Financial Accounting: Wesfarmers and Kidman Ltd Case Study Report

This report analyzes the financial accounting treatment of Wesfarmers' investment in Kidman Resources, considering whether Kidman Ltd should be accounted for as an associate or a subsidiary. It examines the implications of each method, including the application of AASB 128 and AASB 10, and their impact on consolidated financial statements. The report discusses the potential benefits and losses associated with each approach, including the equity method for associates and the consolidation of assets and liabilities for subsidiaries. It also addresses the treatment of intercompany loans and transactions, and the impact of non-controlling interests. The report concludes with a recommendation for the preferred accounting treatment, considering factors such as control, financial reporting perspective, and the value brought to Wesfarmers' consolidated financial statements. The report also includes a discussion of the background of the Wesfarmers and Kidman Ltd takeover, and the strategic implications of the investment.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student:
Name of the University:
Author Note

1FINANCIAL ACCOUNTING
Table of Contents
Answer to Part A........................................................................................................................2
Answer to Part B........................................................................................................................3
Answer to Subpart a...............................................................................................................3
Answer to Subpart b...............................................................................................................3
Answer to Part C........................................................................................................................4
Reference list..............................................................................................................................6

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Answer to Part A
In this case, Wesfarmers is having a substantial interest or significant control over the
management of the Kidman Ltd. Hence, Wesfarmers is a parent company and can treat the
Kidman Ltd as an associate or a subsidiary company for reporting purpose. There are certain
possible losses and benefits for each of these two methods, which are explained below. As
per AASB 128, an associate company is a firm that is influenced by the investor. The entity
does not have to apply a method of equity in its investment if it is a parent company (AASB,
2015). If the company is an associate company, then as per the equity method of accounting,
only the amount invested in shares of the associate company can be shown in the balance
sheet as an investment. Later on, as per the principle of equity method of accounting,
movements or changes in equity attributable to the parent company is adjusted with the
investment (Loyeung & Matolcsy, 2015). Therefore, in this method, assets and liabilities of
the subsidiary company cannot be shown in the consolidated financial statement of the parent
company. On the other hands, if the Kidman is considered as a subsidiary then, at the time of
preparation of the consolidated financial statement all the all the assets and liabilities are
included with the line items of the financial statement of the Wesfarmers (AASB, 2015).
Hence, in this method the company can show the true financial position and strength
including all the subsidiaries as a whole.
To record the investment in associate companies, following journal entry is made.
Investment in associate company A/c ………………………… Dr
Cash/Bank A/c ………………………………………… Cr
For adjusting changes in revenue, following entry needs to be passed subsequently.
Investment in associate company A/c ………………………… Dr
Retained earnings A/c ………………………………… Cr
To record investment in subsidiary company following journal entry is made.
Investment in subsidiary company A/c ………………………... Dr
Cash/Bank A/c ………………………………………… Cr

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For including assets and liabilities of the subsidiary company in the consolidated
financial statement.
All Assets A/c …………………………….………….……….. Dr
Goodwill A/c ……………………………….………….……… Dr
Investment in Subsidiary company A/c ……….…….… Cr
Gain on bargain purchase A/c ………………………..... Cr
NCI Share in equity of the subsidiary company A/c ….. Cr
The standards relating to non-controlling interest state that a parent presents the
interests in the consolidated statements within the equity that is separate from the equity
belonging to the parent’s owner (Hadi, 2015). A change in the ownership of the interest of the
parent in the subsidiary which does not lead to a loss of its control on its subsidiary by the
parent are known as equity transactions. As per AASB 10, Para B94 - B96 have set guidance
for the accounting procedure of the non-controlling interests (Kulikova, Samitova & Aletkin,
2015).
Answer to Part B
Answer to Subpart a
In the given case study, if the Kidman Ltd is considered as an associate company,
then the amount provided by the Wesfarmers as a loan is simply treated as a financial assets
and the same is treated as a liability in the books of the Kidman Ltd. Therefore, there will be
no change in investment in associate (AASB, 2015). If the Kidman Ltd is considered as a
subsidiary company, then at the time of preparation of consolidated financial statement
intercompany debts and loans are eliminated. Therefore, in this method the loan of $700
million will not have any effect in the consolidated financial statement.
Answer to Subpart b
In the given case study, upon recognising Kidman Ltd as an associate company, there
will be creation of creditors in the books of Wesfarmers while there be creation of debtors in
the books of Kidman Ltd as it had provided services. On the other hand, upon recognising
Kidman Ltd as a subsidiary company the expenses upon consolidation will all be eliminated
and there will no creation of debtors or creditors in the books of either companies.

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Wesfarmers aimed to gain advantage of the infrastructure and chemical processing enterprise
at Kwinana for the development of the lithium hydroxide plant with SQM. The conglomerate
of $42 billion was a rare earths first-stage processing plant in Kwinana if the takeover tilt was
successful at Lynas Corporation (Osadchy et al. 2018). The next move being considered by
Wesfarmers is that of a bid for Lynas amounting to $1.5 billion that was pitched at a value of
$2.25 per share as on March 26. The share price of Lynas had risen up to $2.44 per share the
following week (Wesfarmers.com.au, 2019). The takeover of Kidman will help Wesfarmer in
linking itself with Tesla and Elon Musk using a binding off-take agreement that is already
existing with Kidman for supplying the electric vehicle make by making use of lithium
hydroxide. Kidman has an off-take agreement which is non-binding with Mitsui and LG
Chem along with an additional three year binding off-take agreement at fixed price with
Tesla (Arrow, 2017). A commitment deed was entered into by Wesfarmers with SQM that
effectively would shut down the talk of the rival bid for Kidman (Wesfarmers.com.au, 2019).
The share price of Wesfarmers was also seen to rise 1.6 percent to $37.70 while the share
price of Kidman rose marginally to $1.90 per share.
Answer to Part C
The financial reporting perspective of Wesfarmers for the accounting of 50%
investment in Kidman should be accounted as an associate company. The arguments which
support the preferred accounting treatment that bring significant value to the consolidated
financial statements of Wesfarmers have been stated. This type of company is largely
influenced by its investors. It is not compulsory for them to apply the methods of equity. The
benefits and losses acquired from the 50% acquisition will affect the asset position of the
company (Wesfarmers.com.au, 2019). The accounting treatment will be different in the
consolidated statements in comparison to being a subsidiary company. There will be a
difference on the net realizable value of the assets. The possession taken in the associate
company is reported accurately on its investments. The records of an associate company are
maintained by the parent company in various situations. The consolidated financial
statements represent the combination of financial values of the parent company and the
affiliated subsidiaries. There is no requirement of mandatory consolidation of the activities by
the associate company.

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The alternative argumentative points that explain the reasons for selecting the other
accounting treatment of being a subsidiary company have been highlighted. This treatment
will bring a lesser impact to the value of the consolidated financial statements of Wesfarmers
(Wesfarmers.com.au, 2019). The treatment of being a subsidiary company would require the
application of the methods of equity. This makes it more difficult for the company as it
increases the accounting process. The stake by the parent company in a subsidiary company
is more. Therefore, the parent has more control over the operations and activities of the
subsidiary leading to its loss of control. The freedom of management as the scope gets
narrowed. The subsidiary company has limited liability. The maintenance by a subsidiary
company is more complicated than that of a single organization. The process of decision
making becomes time consuming because the issues have to go through many chains of
command. The paperwork relating to the legal aspects and taxations involved for this type of
company is expensive and lengthy. Therefore, it increases complications for them.
It is being recommended to follow the consolidated method of accounting as it is
more suitable in the case of Wesfarmers. The statements that have to be consolidated are
recorded by the parent company. On the other hand, the chain of commands in an equity
model involve complications and are very time consuming. It involves a lot of legal and
taxation aspects.

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Reference list
AASB, C. A. S. (2015). Investment property.
Arrow, K. J. (2017). Optimal capital policy with irreversible investment. In Value, capital
and growth (pp. 1-20). Routledge.
Conde, M., & Le Billon, P. (2017). Why do some communities resist mining projects while
others do not?. The Extractive Industries and Society, 4(3), 681-697.
Hadi, K. T. (2015). Consolidated financial statements.
Investors wary of more cost blowouts on Wesfarmers lithium deal. (2019). Australian
Financial Review. Retrieved 12 October 2019, from
https://www.afr.com/companies/mining/investors-wary-of-more-cost-blowouts-on-
wesfarmers-lithium-deal-20190523-p51qc3
Kulikova, L. I., Samitova, A. R., & Aletkin, P. A. (2015). Investment property measurement
at fair value in the financial statements. Mediterranean Journal of Social
Sciences, 6(1 S3), 401.
Loyeung, A., & Matolcsy, Z. (2015). CFO's accounting talent, compensation and
turnover. Accounting & Finance, 55(4), 1105-1134.
Osadchy, E. A., Akhmetshin, E. M., Amirova, E. F., Bochkareva, T. N., Gazizyanova, Y. Y.,
& Yumashev, A. V. (2018). Financial statements of a company as an information base
for decision-making in a transforming economy. European Research Studies
Journal, 21(2), 339-350.
Rob Scott flags more investments in the electric vehicles sector. (2019). Australian Financial
Review. Retrieved 12 October 2019, from
https://www.afr.com/companies/mining/scott-defends-plunge-into-battery-minerals-
sqm-partnership-20190613-p51x8e
Wesfarmers.com.au. (2019). Retrieved 12 October 2019, from
https://www.wesfarmers.com.au/docs/default-source/asx-announcements/proposal-to-
acquire-kidman-resources---briefing-presentation.pdf?sfvrsn=0

7FINANCIAL ACCOUNTING
Wesfarmers.com.au. (2019). Retrieved 12 October 2019, from
https://www.wesfarmers.com.au/docs/default-source/asx-announcements/proposal-to-
acquire-kidman-resources.pdf?sfvrsn=0