Consolidation Of Financial Statements For Small Ltd And Control Requirement Of AASB 10 Essay.

(a) Prepare journal entries in the records of Small Ltd for each of the years ended 30 June 2018 to 2020 in relation to its investment in Fry Ltd. (Assume Small Ltd does not prepare consolidated financial statements.)

(b) Prepare the consolidation worksheet entries to account for Small Ltd’s interest in the joint venture, Fry Ltd. (Assume Small Ltd does prepare consolidated financial statements.)

Write a report to Bill, advising him how the control requirements of AASB 10 apply in each of the above investments. State, for each investment, where the control rests, citing and explaining how the relevant paragraphs of AASB10 apply, and whether Bill should include the results of the investments within the consolidated accounts explaining the reasons for your decision.

The report should take the format of a formal business report, written by your firm with yourself as lead author. Marks will be awarded for presentation style and an appropriate business format.

Prepare the consolidation worksheet JOURNAL ENTRIES for the preparation of consolidated financial statements by Blake Ltd at 30 June 2018.

Your answer should include an acquisition analysis with a calculation of goodwill, preacquisition entries, dividend adjustments, intragroup sales and transfers, and a calculation of the non-controlling interest

The assignment must be lodged on or before the due date indicated in the assignment details. Only word docs and/or Excel converted to pdf will be acceptable. Handwritten answers will be rejected.

• The assignment must conform to the requirements set out in this assignment
• The assignment must be lodged online via the ACT305 Learnline Assignment Lodgement link on the ACT305 Learnline site. Ensure your file is named using a file naming convention that allows the lecturer to identify to whom it belongs. Failure to use an acceptable file naming convention may result in your assignment lodgement being rejected.

Accounting for investment in joint venture is done as per regulated standards. According to which investment value is increased by the amount of share in profit (Murray, 2018). Dividend received from investment will reduce the investment value (CFI, no date).

At the time liquidation of any company, the realization of the assets is allocated to the secured creditors, liquidators etc. and the balance shall be distributed proportionately (AccountingTool, 2018). In the liquidation process tax liabilities and government rates are also given priority than others (Swayamjit, no date)

Background:

The company has provided its fund to various entities either in terms of loan or equity investment in these companies. The management of the company has doubt about the consolidation of the financial statements with the financial statements of the other entities in which the company has stake. They are required to analyze each facts of the case from the AASB 10 perspective (ACCA, no date). As a business advisor we are analyzing each case and suggesting the consolidation requirement of the company. The detailed discussion is as follows:

AASB 10 deals with the consolidation of the financial statements. In organizational environment each organization is connecting to each other either through the investment in the equity of each other or through the providing loans or other facilities. Now there is a concept of the consolidation of the financial statements of these companies (Deloitte, no date). Generally, consolidation is taken place where number of the companies is operating under the same group. In a group each company or single company has good amount of stake in the other company, it make compulsory consolidation of these financial statement. But, there may number of cases where one entity holds its interest directly or indirectly in other company. In this situation, consolidation of the financial statement depends on the facts of the case. To analyze these facts, there should be common criteria on the basis of which, consolidation requirement can be justified (Drew, 2017).

In the line of resolving the problem of the consolidation requirement AASB 10 provide the basic rules or procedure which needs to be followed to come at the decision of consolidation of the financial statements of an entity (Knapp, 2013). AASB 10 describes some factors like controls in an entity, power to influence the return etc. In other words, it can be said that where an entity has the control in other entities, its subordinates’ companies then the company should prepare the consolidated accounts. AASB 10 emphasis the three terms for the decision of the consolidation these are control, power and return (AASB, no date).

Consolidation Rules of AASB 10

Para 7 of the AASB 10 deals with the control i.e. it describes that there may be control where an entity has power on other entity, one entity is involved in the other company’s operations or one company has the power to influence the return of investor company. Para 10 and 11, deals with the concept of power in other entities. It describes that when an entity is able to monitor some critical activities of other entity, which affects the return of the other company, then it will be considered that entity has power to influence the return of other company (Orpurt, 2016).

Para 15 and 16 of the AASB 10, deals with the return of an entity. It refers to the return on investment may be vary from the actual position of the investee company because of the contributing company during its involvement in the investee company may influence such return. Where the contributing company has dominant position in the other company, then return from the other company might be fluctuating (PWC, no date).

As such, AASB 10 has the underlying rules or techniques to analyze the facts of the case, based on which one can conclude that whether consolidated financial statements to be prepared or not (Sullivan, no date). Based on the above discussion we are analyzing the situation persisting in front of the company NAGIL from the consolidation perspective.  

In this case, the loan has been given by the NAGIL to Struggle Ltd. Further, the loan has been converted into equity due to which, NAGIL obtain the 70 percent holdings in Struggle Ltd. Struggle position is not good as it is accumulating huge amount of losses. There no such limit has been specified in the AASB 10, fulfilling which consolidation become necessary. As, the NAGIL has not involve in the operation as well as financial operations of the Struggle Ltd.

The company NAGIL covers 70 percent equity in the Struggle Ltd., which is a substantial portion of equity. In this situation, it would not be meaningful to discuss whether the company has not involved in the operation activities. Para 10 of the AASB 10, applies here and it can be said that NAGIL has by way of substantial portion in equity, has control over the Struggle Ltd.      

As such, it can be concluded that NAGIL can lead to the consolidated financial statements.

In this situation, NAGIL has contributed in the VBCL by way of providing the loan. VBCL has not been able to repay the loan due to financial crunch. But, as bailout package, the mutual agreement has been come into exits that the operating and financial transaction shall be taken place with the approval of the designated employee of the NAGIL. NAGIL also does not have board membership in VBCL. Besides that, NAGIL got a critical position in the VBCL of passing the bills relating to financial transaction.

Investment in Fry Ltd - Journal Entries and Control Requirement of AASB 10

As per AASB 10, all the consolidation related decisions are not taken according to the underlying rules. Some of them are taken on the basis of facts and circumstances of the case. NAGIL is engaged in such activity, which may influence the return of the investors or investee as well. As such, NAGIL fulfills the conditions of Para 7 of the AASB 10 and It should prepare the consolidated financial statements with VBCL.     

In such case, there are two entities NAGIL and SPL. These entities has owns the 50 percent portion of equity of the MSCL. Both these has equal voting right in MSCL. Apart from that, NAGIL has also provided the loan facility to the MSCL and it was agreed that, SPL will be engaged in its expertise area of management fees. For the purpose of consolidation, it is necessary to understand the control over the other entity. In this case, NAGIL is majorly involved in the MSCL activity by way of equity portion and debt. Its major involvement may influence the return to the investors in comparison of the SPL. From the AASB 10 perspective, NAGIL has control over the MSCL and it should go for the preparation of consolidated financial statements with MSCL.       

In the instant case, NAGIL has obtained the 40 percent share in equity of CrocsRUs. The balance 60 percent portion is hold by the two director of the company CrocsRUs. The power relating to the operational activities has been sublet to the NAGIL by the directors of the CrocsRUs. As such, NAGIL has obtained such power in which chances of return influencing is greater. But, the director of CrocsRUs are monitoring the regular activities of the company so that, NAGIL cannot try to influence the return of their investment. Influencing the return on investment is the basic need for the determination of the control of one entity in another.  

As per AASB 10, where an entity is not able to influence the return on investment, then it cannot be said that the company has control over the other company. Para 7 has some conditions, which needs to be fulfilled for the decision of the consolidation. In this case, the condition of influence of return on investment has not been fulfilled due to which it cannot be said that the company has control in the other entity. In this situation, NAGIL has no control over the CrocsRUs. Thus, NAGIL should prepare the consolidated financial statements.

Reference:

AASB (no date), Consolidated Financial Statements [Online] Available from: https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Assessed 15 September 2018]

AccountingTool (2018), Liquidation basis of accounting [Online] Available from: https://www.accountingtools.com/articles/liquidation-basis-of-accounting.html [Assessed 15 September 2018]

ACCA (no date), Preparing simple consolidated financial statements [Online] Available from: https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f3/technical-articles/preparing-simple-consolidated-financial-statements.html [Assessed 15 September 2018]

CFI (no date), Associates & Joint Venture Accounting [Online] Available from: https://corporatefinanceinstitute.com/resources/ebooks/investment-banking/jv-joint-venture-accounting-associates/ [Assessed 15 September 2018]

Deloitte (no date), Interest in Joint Ventures [Online] Available from: https://www.iasplus.com/en/standards/ias/ias31 [Assessed 15 September 2018]

Drew, J. (2017), FASB issues proposal for consolidation of VIEs [Online] Available from: https://www.journalofaccountancy.com/news/2017/jun/private-company-accounting-alternative-for-vie-consolidation-201716931.html [Assessed 15 September 2018]

Knapp, J. (2013), A Reconsideration of Consolidation Accounting Requirements and Pre-acquisition Dividends [Online] Available from: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1835-2561.2012.00190.x [Assessed 15 September 2018]

Murray, J. (2018), What is Joint Venture and How Does It Works? [Online] Available from: https://www.thebalancesmb.com/what-is-a-joint-venture-and-how-does-it-work-397540 [Assessed 15 September 2018]

Orpurt, S. (2016), Why Consolidation Accounting Matters to Reporters [Online] Available from: https://businessjournalism.org/2016/08/business-basics-consolidation-accounting-matters-reporters/  [Assessed 15 September 2018]

PWC (no date), Consolidation / Joint Venture Formation Accounting [Online] Available from: https://www.pwc.com/us/en/services/audit-assurance/accounting-advisory/consolidations-joint-venture-formation-accounting.html [Assessed 15 September 2018]

Swayamjit (no date), Liquidator’s Financial Statement of Account [Online] Available from: https://www.yourarticlelibrary.com/accounting/liquidation-of-companies/liquidators-final-statement-of-account-with-format/58525 [Assessed 15 September 2018]

Sullivan, D. (no date), Joint Venture Accounting Methods [Online] Available from: https://work.chron.com/joint-venture-accounting-methods-28514.html [Assessed 15 September 2018]