Advanced Financial Accounting

Date:

From:

To: Mr. Lane Miller, Chief Financial Officer, Midas Ltd

Subject: Explanation of Accounting Requirements

Dear Mr. Miller,

We understand that Midas Ltd. is considering purchasing 40% of the issued shares of Queen Ltd. and you want to understand accounting requirements regarding the same. We would explain the accounting requirements in detail for your proposed investment through this memorandum.

The transactions related to this investment would be governed as per AASB 127: Separate Financial Statements and AASB 128: Investments in Associates and Joint Ventures.

AASB: 128 is required to be applied by all entities that have significant influence over Queen Ltd. 

In case an entity holds, 20 per cent or more of the voting power of the investee, it is assumed that entity has significant influence over investee

Hence, by acquiring 40% of shares of Queen Ltd. , Midas Ltd. would be exercising significant influence on Queen Ltd. as per the provisions of AASB 128 (Australian Accounting Standards Board, 2020).

The investment to be made by Midas Ltd. in Queen Ltd. would have to be accounted using equity method. The investment shall be initially recorded at the cost, and the carrying amount of the investment shall be adjusted to recognize the Midas Ltd’s share of profit or loss of the Queen Ltd. after the date of acquisition. Midas Ltd’s share in Queen Ltd’s profit would be recorded in the Midas Ltd’s income statement . The difference between the cost of investment for acquiring 40% of the issued shares of Queen Ltd. and Midas Ltd’s share of net fair value of Queen Ltd’s assets and liabilities shall be accounted as follows:

  1. If the cost of investment is more than Midas Ltd’s share of net fair value of Queen Ltd’s assets and liabilities, the excess shall be included as goodwill in the carrying amount of investment. Amortisation of the goodwill is not allowed.
  2. If the Midas Ltd’s share of net fair value of Queen Ltd’s assets and liabilities is more than the cost of investment, the excess is included as income in the determination of the Midas Ltd’s share of the Queen Ltd’s profit in the period in which investment would be acquired.

For applying the equity method as explained above, the latest financial statements of Queen Ltd. would be used.

In case the close of the financial year of Midas Ltd. is different from that of Queen Ltd. , Queen Ltd. shall prepare , for use of Midas Ltd. , financials as on same date as the financials of Midas Ltd..

In case Queen Ltd. uses accounting policies other than that of Midas Ltd. , appropriate adjustments shall be made so that Queen Ltd’s accounting policies are similar as of Midas Ltd.

Sale of Inventory and Non Current Assets between Midas Ltd. and Queen Ltd.

Sale of assets by Queen Ltd. to Midas Ltd. would be called ‘upstream transactions’, while sale of assets by Midas Ltd. to Queen Ltd. would be called ‘downstream transactions’. Midas Ltd’s share in Queen Ltd’s profits or losses resulting from these transactions would have to be eliminated.

Recognition of Impairment Losses

In case downstream transactions indicate decrease in the value which can be realised from sale of assets, or of impairment in the value assets, those losses shall be recognised fully by Midas Ltd.. In case upstream transactions indicate decrease value which can be realized from assets to be purchased or of impairment in the value of assets, share of Midas Ltd. in those losses shall have to be recognized.

Preparation of Separate Financial Statements-AASB 127

Midas Ltd. shall prepare separate financial statements .The Investment in Queen Ltd. shall be recorded in separate financial statements at cost..

Recognition of Dividends from Queen Ltd.

Midas Ltd. shall recognize dividend from Queen ltd. on shares held in Queen Ltd. when the dividends have been declared.

Recording of Lending of cash by Midas Ltd. to Queen Ltd.

The cash proposed to be lent by Midas Ltd. to Queen Ltd. shall be recorded at original value in the financial statements of Midas Ltd.

Disclosures in Financial Statements of Midas Ltd.

The following information shall be disclosed in Financials of Midas Ltd..

  1. Name of the Investee i.e. Queen Ltd.
  2. Place of business of Queen Ltd.
  3. Percentage of holding o Midas in Queen Ltd. i.e. 40%

Works Cited for Investments in Associates and Joint Ventures

Australian Accounting Standards Board. (2020, September 11). Investments in Associates and Joint Ventures-AASB. Retrieved September 11, 2020, from www.aasb.gov.au: https://www.aasb.gov.au/admin/file/content105/c9/AASB128_08-15_COMPdec15_01-18.pdf

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