per the directions of
AASB. The consolidated accounts shall present a clear picture of all the resources of the combined entity
to investors and other stakeholders. (Duff 2016)
Considering the company JKY Ltd. has acquired FAB Ltd. through successful purchase
acquisition method and adopting best practices, the entire financial statements of the parent company i.e.
JKY is presented as per consolidated accounting method along with the subsidiary FAB Ltd.

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Particulars JKY Ltd. FAB Ltd.
Assets 307000 147000
Liabilities -262000 -125000
Total Equity and Liabilities -307000 -147000
All the items of the Balance sheet of both the companies are structured and presented in a similar fashion
under a single line item. Such presentation shall assist the management of both the companies. The best
part is, it shall assist in true and fair presentation of financial statements post acquisition as well.

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Segment B:
Intra group transactions which are transactions between the companies of the same group are removed
from the consolidated accounts so that the net profit of the parent company or of the group is not inflated.
Examples of Intra group transactions include Loans to and from parent company, current accounts and in-
transit items, interest payable/receivable, bill payable/receivable, dividend receivable/payable etc.
In the scenario, some investments are made by the subsidiary company and some goods are sold by the
parent company at profit. Now the major concern is the treatment of profit in the financial statements. This
profit is income earned from the subsidiary company. The asset that is offered for sale by the subsidiary
company is treated as sales in the subsidiary company’s books. How this is to be treated under NCI is a
major source in analysing the profits and loss of a company. The norms for intra-group transactions list
certain rules and regulations which are to be incorporated while final preparation of consolidated
accounts. The reporting is done in a manner as if the subsidiary doesn’t exist as a separate entity at all. In
cases where the parent itself is a subsidiary of another company or is not listed on the exchanges, it need
not prepare consolidated accounts. However, the company may prepare consolidated or separate
financial statements for its own internal use.
Common intra group differences include:
 Differences in cut-off (entry) dates: Reconciliation is to be prepared in cases of discrepancies
arising out of such differences. The arbitration is mitigated by employment of a reconciliation
process in place.
 Different close dates: There are differences in accounting policies of the parent company and
the subsidiary company, one of which is independent close dates of each. An active reconciliation
is required in such cases. Need be, an interim books of accounts is prepared for subsidiary to
match with the closing dates of the parent company. Say for example, the parent company closes
its books on 31st December every year, and subsidiary books are closed on 31st March every
year, an interim balance sheet is prepared in 31st December and reconciliation entries are
presented. (Caskey and Laux 2016)

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 Conversion of foreign currency transactions: There are foreign currency transactions in most
organizations. The conversion rate of these foreign currencies into home currency is a concern. A
standard rate should be applied in both the parent and subsidiary company’s books. Also, there
are scenarios where a foreign company holds the subsidiary company. There are differences in
accounting policies and implementation of accounting standards across regions. This may lead to
a gap in presentation of financial statements. There may be mismatches due to policy differences
etc. These differences need to account for and disclosed separately. Reconciliation in both parent
company’s currency and subsidiary company’s currency need to be prepared on relevant dates.
 Other Reasons of assessment like adjustment for unrealized profits, foreign company holdings,
depreciation adjustments, Goodwill or Amortization adjustments, Stock in transit etc. These
differences in presentation may lead to significant issues arising in interpretation of accounts by
different stakeholders and investors.
Non-controlling interest :
Parent Company $ Subsidiary Company $
Revenues 812000 250000
Expenses 354000 188000
Excess fair value amortization (50) 32000
Net income 458000 30000
Ownership stake 85% 15%
Controlling interest 25500
Non-controlling interest 4500
The focus is on the ownership stake of the company which is large enough to assist the entire company.
The calculation of Non – Controlling Interest is estimated to be $4500. The net income owing to NCI is

8CORPORATE AND FINANCIAL ACCOUNTING
$30000. With this, we calculate the ownership stake of NCI to be 15% and the balance 85% is the parent
company’s stake which has controlling rights. A profit assessment is in place for the company. Both
parent company and subsidiary company shall be included. The parent company thus intercedes in the
financial statements and controlling rights and the NCI only gets a taste of the actions taken by the
Controlling Interest party.

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Segment C
Response: The financial statements of the above companies provide information which can be used for
proper allocation of company’s resources. It is observed that the retained earnings of the company are
invested in appropriate business plans. Resource free investments are included in the plan. There is
lesser dependency on leverage i.e. debts. The investors can make decisions based on the history of
transactions of the company. The past, present and future events are disclosed in the financial
statements. It is very important to have true and fair representation of financial statements. Global
convergence with international accounting standards also prescribes presentation of fair value of all
assets and liabilities along with book value. It helps the management to understand the performance of
the company in comparison to peers and industry. They can check their growth versus competitor’s
growth and implement smarter strategies. Even the employees of the company would be interested in
ascertaining their wage increment etc. The financial statements would help them understand growth
prospects and possibilities of raise. The auditor is required to verify the authenticity of fair values and
report it in his independent audit report (Crowther 2018).
The investment decisions by prospective investors are taken on the basis of relevance and reliability of
the financial statements. Investors with a more positive outlook may ignore insignificant items and
concentrate on growth lines. Besides this, there are taxation risks in the securities market. This should be
considered while taking suitable decisions on the long term investments. Disclosures made by company
form an important component in significant decisions by investors. Since the company is paying more
taxes, there is a significant reduction of its profits. The investors have reacted to the drop in net income.
They have specified termination of further investments in the company till profits are realised. In this
segment, there is likeliness that the company may start losing its market share. Thus, AASB 10 has
suggested to properly analysing the financial statements. Both IFRS and AASB have made such
presentation compulsory globally.
The disclosures have been made mandatory by the relevant standards. Some of this includes:
 Presentation of true value of the assets. This helps investor to assert the fair value.

10CORPORATE AND FINANCIAL ACCOUNTING
 Dividend payment – When the asset value increases, the company value also increases which in
turn attracts more investors because they believe the company shall pay higher dividend.
 The true rate of return on capital.
 All financial information is presented in a true and fair manner.
 The company can be assisted because of consolidation while applying for loans from banks
because of the increased value of assets. It can keep a suitable mortgage and get a desired rate
of return.
The true value of assets can be retained after revaluation as per relevant standard.
With the fair value visible after revaluation, the accounting system requires SAC 2 statement. This
standard applies to general purpose financial reporting. The aim is to provide common information to
users who are unable to understand complicated statements and need information catering to their
particular needs. The reporting entity must ensure the information provided to investors is reliable. The
directors of the business have used this information for building business plans and policies. This has led
to efficient allocation of company’s resources. All these are base of proper financial reporting. The
standard thus ensures that users get the required information they are seeking.
Profits form a comprehensive part of the financial statements. The parent company adds profits of the
subsidiary company to its shareholders funds as a major percentage of the subsidiary company is held by
it. NCI need not be shown when ownership percentage is less than 50%. There is a separate
consolidated statement for the companies where NCI reports the financial statements. This is essential for
the company to stay focused over reports. (Shroff 2017)
Most important, is the reliability of the financial statements. The disclosures should be about control,
financial structure, solvency etc. It should be free of any errors. The extent of reliability depends upon the
quality of information being rendered. The users rely on the information. They analyse the events
occurred on respective dates which the company has presented. They make decisions on the basis of
provided information. It is required that the reports are in an easy format which is understandable by all
users of the report. It should be simplified giving all necessary details.

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Conclusion
It can be concluded that significant disclosures are required in any financial statement. There are
numerous aspects focused where the company derives benefits. The financial statements are very
significant as it attracts the securities markets, further investors and newer businesses. No investors
should be misleading due to lack of information or false information. Disclosures to financial statements
should contain all information necessary to make decisions by the employees, management and
investors. The NCI has affected the financial statements here. The company shows owner’s equity that
holds a minimum of 50% share of the subsidiary company. Even with the high holding, they are unable to
visualise their equity and voting rights. With potential voting rights as well, the proportions of profits or
changes in equity between Parent and NCI are determined on the basis of current ownerships.