PartThreeLectureNotes.docx
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PartThreeLectureNotes.docx
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PartThreeLectureNotes
ACC2700
FINANCIALREPORTINGSTANDARDS
LECTURENOTES
PARTTHREE
TOPICNINE
CONSOLIDATIONS:
INTRODUCTIONTOACCOUNTINGFORGROUPSTRUCTURES
TOPICTEN
CONSOLIDATIONS:
ACCOUNTINGFORINTRAGROUPTRANSACTIONS
TOPICELEVEN
CONSOLIDATIONS:
ACCOUNTINGFORNON-CONTROLLINGINTERESTS
TopicNine
CONSOLIDATIONS:
INTRODUCTIONTOACCOUNTINGFORGROUPSTRUCTURES
Introduction
Businessesareusuallydrivenbyaneconomicmotive.Forexample,abusinessacquiresscarceeconomicresources(debtandequitycapital)toinvestinproductiveresources(suchasinventory,plantandequipment,patents,trademarksandbrandnames,andgoodwill)forthepurposeofgeneratingaflowofeconomicbenefits(i.e.,profits).
Acompanymaydirectlyholditsinvestmentinproductiveassetsoralternativelyholdequityinanotherbusinessentitywhichcontrolstheuseofproductiveassets.Thedecisiontoinvestintheequityofanothercompanyismotivatedbythedesiretoenhancethereturnearnedbytheinvestorontheeconomicresourcesunderitscontrol.
Theenhancementinearningsmaybedirectlyobtainedthroughtheadvantageouscommercialarrangementsthatexistbetweentheinvestorandinvestee(e.g.,thedecisionofahardwarecomputermanufacturertoinvestinasoftwaredevelopmentcompany).Alternatively,theenhancementinearningsmaybederivedfromtheshareofprofitsdistributedbytheinvesteetotheinvestororbytheappreciationinthemarketvalueofthesecuritiesheldbytheinvestor(e.g.,thedecisionofacompanytoinvestintheequityofa‘bluechip’company).
Thischapterconsiderstheeconomiccharacterofintercorporateinvestmentsandtheprinciplesbywhichsuchinvestmentsareaccountedfor.
Objectives/LearningOutcomes
Onsuccessfulcompletionofthistopicyoushouldbeableto:
understandthereasonsforpreparingconsolidatedfinancialstatements
understandalternativeconsolidationconcepts
understandthebasicsinvolvedinpreparingconsolidatedfinancialstatements
useaconsolidationworksheettoperformrelativelysimpleconsolidations
understandthatcontrol,andnotlegalform,isthecriterionfordeterminingwhetherornottoconsolidateanentity
explainwhatcontrolmeans,andbeabletoexplainwhatfactorsshouldbeconsideredindeterminingtheexistenceofcontrol
providethejournalentriesnecessarytoaccountforanygoodwillordiscountthatarisesonconsolidation
beawareofsomeofthehistorybehindthedevelopmentoftheAccountingStandardspertainingtoconsolidatedfinancialstatements
havethenecessarybasicknowledgeoftheconsolidationprocessonwhichtobaseanunderstandingoffurtherconsolidationissuesasaddressedprimarilyinChapters29and30
Topic/ModuleContent
Thistopicexaminesissuesassociatedwithaccountingfortheconsolidationprocessincluding:
rationaleforprovidingconsolidatedfinancialstatements;abriefreviewofthehistoryofAustralianconsolidatedaccountingrequirements;thenotionof‘control’anditsimportanceinthedecisiontoconsolidateanentity;andtheaccountingprocedurestobeappliedinconsolidationaccountingincludinghowtoaccountforgoodwillaswellasanydiscountthatmayariseonconsolidation.
LearningActivities
Learningactivitiesinthistopicarecentredaroundexaminingtheprovisionsoftherelevantaccountingstandardinthisarea(AASB127)aswellasChapter28ofthetextbook(Deegan6thed2010)andcompletingarangeofexercisesassociatedwithtopic(conceptualandpractical).
Reading:
TextbookandAccountingStandards
TherelevantreadingforthistopicisChapter28ofthetextbook(Deegan,6thed2010)aswellasthefollowingaccountingstandards:
AASB127‘ConsolidatedandSeparateFinancialStatements’
AASB3‘BusinessCombinations’
AASB116‘Property,PlantandEquipment’
AASB136‘ImpairmentofAssets’
AASB138‘IntangibleAssets’
1.IntroductiontoAccountingforGroupStructures(referDeegan6thed2010p.853)
Itiscommonforgroupsofcompaniestocombineinpursuitofcommongoals.Whereareportingentitycontrolsanotherentity,AASB127‘ConsolidatedandSeparateFinancialStatements’requiresthatconsolidatedfinancialstatementsbeprepared.Thistopicaddressestheintroductiontoaccountingforgroupstructures.Keyissuesinclude:
•rationaleforpresentingconsolidatedfinancialstatements
•briefreviewofthehistoryofAustralianconsolidationaccountingrequirements
•theimportanceofcontrolinrelationtodecidingwhetherconsolidationtakesplace
•theconsolidationprocessincluding:
howtoaccountforgoodwilloralternativelygainonbargainpurchase
Subsequenttopicswhichfollowinthisarea(consolidations)include:
howtoaccountforinter-entitytransactions(nexttopic)aswellashowtoaccountfornon-controllinginterests(finaltopicinthisarea).
KeyTernsRelevanttoConsolidations:
•consolidatedfinancialstatements–financialstatementsofthegrouppresentedasthoseofasingleeconomicentity
•group–consistingofparentandallitssubsidiaries
•parent–entitythathasoneormoresubsidiaries
•subsidiary–entityincorporatedorunincorporated(egpartnership)thatiscontrolledbyanotherentity(parent)
•control–thepowertogovernboththefinancialandoperatingpolicesofanentitysoastoobtainbenefitsfromitsactivities
Activity
ReferFigure28.1ofyourtextbook(Deegan6thed2010)onpage854whichillustratesasimpleparent-subsidiaryrelationshipandtherelationshiptoeconomicentity.
2.RationaleforConsolidatingtheAccountsofDifferentLegalEntities(referDeegan6thed2010p.854and855)
Thepurposeofprovidingconsolidatedaccountsistoshowtheresultsandfinancialpositionofagroupasifitwereoperatingasasingleeconomicentity.
Followingtheconsolidationprocess,theconsolidatedstatementofcomprehensiveincomewillshowtheresultderivedfromoperationswithpartiesexternaltothegroupofentities.
Aspartoftheconsolidationprocesshowever,theeffectsofallintragrouptransactionsareeliminated,sincefromtheeconomicentity’sperspective(controllingorparententity)incomewillnotbederivedasaresultoftransactionswithinthegroup-onlyfromtransactionsfromexternalparties.Forexample,liabilitiesowingtoorganisationswithinthegroup(economicentity)byothergroupmemberswillbeeliminatedintheconsolidationprocessandwillnotbeshownintheconsolidatedstatementoffinancialposition.(Thisisexaminedinthenexttopic).
Theconsolidatedstatementoffinancialpositionwillshowthetotalassetscontrolledbytheeconomicentityandthetotalliabilitiesowedtopartiesoutsidetheeconomicentity.
Thepurposeofprovidingconsolidatedfinancialstatementsistoshowtheresultsandfinancialpositionofagroupofentitiesasittheyarereportingasasingleeconomicentity.
Result?
Consolidatedfinancialstatements(ieonesetoffinancialstatementsplussupportingnotes)thatcovertheentiregroup:
•consolidatedstatementofcomprehensiveincome
•consolidatedstatementoffinancialposition
•consolidatedstatementofchangesinequity
•consolidatedstatementofcashflows
Howisthisaccomplished?
AASB127(para18):
Anentitycombinesthefinancialstatementsoftheparentanditssubsidiarieslinebylineaddingtogetherlikeitemsofassets,liabilities,equity,incomeandexpenses
3.HistoryofAustralianAccountingStandardsthatGovernthePreparationofConsolidatedFinancialStatements(referDeegan6thed2010p.855to859)
AAS24wasissuedinJune1990(followingED40).AASB1024becameeffectivefrom31December1991andwasissuedtoeliminatethepracticeofusingpartnershipsandtruststokeepdebtofftheconsolidatedbalancesheet.
Subsidiariesweredefinedascompanies-anyentitythatwasnotacompanycouldnotbelegallyconsolidatedasitcouldnotbeincludedwithinthe‘group’.Norcouldentitiescontrolledbyanon-corporateentitybeconsolidated-evenifthecontrolledentitieshappenedtobecompanies.
BeforeamendmentstotheCorporationsLawin1991,groupconsolidatedaccountscouldonlyincludeentitiesthatwerecompanies.
Thisresultedina‘partitioneffect’causedbyforexample,interposingaunittrustwithinagroupstructure(referFigure28.2ofyourtextbook,Deegan20106thedonpage856)-everythingfromthetrustdownwaspartitionedoffandexcludedfromtheconsolidationprocess.
Thisoftenhadtheeffectofprovidingaconsolidatedbalancesheetwithlowerdebtratiosthanwouldotherwisehavebeenthecase-nota‘trueandfair’viewofthefinancialpositionofthegroup.
SubsequentamendmentstotheCorporationsLawdeletedpreviousdefinitionsof‘group’and‘groupaccounts’.TheCorporationsAct(2001)nowadoptsrequirementsembodiedwithinAASB127(replacingAASB1024):
•S295
(2)(d)statesthatthefinancialstatementsfortheyearare:
(a)thefinancialstatementsinrelationtotheentityreportedonthatarerequiredbytheaccountingstandards;and
(b)ifrequiredbytheaccountingstandards–thefinancialstatementsinrelationtotheconsolidatedentitythatarerequiredbytheaccountingstandards
Inotherwords,theCorporationsActnowrequiresconsolidatedfinancialstatementstobepreparedinthemannerrequiredbyAustralianAccountingStandards.
Thismeansthatallcontrolledentitiesaretobeincorporatedwithintheconsolidatedfinancialstatementsirrespectiveoftheirlegalform(ieregardlessofwhetherthesubsidiaryisacompany,partnership,trustetc).
AASB127(para12):
Theconsolidatedfinancialreportshallincludeallsubsidiariesoftheparent
AASB127(para4):
asubsidiaryisanentity,includinganunincorpor
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