Depreciation of the Subsidiary Companies - Assignment Example

Financial reports Report on financial reporting Introduction Companies havediversified their operations through the opening of subsidiaries across the globe. This is a strategy used by companies so that they can remain competitive in the market. Formation of subsidiaries facilitates the company to diversify their operation, acquire certain benefit such tax reduction, decentralize themanagement and even attract potential customers. Subsidiary companies Companies have rules and regulations that govern their operations in terms of business they carry out, the sources of capital, procedures regarding the appointment of the board of directions and the legal process in case of dissolution. In addition, a company can be declared a subsidiary of another company when they meet the following requirements. A. When they are not only a member of it, but also vested with powers of appointing board of directors B. Theycontrol issues affecting the company. Some of these issues includethe majority of voting rights. In most cases, such privileges are delegatedto a company through mutual agreement with other members. C. The company has the majority of voting right. All these factors are contained in the Companies Act. Comoros Ltd is not a subsidiary of any of the following companies. a) Brunei Ltd, b) Burma Ltd c) Bhutan Ltd This is because none of the above companies own more than 51% of ordinary shares of this company. However, the above companies own one-third of the ordinary shares and this does not qualify a company to be a parent or holding company to the Comoros Ltd. In conclusion, a company can own the subsidiary company through the holding of shares, that is, 51percent and controlling of crucial events in the company. Conversely, a company can be a subsidiary of another company, but they retain the right to sue in its own name, taxed separately, regulation and liability[Bel12]. Calculation of the depreciation of the company’s asset is vital for the sake of financial reporting. It is part of the requirement for the company to prepare its financial performance at the end of the trading period.There is a situation that is challenging when preparing financial information especially for consolidated accounts[Fis12]. International accounting standards dictate that the losses or gain made by wholly owned subsidiary are for the parent company. On the other hand, partly own subsidiary will have to account for all losses or the gain made in the company. The losses are usually made in either during the normal business occurrence or during the disposal of assets. Methods of calculating depreciation There are various ways of calculating depreciation; companies normally choose the methods of calculating it depending on the policies and the purpose of it. Depreciation is one of the most sensitive factors in the company’s books of account. The value of depreciation has always affected the balance sheet, cash flows and profit and loss account[Cha122]. Investors analyses these books of accounts before making the final decision on whether to invest or not. It is, therefore, a factor that can affect the competitiveness of the company. Some of the methods used by companies when calculating the depreciation comprised of: i. Straight line depreciation. ii. Declining balance depreciation iii. Sum of year's depreciation. In most cases, the value that is used to calculate the depreciation is the original value of the assets. This is essential for the purpose of preparing the consolidated account. According to the international accounting standards, it is required that when a subsidiary buys a used asset of the parent or holding company, they should calculate the depreciation of that asset using the original value of that asset. Advantages of depreciation Depreciation is essential in a company because it can be used to account for the company’s asset, especially large assets such as motor vehicles, and equipment. Depreciation is used to measure the value of the assets in time. Business can, therefore, account the usefulness of an asset through depreciating it in their entire life. Furthermore, depreciation helps the company to claim for a tax deduction on the asset because of wear and tear of that asset. However, they are the disadvantages of depreciation especially the straight line method of depreciation. When the asset is bought, it cannot be recorded under expenses but rather the expenses are spread over the entire life of the product as depreciation. Calculations The calculation of the depreciation of the consolidated group calls for the use of original figures because the company (Jessica Ltd) was the parent company. It is, therefore, necessary to use the original figure so that the financial information reflects the real value of those used assets[Mfa06]. Original cost = $ 200,000 Rate of depreciation= 10% Depreciationis $ 200,000 ÷ 0.1 = $ 20,000 Holding or parent companies are in control of subsidiary companies. In reality, the parent company keeps the accounting records since they own subsidiary company completely. The original figures are always used purposely for the consolidated financial report. The figures should reflect the entire worth of the company and not the worth of the subsidiary company. However, subsidiary company maintained their own financial statements purposely for internal management. When a parent company holds a minority share in a subsidiary company, they will not be required to report financial results because the law dictates that the result be announced separately. This means a subsidiary company with a minority shareholders are required to report their own financial issues separately[Fis12]. When preparing the annual financial report the parent company needs to have consolidated financial statements that do not show the existence of the subsidiary company. This is because the investors do not requireknowing whether the company has a subsidiary company in it or not. Conclusion Depreciation helps the company to predict the expenses that are incurred in an asset and its entire life. It is essential since it facilitates the financial forecasting. In addition, it helps the company to know the income generated from the asset when the asset is still new. However, there are various challenges inpreparing consolidated accounts. This is because frequent changes that are going on in the companies and also the amendments that are always made on the international accounting standards. The changes that have affected the preparation of consolidated accounts are the concept that is used in covering the balance sheet, the theories and techniques to be used and the methods of consolidation that need to be adopted. Work Cited Bel12: , (Belverd E. , 2012, p. 59), Fis12: , (Fischer, 2012, p. 97), Cha122: , (Charles, 2012, p. 77), Mfa06: , (Mfandaidza, 2006, p. 95), Fis12: , (Fischer, 2012, p. 129), Bel12: , (Belverd E. , 2012, p. 59), Fis12: , (Fischer, 2012, p. 97), Cha122: , (Charles, 2012, p. 77), Mfa06: , (Mfandaidza, 2006, p. 95), Fis12: , (Fischer, 2012, p. 129), Read More