CORPORATE A CCOUNTING

Answer

Corporate Accounting

Rock Bottom Limited

Question 1

Workings:

The Balance of unsecured loans = 104,000 – 78,333 = $25,667

Balance of the Mortgage = 221,000 – 104,000 – 130,000 = $13,000

Salaries and Wages = Wages of Employees + Directors salary

Salaries and Wages = 5200 +942 = $6,142

Remaining Salary Expenses = Employee holiday pay + Sales commission + MD Director salary + directors fees 

Remaining salary expenses = 6500 + 650 + 3120 + 3900

Taxes paid = PAYG Tax + Fringe Benefits Tax + GST

Taxes Paid = 1,014 + 2,600 + 2,586 = $6,200

Question 2

1. An associate company is an entity in which the parent firm or investor has significant influence. The investor has significant powers in influencing financing, investing, and operating policy decisions (International Financial Reporting Standards, 2020). In many cases, investments in associate firms are with limited options with the equity method of financing preferred. Some of the indicators of significant influence in associate companies include the following. First, there is wide representation on the board of directors or the decision-making body of the investee. The investor takes control of the major decisions of that organization. (International Financial Reporting Standards, 2020) Second, the investor actively participates in the policy decision-making process including dividend policy or distribution to other investors of the firm (International Financial Reporting Standards, 2020). Third, the investor is actively involved in material transactions such as mergers and acquisitions that affect the future and sustainability of the organization. Fourth, the investor can propose an interchange of managerial personnel in the recruitment of experts to the organization as well as the provision of technical information that is valuable to the growth and development of the firm. Finally, the investor has 20 percent or more voting power in the decisions of the organization (International Financial Reporting Standards, 2020). A rule of thumb for having significant influence is when an investor has a direct or indirect stake in subsidiaries with 20 percent or more voting power of the investee.

The presumption of voting rights does not only arise concerning shareholding. It is worth noting that a significant or majority ownership by an investor does not preclude that the latter holds a significant influence. For example, with a 50% shareholding in ordinary shares and 50% shareholding in preference shares, an investment of 10% of the ordinary shares and 35% in preference shares is presumed that the 10% is accounting for under the equity method. Hence, in this case, this is not considered as significant shareholding since the investment is more inclined to the preference shareholding who do not have voting rights in an annual general meeting. Hence, though the investment is significant, it is not considered as an associate. Hence associate significant influence is considered under the equity method or common shareholding. 

28. Entities with significant influence in an investee are required to account for the investment in the associate or joint venture through the equity except when an investment qualifies for exemption under IAS 28. The International Accounting Standard (28) defines the method for accounting where the investment in an organization is initially recognized at cost and thereafter readjusted for the post-acquisition on the investor's share of the assets of the investee (International Financial Reporting Standards, 2020). The profit or loss of the investor is the investor's share of gains and losses at the end of the financial year. Other comprehensive income for the investor includes the share of the investee from the comprehensive income. IAS 28 justifies the equity method in the share of income. The standard justifies that the basis of distribution may not be sufficient in determining the performance of the associate or the joint venture since the distributions bear a little relation to the performance of the investee (International Public Sector Accounting Standards, 2015). Since the investor has had significant influence over the investee decision-making process, the investor has an influence on the performance hence the return of the investment. Based on IAS 28, the investor is supposed to account for the interest in the company extending beyond the performance of the financial statements to include the share of gains and loss of the associate or joint venture (International Financial Reporting Standards, 2020 ). The equity method, therefore, provides a more informative reporting of the investor's net assets, gains, and loss.
29. In circumstances whether a joint venture or associate company incurs losses that exceed the carrying amount of the investment, the investor cannot record the carrying amount of the investment below zero. The investor, therefore, stops accumulating further losses in his account statement.

Question 3

Business Report

Executive Summary

A holding firm or a parent company controlling one or more entities is required to present consolidated financial statements according to the International Financial Reporting Standards. Consolidation of financial statements is the process of summation of the line by line items of the parent firm and its subsidiaries. The consolidated financial statements disclose the profit and loss attributable to the non-controlling interest and the owners of the parent in profit in the statement of financial performance. (Carlo, Antonio, & Annalisa, 2013) Moreover, the minority interest in the statement of financial position is presented separately from the equity owners of the holding company. The parent firm shall make appropriate disclosures in the consolidated financial statements on the accounting policies and principles followed by its subsidiaries (Paul & Niall, 2017). This report provided a guidance in consolidation of financial statements for an investment by a parent company Mandora Cement Limited in its subsidiary Wagait Sand Supplies Pty Limited.

Introduction

Businesses work for the optimal goal of maximization of shareholders' wealth. A business has a set of an integrated mix of activities and assets which provides returns in form of dividends to its shareholders. For business growth and development, organizations get restructured through mergers and acquisitions, joint ventures, associates, or the creation of subsidiaries (Dirk, Hanna, & Joachim, 2015). A business combination is a process in which the acquiring firm acquires a significant control of one or more business operations. Some of the benefits of the business combination include achieving economies of scale through cutting costs and creating value in the supply chain (Francis, 2013). The acquiree may loose or retain a shareholding in a business combination. If the acquiree maintains a separate legal identity depending on the terms of association, the nature of the relationship between the acquirer and the acquiree is defined. In cases where the acquirer has total control on the operating and financial policies of the acquirer, the acquirer is known as the holding or parent firm and the acquiree of the subsidiary.

Once the relationship is defined between the parent and its subsidiary, the preparation of financial statements follows the international accounting standards or the IFRS based on the domicile country. The holding or parent company is required to prepare consolidated financial statements that include the income statement, balance sheet, cash flow statement, and a statement of changes in equity. Consolidated financial statements are statements of a group rather than an individual firm or entity. A group referring to the parent company and its subsidiaries, joint ventures, and associates. The nature of the relationship between the parent company and its investments is designed from the formation of a board of directors to determine the controlling interest (International Accounting Standards b, 2020).  In this case, a subsidiary is an organization where the parent firm has the majority of voting power or composition of the board of directors (Lie, 2018). Therefore, continuous assessment of the nature of the relationship must be determined to distinguish between subsidiary, joint venture, or associate investment.

Findings

1. The consolidation of an investee shall begin at the time the investor obtains control of the investee and cease when the investor loses control of the investee.
2. Consolidated financial statements include the combination of like items of income, expenses, assets, liabilities, equity, and cash flows of the parent and those of the subsidiary. The consolidation process also includes offsetting the carrying amount of the parent's investment with its subsidiaries and the parent's portion of the equity in each of its investees. Intragroup transactions on assets, liabilities, equity, income, expenses, and cash flows are eliminated in full.
3. Any intragroup losses may indicate impairment and this should be recognized in the consolidated financial statements as impairment losses.
4. Income taxes arising during the period applies to temporary differences that arise from the elimination of profits and losses from the intragroup transactions.

Consolidation Adjustments, (International Accounting Standards b, 2020)

1. In the consolidation, the first consideration is to evaluate the excess or deficit of the cost of investment by the parent firm in its subsidiary over the proportionate portion of equity at the date in which the investment was made.
2. The second is to determine the amount attributable to non-controlling interest at the date on which investment in the subsidiary was made.
3. Third eliminate any intragroup transactions relating to management fees, interest among other related costs.
4. Fourth, eliminate any intra-group profits on assets acquired from related investments.
5. Fifth, eliminate intra-group indebtedness.
6. Finally, harmonize accounting principles and treatment between the holding company and its subsidiaries

Calculation of Non-Controlling Interest, (International Accounting Standards b, 2020)

The calculation of non-controlling interest is mainly by two methods that include:

1. The proportionate share method
2. Fair value method

The proportion share method takes the following format:

1. Non-Controlling interest on the date of acquisition/ Share of the equity share capital on the date of acquisition
2. Add; Share of the general reserve on the date of acquisition
3. Add; Share of the profit and loss on the date of acquisition

• Add: Share of other reserves on the date of acquisition

2. Non-Controlling interest at the end of the financial year
3. Add Share of the post general reserves
4. Add share of the profit and loss

• Add share of other post general reserves

The closing non-controlling interest is equivalent to the summation of the Non-controlling interest on the date of acquisition and non-controlling interest at the end of the financial year.

The fair value method takes the following format

1. Non-controlling interest on the date of acquisition

The number of shares held by non-controlling interest on the date of acquisition * the fair value per share.

2. Non-controlling interest at the end of the financial year
3. Add Share of the post general reserves
4. Add share of the profit and loss

• Add share of post general reserves

The closing non-controlling interest is equivalent to the summation of the Non-controlling interest on the date of acquisition and non-controlling interest at the end of the financial year.

Impacts of Plant and Machinery and Inventory, (International Accounting Standards b, 2020)

1. In the case of intra-group sales on assets such as plant and machinery or inventory, the unrealized profit should be eliminated on consolidation. However, if the sale is by the subsidiary, the following adjustments should be made;
2. Reduce the profit elements from the post-acquisition profit for the calculation of the non-controlling interest.
3. Reduce the un-realized profit from the sale of the plant and machinery or inventory in the consolidated balance sheet.
4. If the sale is by the parent firm to the subsidiary, the following adjustments should be made.
5. Reduce the un-realized profit from the sale of the plant and machinery or inventory in the consolidated balance sheet.
6. Reduce the profit element from the consolidated reserves in the calculation of non-controlling interest.

Revaluation of Plant and Machinery, (International Accounting Standards b, 2020)

Revaluation of plant and machinery is done on the date of acquisition. The revaluation is treated as pre-acquisition nature. The process results in the increase in plant and machinery in the consolidated statement of financial position. Revaluation will also create a pre-acquisition reserve for the calculation of non-controlling interest on the date of acquisition as well as the parent's share. An adjustment should be done on additional depreciation on the fixed assets due to revaluation.

Conclusion

Mandora Cement Limited holds significant influence and control over Wagait Sand Supplies as it owns 90% of the total shareholding. Therefore, Mandora limited should prepare consolidated financial statements. The preparation is a responsibility of the management and board of directors of Mandora Cement for its stakeholders including shareholders, creditors, employees, customers, government among others. During the preparation stage, Mandora Cement as the parent firm has to eliminate all intragroup transactions such as the unrealized profits on plant and machinery, inventory among others. The Non-controlling interest will have to be calculated using either the proportionate or the fair value method. In the calculation of the non-controlling interest, goodwill, and capital reserve, William Cox the accountant has to determine the pre-acquisition and post-acquisition profit or loss at the date of acquisition. Thereafter, the accountant shall determine the pre- and post-acquisition profit for consolidation in the financial statements. The accountant shall after that deduct the parent's share of equity on the date of acquisition from the cost of investment of parent in the subsidiary to evaluate the goodwill or capital reserve. A positive carrying amount is considered goodwill and the negative value of a capital reserve. The adjustments should align with accounting principles and standards adopted by Australia (Australian Accounting Standards Board, 2015).