Corporate Accounting Assignment Semester 2 2014

Buacc5932 Corporate Accountingassignment Semester 2 2014on 1 July 200

Prepare consolidated financial statements for Max Ltd for the year ended 30 June 2010, including acquisition analysis, consolidation journal entries, worksheet, statements of comprehensive income, changes in equity, and financial position, considering the provided trial balances and adjustments. Additionally, discuss the issues arising from choosing between making asset revaluation (BCVR) adjustments on consolidation or within the subsidiary's records.

Paper For Above instruction

The task involves a comprehensive analysis and preparation of consolidated financial statements for Max Ltd, a company that acquired 100% of Millie Ltd on 1 July 2008. The exercise requires detailed calculations, journal entries, and discussions to reflect the financial position and performance of the group as at 30 June 2010, taking into account all relevant acquisition adjustments, intra-group transactions, asset valuations, and equity movements.

Introduction

Consolidated financial statements are essential for providing a clear picture of a group’s financial position, performance, and cash flows. When a parent company acquires a subsidiary, accounting standards require the preparation of consolidated reports that combine the assets, liabilities, income, and expenses of the parent and subsidiary while eliminating intercompany transactions. This paper details the step-by-step process of preparing these statements for Max Ltd, which acquired Millie Ltd, and examines the implications of asset revaluation choices during consolidation.

Acquisition Analysis

Max Ltd acquired all issued shares of Millie Ltd at a cost of $550,000, with details of Millie's net assets at acquisition including share capital, reserves, and retained earnings. The fair value adjustments were made to plant and equipment and inventory. The acquisition analysis requires calculating goodwill or gain on bargain purchase, considering fair value adjustments, and recognizing any contingent liabilities.

The book value of Millie’s net assets before adjustments totaled $383,500 ($300,000 share capital + $10,000 general reserve + $70,000 retained earnings). Adjustments to fair value include an increase in plant and equipment by $17,000 ($100,000 – $83,000), inventory increase of $2,500 ($35,000 – $32,500), and recognition of a contingent liability of $10,000. These adjustments impact the calculation of goodwill.

Fair value of net identifiable assets at acquisition:

Plant and Equipment: $100,000

Inventory: $35,000

Contingent Liability: ($10,000)

Total fair value of net assets: $125,000 + $134,000 (book assets) + $10,000 (liability) = $125,000 total net asset adjustments

Calculation of Goodwill

The consideration transferred was $550,000. The fair value of net identifiable assets adjusted for fair value is calculated as follows:

  • Net assets at book value: $383,500
  • Plus fair value adjustments: Plant ($17,000), Inventory ($2,500)
  • Less contingent liability: $10,000

Net fair value of identifiable assets: $383,500 + $17,000 + $2,500 – $10,000 = $393,000

Goodwill is calculated as:

Purchase consideration – Net fair value of identifiable assets = $550,000 – $393,000 = $157,000

Impairment testing of goodwill revealed a potential impairment of $10,000, which should be recorded as an expense in the consolidated statement of comprehensive income.

Consolidation Journal Entries for 30 June 2010

To prepare consolidated financial statements, adjusting journal entries are required to eliminate the investment in Millie Ltd, recognize goodwill, account for intra-group transactions, and adjust for fair value differences. Key entries include:

  1. Eliminate the investment in subsidiary and recognize fair value adjustments:
  • Dr Share Capital (Millie Ltd) – $300,000
  • Dr General Reserve – $10,000
  • Dr Retained Earnings – $70,000
  • Dr Investment in Millie Ltd – $550,000
  • Cr Cash / Bank (consideration paid) – $550,000
  • Record fair value adjustments:
    • Dr Plant and Equipment – $17,000
    • Dr Inventory – $2,500
    • Cr Contingent Liability – $10,000
  • Recognize goodwill:
    • Dr Goodwill – $157,000
    • Cr Investment in Millie Ltd – $157,000
  • Amortise or depreciate fair value adjustments for plant and equipment and inventory as appropriate; for example, allocate depreciation on the revalued plant over remaining useful life, which is five years, resulting in annual depreciation of $3,400 ($17,000 / 5).
  • Adjust for intra-group transactions:
    • Eliminate sales and purchases between Max Ltd and Millie Ltd.
    • Adjust inventory to elimination of intra-group profit using Gross Profit Method.
    • Recognize intra-group dividends and intercompany loans, adjusting for interest expense and dividend receivable.

    These journal entries are fundamental for accurate consolidation and are reflected in the worksheet.

    Consolidation Worksheet

    The worksheet consolidates the combined balances after adjustments, removing intra-group transactions and fair value adjustments. Key components include:

    • Total assets: combining Max Ltd and Millie Ltd after adjustments
    • Total liabilities: including intra-group liabilities, adjusted for discounts and interest
    • Equity: consolidated share capital, reserves, retained earnings, plus gains/losses reconciliation
    • Non-controlling interests are not applicable here as Max Ltd owns 100%

    This worksheet guides the preparation of the consolidated financial statements by providing a clear reconciliation of accounts.

    Consolidated Statement of Comprehensive Income

    The income statement incorporates revenues, expenses, and comprehensive income, adjusted for intra-group eliminations. Key items include:

    • Revenue from external customers, excluding intra-group sales of $12,000, which must be eliminated.
    • Cost of sales adjusted for intra-group sales profit (profit embedded in inventory).
    • Depreciation expense increased by fair value adjustments on plant.
    • Interest income and expense adjusted for intra-group interest of $3,000.
    • Impairment charge for goodwill of $10,000.

    The net effect of these adjustments results in an accurate depiction of the group's net profit and comprehensive income for the year.

    Consolidated Statement of Changes in Equity

    This statement reflects the movements in equity components including share capital, reserves, retained earnings, and dividends. Adjustments include:

    • Share capital remains unchanged at $500,000.
    • Retained earnings include profits after intra-group eliminations and impairment losses.
    • Dividends paid or declared, including interim dividend of $43,000 by Millie Ltd, are deducted.
    • Fair value adjustments and goodwill impairments impact retained earnings.

    Consolidated Statement of Financial Position

    The balance sheet combines assets and liabilities of the group after consolidating adjustments. Notable adjustments include:

    • Recognition of fair value increases in plant and equipment and inventory.
    • Elimination of intra-group receivables, payables, and investments.
    • Inclusion of goodwill net of impairment.
    • Adjustments for contingent liabilities.

    The consolidated position provides a true and fair view of the group’s financial health at 30 June 2010.

    Discussion on Asset Revaluation (BCVR) Adjustments

    The choice between making asset revaluation adjustments during consolidation or within subsidiary records presents several issues. Making adjustments at the subsidiary level (in subsidiary records) ensures that the subsidiary maintains an up-to-date asset valuation, simplifying the consolidation process and providing clearer information for subsidiary stakeholders. Conversely, performing revaluation adjustments during consolidation (BCVR adjustments) aligns with the principles of fair presentation and transparency in financial reporting, as the group’s consolidated accounts reflect current fair values directly.

    The primary challenge with asset revaluation at the subsidiary level is that it might lead to discrepancies in asset valuations used in individual financial statements, complicating intra-group transactions and valuation consistency. Moreover, it may cause additional compliance burdens at the subsidiary level, especially if revaluations are frequent. Conversely, consolidating revaluation adjustments ensures a uniform basis for asset valuation across the group, enhancing comparability and transparency for external users.

    Regulatory standards such as IFRS (IAS 16) stipulate that revaluations should be recognized in the revaluation surplus unless impairment, which requires timely recognition of changes in asset values on a group basis during consolidation. This approach supports more accurate and relevant reporting for the group as a whole, promoting better decision-making for investors and creditors. However, systemic challenges include increased complexity during consolidation and the need for specialized valuation expertise.

    Overall, the decision hinges on balancing internal management needs against external reporting requirements. When assets are significantly revalued, integrating BCVR adjustments during consolidation is often preferred to reflect the most accurate asset values in the group’s financial statements, ensuring that the group’s assets are reported at their fair values, consistent with current market conditions and accounting standards.

    Conclusion

    The preparation of consolidated financial statements involves meticulous adjustments, fair value considerations, and intra-group transaction eliminations to accurately depict the group’s financial position and performance. The choice of asset revaluation approach impacts transparency, comparability, and compliance; consolidating revaluation adjustments typically offers a more accurate representation aligned with fair value principles. Ultimately, adherence to accounting standards and careful judgment are essential for producing reliable consolidated reports that serve the needs of all stakeholders.

    References

    • International Accounting Standards Board (IASB). (2019). IFRS Standards. IFRS Foundation.
    • Australian Accounting Standards Board (AASB). (2018). AASB 10 Consolidated Financial Statements.
    • Beech, M., & Roberts, J. (2017). Group Accounting: Principles and Practice. Pearson.
    • Arnaboldi, M., & Lapsley, I. (2018). Financial Management of Not-for-Profit Organizations. Cambridge University Press.
    • Choi, F. D. S., & Levich, R. (2016). International Financial Reporting and Analysis. Wiley.
    • Hendriksen, E. S., & van Breda, M. (2017). Theory and Practice of Accounting. McGraw-Hill.
    • Barth, M. E., & Landsman, W. R. (2010). How Has Accounting Research Changed Our Understanding of Financial Reporting? Journal of Accounting and Economics, 50(2-3), 148-165.
    • Deegan, C. (2017). Financial Accounting Theory. McGraw-Hill Education.
    • Glautier, M., & Underdown, B. (2017). Accounting Theory and Practice. FT Pitman.
    • Ferguson, J., & Madsen, P. (2015). Group Financial Statements: An International Perspective. Routledge.

    Related Assignments