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Executive summary

The main focus of this report is on accounting problems faced by JKY Limited and the manner in which these accounting problems can be solved by applying accounting standards. First of all, it is recommended to the management of the organization to adapt to the equity accounting method for purchasing an interest in FAB Limited. Suggestions for the elimination of profit on intra-group transaction is also provided to JKY Limited which will help you in following the principles of the accounting standard for consolidated financial statements. At last disclosure requirements are discussed which will help management to provide all the disclosures in relation to non-controlling interest at the end of the accounting period.  


Executive summary 2

Introduction 4

Part A- Business combination accounting 4

Part B- Intra-group transaction 6

Part 3- NCI disclosure required 8

Conclusion 10

References 11


Regulatory requirements applicable to business organizations operating in any country are very high and it is important to follow these regulatory requirements. Non-compliance with any of these regulations can result in serious actions taken by a government or different regulatory authorities. In addition to that regulatory requirement like accounting standards helps the business organization to represent financial statements in an effective manner to the stakeholders. The main focus of this report will be to evaluate a different kind of accounting standards applicable on business organizations operating in Australia along with their importance for management as well as external stakeholders (Griffin and Wright, 2015).

Part A- Business combination accounting

One of the easiest methods of growth and diversification in a particular industry is merger and acquisition. In this type of arrangement, business organization acquire other organizations operating in a similar industry or another industry for the purpose of internal growth or diversification respectively. In the given scenario JKY Limited and FAB limited are operating in similar industry and management of JKY Limited has proposed to purchase the other organization. In this section, consultation is provided on the method that will be helpful for conducting undertaking the decision of merger and acquisition.

Directors in this organization are divided on the use of purchase method and significant influence method for executing the strategy of merger and acquisition. It is important to evaluate both of these methods before making any decision.

Purchase method- Desire merger and acquisition method is used by a business organization when they want to acquire the business organization immediately rather than evaluating whether the business organization will be profitable or not. This method is very useful when directors of the company are aware of the financial situation of the target company. In addition to that, they should also be aware of the Synergy benefits that will be created with the help of this combination. If these two conditions are satisfied then management of the company should acquire more than 51% of the interest in FAB Limited (O'Connell, 2015).

Significant influence method- Significant influence method is different from the purchase method in the strategy used for acquiring the target organization. This can be categorised as a long term strategy development method in which business organization evaluates the Synergy benefits created with the help of business combination over the period of time and then take their decisions. First of all JKY limited will acquire 20% of the interest in business operations of FAB Limited through equity investment. Over a period of time, they will evaluate whether the business combination is generating additional profit for both the organization or not. If management and directors of the company are satisfied that this combination will be profitable for JKY Limited then investment will be increased over the period of time to 51%.

Method of accounting that will be used in case of this two above-mentioned method will be as follows-

Consolidation accounting- Consolidation accounting will be used when management to has used the purchase method for acquisition purposes. Rules and regulations in relation to AASB 3 and AASB 10 will be applicable on JKY Limited in this scenario. In this case business organization will be required to represent the Assets and liabilities of both the companies in the preparation of the financial statement. This type of financial statements will be called as consolidated financial statements which will be prepared in addition to normal statements prepared at the end of every financial year (Paugam, Astolfi and Ramond, 2015). Therefore it can be said that it two sets of financial statements will be required to be prepared by JKY Limited. The financial statement will still be prepared by FAB limited but method of accounting will not change in case of their financial accounting. 

Equity Accounting- Equity accounting method is used to wear management has used the significant influence method for acquiring an interest in a business organization. Accounting methods in case of this accounting method will not change significantly for JKY Limited and FAB Limited both. The only difference in normal accounting and equity accounting is that JKY Limited will be required to show investment made in FAB Limited under the head long-term assets. Once the management of the company acquired 51% two or more interest in FAB Limited over the period of time then consolidation method will be used for accounting in this scenario also (Milojević, Vukoje and Mihajlović, 2013).

After evaluation of both the methods and accounting procedures, it can be said that management should opt significant influence method in place of purchase method. This is due to the fact that FAB Limited is a small organization and acquisition will require a significant amount of financial as well as time resources.  There is always management risk and financial risk in merger and acquisition decisions and with the help of a significant influence method management can identify whether this business combination will be beneficial or not (Kieso, Weygandt and Warfield, 2016). This method will give time to directors so that they can make a decision after evaluating the different external and internal factors.

Part B- Intra-group transaction

There are various different Accounting Principles provided in AASB 10 that helps the business organization to ensure that representation of combined financial statements is accurate and relevant. One of such accounting principle is the elimination of inter-group profit identification of such transactions and providing effective accounting treatment. In addition to that this accounting standard has also provided disclosure requirements in relation to non-controlling interest. According to AASB 10, the proportion of owner's capital in the subsidiary that is acquired by shareholders other than Parent company should be classified as non-controlling interest. Both of these concepts will be discussed in the section of the report.

Intra-group transactions

Following are the basic intergroup transaction that you should be identified and considered separately by the management of parent company while preparing consolidated accounts (Buchuk, 2014).

Dividend distributed by subsidiary- Significant part of dividend distributed by a subsidiary organization will be allocated to the Parent company as it is holding more than 51% interest in share capital. Distribution of dividend should be eliminated for preparation of consolidated accounts of because the subsidiary organization and parent organization are considered as one entity for the purpose of such accounts. According to normal business concepts, a particular organization cannot distribute a dividend to itself. In this scenario entry made for the distribution of dividend to the company will be eliminated which will increase the cash balance of the subsidiary and reduce the cash balance of parent company.

Sale of goods- Sale of any kind of goods including raw material, finished goods and inventory will be categorised as the intra-group transaction is the management of the company has a charged additional profit over the cost (Haier, Molchanov and Schmutz, 2016). As it is already discussed that for the purpose of consolidated accounts both organization are considered as one entity and charging profit for departmental transfer would not be in accordance with accounting principles. This is due to the fact that two departments in a particular organization are not considered as profit generating units. Therefore any profit generated on the transfer of goods from the parent company to subsidiary company or vice versa should be eliminated in consolidated accounts.

Professional services- Similar to sale of goods and profit charged on professional services should also be eliminated.

Loans and advances- Loans and advances provided by the Parent company to subsidiary company or vice versa should also be eliminated as a particular business organization cannot give loan to itself. The fact that business organization is charging interest on the loan will not make any kind of difference in this scenario (Rahim, 2014). For the accounting purposes management will be required to eliminate any interest income and the principal amount should also be eliminated by increasing and decreasing amount of long term loan payable in respective organizations.

After evaluating the above transactions it can be said that profit charged on professional services and sale of inventory should be eliminated as a part of a consolidated accounting. Both of the transactions under consideration are falling under the category of intra-group transactions and accounting treatment should be made accordingly.

It is also very important to evaluate the impact that intra-group transactions have on non-controlling interest. As discussed above non-controlling interest in the subsidiary company are shareholders other than the Parent company. These controlling interest can also be defined as minority shareholders. Elimination of profit or transactions in intergroup transactions will not have any impact on minority interest holders. This is due to the fact that elimination of determination of profit will be limited to the proportion of ownership held by majority shareholder i.e. parent company. 

For example, If management has provided professional services amounting to $20000 which includes a profit of $5000 then the proportion of majority shareholders will be eliminated from the consolidated income statement (Di Carlo, 2014). If the percentage of shareholding in the subsidiary company is 60% then only $ 3000 will be eliminated and 2000 will be included in consolidated income statement which is the profit distributable to non-controlling interest on the intra-group transaction.

Part 3- NCI disclosure required

Concept of non-controlling interest has already been discussed and this section will discuss the disclosure requirements provided by different accounting standards such as AASB 127 and AASB 101. Apart from NCI disclosure, another problem has been identified by the management of JKY Limited while preparing consolidated financial accounts. The accounting department of a subsidiary organization has disclosed that they have been preparing their accounts on the basis of historical costing method. All the non-current assets in the organization's balance sheet have been presented at historical cost. According to applicable accounting standards, it is important to disclose the fair value of assets at the end of the financial year and impairment loss or loss should be recorded in PL account (Guthrie and Pang, 2013). Accounting treatment during the process of preparing consolidated accounts will be as follows-

For the valuation of an asset- According to applicable accounting standards one of the primary requirement of AASB 136 is to identify impairment of non-current assets at the end of every financial year. As a subsidiary organization will be considered as a part of JKY Limited, it can be said that all the rules and regulations applicable on a particular organization will also apply on its subsidiaries for preparation of consolidated accounts. Therefore accounting treatment of non-current assets should be similar for assets acquired by both organizations. Before preparing consolidated accounts of management is required to conduct impairment testing for all the assets acquired during the business combination from a subsidiary company. 

There are various factors that can help the business organization to identify whether there is a decrease in value of a particular asset or not. For example, if you're productivity from particular machinery is decreasing over the period of time then there is a probability of impairment existence. After conducting impairment testing business organization is required to identify fair value of Assets and record in consolidated balance sheet accordingly (Gluzová, 2016). Following this accounting principle is very important as it helps in the achievement of one of the basic accounting principle of financial accounts i.e. faithful representation. In addition to that management is also required to disclose that they have followed fair value accounting for the valuation of non-current assets.

NCI Disclosure

Each and every component of a financial statement requires disclosure in relation to non-controlling interest at the end of every accounting period. Disclosure requirement with respect to specific financial statement component is as follows- 

Consolidated income statement- At the end of the consolidated income statement, management is required to disclose profit attributable to equity shareholder. This disclosure is required in the normal income statement but in case of the consolidated income statement, a business organization will be required to divide the profit attributable to equity shareholder into two parts i.e. profit attributable to the subsidiary company and non-controlling interest (Carey, Potter and Tanewski, 2014). This disclosure will help in the distribution of profit into minority and majority shareholder in an effective manner.

Consolidated balance sheet- According to applicable rules and regulations of business organization is required to disclose the different components of the owner's capital at the end of the balance sheet under the head equity and Reserves. In the same heading different component of owner’s capital attributable to minority shareholders should be disclosed under non-controlling interest. This amount will represent the reserves and equity held by non-controlling interest shareholders at the balance sheet date. This disclosure will help in evaluating the equity capital that is financed by non-controlling interest shareholder i.e. other than the subsidiary company. 

Consolidated cash flow statement- In this statement, specific disclosure will be provided with respect to the dividend paid to non-controlling interest separately. In addition to that issue of right shares or bonus shares to 30 shareholders in a particular accounting period should also be disclosed under the head cash flow from financing activities (Henderson, 2015). In addition to any cash related transactions in the card by the organization in relation to minority shareholders will also be required to be disclosed separately.

Consolidated change in equity statement- Change in equity shareholding of minority shareholders will also be disclosed in these components of financial statements. Issue of shares for buyback of shares with respect to non-controlling interest will also be disclosed specifically in this accounting statement. It is important for management and accounting department to make sure that all the above-mentioned disclosures are properly followed by JKY Limited.

These requirements will be checked by the external auditor of the company while conducting a statutory audit at the end of the financial year. In case of non-compliance, the external auditor will be required to issue unqualified audit report which will be presented in the annual general meeting for shareholders (Nobes, 2014). In such case management of the organization will be accountable to provide the appropriate reason for non-compliance.


It can be concluded that the following accounting standards help the business organization to present true and fair value of business operations which is very important from the perspective of investors and other stakeholders. The main focus of this report was on JKY limited which is facing different problems in relation to accounting for business combinations. This report has provided recommendations to JKY Limited with respect to its accounting problems after considering all the accounting principles applied by the Australian Accounting Standard Board.


Buchuk, D., Larrain, B., Muñoz, F. and Urzúa, F., 2014. The internal capital markets of business groups: Evidence from intra-group loans. Journal of Financial Economics, 112(2), pp.190-212.

Carey, P., Potter, B. and Tanewski, G., 2014. AASB Research Report No.

Di Carlo, E., 2014. Related party transactions and separation between control and direction in business groups: the Italian case. Corporate Governance, 14(1), pp.58-85.

Gluzová, T., 2016. Disclosure of subsidiaries with non-controlling interest in accordance with IFRS 12: case of materiality. Acta Universitatis Agriculturae ET Silviculturae Mendelianae Brunensis, 64(1), pp.275-281.

Griffin, P.A. and Wright, A.M., 2015. Commentaries on Big Data's importance for accounting and auditing. Accounting Horizons, 29(2), pp.377-379.

Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.

Haier, A., Molchanov, I. and Schmutz, M., 2016. Intragroup transfers, intragroup diversification and their risk assessment. Annals of finance, 12(3-4), pp.363-392.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2016. Intermediate Accounting, Binder Ready Version. John Wiley & Sons.

Milojević, I., Vukoje, A. and Mihajlović, M., 2013. Accounting consolidation of the balance by the acquisition method. Economics of Agriculture, 60(297-2016-3534), p.237.

Nobes, C., 2014. International classification of financial reporting. Routledge.

O'Connell, B., Carnegie, G., Carter, A., de Lange, P., Hancock, P., Helliar, C. and Watty, K., 2015. Shaping the future of accounting in business education in Australia.

Paugam, L., Astolfi, P. and Ramond, O., 2015. Accounting for business combinations: Do purchase price allocations matter? Journal of Accounting and Public Policy, 34(4), pp.362-391.

Rahim, M.A., 2017. Managing conflict in organizations. Routledge.

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