Analysis of Parent-Subsidiary Relationships in Financial Reporting

This report provides a comprehensive analysis of parent-subsidiary relationships in financial reporting, focusing on the application of accounting standards, particularly AASB 10. The report examines various scenarios, including ABC Ltd and XYZ Ltd's investment in GTD Ltd, GLL Ltd's acquisition of Sun Ltd, VEN Ltd's stake in GIL Ltd, and the relationship between Tim Ltd and BGL Ltd. It delves into the concepts of control, consolidated financial statements, and the impact of ownership percentages on the preparation of financial statements. The analysis covers issues such as management fees, board of director representation, and the application of consolidation methods. The report references relevant accounting standards and provides insights into the complexities of inter-corporate investments and their accounting treatment, offering valuable information for finance students studying accounting and financial interpretation.

Running head: ACCOUNTING AND FINANCIAL REPORTING
Finance
Name of the Student:
Name of the University:
Author’s Note:

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-Memorandum
To: Mr Joe, Managing Director, ABC Limited
Subject: Determination of parent subsidiary relationship
Issue A
The issues that are mentioned for the relationship between the parent company as well as
the subsidiary company includes the receiving of certain payment which is to be considered. In
this particular issue, ABC limited and XYZ limited holds 50 % of shares each in the subsidiary
company which is GTD limited that mainly deals with the industry of computer software
industry. The management of GTD limited provides the expertise to the manager director of the
company, Bob Gates. The management fees that is provided for the expertise is received by the
Busselton limited (Sinclair, Northcott and Hooper 2014). The issue is brought to the manager as
per the accounting standard AASB 10 which mainly deals with consolidated financial statement
that are mainly prepared before preparation of final financial statement. The Australian
Accounting Standard Board points out the entities of the non profit seeking organisation which
reports the entities for general purpose of preparation of financial statement. AASB 10 deals with
the preparation of consolidated financial statement that would be prepared before preparation of
final financial statement in their overall course of business (Bisogno, Santis and Tommasetti
2015). The accountability of the financial statement mainly points out the effective requirement
that would be reflected in the financial statement that has been prepared by the company.
The issue that has been mentioned points out the GTD limited as the subsidiary limited as
the share of the company are holds by another company for their operation. Moreover, ABC
limited as well as XYZ limited is considered as parent company as they hold majority of the

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shares of the subsidiary company (Santis, Grossi and Bisogno 2018). The existence of parent
subsidiary relationship exist between both of the companies and the parent company is required
to be prepare the financial statement that are consolidated in nature under the guidance of AASB
10. This accounting standard includes the effective valuation of assets that would be reflected in
the financial statement of the subsidiary company along with other assets that would be
beneficial for both of the companies. The main objective of this particular accounting standard
requires the parent company for controlling one or more entity for presenting the consolidated
financial statement (Perera and Chand 2015). The principle of control is to be established on the
basis of consolidation that would mainly apply the principle of controlling the investors.
Therefore, the parent company is required to prepare the consolidated financial statement under
the basis of AASB 10. The consolidation can also be explained with the help of an hypothetical
example where the consolidation between ABC and XYZ ltd will be presented (Aasb.gov.au
2019).
Issue B
The second issue is associated with Sun limited and Gill limited that has recently
acquired around 35 % of total amount of interest. The company has also discovered that there are
large deposits of iron ore is present. Some extensive experience is associated with mining
industry which includes the board of directors that are required to be elected for the Sun limited.
Moreover, Gill limited consist of four directors that are appointed by the company whereas Sun
limited consist of total six directors that are also appointed by the company (Aasb.gov.au 2019).
Gill limited has recently acquired around 35 % of the total interest that are directly associated
with the business along with acting as the parent company in the process of preparation of
consolidated financial statement. In this particular case, Sun limited is the subsidiary company

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and Gill limited is the parent company as Gill limited holds certain percentage of percentage in
the subsidiary company. As per the accounting standard AASB 10, both of the company are
required to prepare the consolidated financial statement before the preparation of final financial
statement as the adjustments between both of the company are required to be reflected in the
financial statement of both of the entities (Aasb.gov.au 2019).
The board of directors of both of the entities are responsible for preparation of
consolidated financial statement as the percentage of interest is associated with the subsidiary
company which is also to be prepared under the guidance of AASB 10. The accounting
requirement of the business combination consist of certain effect on the consolidation that are
associated with preparation of financial statements (Tahat 2014). The existence of parent
subsidiary relationship exist between both of the companies and the parent company is required
to be prepare the financial statement that are consolidated in nature under the guidance of AASB
10. Therefore, the parent subsidiary relationship exist between both of the entities and the parent
company is required to prepare the consolidated financial statements (Aasb.gov.au 2019).
Issue 3
In accordance with the AASB 10 the case can be well explained with the AASB 10 where
the control of an entity from an investor perspective is well defined. An investor that has a
significant control or stake thereby controlling the stake position it held whereby it has rights to
variable return from its involvement with the investee reflects the ability in affecting the
associated return through its power over the investee. In the case of VEN Ltd that holds around
30% of shares issued by the GIL Ltd can be said to have a significant stake thereby controlling
the level of interest and business activities operations that is carried on by the company i0n the
due period of business. The above situation can be well related to the context of “Rights that give

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an investor power over an investee” where power is arising from rights. In the case the investing
company that is VEN ltd has a significant stake for directing the operations and influencing the
management decision as the other shareholders of the company are having less than 10% of stake
in GIL Ltd (Aasb.gov.au 2019).
On the other hand, the case of Arnhem Ltd can be well explained with the help of the
substantive rights section in accordance with the AASB 10 explaining the exercise of rights that
can be taken by the board as a whole. The AASB 10 well explains that the Consideration of the
rights that is held by other related parties that includes the various assessment of possessed rights
that can be well exercisable by an investee’s board of directors (or other governing body) and
their effect for the purpose of decision making. However, under this case the board of directors
where the said members are independent in the context of decision making that they would make
and it would be serving as a mechanism for various investors to act collectively in exercising
their rights. Thus it is crucial to note that, removal rights exercisable by an independent board of
directors are often likely to be substantive than if the same rights were exercisable individually
by a large number of investors (Aasb.gov.au 2019).
Issue 4
The AASB 10 guides companies and institutions in the case of business combination and
other inter-corporate investments that they carry out during the business period in the form of
correct accounting transactions and classifications. In the case of Tim Ltd the company owns
around 80% of the equity share stake in the BGL ltd and the same can be well related as
Investment in Associate where the Tim Ltd has not only significant stake in BGL ltd but has also
a control power that is affecting the ability of the company in making up the decision (Handley,
Evans and Wright 2019). The investment percentage or the stake percentage that is enjoyed by

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the Tim Ltd has been around 80% and the rest 20% will be shown as Minority Interest. While
preparing the financial statements Tim Ltd will be preparing a consolidated financial statement
whereby all the activities of BGL ltd will be shown on a consolidated basis and in the equity
section of the balance sheet 20% minority interest will be shown (Bini 2019). On the other hand,
it was also noted that BGL ltd also owns around 100% of stake in the Arnhem Ltd allowing the
BGL ltd itself to prepare a consolidated financial statement that will be further used by the Tim
Ltd for the purpose of classifying and presentation of the consolidated financial statements
(Aasb.gov.au 2019). In the case of BGL ltd that owns 100% stake in the JIL Ltd a full
consolidation method will be applied for undertaking, reflecting and classifying the various
accounts of JIL Ltd.

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References
Aasb.gov.au. 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Accessed 8 Sep. 2019].
Bini, M., 2019. Models of mandate in public audit: An examination of Australian
jurisdictions. Public Money & Management, 39(3), pp.201-208.
Handley, K., Evans, E. and Wright, S., 2019. Understanding participation in accounting
standard‐setting: the case of AASB ED 192 Revised Differential Reporting
Framework. Accounting & Finance.
Bisogno, M., Santis, S. and Tommasetti, A., 2015. Public-Sector consolidated financial
statements: An analysis of the comment letters on IPSASB’s exposure draft no. 49. International
Journal of Public Administration, 38(4), pp.311-324.
Perera, D. and Chand, P., 2015. Issues in the adoption of international financial reporting
standards (IFRS) for small and medium-sized enterprises (SMES). Advances in
accounting, 31(1), pp.165-178.
Santis, S., Grossi, G. and Bisogno, M., 2018. Public sector consolidated financial statements: a
structured literature review. Journal of Public Budgeting, Accounting & Financial
Management, 30(2), pp.230-251.
Sinclair, R., Northcott, D. and Hooper, K., 2014. Can sector-specific standards enhance the
comparability of Third sector organisations' financial statements?. Third Sector Review, 20(2),
p.27.

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Tahat, Y.A., 2014. Risk disclosure associated with financial statements reporting of Jordanian
public corporations. International Journal of Business and Emerging Markets, 6(2), pp.139-162.