Advanced Financial Accounting Problems in Australia - Assignment Example

Running Head: FINANCIAL REPORTING AND DISCLOSURE Name Course Lecturer Date QUESTION 1 Proportional/partial goodwill method Assets of C Ltd Net identifiable assets 215760 Percentage acquired (75% x 215760) 161820 Investment in C Ltd 171820 Goodwill on acquisition 10000 Journal entries Dr Cr Goodwill 10000 Net identifiable assets 215760 Investment in C Ltd 171820 Non controlling interest 53940 To eliminate investment in C Ltd and recognise goodwill Fair value/full goodwill method Worth of company C Ltd (171820/75%) 229093 Net identifiable assets 215760 Goodwill on acquisition 13333 Journal entries Dr Cr Goodwill 13333 Net identifiable assets 215760 Investment in C Ltd 171820 Non controlling interest 57273 To eliminate investment in C Ltd and recognise goodwill Consolidation journal entries Dr Cr c Consolidation account 21500 Administrative expenses 21500 To eliminate the management services from B Ltd to C Ltd d Sales : B Ltd 16900 Inventory B Ltd 16900 To eliminate the profit on sale of goods to B Ltd E Revaluation account 4000 Goodwill account 4000 To record impairment of goodwill G Retained earnings C Ltd 2520 Inventory B Ltd 2520 To record profit tied up in the opening inventory of B Ltd bought from C Ltd h Sales C Ltd 3080 Inventory B Ltd 3080 To record profit in the closing inventory of B Ltd bought from C Ltd i Dividend payable 20000 Dividend proposed 20000 To eliminate dividends proposed by C Ltd i Dividend income B Ltd 15000 Non controlling interest 5000 Dividend receivable B Ltd 20000 To eliminate dividends proposed by C Ltd The Consolidated Worksheet Statement of Comprehensive Income   B Ltd C Ltd Income: $ $ Opening inventory $ 27,180.00 43 200 Purchases 717 938 504 285 Closing inventory $ 39,320.00 27 800 Cost of sales $ 705,798.00 $ 519,685.00 Sales revenue $ 946,500.00 $ 717,620.00 Gross profit $ 240,702.00 $ 197,935.00 Other Income: $ 44,000.00 - Dividend income $ 2,500.00 - EBIT $ 287,202.00 $ 197,935.00 Expenses: $ 208,362.00 $ 148,515.00 Admin and other expenses $ 123,546.00 $ 95,045.00 Depreciation $ 19,360.00 $ 15,640.00 Other expenses $ 65,456.00 $ 37,830.00 Profit before tax $ 78,840.00 $ 49,420.00 Tax exp. $ 31,536.00 $ 19,768.00 Profit/surplus after tax $ 47,304.00 $ 29,652.00 Dividends proposed & paid $ 40,000.00 $ 10,000.00 Retained earnings for the year $ 7,304.00 $ 19,652.00 Statement of Financial Position     Equity and liabilities     Contributed capital $ 270,000 $ 150,000 Revaluation surplus - $ 50,000 Retained earnings $ 7,304 $ 19,652 Long-term loan - $ 93,030 Accounts payable $ 25,670 $ 29,546 Taxation payable $ 31,536 $ 19,768 Dividends payable $ 28,000     $ 362,510 $ 361,996 Assets     Non-current assets $ 154,677 $ 392,601 Investment in C Limited $ 171,820 - goodwill $ 6,000   Inventory $ 39,320 $ 27,800 Accounts receivable $ 33,450 $ 45,609 Cash $ 4,447 $ 3,766   $ 409,714 $ 469,776 QUESTION 2 Australian Accounting Standard Board Three (AASB 3) is a standard dealing with business combinations. It is in accordance to the international financial reporting standard 3 (IFRS 3) (Barth et al., 2010). The purpose of this standard is to comparability, reliability and relevance of information tat any reporting entity provides to the users of the information in its financial statements concerning business combinations and the effects thereof. The AASB 3 standard applies to reporting periods after 1 July 2009 (Shahwan, 2011). AASB 10 deals with consolidation of financial statements. The standard provides expanded guidance in determination of whether there is control of an entity and therefore consolidation of financial statements. This standard came to effect on 1st January 2013. It requires that the reporting entities make clear guidance on the process it used to determine control of another entity and consolidation of the financial statement thereof. The two companies in consideration are Brambles Limited and AMP limited. The financial statements are in appendix 1. Brambles Limited is a resident company in Australia with several foreign subsidiaries it operates in more than 50 countries. The company provides professional and commercial services. It is a supply chain logistic company primarily dealing with IFCO and CHEP brands (Jubb, 2005). The company is listed in the Australian stock exchange with a registered office in Sydney, Australia. This office serves as its headquarters. The specialty of the company is in pooling solutions and the associated services. As such, it focuses on outsourcing management of returnable crates, pallets and containers. It has three main poling solutions namely containers, pallets and reusable plastic crates (RPCs). Brambles Limited also owns Recall, an information management solutions business. AMP limited is a resident company in Australia as well. It owns several subsidiaries in Australia and New Zealand. The main activities of the company are providing life insurance services. The company also provides investment services, superannuation services and investment business. Brambles Limited has applied the ASSB 3 to great effect. With operations in more than 50 countries worldwide, the company owns several subsidiaries to help it in operations and ease of management (Stevenson, 2012). It owns the subsidiaries fully. In reporting the financial statements, the company combines the financial statements of all the subsidiaries and reports them together as Brambles Limited. In determining if, transactions as well as other events are business combinations, Brambles Limited applies the definitions and requirements of AASB 3 standard. In effect, the company combines the assets and liabilities of the subsidiaries to constitute a business. The company has assets and liabilities that constitute a business because; the assets and liabilities are specifically for selling and therefore constitute a business (Bugeja & Gallery, 2006). As such, Brambles Limited accounts for the business transactions and the other events as acquisition of assets. The company provides definition of business as production and selling of the products and therefore combines the financial statements as the reporting entity. The financial reporting and disclosure of this company are therefore consistent with the require3ments of AASB 3. AMP limited measures and recognizes in its financial statements all the identifiable assets that it acquires the liabilities that it assumes and the non controlling interest in the business acquired. The reporting entity also measures and recognizes the goodwill on acquisition and therefore reports it in the financial statement. However, the AMP limited is selective on the information it includes in the financial statement for the 2013 financial period. Unlike Brambles Limited, AMP limited does not include the liabilities assumed and the non controlling interest in the financial statements. The disclosure of all the assets acquired, liabilities assumed and the non controlling interest are very important in enabling the users of the financial statements to assess and examine the financial effect and the nature of the business combination. As such, the financial reporting and disclosure of the company are not consistent with the requirements of AASB 3. The users of the financial statements may therefore be unable to understand the business combination because of the relative gap in disclosure and financial reporting (Brown, 2006). Brambles Limited has well established principles for preparation and presentation of consolidated financial statements. This is because of the several entities it controls and the accounting system the entities use (Bloom, 2009). The AASB 10 requires that an entity controlling one or more other entities shall present consolidated financial statements. Brambles Limited has therefore consistent with this requirement because it reports consolidated financial statements (AASB, 2013). The company has also established the accounting requirements in the preparation of the consolidated financial statements. Determination of control is essential for an entity because it determines if the controlling entity will present consolidated financial statements. Many of the entities that Brambles Limited owns control them fully and therefore do not consolidate their financial statements. This is as per the requirements of the AASB 10 that provide that an entity need not provide consolidated financial statements for wholly owned entities (Kober & Lee, 2010). The company is consistent with the requirements of AASB 10 on consolidation of financial statements. AMP limited also presents consolidated financial statement. The consolidated financial statements consist of all its controlling entities. In all its controlling entities, AMP limited have, more than 50 percent voting rights as sit discloses in the financial statements. This is the basis of determining control over the entities and consolidation of the financial statements thereof (Alfredson et al., 2012).. The company therefore exercises judgment in the Management and operations of the entities. This indicates control and consolidation of the financial statements. The company is consistent with the requirements of AASB 10. The strengths of Brambles Limited reporting and disclosure are that it owns most of its controlling entities. The company has management expertise and therefore helps in reporting and disclosure (Kvaal & Nobes, 2010). The weakness of the reporting and disclosure is that the foreign owned entities operate as independent entities without the influence of the parent company. This provides difference in the accounting policies used in preparation of the financial statements. For AMP limited, it is not consistent in consolidation of its financial statements. This provides difference in accounting procedures of business combinations. There exists a gap and major differences in the reporting and disclosure of the two companies. While Brambles Limited is consistent with the AASB 3 and 10, AMP limited is not consistent with AASB 3. This difference is evident in the financial statements of the two companies. To minimise the reporting and disclosure gaps between them, the companies need to use the same accounting procedures in business combinations and consolidation of their financial statements Wines et al., 2007). Another recommendation is that the companies together with their controlled entities should use the same accounting principles in preparation of the financial statements (AASB, 2013). This will reduce the gap between the two companies. References AASB, C. A. S. (2013). Fair Value Measurement. Alfredson, K., Leo, K., Picker, R., Pacter, P., Radford, J., & Wise, V. (2012).Applying international accounting standards. John Wiley & Sons. Barth, M. E., Landsman, W. R., Lang, M., & Williams, C. (2010). Are International Accounting Standards-based and US GAAP-based accounting amounts comparable. Available at SSRN 1585404. Bloom, M. (2009). Accounting for goodwill. Abacus, 45(3), 379-389. Brown, A. M. (2006). The financial milieu of the IASB and AASB. Australian Accounting Review, 16(38), 85-95. Bugeja, M., & Gallery, N. (2006). Is older goodwill value relevant?. Accounting & Finance, 46(4), 519-535. Jubb, C. (2005, March). Transition to IFRS: Listed companies’ expected accounting policy impacts as revealed by AASB 1047 disclosures. In AFANE Annual Conference, Melbourne. Kober, R., Lee, J., & Ng, J. (2010). Mind your accruals: perceived usefulness of financial information in the Australian public sector under different accounting systems. Financial Accountability & Management, 26(3), 267-298. Kvaal, E., & Nobes, C. (2010). International differences in IFRS policy choice: a research note. Shahwan, Y. (2011). The Australian market perception of goodwill and identifiable intangibles. Journal of Applied Business Research (JABR), 20(4). Stevenson, K. M. (2012). The changing IASB and AASB relationship. Australian Accounting Review, 22(3), 239-243. Wines, G., Dagwell, R., & Windsor, C. (2007). Implications of the IFRS goodwill accounting treatment. Managerial Auditing Journal, 22(9), 862-880. Appendix Read More