Corporate Accounting Issues - Case Study Example

Corporate Accounting Name: Institution: Date: Abstract This report discusses the case of preparation of consolidated financial statements and the decisions that finance officers have to make when faced with a consolidation dilemma. The introduction elaborates the main theme of the report and the different parts that will be addressed hence setting the tone for the arguments. The case under discussion involves Financial Advisers Ltd who are involved with other businesses that have to be determined whether they qualify for consolidated financial statement preparation or not. The first part explains the accounting standards and pronouncements that provide guidance to the chief finance officer in the preparation of consolidated financial statements. The second part outlines how the relationships within a group are determined in the case of subsidiaries. The last part analyses the provided case and gives personal opinion but using accounting standards on whether to prepare consolidated financial statements for the two scenarios provided. Introduction This report dwells on the case of Financial Advisers Ltd who offers financial services to various clients. There are two situations that the Chief Finance Officer has to determine whether consolidation of financial statement is needed or not. The parent/subsidiary relationship determination is important in making the decision for preparation of the consolidated accounts. Control criterion provides guidance on determining whether the parent can prepare consolidated financial statements for an economic entity (Julie, 2011). The pronouncements as well as accounting standards involved have been discussed while also explaining the relationship within a group. The important decision of whether to prepare consolidated financial statement for the two scenarios provides guidance to the chief financial officer in the final part. The report concludes on the important of consolidated accounts and how is important to determine the kind of relationship that exist between a parent and its subsidiary before consolidating accounts. Guidance and pronouncements to the CFO There a lot of guidance that the Chief Financial Officer can rely on from accounting standards and pronouncements when dealing with an issue of consolidated accounts or groups accounts. AASB 10 provides extensively for the treatment of subsidiaries in case of group accounting where consolidates financial statements have to be prepared (Dagwell, Wines & Lambert, 2011 Consolidation is founded on the concept of ‘control’ as well as changes in the ownership interests whereas control is maintained are accounted for as transactions between owners as owners in equity. The aim of the consolidation account principle within the Australian Accounting Standards is to put in place procedures and principles for preparation and presentation of the consolidated financial statements (Brown, 2013). Consolidated financial statements are normally presented by the parent company also referred to as a holding enterprise for the purpose of offering financial information concerning the economic activities of its group. The statements target to present financial information concerning a parent as well as its subsidiary (ies) as being a single economic entity showing economic resources controlled by the group, the group’s obligations and results that the groups realizes with its resources. Basic definitions are important in the understanding the parent and subsidiary relationship and how the control aspect is determined. A subsidiary is an entity that may include an unincorporated entity like a partnership which is controlled by another entity that is referred to as the parent. Control refers to the power of governing the operating and financial policies of an entity in order to get returns from its activities. Control is normally presumed when the parent company acquires more than fifty percent (half) of the voting rights of the entity. A subsidiary cannot be excluded from consolidation for the reason that its business activities are not similar from those of other entities in a group (Brown, 2013). Relevant information is offered through consolidating such subsidiaries as well as disclosing additional information within the consolidated financial statements concerning the various business activities of the subsidiaries. During the preparation of the financial statements, an entity will combine the financial statements of the parent together with its subsidiaries line by line though addition of like items of liabilities, assets, income, equity and expenses. Whereas only one investor has the power to control an investee, more than one party can share in the returns of an investee. Consolidated financial statements often comprise of consolidated balance sheet, consolidated statement of profit and loss, as well as notes, other various statements together with explanatory material that form the important part thereof. A consolidated cash flow statement is prepared whereby a parent presents its own cash flow statement (Julie, 2011). Consolidated financial statements are presented in a bigger way as the same format as that used by the parent for in its separate financial statement. An investor has the capacity to control an investee when it is exposed, or has rights, to variable returns from its engagement with the investee and has ability to affect those returns via its power over the investee. Consequently, an investor has the power to control an investee if and only if the investor has the following: i) Power over the investee (para. 10-14) ii) Exposure, or rights, to variable returns from its engagement with the investee (para. 15 & 16); and iii) The capacity to utilize its power over the investee to affect the amount of the investor’s returns (para. 17 & 18). An investor has to consider all the facts as well as circumstances when assessing whether it controls an investee. The investor has to reexamine whether it controls an investee if circumstances and facts indicate that there are changes to one or more of the three components of control listed in paragraph 7. There are enough pronouncements and guidance that the Chief Finance Officer can refer to when deciding whether to prepared consolidated financial statements or not. There should be keenness in interpreting the various provisions provided in the accounting standards about consolidation of accounts or where of groups of companies are concerned. Determining relationship with a group It is important to determine the relationship with a group prior to attempting to prepare consolidated accounts where subsidiaries are involved. The adoption of the control criterion in the definition of an economic entity has crucial implications with regard to the parent/subsidiary relationships pointed out in accordance with the AASB 10 Standard and the legal form of involved entities. By adopting the criterion of control enables a complete economic entity to be reflected in consolidated accounts even though, for instance, some of the involved subsidiaries will be in form of trusts or partnerships (Maree & Keryn, 2007). In circumstances where an economic entity is a reporting entity, consolidated accounts preparation for the entity is not necessary according to AASB 10. A parent has to present non-controlling interests in the consolidated statement of financial position in the equity, separately from that of the equity of the owners of the parent. Relationships within a groups a largely determined by the shares controlled by every economy entity or subsidiary. The entity with the largest share has more clout in decision making on returns and financial spending. Advise to the CFO on consolidated statements requirements and justification The managing director of Computing Services Pty Ltd owns 30% of the shares while the remaining is owned by 70% are owned by Shipton Holdings Ltd (Shipton). Advisers Ltd only owns 50% of the Shipton shares where the other 50% is owned by employees of the associated companies. In this case Advisers only owns 35% of Computing Services. As it has been explained previously an investor can control an investee if and only the investor has power over the investee, has rights to variable returns from involvements with the investee and has the capacity to use its power over the investee in affecting the amount of the investor’s return. In this case Advisers Ltd has no power over computing Services Ltd. However, they own 50% of Shipton Ltd but less has been said about involving in decision making. The composition of the board at Shipton Ltd will give more guidance on Advisers Ltd stake in the Subsidiary (Atrill, McLaney & Harvey, 2014). In this case consolidated financial statements are not required by the management of Advisers Ltd since the company has no full control on the subsidiary and cannot determine the fate of the returns from the group. This case does not qualify for preparation of consolidated financial statement as a subsidiary of Advisers Ltd. In the second case, Advisers Ltd owns only 35% of Bellinger Travel Pty Ltd whereas the remaining 65% is in the possession of the managing director of Bellinger. In this case, Advisers Ltd is the minority shareholder while the managing director controls 65% of the interest. Despite the fact that the majority of business of Bellinger is with Advisers Ltd, this does not give Advisers Ltd control over the returns of the company (Atrill, McLaney & Harvey, 2014). Advisers Ltd has two of its people at the helm of Bellinger’s board as directors. Nevertheless, operational decisions are determined by the managing director who is the majority shareholder. It has been previously noted that Control refers to the power of governing the operating and financial policies of an entity in order to get returns from its activities. Control is normally presumed when the parent company acquires more than fifty percent (half) of the voting rights of the entity. Advisers has not acquired more than fifty percent of the voting rights in Bellinger and is not involved in making important decisions that affect returns at the company (Dagwell, Wines & Lambert, 2011). Consequently I would advise the Chief Financial Officer at Advisers Ltd not to consider preparing consolidated financial statements for Bellinger as subsidiary to Advisers Ltd in any financial year unless the circumstances change. The chief financial officer must have a clear guideline whether to prepare consolidated financial statements and Australian Accounting Standards provide adequate information on what to do in any given situation involving a thought subsidiary and parent company. Conclusion Preparation of consolidation financial statements provides an opportunity for groups of companies to prepare a single a financial statement indicating their performance as a whole. The decision to prepare consolidated statements largely lies on the control criterion that is provided in AASB 10. A parent must have control over voting rights and returns of a subsidiary before thinking about preparation of consolidated accounts. The case of Financial Advisers Ltd provides a typical example of the dilemma that financial officers face in determining preparation of consolidated accounts. The parent and subsidiary relationship has to be determined in the first place. References Atrill, P., McLaney, E., & Harvey, D. (2014). Accounting: An Introduction, 6/E, London: Pearson Higher Education AU. Brown, P. (2013). Financial Accounting and Equity Markets: Selected Essays of Philip Brown, Melbourne: Routledge Dagwell, R., Wines, G., & Lambert, C. (2011). Corporate Accounting in Australia, Sydney: Pearson Higher Education AU. Julie, E.M. (2011). Solvency in Financial Accounting, New York: Routledge. Maree, J.G., & Keryn, C. (2007). Globalization of Accounting Standards, Sydney: Edward Elgar Publishing. Read More