ACCT3011 Individual Assignment PDF

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ACCT3011 Individual Assignment 1. In relation to the Consolidated Income Statement for the year ended 30 June 2016, we see that Qantas split the Total Comprehensive Income for the year to both the Members of Qantas and any Non-Controlling Interests in the firm. However, for the year ended, there is no profit attributable to the Non-Controlling Interest as well as any dividends paid, or any acquisitions to non-controlling interests. As a result, Closing balance of Equity attributable to the Non-Controlling Interest remains at $5million as part of the Total Equity in the Balance Sheet at 30 June 2016. ‘The Consolidated Financial Statements for the year ended 30 June 2016 comprise Qantas and its controlled entities (together referred to as the Qantas Group) and the Qantas Group’s interest in investments accounted for under the equity method.’ Through Note 25 detailing the Deed of Cross Guarantee in relation to debts, we can see the wholly owned and controlled entities by the Qantas Group including Airlink Pty Ltd, Jetstar Airways Ltd, Q Catering Ltd, Q H Tours Ltd, Qantas freight Enterprises Ltd, etc. As per control, the Parent has majority voting rights in respect of each of the material subsidiaries. For the year ended 30 June 2016, no dividends (2015:$4 million) were declared and paid to noncontrolling interest shareholders by non-wholly owned controlled entities. Qantas has disclosed limited information in regard to the group structure or names of subsidiaries. They have stated the Operating Segment nothing in relation to the noncontrolling interest in their subsidiaries. They primarily recognise ‘five subsidiaries material to the group’. However, through Note 25, the disclosure for cross guarantees is given. This provides a list of wholly owned subsidiaries within the group. This however, does not comprise the entire reporting entities. We see this when comparing the financial statements of the cross-guarantee group to the consolidated group. The composition of the group is unclear, as a result, not indicating the ownership within the group. Therefore, we cannot determine from the Qantas report 2016 the NCI which applies to the subsidiaries nor the percentages of interest. AASB 12 (para 10) states that ‘an entity shall disclose information that enables users of its consolidated financial statements to understand, the composition of the group and the interest that non-controlling interests have in the group’s activities and cash flows. Furthermore, AASB 12 (para 12) states that ‘an entity shall disclose for each of its subsidiaries that have non-controlling interests that are material to the reporting entity.’ In regard to this Qantas may justify their minimal reporting on the NCI as Qantas Group’s profit attributable to NCI for the year ended June 2016 is nil (Qantas, p. 52) and equity attributable to NCI is at 0.15% (Qantas, p. 54). Therefore, NCI can be argued to be immaterial to the group and that further disclosure is not required. Finally, there have not been any changes to ownership interest in subsidiaries. All in all, Qantas Annual Report does not provide all the information required to satisfy AASB 12, essentially in relation to the composition of the group (AASB 12, p. 13). However, the nature of the NCI can be deemed as immaterial therefore allowing Qantas to justify the basic and limited disclosures provided.

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2. Disclosures relating to Investments in Associates and Joint Ventures in the annual report are quite limited. The 2015 report includes the disclosure under note 14 (Qantas 2015, p. 65), that presents a summary of the key items which includes the share of Other Comprehensive Income as well the Carrying Amount of investments accounted for under the Equity method. However, compared to the 2015 report, in the 2016 report both share of OCI and Carrying Amount are not disclosed separately under a note essentially for investments, although they are mentioned in the Consolidated Statement of Comprehensive Income and Statement of Changes in Equity. Regardless of not making an interest income from investments in joint ventures and associates for the year of 2016, under Note 4 (Qantas 2016, p. 63), it is disclosed separately from financial assets. Cash flows from investing activities accounted for under the equity method are given in the cash flow statement (Qantas 2016, p. 57). Note 26 B) (Qantas 2016, p. 87) which is on related parties details the related party transactions to the associates to provide a sense of transparency. ‘Investments accounted for under the equity method’ (Qantas 2016, p. 54) given on the Consolidated Balance Sheet, has been adjusted mostly relating to equity method accounting for investments in Joint Ventures and Associates. According to AASB 128 para 3, (AASB 128 para 3, p. 9) ‘the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets’. This means the investment is measured firstly at cost. Subsequently, adjustments are made to realise movements of Equity in the Joint Ventures and Associates. These adjustments include movements in the OCI changes arising from the revaluation of property, plant and equipment from foreign exchange differences (AASB 128, para 10), impairment on the investment assets (AASB 128, para 40) and adjustments regarding depreciation from fair value adjustments at acquisition (AASB 128, para 32). Fair Value in AASB 13 (AASB 13 para 24, p.8) is defined as ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date.’ There’s differences in regard to the measurement of investments in accordance to AASB 128, that requires the equity method. In accordance to AASB 128, the initial investment in the Joint Venture or Associate is recorded at Cost and adjustments are made to the carrying amount subsequently, as mentioned above. Therefore, we see that the equity method is based on cost-accounting principles. This is unlike Fair Value measurement which is concerned with the price that would be received to sell an asset. Furthermore, Fair Value measurement may look into external information regarding market conditions that are left out of cost measurement in order to estimate the current market price.

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3. In comparison to Qantas, Virgin’s report has a separate section F (Virgin 2016, p. 80) highlighting the Group Structure. Entities controlled by Virgin Australia Holdings Limited have been disclosed individually in a list under section F3 (Virgin 2016, p.83). This is in accordance to AASB 12 (para 10, p.7) in which it states that ‘an entity shall disclose information that enables users of its consolidated financial statement to understand the composition of the group.’ This is unlike Qantas in which we cannot identify the controlled entities separately but we are able to get an idea of some controlled entities through the Deed of Cross Guarantee in the Qantas report (Qantas 2016, p.85). It is not clearly mentioned in the Qantas report if those are the only controlled entities and if there are any more. Therefore, they have not complied to AASB 12 (para 10, p.7) like Virgin. In regard to non-controlling interest in the subsidiaries, in Virgin’s report it is stated that ‘the Company owns 100% of the ordinary share capital of these entities but recognises a 35.28% non-controlling interest in these entities as a result of the issue of convertible notes to third parties’ (Virgin 2016, p.84). Initially, Qantas report’s disclosure is unclear on its subsidiaries which makes it even more difficult to identify any non-controlling interest in those subsidiaries meaning they haven’t complied at all to AASB 12 (para 10) in having to provide ‘the interest that non-controlling interests have in the group’s activities’ (AASB 12, p.7). We see that Virgin have in fact disclosed the information regarding the sale of 35% interest in the Velocity Frequent Flyer Group (VFF) and outlining the accumulated non-controlling interest at the end of the reporting period, of 35.28% (Virgin 2016, p.85), in compliance with AASB 12 (para 12f, p.7). In addition to that, Virgin have disclosed the profit attributable to the non-controlling interest for the year 2016 in compliance to AASB 12 (para 12d, p.7) In relevance to Joint ventures and Associates, Virgin has disclosed their 49% interest in Virgin Samoa Limited, a company incorporated in Samoa, and has accounted for it as an associate (Virgin 2016, p. 82). This in accordance to AASB 12 (para 21a, p.10) mentioning the name of the associate and its principal place of business as well as the proportion of ownership interest held by Virgin. Furthermore, the nature of the relationship with the associate in which the Group provides airline services and wet leases aircraft to Virgin Samoa is also given as requested by AASB 12. Qantas have mentioned the transactions between the Qantas Group and the associates (Qantas 2016, p.87), which has not been provided by Virgin. Although, both Qantas and Virgin measure their respective investments using the equity method, Virgin has separately disclosed their associate’s financial information (Virgin 2016, p.82) in response to AASB 12 (para 21b i), p.10) unlike Qantas.

4. To be considered a subsidiary, Virgin Group will need to have control over the subsidiary. This means, according to AASB 10, Virgin Group needs to have; ‘power over the investee, exposure, or rights, to variable returns from its involvement with the investee and the ability to use its power over the investee to affect the amount of the investor’s returns’ (AASB 10 para 7, p.6). Virgin Group and the Government of Samoa hold 49% interest each in Virgin Samoa Limited, the remaining 2% is held by Aggie Grey’s Hotel Limited (Virgin 2017, p.86). This particular information is not given in the 2016 report. Although, both Virgin Group and the Government of Samoa have equal interest in Virgin Samoa Limited we cannot say who has control from only looking at how much interest they have in the firm. We need to look closely at AASB 10 (para 7, p.6) and see which particular organisation/ government has

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control over Virgin Samoa Limited. Recently we saw that the joint venture (Virgin Samoa Limited) was being called to an end by the Samoan Government (Hatch, 2017). This decision was made by the Samoan government when they told Virgin that they wanted to end their venture. In terms of ability to use its power over the investee to affect the investor’s returns, we see that the Samoan government have made the decision to call it off regardless of what Virgin want to do. This would directly affect the returns as they are planning on shutting down, thereby slightly pushing control towards the Samoan government. However, in a report Samoa PM, Tuliaepa Sa’ilele Malielegaoi, said that Virgin Australia had ‘total control of the operation of the JV through management and commercial services agreement’ and ‘also had total control of costs associated with the JV with little direct reporting to the Board of the JV Company’ (Feagaimaali’i-Luamanu, 2017). This in fact, changes everything in putting Virgin Australia ahead for control in managing the operations and not fully reporting to the Board. Therefore, Board is unaware of the full extent of the information provided and make decisions that would favour Virgin Australia in comparison to the Government of Samoa. However, in the 2016 report, we see that Virgin Samoa Limited has been disclosed as an associate, which means that it is an entity over which the Group has significant influence. In terms of significant influence and when it is evident is when there is participation in policymaking processes, including dividends. These decisions are made by the Board. Perhaps in assessing Board Directors and Members of Virgin Samoa, there maybe a higher percentage of voting rights for the Government of Samoa putting them in control over the decisions made by the Organisation, despite the lack of information provided to them. As stated above, the decision made by the Government of Samoa to discontinue the airlines regardless of Virgin’s permission would also indicate their current ability to affect the returns. Therefore, assuming Virgin have significant influence over Samoa Limited, they would have classified it as an associate and not a subsidiary and use equity method to account for it.

5. The core utility of an Annual Report is that it needs to provide investors accurate and necessary information in order for them to make decisions. This essentially relates to Disclosure of interests in the Subsidiaries as well as in other Entities. When looking at Disclosure of interest in other Entities, we follow AASB 12 to necessitate the information required to be disclosed. According to AASB 12 (para 10a i)), it is said to disclose information relating to the composition of the group. This in my opinion is highly important as investors are able to better understand the group as a whole. Regardless of which entity they have invested within the group, it enables them to gain an idea on the other entities within the group and gain an overall image of the group and what they do (Vision). Creditors within the group are able to identify the risks involved as well as seek any potential when looking at the entities within the group based on their performance and recognition till date. However, as we see earlier Qantas have neglected this requirement in having to disclose the Group information as a whole. This makes it a problem as they have not complied to the requirement of AASB 12 (para 10a i)) and this will need to change in the future, perhaps enforcing the need to

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follow the standards appropriately. AASB 12 (para 10a ii)) requires the interest that non-controlling interests have in the group’s activities and cash flows to be disclosed. This too is important recognising external interest in the Group. Investors are able to identify the risks associated in the Group as a whole. This risk essentially means the risk of takeover. This enables financial statement preparers to disclose profits and equity attributable to NCI separately to reflect a more accurate financial position of the business. This is reflected more on AASB 12’s (para 12). We see that information regarding subsidiaries with non-controlling interest are disclosed in detail. This includes name of the subsidiary and principal place of business (AASB 12, para 12 a), b)) which enables users to understand the subsidiary individually compared to the whole list of subsidiaries controlled by the Parent entity. Next we see that the profit or loss allocated to non-controlling interest as well as accumulated non-controlling interests of the subsidiary at the end of the reporting period is required to be disclosed. Investors can separately identify profits/losses allocated to NCI holders to assess the share of profits. Finally, it requires the proportion of ownership interests and the proportion of voting rights held by Non-Controlling interests. This can help determine the level of control the NCIs have on the subsidiaries by assessing who has the majority of the voting rights and who makes top decisions. It can also help determine if the NCIs have significant influence or joint control over the subsidiary. Moving on when we look at AASB 12’s (para 21) we see that an entity is required to disclose information regarding each joint venture and associate that is material to the reporting entity. From para 21 a), investors gain a base knowledge of the joint venture/associate and their activities as well as the relationship between the two entities. Virgin and Qantas in their 2016 reports have appropriately complied to this disclosure thereby providing necessary information to the investor. Next we see that para 21 b) helps determine the method of measurement for the investment to see if it is equity method or fair value. This will shape the recognition and calculations for future purposes of the investment in financial statements and is very important to be disclosed. As a whole AASB 12’s requirements of disclosure are very straight forward and it essentially requires important information which is useful for investors in making decisions as well as other stakeholders including governments to identify and assess their involvement in other entities. Overall it is good however, we see that large companies are able to manipulate this to some extent and not disclose certain key areas of information. In terms of recommendation this needs to be prevented in order to present a true and fair view to the investors.

References 5

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Hatch, P. (2017). Virgin Samoa closure puts non-stop flights from Australia in doubt. [online] The Sydney Morning Herald. Available at: http://www.smh.com.au/business/aviation/virgin-samoa-closure-puts-nonstopflights-from-australia-in-doubt-20170523-gwb6ht.html [Accessed 10 Oct. 2017].

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Feagaimaali’i-Luamanu, J. (2017). Samoa PM Defends Decision To End Relationship With Virgin Australia | Pacific Islands Report. [online] Pireport.org. Available at: http://www.pireport.org/articles/2017/05/18/samoa-pm-defends-decision-endrelationship-virgin-australia [Accessed 10 Oct. 2017].

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Virgin Australia. (2016), Virgin Australia annual report 2016, Australia, Retrieved from Virgin Australia website: https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webco ntent/~edisp/2016-annual-report.pdf

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Qantas Airways Limited. (2016), Qantas annual report 2016, Australia, Retrieved from Qantas Airways Limited website:

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Virgin Australia. (2017), Virgin Australia annual report 2017, Australia, Retrieved from: https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webco ntent/~edisp/2017-annual-report.pdf

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Australian Accounting Standards Board, (2015). AASB 10 Consolidated Financial Statements. Sydney, Australia: AASB https://www.legislation.gov.au/Details/F2016C00206/Download

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Australian Accounting Standards Board, (2015). AASB 12 Disclosure of Interests in Other Entities. Sydney, Australia: AASB http://www.aasb.gov.au/admin/file/content105/c9/AASB12_08-11_COMPoct13_0114.pdf

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Australian Accounting Standards Board, (2015). AASB 13 Fair Value Measurement. Sydney, Australia: AASB http://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf

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Australian Accounting Standards Board, (2015). AASB 128 Investments in Associates and Joint Ventures. Sydney, Australia: AASB https://www.legislation.gov.au/Details/F2016C00208/Download

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