Requirement of AASB 3 and AASB 10 - Assignment Example

Advanced Financial Accounting Name: Institution: Date: Question 1 (a) L Ltd acquired 70% of the issued capital of Y. Contributed capital $200,000×70% = $140,000 Retained earnings $138,000×70% = $96,600 Revaluation surplus 32,000×70% = $22,400 Determination of good will on acquisition: Date Description Dr. Cr. $ $ Contributed capital 140,000 Retained earnings 96,600 Revaluation surplus 22,400 Goodwill 30,000 L Ltd investment in Y Ltd 289,000 Goodwill was $30,000 on acquisition date. (Mirza, Holt & Orrell, 2006). Question 1 (b) Date Description Dr. Cr. $ $ July 1st 2007 Goodwill 30,000 July 1st 2007 Reserve 30,0000 July 1st 2007 Being a record of goodwill realized on acquisition. Date Description Dr. Cr. $ $ July 1st 2007 Contributed capital 140,000 July 1st 2007 Retained earnings 96,600 July 1st 2007 Revaluation surplus 22,400 July 1st 2007 Goodwill 30,000 July 1st 2007 L Ltd investment in Y Ltd 289,000 To record the acquisition of 70% of Y Ltd by L Ltd. Question 1 (c) (iii) Sales of $65,000 made to Y at a markup of 25%. Cost- $65,000 Selling price – 125% of $65,000 = $81,250 Eliminating the common times will be as follows: Date Description Dr. Cr. $ $ 31st Dec 2010 sales 81,250 31st Dec 2010 Cost of sales 65,000 31st Dec 2010 Inventory 16,250 To eliminate L Ltd sale of goods to Y Ltd (iii) Y Ltd inventory at 31st Dec 2010 is 29,000, of this $12,000 was purchased from L Ltd. The elimination entries will be as follows: Date Description Dr. Cr. 31st Dec 2010 Sales 12,000 31st Dec 2010 Cost of sales 12,000 To record elimination of common inventory (iv) Y Ltd sold goods amounting to $32,000 to L Ltd at a gross profit of 20% Selling price- 120% of $32,000 = $38,400 Consolidated journal entries to eliminate this transaction will be; Date Description Dr. Cr. $ $ 31st Dec 2010 Sales 38,400 31st Dec 2010 Cost of sales 32,000 31st Dec 2010 Inventory 6,400 To record elimination of goods sold by Y Ltd to L Ltd at a profit of 20% (v) Inventory of L Ltd at 31st Dec 2010 is $92,000, of this $33,600 was purchased from Y Ltd. The elimination will be as follows: Date Description Dr. Cr. $ $ 31st Dec 2010 Sales 33,600 31st Dec 2010 Cost of sales 33,600 31st Dec 2010 To record elimination of goods sold to L Ltd by Y Ltd. There is need to eliminate the opening inventory which include $41,760 purchased from Y Ltd. This will be as follows: Date Description Dr. Cr. $ $ 31st Dec 2010 Sales 41,760 31st Dec 2010 Cost of sales 41,760 31st Dec 2010 To eliminate opening inventory bought from Y Ltd (vi) Date Description Dr. Cr. $ $ 31st Dec 2010 Retained earnings 3,000 31st Dec 2010 Goodwill 3,000 To record impairment of goodwill acquired from Y Ltd Question 2 Andy Ltd sold an item of plant to Irons Ltd at $ 145,000. It is carrying value at Andy was $101,250. Profit on sale will be: $(145,000- 101,250) = $43,750. Consolidation journal entries Date Description Dr. Cr. July 1st 2008 Plant disposal a/c 168,750 July 1st 2008 Plant a/c 168,750 To transfer the plant item to disposal account July 1st 2008 Provision for depreciation 67,500 July 1st 2008 Plant disposal a/c 67,500 To transfer accumulated depreciation to disposal account July 1st 2008 Cash/bank 145,000 July 1st 2008 Disposal plant a/c 145,000 To record many received from Irons Ltd on sale of plat item July 1st 2008 Disposal a/c 43,750 July 1st 2008 Profit and loss a/c 43,750 To record profit upon the sale of plant item to Irons Ltd. (Mirza, Holt & Orrell, 2006). Question three Journal entries On acquisition Date Description Dr. Cr. Jan 1st 2009 Share capital 4,000,000 Jan 1st 2009 Retained earnings 2,000,000 Jan 1st 2009 Goodwill 1,160,000 Jan 1st 2009 Investment in B & G Ltd 7,160,000 To record acquisition of B & G Ltd by Wiley Ltd. Interest revenue elimination Date Description Dr. Cr. $ $ Interest revenue 48,000 Revenue expense 48,000 To record elimination of interest revenue by Wiley Ltd and revenue expanse by B & G Ltd. Goodwill impairment Date Detail Dr. Cr. $ $ Goodwill 1,160,000 Goodwill impairment 320,000 Reserve 840,000 To record impairment of goodwill after acquisition. Loans payable DATE Detail Dr. Cr. $ & Loans payable 1,000,000 Loans receivable 1,000,000 To record a loan of one million dollars advanced to B & G Ltd by Wiley Ltd. Dividend revenue Date Description Dr. Cr. Dividend revenue 400,000 Dividend expense 400,000 To eliminate dividend revenue by Wiley Ltd and dividend expense by B & G Ltd. Consolidation worksheet for 31 December 2010   Wiley Ltd B&G Ltd Eliminations and adjustments Group   $000 $000 Dr. ref Cr. $000  Sales revenue 4 320 1 720       6040   Interest revenue 48 -  48     -   Dividend revenue 400 -  400      -   Cost of sales:              Inventory 1.1.2010 1 600 400       2000   Purchases 2 800 1 200       4000   Inventory 31.12.2010 2 360 800          Interest expense -  48     48  -   Goodwill impairment -  -      320  320  Other operating expenses 328 112       440   Income tax expense 320 120          Retained profits 1.1.2010 2 800 2 400 2320      2880   Dividends paid 1 000 400     400  1000   Share capital 24 000 4 000 4 000      24000   Asset revaluation reserve -  -  600      600   Borrowings payable -  1 000 1 000     -   Other liabilities 2 400 680       3080   Deferred Tax Liability - 240       240   Land 18 000 5 600 400      24000   Buildings 800 400 200      1600   Accumulated depreciation 80 80       160   Current assets 3 400 2 400       5800   Loan receivable 1 000 -      1000  -   Investment in B & G Ltd 7 160 -        7 160   Goodwill on acquisition 1160 -      320  840                (Mirza, Holt & Orrell, 2006). Question 4 Introduction AASB3 and AASB4 provide the guidelines that should be taken into consideration when dealing with group accounts. Individual items that are common to the individual entities have to be eliminated in the consolidated accounts. Combined entities are able to post their periodic statements in a consolidated form by applying the principles stipulated by AASB3 and AASB4. A company that has subsidiaries that have been wholly acquired or partly acquired can be able to calculate or determine a combined income by applying the accounting principles found in IAS127. This report reviews the consolidated statements of BHP Billiton Group and analysis of the reporting and disclosures of the various items that are found in the group reports. Description of the companies In 2001, BHP Billiton Ltd (BHP Ltd), an Australian listed company, and BHP Billiton Plc (Billiton Plc), a listed company in the United Kingdom, entered into a Dual Listed Company merger. This was made possible through contractual arrangements between the companies and adjustments to their constitutional documents (Clarke, 2012). The result of the DLC merger is that BHP Billiton Ltd and its subsidiaries and BHP Billiton Plc and its subsidiaries work together as a single economic entity (the Group). The shareholders of the BHP Billiton Ltd and BHP Billiton Plc possess a common economic interest in both Groups. Key decisions are taken by both shareholders of BHP Billiton Plc and BHP Billiton Ltd using a joint electoral procedure under which the two companies’ shareholders vote jointly. BHP Billiton Plc and BHP Billiton Ltd have a common Board of Directors, joint objectives and unified management structure. The separate companies present their consolidated statement of accounts reflecting the impact of the performance of the various subsidiaries involved. BHP Billiton Group is involved in mining and exporting of minerals (bhpbilliton.com). Requirement of AASB 3 and AASB 10 and evaluation of the case AASB3 requires that entities involved in the business combination have to utterly be controlled by the same parties or party after and before combination. Usually the entities involved are absolutely controlled by one of the party. BHP Billiton Group has ensured this by making sure that key decisions are taken jointly. Nevertheless, control does not have to be held by an individual party. A number of parties may share the control. For instance, a group of entities control another entity if they possess control under a contractual agreement. Consequently, common control exists even when there is absence of a group and no individual controlling party. This is exactly the case with BHP Billiton Group since it involves BHP Billiton Plc and BHP Billiton Ltd. The determination of the income of the group has been done jointly and even the recognition of revenue realized. It is only the equity capital under the balance sheet that shows separate entries for the companies in the Group. This has been done to distinguish the individual contribution of the economic entities that make up BHP Billiton Group (BHP Billiton Plc and BHP Billiton Ltd). Another condition is that common control should not be transitory. In this regard, the transaction should not be structured in a way that suggests that there is temporary control that is common. This does not allow AASB3 being applied where in the substance control has changed. The determination of whether control is just transitory is based on the aspect of judgment. On the other hand, control is not always transitory if the combining individual entities have been under common control for sometime before being combined (Chand & Patel, 2011). The control that exist under the affairs of BHP Billiton Group are not transitory and therefore meeting this condition. The Group was formed way back in 2001 with the aim of having a common interest and realizing common objectives and goals. Key decisions are done jointly. Consequently, this cannot be termed as transitory. The procedure of AASB3 involves the identification of the acquirer as well as the determination of the acquisition date. Identifiable liabilities and assets of the acquiree are measured and recognized at the acquisition date at fair value. Goodwill or gain from a bargain purchase is recognized and measured (Berrington & Bhandari, 2011). The consideration transferred to the acquiree is measured and recognized including the amount of any non-controlling interest. The acquisition method or the predecessor accounting is normally applied. In this case there was no acquisition on the part of BHP Billiton Group. This was a merger that involved separate entities of group of companies coming together for a common goal or purpose. AASB 10 establishes procedures of presentation of consolidated financial accounts. BHP Billiton Group has done well in observing the stipulated condition under this accounting standard. AASB10 replaces the conditions that had to be met under IAS127. Copies of consolidated financial statements (BHP Billiton Group) Statement of changes in equity Strengths and weakness of disclosures The merger has presented separate equity capital for BHP Billiton Plc and BHP Billiton Ltd. This has been done to avoid confusion of the separate group of companies although their various activities present common income. This has been done since BHP Billiton Plc and BHP Billiton Ltd merged as opposed to being acquired by the other. However, the various subsidiaries of the group entities have had the financial statement prepared according to stipulated principles of consolidated accounts in IAS127 as well as AASB3 and AASB4. It is only the equity capital and subsequent changes in equity that have been presented separately for the two economic entities. The other operations like income statement and preparation of cash flows has been done adhering to the standards set out for group accounts under IAS127 which is what is represented in AASB 10. This has been indicated in the statement showing financial position so as to indicate the contribution of each of the group individual entities. Within these entities there are subsidiaries which conform to the reporting standards of IAS127 as stipulated in AASB3 and AASB4. Consolidated income statement has been prepared jointly for the BHP Billiton Plc and BHP Billiton Ltd (Mirza, Holt & Orrell, 2006). This represents BHP Billiton Group and therefore it enables easier analysis of the group without having to go through tedious postings of individual parties to the group. Recommendation on minimizing reporting and disclosure gaps It would be prudent for the individual entities of the BHP Billiton Group to show separate working of statements with respective subsidiaries in order to enlighten a layman on the procedures that have been followed in order to reach at the performance of the single entities as either BHP Billiton Plc or BHP Billiton Ltd. The report is rather amorphous and not pointing out the individual weaknesses of the parties to the group through analysis of the subsidiaries that support them. The real elimination of common items took place when preparing financial statement of entities to the group. It is important that all other items have been presented as one in the financial position statement as well as the income statement of BHP Billiton Group. Reporting and disclosure gaps will be further dealt with if individual statements of parties to the group are prepared in line with IAS127. Conclusion BHP Billiton Group is a merger that involves an Australian company BHP Billiton Ltd and a company from the United Kingdom, BHP Billiton Plc. This essay demonstrates how BHP Billiton Group has presented its financial statement and the various applications of AASB3 and AASB4. IAS 127 shows how group accounts have to be dealt with when it comes to preparation of financial statement. BHP Billiton Group is a unique case that involves a merger and not an acquisition. However, the subsidiaries of the individual entities are prepared according to the principles of AASB3 and AASB4. These principles enable accounts to prepare financial statements for groups following a standardized procedure. In order to understand the procedures to an acquisition and presentation of financial statement, it is important that separate income statements for subsidiaries to the group have to be prepared. References Chand, P. & Patel, C. (2011). Achieving Global Convergence of Financial Reporting Standards, Melbourne: Emerald Group Publishing. Clarke, E.A. (2012). Accounting: An Introduction to Principles and Practice, New York: Cengage Learning. Berrington, M. & Bhandari, V. (2011). Pinnacle Financial Statements, Volume 2, IFRS SYSTEM. Mirza, A.A., Holt, G. & Orrell, M. (2006). International Financial Reporting Standards (IFRS) Workbook and Guide: Practical insights, Case studies, Multiple-choice questions, Illustrations, Sydney: John Wiley & Sons. Read More