Acct7104 Seminar 1 s1 2016 Pdf6

ACCT7104
Semester 2 2016
Presented on: 26 & 28 July 2016
Administrative Matters
Welcome!
ACCT7104
CORPORATE ACCOUNTING
To enrol in ACCT7104 you should have passed at least an
introductory accounting course (ACCT7101 or equivalent).

Completion of first level financial accounting course
SEMINAR 1: CONTROL & BASICS OF CONSOLIDATION
ACCT7101 is a pre-requisite.
Knowledge of ACCT7102 material would be advantageous,
but not compulsory.
Course Co-ordinator & Lecturer: Mr Paul Woollard

Phone: 3346 5187 Email: p.woollard@uq.edu.au
Campus: St Lucia
Building: Joyce Ackroyd Building (Bld 37) Room: 418
ACCT7104 (or ACCT3103) is required for entry to either
CPA Australia or the CAANZ

Note that ACCT7104 is offered in both main semesters, but
not in Summer Semester

ACCT7104 Seminar 1 Semester 2 2016
Key Textbooks
Additional Recommended References

Recommended Reading
Australian Corporations and Securities Legislation
Prescribed textbook package:

Arthur, N., Luff, L. and Keet, P., "Accounting for
Corporate Combinations and Associations" (2012),
Pearson Education Australia, 7th edition.
&
Dagwell, R., Wines, G. and Lambert, C. 2012.
Corporate Accounting in Australia, Pearson Australia
Chapter 20 only re External Administration
Reference Material
Dagwell, R., Wines, G and Lambert, C. 2012. Corporate Accounting
in Australia, Pearson Australia
Deegan, C. 2012. Australian Financial Accounting. 7th Edition,
McGraw Hill Australia Pty. Ltd.
Jubb, P., S. Haswell and I. Langfield-Smith (2010), "Company
Accounting", 5th edition, Thomson Learning Australia
Leo, K., Knapp, J., McGowan, S. and Sweeting, J. 2015. Company
Accounting. 10th Edition, John Wiley & Sons Australia, Ltd
AASB website (www.aasb.gov.au/)
IFRS website (www.ifrs.org/)
CPA & CAANZ websites
Not prescribed, but very necessary:

Access to the current Australian Accounting Standards
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BlackBoard & Other Resources
Summary of Assessment
BlackBoard
Announcements
Seminar slides, practise questions & answers
Specific additional content
General information
Moderated Discussion Board
Project Group page (including Group Blog)
Yourselves!!
ECP Course Profile
Workshops
Consultations
Wednesdays, 2.00 pm 4.00 pm
My office in Joyce Ackroyd Building (Bld 37-418)
Other times by arrangement (confirmed e-mail)
Any mutually convenient time you find me in my office
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Seminar 1
Control & Basic Introduction to Groups
Assessment Task
Due Date
Weighting
Learning
Objectives
Exam - Mid Semester

During Class
Mid-Semester
Examination
Wednesday,
7 September 2016
Seminars 1 - 5 plus
workshop/revision
activities
30%
1, 2,
4, 6
Interim due date:

16 September 2016
12:00
25%
(being
10%
Individual
+ 15%
Group)
1, 2, 3,
4, 5, 6
Examination Period
45%
1, 2,
3, 6
Financial Statement
Project
(Individual/Group)
Exam - during Exam

Period (Central)
Final Exam
6
21 October 2016 12:00
ACCT7104
Semester 2 2016
Seminar Slides, Questions & Answers
Seminars
Seminar slides on ACCT7104 Blackboard site by previous Friday of
Three (3) hours each week
every week
Three (3) elements each week:

Each week, a list of questions/problems is set from the text and other
sources
1.
For most weeks before each seminar, MCQs based on the current
weeks material will be posted on BlackBoard for students to
attempt anonymously, the results of which will be immediately
available to you from BlackBoard. The cumulative results will
indicate the weaker areas of understanding, thus allowing
concentration on these areas when discussing the key points;
2.
The new material will be presented in each Seminar (approximately

2 hours, with examples where relevant); and
3.
Additional material will be provided for all students to attempt for

themselves (individually & collectively) during the Final hour to
enable each student to assess their progress in understanding
(feedback).
Sometimes some of these are covered in Seminars, but the
remainder are for you to prepare in your own time

Not all set work questions will be covered in Seminars - if you have
any queries on uncovered materials, you should raise these in

consultation or on the Discussion Board
Solutions to weekly problems/questions posted on the Sunday
afternoon after the week in which the Seminars were held

Feedback from additional weekly revision questions will be provided
immediately if MCQs and soon after Workshops

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What is this course about?
Course Aims [ECP extract]
So far, you have dealt with financial reporting issues for a
independently trading single business entities, such as a

company or a sole trader (perhaps more if taken ACCT7102)
Appreciate how different levels of control between entities
effect the accounting treatment of such entities, being able to

delineate each situation and display practical ability to do so.
ACCT7104 deals with accounting issues that arise in business
combinations and other business relationships, and how to

account for them plus extras such as foreign currency,
operating segments & liquidation of a company
Develop the ability to link a variety of concepts in corporate
accounting, displaying a wider appreciation of the complexity &

inter-relatedness of the concepts.
Such business combinations involve control between
multiple entities such as parent + subsidiaries, whilst

other relationships include associates & joint
arrangements
Achieve sufficient awareness of current developments in
accounting standards through research and critical evaluation

to interpret and communicate their effect on entities.
Most listed Australian entities are parent entities operating in a
Relate core material to real world scenarios, developing an
group structure - Business Combinations are everywhere!
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awareness of how currently reporting entities adopt these

concepts and whether there are any ethical issues.
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Learning Objectives [ECP extract]
Course Changes in 2016 (1)
1 Understand how the umbrella themes of control and influence pervade all
aspects of accounting for corporate structures through clear application and
interpretation of both key issues to all specific topics.
2 Gain an overview of current international trends of reform in the reporting of key
accounting areas, recognising their impact on Australian reporting entities, and
linking these to the relevant Australian Accounting Standards relating to
intercorporate investments.
3 Explain the process of consolidation and undertake the accounting procedures
required to consolidate a parent entity and its controlled entities (including partlyowned controlled entities) in compliance with applicable accounting regulations.
4 Display a practical ability to account for: interests in associated companies using
the equity method of accounting; investments in entities where the investor is a
party to a contractual arrangement conferring joint control; the translation and
consolidation of financial statements of foreign operations; segment reporting,
determining reportable segments and the disclosure thereof; and the liquidation and
divestment of a controlled entity.
5 Analyse and critically evaluate real world presentations of accounting topics,
showing the ability to present findings to peers and professional accountants.
6 Consider both ethical and cultural issues facing accountants in organisations,
being able to explain and present such problems to peers and professional
accountants.
Financial Statement Project

Recently increased from 20% => 25%
Recognition of work required to complete
New hurdle rate:
All elements must be properly attempted if any marks are to be
awarded for any part
Seminar 1
Hurdle Rate Examples

Individual 9/10, Group not attempted
= 0 marks overall
Individual 9/10, Group Report 4/5, Blogs & Video 6/7, but no Peer
Review submitted
= 0 marks overall
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ACCT7104
Semester 2 2016
Seminar Objectives
Course Changes in 2016 (2)
Seminar 1: Control & Basics of Consolidation
Final Examination
Decreased from 50% => 45%
New hurdle rate:
Must obtain at least 40% of available marks in examination if
course is to be passed overall
1. Control
1.1 Range of business transactions/combinations
1.2 Explain the meaning and indicators of the power to control
1.3 Contrast control with significant influence
1.4 Understand various levels of business
transactions/combinations and their implications

Hurdle Rate Examples
MS 6/30, FSP 6/25, FE 40/45
FE > 40%, Total >50% (that is, 52/100) => PASS COURSE
2. Basics of Consolidation
2.1 What is a simple Group?
2.2 What financial accounts are required?
2.3 Fair Value Adjustments & Subsequent Depreciation
MS 30/30, FSP 25/25, FE 17/45
2.4 Deferred Tax
Total >50% (that is, 72/100), BUT FE < 40%, => FAIL COURSE
2.5 Recognition of Revenue/Profit

2.6 Dividends
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Seminar 1 Reading and Study Questions
Seminar 1 Reading and Study Questions

Accounting Standards:
AASB 3 Business Combinations
AASB 10 Consolidated Financial Statements
AASB 11 Joint Arrangements
AASB 12 Disclosure of Interests in Other Entities
AASB 13 Fair Value Measurement
AASB 112 Income Taxes
AASB 116 Property, Plant & Equipment
AASB 127 Consolidated & Separate Financial Statements
AASB 128 Investment in Associates
AASB 136 Impairment of Assets
AASB 139 Financial Instruments: Recognition & Measurement
Reading: Arthur et al, Chapters 1, 2, 8 & 9 (overview)

(Read only those parts of the chapters that are relevant to the Seminar slides)
Set work: Arthur et al:

Q8.1, Q1.8, Q1.11, Q1.15 (see text)
plus: On-line BlackBoard MCQs
plus: Additional Questions Q1 & Q2
(available on BlackBoard in Learning Activities)
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Process to adopt new Standard
Brief Background to International Accounting

Two accounting standards boards
Australia follows IASB (International Accounting Standards Board)

1. IASB selects topic to standardise, proposes what is
required, and seeks views from IASB members
2. Australia makes submissions to overall IASB
FASB (USA based) & IASB

Overall Aims
Standardise accounting reporting worldwide
a)
Harmonisation & convergence
b)
IASB issues an IFRS (International Financial Reporting Standard)
3.
Adopt the Fair Value principle into all aspects of accounting
Considered with submissions from other members

Periods of consultation and amendments
intended to be adopted unchanged by all member countries
Australia receives this,

facilitated by AASB (Australian Accounting Standards Board)
4.
Each have different views on accounting

Differing standards leads to confusion, therefore a
a)
determined effort to standardise accounting across the

globe is underway
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Seminar 1
b)
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May issue an AIFRS initially, adding specific differences

Then final standard is issued as an AAS (Australian Accounting Standard)
ACCT7104
Semester 2 2016
Recent major changes in Australia
Recent major changes in Australia
Consolidation suite of AASs (AASBs 10, 11, 12 & 13)

Issued August 2011
Effective for all accounting periods beginning on or
after 1 January 2013
Arthur textbook
Issued before new AASBs introduced
Refers to old AASB127 (now redundant)
Need to be sure that you understand new AASBs
You will not be assessed on anything related to AASB127
Practical elements of accounting in this area have not
changed greatly, except for terminology
Arthur kept as preference as still best book for practical
questions
AASB 10 Consolidated Financial Statements

AASB 11 Joint Arrangements
AASB 12 Disclosure of Interests in Other Entities
AASB 13 Fair Value Measurement
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Contrast AASB 10 to AASB127
Seminar 1 Objective 1
See Q1.15 Set Questions

The AASB 127 (2008) definition of control has 2 criteria being:
1. The capacity to dominate strategic financial and operating policy decisions (power limb) .
2. So as to achieve benefits (reward limb).
1. Control
1.1 Range of business transactions/combinations
The IFRS 10 definition of control has 3 parts, being:

Power over the investee
Exposure, or rights to variable returns
Power to affect controlled entity returns
1.2 Explain the meaning and indicators of the power to control

1.3 Contrast control with significant influence
1.4 Understand various levels of business
transactions/combinations and their implications
In relation to the first part, power is defined to exist when the investor has the current ability to:
direct the relevant activities, that is, the activities that significantly affect the investees returns
(IAFR 10 para. 10).
The principle difference between these two standards definition of control is the AASB 127 control
concept and IFRS 10 power concept. IFRS 10 requires power over the significant activities of another
entity and activities which significantly affect investors returns. As stated in Section 1.5.4 this could
be a problem as power could relate to a group of assets (a silo) as opposed to the investee as a
whole. AASB 127 applies control on the basis of strategic policy decision making over another entity
to achieve benefits without any link to the effects on a parent entitys return. AASB 127 control
concept is different to IFRS 10 power concept as it has introduced the aspect of a parent entitys
exposure and variable return on its investments into the definition of control.
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Investments in other entities
Business Transactions
This course is concerned with the treatment of
In order of increasing complexity, the purchase of:

A. A single asset
B. A group of assets (not a business)
C. A group of assets (constituting a business)
D. Shares directly from a shareholder (private company) or
on a stock exchange (public company)
1. Gaining an investment
2. Gaining significant influence
3. Gaining joint control
4. Gaining control (and losing it!)
investments in other entities in the external reports of

the investor entity (separate/consolidated accounts)
Such investments can take a vast range of formats
Deals with anything where more than one entity
involved
This part of the Seminar is intended to provide a brief
overview of the various types of business transactions,

combinations & investments
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Seminar 1
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ACCT7104
Semester 2 2016
Single asset acquisitions
Acquiring a collection of assets:

direct acquisition from vendor
Previous courses covered these basic transactions

Tangible assets initially recorded at cost as per AASB 116:
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Property, Plant & Equipment (in many cases), may later be

subject to revaluation
Cost means the amount of cash or cash equivalents paid
or the fair value of other consideration given to acquire an
asset
If necessary, asset is then depreciated and is subject to
impairment testing as per AASB 136 Impairment of Assets
Similar situation for intangible assets acquisition subject to
rules of AASB138 Intangible Assets (patents, copyrights,
etc.)
This course will cover the effect of asset sales between
entities in business combinations
Acquisition of some or all of the assets from
a 3rd party vendor

The acquisition method (AASB 3) must be
applied
Different methodologies apply dependent
on whether a business is constituted
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Acquiring a collection of assets
Acquiring a collection of assets
Need to determine if the collection of assets
If the collection of assets acquired does not
constitutes a business as defined in AASB 3

Business Combinations
constitute a business, then the total amount paid

for the assets is allocated to the individual assets
based on their relative fair values at the date of
acquisition (AASB3.3) (NB no goodwill)
AASB 3 (Appendix A) defines a business as:

An integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return in
the form of dividends, lower costs or other economic benefits
directly to investors or other owners, members or participants.
If the collection of assets does constitute a
business, (a business combination) we must

account for the acquisition in accordance with
AASB 3 as a business combination (NB goodwill)
It will consist of inputs and processes applied to those inputs that

have the ability to create outputs. (Appendix B)
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Business Combinations:
via controlling share acquisitions
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Categories:
1) Trading investments financial assets at fair value
2) Available-for-sale investments
3) Investments providing the power to exert control, joint control
or significant influence
Categories 1) & 2)
AASB 139 Financial Instruments: Recognition and Measurement
contains the requirements for accounting for 1) Trading investments and
2) Available-for-sale investments, and is covered in ACCT7102.
This is gaining an investment
That is, no significant influence, no joint control & no control
This type of investment is called

an equity investment.
Seminar 1
Classification of Equity Investments
Rather than directly purchasing the business from

the vendor, an investment in another entity can be
made by the investor acquiring shares in that
other entity by acquiring the shares directly from
a known shareholder (in the case of a private
company); or by acquiring the shares on the stock
exchange (in the case of a public company)
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Category 3) will be the main focus of this course, ACCT7104
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ACCT7104
Semester 2 2016
Power to Control (AASB 127* (2008) & AASB 3)
Acquisitions Providing the Power to Control

A share acquisition can give control of the
As stated above, the power to control is the power to
investee to the investor
govern the financial and operating policies of an entity to

gain benefits from its activities.
Control is defined as (AASB 3 Appendix A):

the power to govern the financial and operating
policies of an entity so as to obtain benefits from its
activities
The power to control must be capable of being
exercised at the reporting date although not necessarily

exercised (that is, the ability to control must exist, even if
passively).
o Usually control exists if the investor holds >50% of the
voting power of the investee and the investee is a

subsidiary of the investor (parent)
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Control also exists when the parent owns half or less
Control is presumed to exist when the parent
than half of the voting power of an entity when there is

(AASB 127*.13):
owns, directly or indirectly through subsidiaries,

more than half the voting shares of an entity,
unless, in exceptional circumstances, it can be
clearly demonstrated that such ownership does
not constitute control. (AASB 127*.13)
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(a)Power over more than half of the voting rights by virtue of an
agreement with other investors

(b)Power to govern the financial and operating policies of the entity
under a statute or an agreement;

(c)Power to appoint or remove the majority of the members of the
board of directors or equivalent governing body and control of the
entity is by that board or body; or
(d)Power to cast the majority of votes at meetings of the board of
directors or equivalent governing body and control of the entity is
by that board or body.
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AASB 10 Control: Key Concepts
AASB 10 Control (paragraphs 5 & 7)
Key concepts:
Control of Relevant Activities
Power
Rights
Variable returns
Ability to Exert Power through Rights to Variable
returns
Actually receive the benefit
5 An investor, regardless of the nature of its
Seminar 1
involvement with an entity (the investee), shall

determine whether it is a parent by assessing
whether it controls the investee.
7 An investor controls an investee if and only if
the investor has all the following:

(a) power over the investee;
(b) exposure, or rights, to variable returns from
its involvement with the investee; and
(c) the ability to use its power over the investee
to affect the amount of the investors returns.
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ACCT7104
Semester 2 2016
AASB 10 Power (paragraphs 10 & 17)
AASB 10 compared to AASB127 (2008)
10 An investor has power over an investee
AASB 10 widened the parameters for control

Relevant activities, not limited to financial and operational
Aims for wider disclosure through reduction of non-reporting
scenarios
when the investor has existing rights that give it

the current ability to direct the relevant
activities, that is, the activities that significantly
affect the investees returns.
Many considerations of AASB 127 (2008) will still apply

eg. > 50% voting rights, majority board of directors, etc.
17 An investor controls an investee if the
investor .. has the ability to use its power to

affect the investors returns from its
involvement with the investee.
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Effect of Control
Entity Relationships Group ABC

Group ABC or
A Limited Group
Acquisitions of other entities directly or indirectly
through other entities

A business combination of entities always
involves one entity acquiring control over another

business segment, entity or entities
A Ltd
Control
B Ltd
Control
C Ltd
In this course, most important is a Group
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Indicators of the Power to Exert

Significant Influence
An investor can have significant

influence over an investee, defined as
(AASB 128.3):
the power to participate in the financial

and operating policy decisions of the
investee but is not control or joint control
over those policies.
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This is clearly different to control.

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Seminar 1
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Representation on the investees Board

Participation in policy-making processes
Economic dependency involving material
intra-entity transactions
Technological dependency
Organisational dependency
AASB128.6
ACCT7104
Semester 2 2016
43
Consider when an investor holds 25% of the

voting power of an investee
Prima facie, significant influence
If the investor holds 20% or more of the

voting power of an investee (and less than
50%), it is presumed that the investor has
significant influence, unless it can be clearly
demonstrated that this is not the case.
BUT what if the other 75% held by a single other

investor?
Cannot be significant influence,
as always overwhelmed by the 75%
Unless secondary considerations exist!!
At a holding of < 20%, it is presumed that

the investor does not hold significant
influence, unless such influence can be
clearly demonstrated.
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How Does This Fit into the Course?
Control vs Significant Influence
Remember:
A subsidiary is an entity over which another entity has
the power to exert control over relevant activities.

50+% voting rights or control of relevant activities results
in groups & subsidiaries
The power to exert control is the power to dominate
decision-making in the subsidiary.

In simplest case, 20% - 50% voting rights and/or
significant influence results in associates
An associate is an entity over which another entity has
the power to exert significant influence.

<20% voting rights results in financial assets and/or
investments as discussed in ACCT7102
The power to exert significant influence is the power to
participate in decision-making in the associate.

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AASB11 Joint Control

Now:
Joint arrangements where joint control arises,
including specifically joint ventures
AASB11.7
7 Joint control is the contractually agreed sharing
of control of an arrangement, which exists only
when decisions about the relevant activities
require the unanimous consent of the parties
sharing control.
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Seminar 1
46
Summary
In order of increasing complexity, the purchase of:
A. A single asset
} Previously covered:
B. A group of assets (not a business) } (ACCT7101 material)
C. A group of assets (a business)
AASB3 Business Combination
AASB 10 Consolidation
D. Shares directly from a shareholder (private company) or on a stock
exchange (public company)
1. Gaining an investment
AASB139 Financial Instruments
(ACCT7102 material)
2.
3.
4.
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Gaining significant influence

Gaining joint control
Gaining control
AASB128 Associates
AASB11 Joint Arrangements
AASB10 Consolidation
ACCT7104
Semester 2 2016
Seminar 1 Objective 2
Basics of Consolidation
For this introductory topic, a simple Group will be:
2. Basics of Consolidation
1. One Company will buy one (1) Company to form a
Group of a Parent with one (1) subsidiary;
2.2 What financial accounts are required?
2. The purchase will be in cash only;
2.3 Fair Value Adjustments
3. Goodwill will result in the Group;
2.4 Deferred Tax
4. The parent will control 100% of the subsidiary;
2.5 Investment in Subsidiary
5. The parent will buy the subsidiary on the 1st day of the
2.6 Intra-group Transactions
financial year; and
2.7 Dividends
6. The date of reporting for financial accounts will be the
last day of the year in which the subsidiary was bought

(that is, one years trading only)
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2.1 Consolidation Procedures
A Simple Group AB Group Limited
B86 of AASB 10 Consolidation Procedures

Consolidated financial statements:
AB Group Limited
(a) Combine like items of assets, liabilities, equity, income, expenses
and cash flows of the parent with those of its subsidiaries.

(b) Offset (eliminate) the carrying amount of the parents investment in
each subsidiary and the parents portion of equity of each subsidiary

(AASB 3 explains how to account for any related goodwill).
(c) Eliminate in full intragroup assets and liabilities, equity, income,
expenses and cash flows relating to transactions between entities of
the group (profits or losses resulting from intragroup transactions that
are recognised in assets, such as inventory and fixed assets, are
eliminated in full). Intragroup losses may indicate an impairment that
requires recognition in the consolidated financial statements. AASB
112 Income Taxes applies to temporary differences that arise from the
elimination of profits and losses resulting from intragroup
transactions.
Control
100%
B Ltd
A Ltd
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WHAT GROUP HAS vs WHAT GROUP WANTS
2.2 Group Financial Accounts
Less
Plus
A Ltd
Even when a Group is established, all individual Group members
Parts (b) & (c) B86 AASB10
Part (a) B86 AASB10
B Ltd
Equals
Group
Adjustments
will continue to create financial accounts as if the Group had not

been formed
Thus, when adding A + B together in our simple group, by
default, the result is WHAT THE GROUP HAS
Group
This may not equate to WHAT THE GROUP WANTS
SEPARATE BOOKS OF ACCOUNTS
The difference between the two represent any consolidation
GROUP ACCOUNTS
adjusting journals (CAJ) that are required

These adjustments affect the Consolidated Accounts only,
never the separate books of account
However, it is always vitally important to understand what the
separate books are recording in order to make the correct
adjustments
What parts of this accumulation are important?

EXTERNAL TRANSACTIONS ONLY
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Seminar 1
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ACCT7104
Semester 2 2016
2.3 Consideration of Fair Value
2.2 Group Financial Accounts

CONSOLIDATION
ADJUSTMENTS
WHAT THE GROUP HAS
A Ltd
B Ltd
Assets can be valued at cost or fair value

Recently issued Australian Accounting Standard AASB13
Equals
Less
Plus
WHAT THE
GROUP WANTS
Group
Adjustments
Pervasively assumes Fair Value will be used in financial
Group
reporting
Regardless of how the Parent & Subsidiary account for value,
SEPARATE BOOKS OF ACCOUNTS
the Group Accounts must always be at Fair Value
GROUP ACCOUNTS
That is, after A Ltd + B Ltd accounts has occurred (HAS), an
But what problems can this cause in the Group Accounts?

1. Valuation issues
2. Investment in Subsidiary
3. Trading with oneself
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adjustment may be required in the consolidated accounts

(CAJ) to ensure the Group accounts are shown at
fair value (WANTS)
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Why might a Fair Value Adjustment be required?
FVA in Consolidated accounts
Remember:
the Group Accounts must always be at Fair Value
Example 1
A Ltd buys 100% B Ltd (that is, A Ltd controls B Ltd
=> B Ltd is subsidiary of A).
B Ltd accounts for non-current assets at cost, and has land
with carrying value $100,000, but with fair value of $150,000.
What Group consolidating adjustment is required at the date of
acquisition assuming a 30% tax rate?
What if the subsidiary records its non-current assets at
cost, and there is a higher fair value at date of acquisition?

An adjustment will be required in the Group Accounts to
show any increased asset values to Fair Value

This will be required if the Group Accounts are to be
shown at Fair Value

The adjustment will be made in a Revaluation Surplus
Dr Land
50,000
Cr Revaluation Surplus
account in the Group Accounts (not in the separate books

of account)
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2.4 Tax Effects
A companys offer to buy a subsidiary will be at Fair Value

(what the new parent thinks the new subsidiary is worth to them)
Asset value of land increased by $50,000 due to valuation.

Higher tax potentially payable when derecognised in the future
=> deferred tax effect
That is: value up, future potential profit up, tax payable on sale up
=> future (deferred) tax liability
In the new parents separate books, the entry will be:

Dr Investment in Subsidiary
Cr Cash (fair value) paid
What consolidating adjustment is required?
X
X
This entry will automatically be included in the Group accounts
when A Ltd + B Ltd is accumulated
15,000
15,000
But this would indicate an illogical investment by the Group in
That is, a recognition of later tax charge through deferred tax that
needs to be recognised by the Group in the current year
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2.5.1 Investment in Subsidiary
Example 1 (continued):
Dr Revaluation surplus
Cr Deferred tax (liability)
50,000
Seminar 1
itself in the Group accounts, which will need to be eliminated
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10
ACCT7104
Semester 2 2016
What has the new parent actually bought?
Sometimes, the new parent will offer cash greater than the
Fair Value of the subsidiarys net assets
The Group consolidated financial statements need to reflect the Fair

Value of the net assets of the subsidiary at the date of acquisition
that is, the subsidiary appears to be worth more to them
But, if the new subsidiary accounts at cost in its separate books, an

adjustment will be needed to show these net assets at Fair Value in the
Group accounts
Here, the parent has effectively created an additional asset

in the Group accounts
Thus, the Fair Value of the subsidiarys net assets (WANTS) is:
This asset is called GOODWILL
Value shown in subsidiarys separate books (HAS)

+
Fair Value Adjustment made in Group Accounts (CAJ)
This new asset will need to be recognised in the Group
accounts
(per Section 2.3)

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When a company gains control of another, the Group is only allowed to take its share of the
accumulated wealth (reflected in equity changes) of the new subsidiary from the date of acquisition
When the separate books of accounts are added together, all of the subsidiarys accumulated wealth
is included in the Group
Thus, the Group is not entitled to include the pre-acquisition

accumulated value of the subsidiary, which will need to be
eliminated from the Group accounts
Thus, the Group ( A + B) equity will initially include (HAS):
Acquirer("parent")
Acquiree ("subsidiary)
This value is represented by the FV of the net assets

(same as equity) of the subsidiary at the date of acquisition
But the Group is only entitled to (WANTS):
Acquirer("parent")
This pre-acquisition equity must be eliminated from the

Group accounts
Acquiree ("subsidiary")
Date of acquisition
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Date of reporting
64
2.5 Combined The Elimination Journal
Investment in Subsidiary
Summary
There are three (3) values thus that must be eliminated/recognised at the date of
acquisition:
1.
Investment paid for the subsidiary by the parent (shown originally in separate
books) to be eliminated from the Group accounts (section 2.5.1 above);
2.
The new asset of goodwill to be recognised in the Group accounts (section

2.5.2 above); and
3.
The subsidiarys pre-acquisition equity at fair value to be eliminated from the

Group accounts (section 2.5.3 above).
Example 2
A Ltd buys 100% of B Ltd (that is, A Ltd controls B Ltd => B Ltd is
subsidiary of A Ltd) for $400,000. The fair value of B Ltds net assets (which
is the same as B Ltds shareholders equity) is $350,000 at date of
acquisition, which is the value shown in B Ltds separate books of account.
What consolidating adjustment journal will be required?
Note: Amount paid ($400,000) less FV B Ltds net assets/equity ($350,000)
= Goodwill created on acquisition ($50,000)
All these requirements are combined into one Consolidating Adjustment Journal
(the elimination journal), in the following format:
Dr Subsidiarys pre-acquisition equity (separate accounts)
Dr Revaluation Surplus (due to FVA)
Cr Investment in Subsidiary
Dr Goodwill (balance)
Dr Shareholders Equity (pre-acq)

Cr Investment in subsidiary
X
X
X
350,000
400,000
50,000
This is what Part (b) of B86 AASB10 refers to (see earlier slide), that is:
Offset (eliminate) the carrying amount of the parents investment in each subsidiary and the parents
portion of equity of each subsidiary (AASB 3 explains how to account for any related goodwill).
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ACCT7104
Semester 2 2016
Combined Example
Combined Example
Example 3
Example 3
A Ltd buys 100% of B Ltd (that is, A Ltd controls B Ltd => B Ltd is
subsidiary of A Ltd) for $900,000 in cash on 1 January 2012. B
Ltd accounts for non-current assets at cost. On 31 December
2011, B Ltd has land with carrying value $75,000 (fair value of
$85,000) and total shareholders equity of $800,000. What
Group consolidating adjustments are required for the year ended
31 December 2012, assuming no other intra-group transactions
and a 30% tax rate?
Required:
1. FVA to increase value of B Ltds land to fair value in the Group
accounts;
2. Deferred tax adjustment related to FVA above; and
3. Elimination of pre-acquisition equity of B Ltd, and the goodwill
created.
67
1. FVA re B Ltds Land

Dr Land
Cr Revaluation surplus
10,000
2. Deferred tax effect on FVA above

Dr Revaluation surplus
Cr Deferred tax (liability)
3,000
3,000
3. Elimination of B Ltds pre-acquisition equity value

Dr Shareholders equity (pre-acq) 800,000
Dr Revaluation surplus (above)
7,000
Cr Investment in subsidiary
900,000
93,000
68
10,000
Intra Group Trading

Profit/Revenue Recognition
2.6 Intra Group Trade: Profit/Revenue Recognition
If trading occurs between group companies, these are not

real transactions as they are effectively selling to
themselves within the Group
External Sales
That is, the profit is unrealised to the Group
Profits for the Group can only be recognised when the

sales have been made to a third party external to the
Group
A
Internal Sales
There is a need to consider what needs to be adjusted in

the group accounts
AB Group Limited
This is what Part (c) of B86 AASB10 refers to (see earlier slide):
Eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions
between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets,
such as inventory and fixed assets, are eliminated in full).
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Intra Group Trading
Intra Group Trading

In this introduction, it is assumed that the only type of intragroup transaction is the selling of inventory in the current
year
Example 4
A Ltd sells $600,000 inventory to B Ltd in current year. The profit
on this transaction shown in A Ltds separate books is $200,000.
B Ltd has not sold any of the inventory to external parties (thus
no external transaction, only between group companies).
Questions:
1. Has an intercompany sale/purchases been recorded in
the separate books? (if yes, must always be eliminated)
2. What inter-company profit has been recognised in the
separate books? (must be eliminated, unless 3. applies)
3. Has this profit been realised by being subsequently sold
to a third party outside the Group? (no profit elimination
required)
4. Is the Group value for inventory correct?
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What issues exist here?

1. A sale has occurred between Group members that results in
sales revenue in the separate books of accounts of A Ltd,
and purchases in the separate books of accounts of B Ltd;
and
2. A profit has been recorded in the separate accounts of A Ltd
that is only internal to the Group (that is, an unrealised
profit).
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ACCT7104
Semester 2 2016
Intra Group Trading

Intra Group Trading

Example 4
Example 4
What group consolidating adjustment(s) are required at the

year end?
2. The profit earned by A Ltd on the sale of inventory

(HAS) is unrealised as far as the Group is concerned
(WANTS), as it has not been sold outside of the Group.
Thus, this profit must be removed from the Group accounts.
Further, the cost of the inventory to the economic entity is
also overstated.
1. The sales and purchases recorded in the separate books

of accounts (and therefore included automatically in the
Group accounts (HAS)) must be eliminated as intra
group transactions and must not be reflected in the Group
accounts (WANTS)
Dr Sales revenue (Has from A Ltd)
600,000
Cr Purchases (COGS) (Has from B Ltd)
600,000
73
Dr Current Year Profit (COGS) (Has from A Ltd) 200,000

Cr Inventory (B/S) (Has from B Ltd)
200,000
What effect does deferred tax have?
74
Intra Group Trading

Deferred Tax Reminder (ACCT7102)

Deferred Tax:
Recognition of a change in the future tax position caused by a current
change in valuation, thus requiring an adjustment now
Example 4
2. As the value of the inventory (asset) has been reduced,
the current year tax payable by the Group must also be
reduced (WANTS) . However, as the full tax has already
been provided for in the separate books of A Ltd (HAS),
when the inventory is sold externally in a later period, the
Group will have recognised a deferred tax asset as the tax
has already been provided in the separate books.
Asset value increases compared to tax base (cost)

Future profit on sale up
Future tax liability up at the date of sale
DEFERRED TAX LIABILITY
Asset value increases compared to tax base (cost)
Thus:
Dr Deferred Tax Asset
Cr Income Tax Expense
75
Future profit on sale down
60,000
Future tax liability down at the date of sale
60,000
DEFERRED TAX ASSET

76
Deferred Tax
2.7 Dividends
The following assumes knowledge of the treatment of
declared and paid dividends in separate books of accounts
If uncertain, review in Revision Material on BlackBoard
Again, this is what Part (c) of B86 AASB10 refers to (see earlier slide):
Eliminate in full intragroup assets and liabilities, equity, income,
expenses and cash flows relating to transactions between entities of
the group (profits or losses resulting from intragroup transactions that
are recognised in assets, such as inventory and fixed assets, are
eliminated in full). Intragroup losses may indicate an impairment that
requires recognition in the consolidated financial statements.
AASB 112 Income Taxes applies to temporary differences that
arise from the elimination of profits and losses resulting from
intragroup transactions.
Intra-group dividends are a form of transacting between

members of the same Group (that is, only internal)
Any balances outstanding at year end for intra-group
dividends in the Group accounts must be eliminated
Again, this is what Part (c) of B86 AASB10 refers to (see earlier slide):
Eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions
between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets,
such as inventory and fixed assets, are eliminated in full).
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ACCT7104
Semester 2 2016
2.7 Dividends
2.7 Dividends
Example 5
Example 5 (continued)
A Ltd controls 100% of B Ltd throughout the period. In the

current year, B Ltd has declared (but not yet paid) a dividend of
$50,000. What consolidation adjusting entries are required in the
current year?
Consolidation adjustment journals in Group accounts:

1. Revenue/Expense
Dr Dividend revenue (HAS from A Ltd)
50,000
50,000
Cr Dividend declared (R/E) (HAS from B Ltd)
In separate books, A Ltd & B Ltd have (HAS) respectively:

1. Dividend revenue & appropriated profits (from retained
earnings not an expense via dividend paid or declared);
and
2. Dividends receivable & payable
2. Receivable/Payable
Dr Dividend payable (HAS from B Ltd)
Cr Dividend receivable (HAS from A Ltd)
As intra-group transactions, the Group accounts must eliminate

these balances (WANTS)
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In Class Discussion Questions
50,000
50,000
The End See you next time!
Broncos Scenario
51% Shares Scenario
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Seminar 1
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ACCT7104

Presented on: 26 & 28 July 2016

To enrol in ACCT7104 you should have passed at least an

introductory accounting course (ACCT7101 or equivalent).

SEMINAR 1: CONTROL & BASICS OF CONSOLIDATION

but not compulsory.

Course Co-ordinator & Lecturer: Mr Paul Woollard

ACCT7104 (or ACCT3103) is required for entry to either

CPA Australia or the CAANZ

not in Summer Semester

Additional Recommended References

Prescribed textbook package:

Not prescribed, but very necessary:

ACCT7104 Seminar 1 Semester 2 2016

BlackBoard & Other Resources

Exam - Mid Semester

Interim due date:

Exam - during Exam

ACCT7104 Seminar 1 Semester 2 2016

ACCT7104 Seminar 1 Semester 2 2016

21 October 2016 12:00

ACCT7104 Seminar 1 Semester 2 2016

Presented on: 26 & 28 July 2016

Seminar Slides, Questions & Answers

Seminar slides on ACCT7104 Blackboard site by previous Friday of

Three (3) hours each week

Three (3) elements each week:

The new material will be presented in each Seminar (approximately

Additional material will be provided for all students to attempt for

Sometimes some of these are covered in Seminars, but the

remainder are for you to prepare in your own time

any queries on uncovered materials, you should raise these in

afternoon after the week in which the Seminars were held

immediately if MCQs and soon after Workshops

ACCT7104 Seminar 1 Semester 2 2016

ACCT7104 Seminar 1 Semester 2 2016

What is this course about?

Course Aims [ECP extract]

So far, you have dealt with financial reporting issues for a

independently trading single business entities, such as a

Appreciate how different levels of control between entities

effect the accounting treatment of such entities, being able to

ACCT7104 deals with accounting issues that arise in business

combinations and other business relationships, and how to

Develop the ability to link a variety of concepts in corporate

accounting, displaying a wider appreciation of the complexity &

Such business combinations involve control between

multiple entities such as parent + subsidiaries, whilst

Achieve sufficient awareness of current developments in

accounting standards through research and critical evaluation

Most listed Australian entities are parent entities operating in a

Relate core material to real world scenarios, developing an

group structure - Business Combinations are everywhere!

ACCT7104 Seminar 1 Semester 2 2016

awareness of how currently reporting entities adopt these

ACCT7104 Seminar 1 Semester 2 2016

Learning Objectives [ECP extract]

Course Changes in 2016 (1)

Financial Statement Project

ACCT7104 Seminar 1 Semester 2 2016

Hurdle Rate Examples

ACCT7104 Seminar 1 Semester 2 2016

Presented on: 26 & 28 July 2016