Wesfarmers and Kidman: Subsidiary and Associate Accounting Analysis

This report analyzes the accounting treatment of subsidiaries and associates, focusing on the case of Wesfarmers and its investment in Kidman. It differentiates between significant influence (associate) and control (subsidiary), outlining the implications of each classification based on AASB 127 and AASB 128. The report examines the impact of a $700 million loan and a non-cash transaction of chemical processing managerial service on the consolidated financial statements under both scenarios. The analysis highlights the benefits and disadvantages of each accounting method, emphasizing that treating Kidman as a subsidiary allows Wesfarmers to exercise full control and consolidate accounts, which can lead to a more valuable presentation of financial performance and enhance its net worth. The report concludes that recognizing Kidman as a subsidiary is the preferred approach for Wesfarmers to achieve its strategic goals.

Analysis of Subsidiary
And
Associate Accounting
Effects

Table of Contents
TASK...............................................................................................................................................3
PART A:......................................................................................................................................3
PART B:.......................................................................................................................................4
PART C:.......................................................................................................................................5
REFERENCES................................................................................................................................7

TASK
PART A:
Associate Company:
Associate company is enterprise over which enterprise or investor company has
significant degree of influence. Here significant degree of influence relates to strength to take
part in fiscal and operational policy related investee-company's decisions but it is not a control or
a jointly control of such policies. This significant influence is normally gain by buying above
20% of aggregate voting-power but lower-than 50%. Application of AASB 128 is required by all
companies which are investors having joint control or key-significant influence over, an
company investee (AASB 128 - Investments in Associates and Joint Venture. 2019).
Benefits:
Recognising company as associate company is beneficial as there are no additional
requirement like consolidation of accounts as per AASB 127 (AASB 127: Consolidated and
Separate-Financial Statements. 2019). Also liability in an associate entity is limited to the
holding share of parent company. There is no requirement of consolidation of accounts of
associate company. By sustainable interest in associate company investment company can
operate business of associate company to an substantial extent.
Disadvantages:
Significant influence does not provide full control and access in associate entity. Also
there in case of exercise of voting rights, position of investor company is not effective as
percentage share in associate company not equivalent to majority. So in most cases company is
not in position to take significant business decisions and can not exercise effective control. Here
company who made investment can not exercise full control in company in which company
made investment.
Subsidiary:
While Subsidiary is an enterprise or company which is regulated or controlled by any
another enterprise. Here control implies to parent company has power to govern and control
fiscal and operational policies of company's subsidiaries in order to attain benefits through
different operations of company subsidiary. Control could be attained if above 50% of aggregate
voting rights are obtained by parent. Which is normally acquired by buying above 50 percent of

subsidiary's share-holding. AASB 127 Consolidated and Separate-Financial Statements deals
with formation and proper presentation of company's consolidated FS for group enterprises
which are under control of parental-company.
Benefits:
One major benefit of recognising Kidman as subsidiary is business expansion. If a subsidiary is
well organized, it could be utilized for a range of investment and business expansion purposes.
By recognising acquired entity as subsidiary company provides more enhanced control over
acquired company without any disputes (Poser, 2012).
Disadvantage:
Here possible disadvantage of recognising company as subsidiary company is preparation of
consolidated accounts which is complex process and also losses of subsidiary company can
affect overall presentation of consolidated final accounts. The parent corporation's reputation is
attached to subsidiary company's reputation as well as parent corporation may require to bear or
pay out subsidiary's debts to save reputation. Parent corporation may also need to protect its
subsidiaries ' debts and long term loans, there by linking itself directly to its subsidiaries '
obligations (Ambos, Ambos and Birkinshaw, 2016).
From above discussion on subsidiary and associate company criteria it has been found
that significant influence over a company start with acquisition of more than 20% share but in
order to become a parent company such share percentage should be above 50%. Here
Wesfarmers has acquired 50% share of Kidman, which indicates that Wesfarmers has significant
influence on Kidman company, but no control exists as shareholding in Kidman is not exceed
50%.
PART B:
(a). In given case Wesfarmers has made dollar 700 millions loan transaction with company
Kidman to create Kidman’s interest in Mt-Holland's mine project, Kwinana refinery and
concentrator. Here two different criteria is given to analyse different treatment of asset accounts
in Wesfarmers consolidated financial statements. Following is discussion on how this transaction
can impact individual-asset accounts and aggregate assets amount if 50% of interest in company
Kidman is being recognised as:
1. An associate: In case if Kidman company is considered as associate than it is deemed that
Wesfarmers has significant influence over Kidman. Here Wesfarmers is not required to

consolidate accounts as per AASB 127 thus separate books are maintained by both companies.
Therefore transaction of $700 million loan will affect both companies individual asset accounts
to the extent of interest and percentage share. Also any project related decision will be passed by
consent of both companies (Shiquan, Dan and Lidong, 2012).
2. A Subsidiary: Another case is recognition of 50% interest acquired in Kidman as subsidiary.
In this case Wesfarmers will act as parent company and Kidman is its subsidiary company. Now
in such case parent company has full control over operations of subsidiary company and required
to prepare consolidated financial statement. Therefore such transaction of $700million will affect
overall asset account under consolidated annual-financial statement.
(b). Following is discussion on effect of non-cash transaction of chemical processing managerial
service in Wasfarmers's consolidated FS in case 50% of interest in company Kidman is being
regarded as:
1. An Associate: In this case effect of this transaction will be only in Wesfarmers accounts as
company can not exercise control over associate company. This non-cash transaction of chemical
processing managerial service transaction would not impact Kidman company's accounts
(Richardson, Roubi and Soonawalla, 2012).
2. A Subsidiary: Here Wesfarmers has full control over management and operation of its
subsidiary company Kidman. Every transaction will affect consolidated accounts of both
companies. Therefore non-cash transaction of chemical and processing managerial service would
affect overall consolidated accounts of Wesfarmers company.
PART C:
Wesfarmers' intention form this statement indicates that company is always ready to put
value addition in it's financial statements. In tuff competitive business environment, it is essential
for every large corporation like Wesfarmers to present their financial performance in a way that
help company to attracts investors and stakeholders. Here behind the above statement key fact is
that company has made 50% investment in Kidman which lead to arise argument about
recognising company as a subsidiary or an associate. In both case control and accounting

treatment may differ due to different criteria and definitions (Rob Scott flags more investments in
the electric vehicles sector.
2019).
First argument topic here is preferred accounting treatment which can bring most
valuable figures to Wesfarmers' consolidated financial statements. If company treat Kidman as
associate than investor company will get only substantial influence and Wesfarmers will not get
full control over company's management. While taking any significant decision which require
shareholders voting related to Kidman, for Wesfarmers it may be difficult to take majority.
Separate disclosure is also required in financial reporting and preparation of financial statements
in respect of transactions of Kidman. Here all value treating company as associate will provide
less value addition in Wesfarmers financial statement due to separate disclosure and not full
control over investee company. In case Wesfarmers opt to treat Kidman company as subsidiary
company than company can achieve full control over company's management and different
operational tasks. A subsidiary is a company controlled or managed by some other corporation.
There must be a differentiation between control and ownership. Ownership takes place when a
company holds greater than 50% of subsidiary's securities (Cavanagh and Freeman, 2012).
Control will take place even if the corporation doesn't own greater than 50% of the company
securities. Establishing a subsidiary provides the benefit of having several companies in the same
corporation with direct control by parent company on subsidiary companies. Also here
Wesfarmers is required to consolidate accounts of Kidman which ultimately lead to a clear value
addition in company's financial statements. This step of company can boost the financial
position.
Every corporation like Wesfarmers wants to make expansion by making investment in
other companies. Here company also want to achieve full control over Kidman company which
is only possible by recognising Kidman as associate company. Moreover, consolidated accounts
provide more effective presentation of financial performance of company who made investment.
While separate disclosure of transaction of Kidman company will lead to complexities in
financial reporting and accounting treatment. From respective statement it seems that company
should prefer recognition of Kidman as subsidiary. It also help company to enhance overall net-
worth of company.

REFERENCES
Books and Journals:
Poser, T. B., (2012). The impact of corporate venture capital: Potentials of competitive
advantages for the investing company. Springer Science & Business Media.
Shiquan, W., Dan, W. & Lidong, W., (2012). The Internal Mechanism in which the Network of
the Relationship between the Parent Company and its Subsidiary Impacts on the
Subsidiary Starting an Undertaking: a Case Study Based on the Hisense Group
[J]. Management World.
Richardson, A. W., Roubi, R. R. & Soonawalla, K., (2012). Decline in financial reporting for
joint ventures? Canadian evidence on removal of financial reporting choice. European
Accounting Review. 21(2). pp. 373-393.
Ambos, T. C., Ambos, B. & Birkinshaw, J. M. eds., (2016). Perspectives on Headquarters-
subsidiary Relationships in the Contemporary MNC. Emerald.
Cavanagh, A. & Freeman, S., (2012). The development of subsidiary roles in the motor vehicle
manufacturing industry. International Business Review. 21(4). pp. 602-617.
Online:
AASB 128 - Investments in Associates and Joint Venture. (2019). [Online]. Available
through:<https://www.legislation.gov.au/Details/F2019C00416>
AASB 127 - Consolidated and Separate Financial Statements. (2019). [Online]. Available
through:<https://www.legislation.gov.au/Details/F2011C00949>
Rob Scott flags more investments in the electric vehicles sector. (2019).[Online]. Available
through:<https://www.afr.com/business/mining/scott-defends-plunge-into-battery-
minerals-sqm-partnership-20190613-p51x8e>