Advance Financial Accounting: Investment Accounting for Wakefield Ltd

This report analyzes the accounting treatment for Wakefield Ltd's potential investment in Hobson Ltd, considering various scenarios based on the percentage of shares acquired. It outlines the application of Australian Accounting Standards (AAS) 9, 14, and 10, which cover financial instrum...Read More

Advance financial accounting

QUESTION 1: ACCOUNTING FOR INVESTMENT
By considering the given case scenario, there are three possibilities for accounting of investment
by company. For accounting of investment, it is essential to determine the type of investment.
Generally, there is four types of investment, such as Passive investment, Associates, Joint
arrangement, and consolidation accounting. Passive investment means investment where investor
does not exercise any power on the company. Further, Associate investment means investor can
exercise significant influence by holding shares of company. The joint arrangement gives joint
control by contractual agreement among the companies. Moreover, if the company is controlled
by investor, then it is considered as subsidiary company. It can be said that the level of control
makes the impact on classification of investment (Potter, Pinnuck, Tanewski, & Wright, 2019).
In the case of passive investment, there is no requirement of consolidated financial statement. If
the Wakefield acquires 5% or more but less than 20% shares in Hobson Ltd, then accounting
should be done as per Australian Accounting standard 9 which is related to a financial
instrument. In this, Wakefield Company recognizes investment as per fair value method. Any
changes in the fair value should be recognized in Income and expenditure as income or loss
(Financial Instrument 2014). However, it can also be recognized in other comprehensive income
if the company has policy to recognize gain or loss by other comprehensive income (Handley,
Wright, & Evans, 2018). Any dividend paid by company should be recognized in profit or loss
account of investor company.
Further, if the investor acquires 20% or more, then it is considered that significant influence can
be exercised by the investor over Investee Company. In the given case if Wakefield acquires at
least 20% shares of Hobson Ltd, then it is considered as associate entity. In Australia, Australian

Accounting standard 14 deals with Accounting for Investment in Associates. If company
acquires investment then it is recognized at the cost of acquisition. Wakefield (investor) should
recognize an investment in associates by application of equity method in consolidated financial
statement and cost method in its separate financial statement. Further, equity method assists in
ascertainment of carrying amount of investment in associates and the amount of profit from
investment. Initially, inequity method the investment is recorded at the cost of acquisition. On
the date of purchase, the carrying value of identifiable assets and liabilities should be adjusted for
fair values (Banks, Hodgson, & Russell, 2018). If there is any difference in cost of acquisition of
investment and share of investor in net adjusted fair value is considered as goodwill or discount
on acquisition as the case may be. Further, in profit or loss of the associate’s notional adjustment
should be made in later period which shows the revision of goodwill or discount on acquisition
and depreciation on assets. In the consolidated financial statement, goodwill or discount on
acquisition should not be disclosed in a separate manner.
Equity Method of Accounting in case of associates
This method is applied only if the investor has significant influence over the investee. In this
method, at the beginning investor recognize cost of investment in the investee, and in later
period, share in the profit or loss of the investee should also be recorded by investor. Adjustment
in the Balance sheet, as well as the Income statement, should be done by investor. The investor
recognizes its share in profit of Investee Company, which is computed on the basis of percentage
of ownership of investor in common stock of investee. Further, intra profit or loss should be
eliminated while computation of share of profit in investee company. In case, if any dividend is
declared by Investee Company, investor should reduce its share in dividend from carrying value
of the investment (Lepone, & Wong, 2018).

Cost Method of Accounting
In this method, investor recognized investment at its cost. Related revenue from the investment is
recognized only to the extent of dividend received or receivable out of post-acquisition profit of
the investee.
Apart from the above aspect, if the company controlled Investee Company such as if Wakefield
Company acquires more than 50% shares in Hobson Ltd, then accounting should be done
according to consolidated financial statement. In Australia, Australian Accounting Standard 10
deals with consolidated financial statement. In this, Investor Company should prepare its
accounting by following the uniform accounting policy (Consolidated Financial Statement
2011). From the date of acquisition, Investor Company prepares its consolidated financial
statement. Non-controlling interest in the consolidated financial statement should be present
separately from equity of owner. The profit or loss of the company along with any
comprehensive income should be divided into the share of investor and non-controlling interest.
If the investee company has outstanding cumulative preference share, then they are classified as
equity, and profit or loss should be computed after adjustment of dividend even if it is declared
or not. At the time of consolidation, assets, liabilities, income, expenses, cash flow, and equity of
the investor company should be combined with subsidiaries. If the subsidiary company pays the
dividend then it should be reduced from carrying amount of investment.
On the basis of the above analysis, it has been drawn that Wakefield Ltd record investment made
by them as per the type of investment made by it.

REFERENCES
Books and Journals
Potter, B., Pinnuck, M., Tanewski, G., & Wright, S. (2019). Keeping it private: financial
reporting by large proprietary companies in Australia. Accounting & Finance, 59(1), 87-113.
Handley, K., Wright, S., & Evans, E. (2018). SME Reporting in Australia: Where to Now for
Decision‐usefulness?. Australian Accounting Review, 28(2), 251-265.
Banks, L., Hodgson, A., & Russell, M. (2018). The location of comprehensive income reporting–
does it pass the financial analyst revision test?. Accounting Research Journal, 31(4), 531-
550.
Lepone, A., & Wong, J. B. (2018). The impact of mandatory IFRS reporting on institutional
trading costs: Evidence from Australia. Journal of Business Finance & Accounting, 45(7-8),
797-817.
Online
Consolidated Financial Statement (2011). Retrieved
from<https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf>
Financial Instrument (2014). Retrieved
from<https://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-14.pdf>