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Corporate Accounting
Seminar One: Introduction to Consolidation
Course coordinator details 2
Administrative matters 3
Welcome!
Prescribed textbook:
Arthur, N., Luff, L., Keet, P, Egan, M., Howeison, B. and Ram, R., "Accounting for Corporate
Combinations and Associations", (2017), Pearson Education Australia, 8th edition.
Please note that ACCT7104 is written to the 8th edition of the text and earlier editions may not
reflect recent changes to Australian Accounting Standards.
Also required for the final topic of external administration and liquidation:
Dagwell, R., Wines, G. and Lambert, C. 2012. Corporate Accounting in Australia, Pearson
Australia Chapter 20 only re External Administration
BlackBoard:
Announcements
Seminar slides, set questions & solutions
Pencasts of selected problems
Specific additional content
General information
Moderated Discussion Board
Consultation:
Julie: Monday, 2.00 pm 4.00 pm (Bld 39-436)
Assessment summary 7
*Please note: At this stage the mid-semester exam will be held in the usual seminar rooms at the
usual seminar times. Students must attend their sinet registered seminar.
Seminar notes, homework and solutions 8
Each week, a list of questions/problems is set from the text and other sources
Some of these are covered in seminars, but the remainder are for you to
prepare in your own time
The next slide shows the detailed semester roadmap for ACCT7104. The
roadmap is posted on Blackboard and referenced each week
S01 2017 Week Date Lecture Reading Set Work Assessment
1 27/02 Introduction to Consolidation Arthur et al Chapter 1 and 2; AASB 10 Consolidated Financial Statements; AASB 12 Disclosure of Interests in
Other Entities Q1.1; Q1.2; Q1.3; Q1.9; Q1.11.
2 06/03 Consolidation: Basic Principles Arthur et al Chapter 1 and 2; AASB 3 Business Combinations; AASB 13 Fair Value Measurement Case Study and rubric available this
week
Q2.3; Q2.4; Q2.5; Q2.6; E2.1; E2.2; E2.8; E2.10.
3 13/03 Consolidation: Fair Value Adjustments and Tax Effects Arthur et al Chapter 3; AASB 112 Income Taxes; AASB 6 Exploration for and Evaluation of Mineral Resources.
Q3.1; Q3.3; Q3.6; Q3.8; E3.3; E3.7.
4 20/03 Consolidation: Intra-Group Transactions Arthur et al Chapter 4; AASB 102 Inventories; AASB 116 Property, Plant & Equipment
Q4.2; Q4.3; Q4.11; E4.1; E4.5; E4.7.
5 27/03 Consolidation: Partly Owned Subsidiaries (DNCI) Arthur et al Chapter 5; AASB 101 Presentation of Financial Statements
(Census #1 date 31 March)
Q5.1; Q5.3; Q5.8; E5.1; E5.3; E5.9.
6 03/04 or Mid-Semester Exam (30%) In-Class exam. Students must attend their sinet registered seminar session.
07/04 Mid semester exam
Good Friday 14/04. 7 10/04 Consolidation: Partly Owned Subsidiaries (INCI) Arthur et al Chapter 6; AASB 127 Separate Financial Statements; AASB 1024 Consolidated Accounts.
No Friday seminar Q6.1; Q6.5; Q6.6; Q6.8; E6.1; E6.3; E6.8,
Anzac Day Tuesday 25/04 8 24/04 Accounting for Joint Arrangements/Joint Ventures Arthur et al Chapter 8; AASB 11 Joint Arrangements Q8.2; Q8.3; Q8.6; Q8.7; E8.1; E8.5; E8.8.
(Census #2 date 30 April)
May Day 9 01/05 The Equity Method Arthur et al Chapter 9; AASB 128 Investments in Associates and Joint Ventures Q9.1; Q9.2; Q9.4; Q9.9; E9.2; E9.3; E9.8.
Monday 01/05
No Monday seminar
10 08/05 Foreign Currency Translation Arthur et al Chapter 10; AASB 121 The Effects of Changes in Foreign Exchange Rates Case Study due Thursday 11 May.
Q10.1; Q10.3; E10.2; E10.6
13 29/05 Review and sample paper walkthrough Sample final paper available on Blackboard Centrally organised final exam
SWOTVAC
What is this course about? 10
So far, you have dealt with financial reporting issues for independently trading
single business entities, such as a company or a sole trader
ACCT7104 deals with accounting issues that arise in business combinations and
other business relationships and how to account for them.
Most listed Australian entities are parent entities operating in a group structure
Course aims 11
A. Gain an appreciation of how different levels of control between entities effect the
accounting treatment of such entities, being able to delineate each situation and
display practical ability to do so;
D. Relate core material to real world scenarios, developing an awareness of how reporting
entities adopt these concepts and whether there are any ethical issues.
Seminar 1 objectives 12
Questions and problems from Arthur et al: Q1.1; Q1.2; Q1.3; Q1.9; Q1.11.
Accounting standards 14
1. IASB selects topic to standardise, proposes what is required, and seeks views from
IASB members
2. Australia makes submissions to overall IASB
a) Considered with submissions from other members
b) Periods of consultation and amendments
3. IASB issues an IFRS (International Financial Reporting Standard) intended to be
adopted unchanged by all member countries
4. Australia receives this, facilitated by AASB (Australian Accounting Standards Board)
a) May issue an AIFRS initially, adding specific differences
b) Then final standard is issued as an AAS (Australian Accounting
Standard)
Recent major changes in Australia 17
Required: Show the general journals to account for the equipment on 1 July
2013, 1 July 2014, 1 July 2015 and 2 July 2015.
Single asset acquisitions 22
1/7/13
Dr Equipment 50000
Cr Cash 50000
1/7/14
Dr Depreciation 10000
expense
Accumulated depreciation 10000
Cr - equipment
Single asset acquisitions 23
1/7/15
Dr Depreciation 10000
expense
Cr Accumulated depreciation 10000
- equipment
2/7/15
Dr Impairment 6000
expense
Accumulated impairment - 6000
Cr equipment
Acquiring a collection of assets: direct
24
acquisition from vendor
Now consider the acquisition of a collection of assets from a 3rd
party vendor:
Dr Plant 25,000
Dr Land 40,000
Dr Vehicles 20,000
Dr Office equipment 5,000
Dr Goodwill 10,000
Cr Cash 100,000
Acquiring a collection of assets: business
30
combinations
Often there is a difference between the amount paid for the business
combination and the fair value of the net identifiable assets acquired.
Assuming the transaction constitutes a business, such a difference is
either:
In the previous example OConnor Ltd paid $10,000 more than the total
of the fair values for the parcel of assets from Lyneham Pty Ltd.
Business combinations: goodwill 31
34
Lets look now at business combinations through the acquisition of shares in the
investee
Acquisition of a business via acquisition
36
of shares in the business
Rather than directly purchasing the business from the vendor, an
investment in another entity can be made by the investor acquiring shares
in that other entity
Categories:
1. Financial assets no special business relationship between investor and
investee
2. Investments providing the power to exert control, joint control or significant
influence
Classification of equity investments 38
Category 1:
AASB 9 Financial Instruments or AASB 139 Financial Instruments: Recognition
and Measurement are the relevant accounting standards for financial assets and
are covered in ACCT7102. For the types of equity investment that we consider,
the relevant possible accounting treatments are to measure the asset as either a
financial asset at fair value through profit or loss (AASB 139.9) or in some cases
at fair value through other comprehensive income. The important point for our
purposes is that this type of equity investment does not give rise to significant
influence, joint control or control by the investor over the investee. AASB 9 and
139 do not apply to category 2 investments (AASB 9.2.1).
For now, just note that significant influence requires the investment to
be accounted for using the equity method
Acquisitions conferring joint control 41
Some equity investments provide the investor with shared control of the
investees economic resources
In this case, the investor shares control with another investor(s) such that
there is a contractual obligation to obtain unanimous consent from all
controlling parties for all strategic decisions involving the investees
economic resources
In such a situation, the investors have joint control over the investee
Acquisitions conferring joint control 42
Returns must potentially be variable rather than fixed the returns depend
on the investees performance (AASB 10B.56)
Acquisitions conferring the power to
47
control
3. Link between power and returns
The investor must be able to use its power over the investee to affect the
amount of return generated by the investee.
Q1.1 from Arthur et al asks the following (this is part of your set work this
week):
A Ltd (parent)
The A Ltd group
Control
B Ltd (subsidiary)
C Ltd (subsidiary)
Acquisitions conferring the power to
55
control
Parent entity: A parent is an entity that has one or more subsidiaries (AASB
10 Appendix A). In the previous diagram, A Ltd is the parent entity of B Ltd
and C Ltd because it has direct control over B Ltd and indirect control over
C Ltd. Note that B Ltd is also a parent entity to C Ltd.
Ultimate parent entity: The ultimate parent entity in the previous diagram
is A Ltd because it has ultimate control over the A Ltd Group, B Ltd, the B
Ltd Group and C Ltd.
Acquisitions conferring the power to
56
control
Subsidiary: A subsidiary is an entity, including an unincorporated entity
such as a partnership that is controlled by another entity known as the
parent (AASB 10 Appendix A). In the previous diagram, B Ltd and C Ltd are
subsidiaries to A Ltd because A Ltd controls them through a singular line of
power. C Ltd is also a subsidiary to B Ltd.
Group: A group consists of a parent (entity) and all its subsidiaries (AASB
10 Appendix A). In the previous diagram, the A Ltd group comprises A Ltd
and its controlled entities B Ltd and C Ltd. Note that there is also a B Ltd
group made up of B Ltd (parent entity of the B Ltd group) and C Ltd (its
subsidiary).
Consolidated reporting 57
This seminar and the next 5 seminars will deal with various aspects of
consolidated financial reporting
The rest of this seminar will introduce some basic history and concepts in
consolidated reporting
Consolidated reporting 58
Since 2010, the Australian Corporations Act has stated that if accounting
standards require consolidated financial statements then only consolidated
statements are required to be provided to the shareholders of the parent
entity.
Consolidated reporting 61
This has happened in recent times e.g. Enron and its use of unconsolidated
Special Purpose Entities (SPEs)
Importance of consolidated reporting 63
You are a manager with a firm of accountants. You have been approached
for advice. Determine whether or not consolidated financial statements
need to be prepared in the following scenarios:
a. Mr P holds 100% of the voting shares in See Pty Ltd (See), which is a
large proprietary company. See owns 100% of the voting shares of Q Pty
Ltd, which is a small proprietary company. The directors of both
companies are Mr P and his sons. The only external user of the
financial statements of See is BMI Ltd (BMI), the companys bankers.
See owes a substantial amount to BMI and this is secured against the
assets of See. As part of the terms of the loan, See provides BMI with
detailed monthly cash flow information.
For your consideration Q1.9 68
a. It appears that See Pty Ltd only has to provide financial information for
inside shareholders (Mr P and his sons) and its banker (BMI Limited).
Both of these users are in a position to command the specific financial
information that they need (i.e., specific purpose financial reports). For
example, as part of the terms and conditions of the loan agreement See
Pty Ltd must provide monthly cash flow data to BMI Limited. It follows
that See Pty Ltd and the See Pty Ltd group entity are non-reporting
entities.
b. The Smith family owns 80% of the ordinary voting shares of A Ltd (A), a
public company listed on the Australian Securities Exchange. A owns
100% of the ordinary shares of B Pty Ltd, a large proprietary company
with no external borrowings and no known users of its financial
statements other than its holding company.
For your consideration Q1.9 70
d. The third arm of AASB 10.7 definition of control relates to the ability of
the entity to use its power to obtain benefits from the activities of the
other entity. The receiver appointed by Northpac is instructed under a
fiduciary arrangement to act as an agent to protect the interests of
Northpac and the other secured creditors. The receiver will only be paid
fees for services rendered and will not be obtaining any other benefits.
From next week our focus will be more technical as we look more closely
at the process of consolidation and begin preparing simple consolidated
financial statements
As part of your weekly study routine for this course you should attempt
the homework problems set for each week