Lecturenote 1966059717 Advanced Fianacial Accounting- Draft PDF

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DISTANCE MODULE FOR DEGREE PROGRAMnullAADDVVAANNCCEEDD FFIINNAANNCCIIAALL AACCCCOOUUNNTTIINNGG ((AACCFFNN 33115511 ))nullPrepared By: Haimanote Walle (PhD, Candidate)Editor: Selamawit Lemech (MSc.)Distance Education Program2020nullnullWWOOLLLLOO UUNNIIVVEERRSSIITTYYCCOOLLLLAAGGEE OOFF BBUUSSIINNEESS...

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WOLLO UNIVERSITY COLLAGE OF BUSIN ESSS AND EC ONO MIC S DEP PA RTME NT T OF ACC OU UNTING AND FINANCE

DISTANCE MODULE FOR DEGREE PROGRAM

ADVA NCED FINANCIAL ACCOUNTING (ACFN3151) Prepared By: Haimanote Walle (PhD, Candidate)

Editor: Selamawit Lemech (MSc.)

Distance Education Program 2020

Contents CHAPTER ONE OVER VIEW OF ACCOUNTING FOR JOINT VENTURES AND PUBLIC ENTERPRISES 1.1.

Characteristics and Historical Background ...................................................................... 6

1.2.

Present-day Joint Ventures ............................................................................................... 7

2.3

Accounting by Joint Venturers......................................................................................... 9

2.3

Accounting for Investments in Joint Ventures ............................................................... 14

1.4. 1.5.

Joint Venture Provisions in Ethiopia .............................................................................. 24 Public Enterprises........................................................................................................... 25

1.5.1.

Benefits of Public Enterprises................................................................................. 27

1.5.2.

Forms of Public Enterprises .................................................................................... 28

1.5.3.

Public Enterprise in Ethiopia .................................................................................. 29

1.7.1. Accounting for Public Enterprises .......................................................................... 31 1.8. Chapter Summary........................................................................................................... 32 1.9.

Self-Test Questions ........................................................................................................ 33 CHAPTER TWO

ACCOUNTING FOR SALES AGENCIES AND PRINCIPAL; BRANCHES AND HEAD OFFICE 2.1

Characteristics of Principal and Agency and Branch ..................................................... 35

2.2

Distinguishing Sales Agency, Branch and Division ...................................................... 36

2.3.

Accounting for Sales Agency......................................................................................... 37

2.3

Accounting for Branch ................................................................................................... 38

2.3.1. Underlying Principles of Decentralized branch accounting ................................... 39 2.4 Reciprocal Accounts ...................................................................................................... 40 2.5

Expenses Incurred by Home Office and Allocated to Branches .................................... 42

2.6

Alternative Method of Billing Merchandise Shipments to Branches ............................ 43

2.7

Financial Statements for Branch and Home Office ....................................................... 44

2.7.1. 2.7.2.

Separate financial statements for Branch and for Home Office ............................. 44 Combined Financial Statements for Home Office and Branch .............................. 44

2.8.

Reconciliation of Reciprocal ledger Accounts ............................................................... 61

2.9.

Transactions between branches ...................................................................................... 64

2.10.

Chapter Summary ....................................................................................................... 66

2.11.

Self-Test Questions..................................................................................................... 67 CHAPTER THREE INSTALLMENT AND CONSIGNMENT CONTRACTS

3.1.

Installment Sales ............................................................................................................ 70

3.1.1. Special Characteristics of Installment Sales ............................................................... 71 3.1.2.

Methods for Recognition of Profits on Installment Sales ....................................... 72

3.1.3.

The Installment Method of Accounting .................................................................. 75

3.1.4.

Defaults and Repossessions .................................................................................... 83

3.1.5.

Other accounting issues relating to installment sales ............................................. 84

3.2.

Consignment Sales ......................................................................................................... 85

3.2.1.

Definition of Consignment Sales ............................................................................ 85

3.2.2. 3.2.3.

Distinction between a Consignment and a Sale ...................................................... 86 Right and Duties of the Consignee ......................................................................... 86

3.2.4.

The Account Sale (Report of Sales)........................................................................ 88

3.2.5.

Accounting for the Consignee ................................................................................ 88

3.2.6.

Accounting for Consignors ..................................................................................... 90

3.2.7. Accounting for partial sale of consigned goods...................................................... 93 1. Gross profit on consignment sales are determined separately ....................................... 94 2. Gross profit on consignment sales are not determined separately ................................. 94 3.2.8.

Other issues in Consignment Contracts .................................................................. 95

3.3.

Summary ........................................................................................................................ 97

3.4.

Self-Test Questions ........................................................................................................ 97 CHAPTER FOUR BUSINESS COMBINATIONS

4.1.

Nature of Business Combinations .................................................................................. 99

4.2.

Definition, Classes, Reasons and Types of Business of Combination ......................... 100

4.2.1.

Definition of Business Combination ..................................................................... 100

4.2.2.

Classes of Business Combinations........................................................................ 101

4.2.3.

Reasons for Business Combination ...................................................................... 103

4.2.4.

Types of Business Combinations .......................................................................... 106

4.3.

Methods for Arranging Business Combinations .......................................................... 107

4.4.

Establishing Price for a Business Combination ........................................................... 110

4.5.

Accounting Methods for Business Combinations ........................................................ 111

4.6.

Comparison of Purchase and Pooling Accounting....................................................... 123

4.7.

Criticisms of Methods of Accounting for Business Combinations .............................. 124

4.9.

Self-Test Questions ...................................................................................................... 126 CHAPTER FIVE CONSOLIDATED FINANCIAL STATEMENTS

5.1. Consolidated Financial Statements on the Date of Business Combination under Purchase Accounting (Acquisition Method) ........................................................................... 129 5.1.1. Consolidation of Wholly Owned Subsidiary on Date of Business Combination under Purchase Accounting (AcquisitioSageethod) ........................................................... 133 5.1.2. Consolidation of Partially Owned Subsidiary on Data of Business Combination under Purchase Method of Accounting............................................................................................. 138 5.2. Consolidated Financial Statements Subsequent to Date of Business Combination under purchase method of accounting .............................................................................................. 148 5.2.1. Accounting for operating Results of Wholly owned purchased subsidiaries ....... 149 5.3. Accounting for Operating Results of partially Owned purchased Subsidiaries Subsequent to Date of Business Combination ........................................................................ 158 5.4.

Chapter Summary......................................................................................................... 163

5.5.

Self-Test Questions ...................................................................................................... 163 CHAPTER SIX FOREIGN CURRENCY ACCOUNTING

6.1

Accounting for Foreign Currency Transactions ........................................................... 165

6.1.1.

Economic, Transaction, and Translation Exposure .............................................. 166

6.2. Accounting for Translation of Foreign Currency Financial Statements ...................... 169 6.2.1. Translation Terminology ...................................................................................... 169 6.2.2.

Identifying Functional Currency ........................................................................... 170

6.2.3

Translation Exchange Rates.................................................................................. 171

6.2.4

Alternative Methods of Translation of Foreign Subsidiary's Financial Statement 172

6.2.5. Translation and Re-measurement: Producing Financial Statements Using Translation or Re-measurement, or Both. ........................................................................... 176 2.8.

Transactions of the Year 2008: .................................................................................... 178

2.8.1.

December 31, 1999 ............................................................................................... 179

6.2.6.

Other Aspects of Foreign Currency Translation ................................................... 184

6.2.7.

Appraisal of Accounting Standards for Foreign Currency Translation ................ 186

6.3.

Chapter Summary......................................................................................................... 186

6.4.

Self-Test Questions ...................................................................................................... 186 CHAPTER SEVEN

ACCOUNTING FOR SEGMENT AND INTERIM REPORTING 7.1.

Accounting for Segment Reporting; Computation of segment profit and loss ............ 187

7.1.1. 7.1.3.

Identification of Reportable Industry Segment ..................................................... 188 Reporting Disposal of a Business Segment .......................................................... 196

7.2.

Interim Financial Reporting ......................................................................................... 203

7.3.

Chapter Summary......................................................................................................... 210

7.4.

Self-Test Questions ...................................................................................................... 210

Reference .................................................................................................................................... 211

CHAPTER ONE OVER VIEW OF ACCOUNTING FOR JOINT VENTURES AND PUBLIC ENTERPRISES Learning objectives: Dear students, after successfully completing this chapter you will be able to:  Define the joint venture;  Differentiate joint venture with partnership;  Describe and explain accounting for joint venture;  Define the term public enterprises;  Explain the characteristics of public enterprises;  Describe the benefits of public enterprises;  Understand Proclamation 25/1992 with regard to public enterprises in Ethiopia;  Understand and explain accounting for public enterprises;

1.1.Characteristics and Historical Background A joint venture differs from a partnership in that it is limited to carrying out a single project, such as production of a motion picture (movie) or construction of a building. Historically, joint ventures were used to finance the sale or exchange of a cargo of merchandise in a foreign country. In its traditional form a joint venture is a cooperative arrangement between two or more parties (venturers) for the purpose of carrying out a single project and is usually dissolved upon completion of the project. Historically, joint ventures were used to finance the sale or exchange of a cargo or merchandise in a foreign country. In an era when marine transportation and foreign trade involved many hazards, individuals (venturers) would band together to undertake a venture of this type. The capital required usually was larger than one person could provide, and the risks were too high to be borne alone. Because of the risks involved and the relatively short duration of the project, no net income was recognized until the venture was completed. At the end of the voyage, the net income or net loss was divided among the ventures, and their association was ended.

 Explain the characteristics and historical background of joint venture? 1.2.Present-day Joint Ventures In today's business community, joint ventures are less common but still are employed for many projects such as (1) the acquisition, development, and sale of real property; (2) exploration of oil and gas; and (3) construction of bridges, buildings, and dams. Joint ventures, in the sense in which the term is generally used in business today, are largely a post-second world war development. Ordinarily, a joint venture denotes a strategic alliance whereby two or more parities combine their resources and skills in an economic activity with the objective of receiving benefits from it. The participants in a joint venture are generally referred to as ventures. The joint venture can be national or an international one, the latter being present if the participants come from different countries.

Joint ventures have long been used in international business for

expansion into markets, particularly in developing countries. In recent years, joint ventures are being used as the principal vehicle for foreign direct investments. The characteristic features of joint ventures give rise to some very important accounting issues which need to be addressed by the accounting standard setters. There are two sides of these accounting issues. One is accounting and financial reporting by the joint ventures and the other is accounting and financial reporting of joint venture investments by the ventures. The former becomes most acute when the economic systems and accounting systems of the ventures diverge considerably.

Explain the present day’s joint ventures? 1.3.Types of Joint Ventures Considering the nature of joint venture arrangements, joint ventures can be classified as belonging to one of the following types. 1. Jointly controlled entities

2. Jointly controlled operations 3. Jointly controlled assets 1. Jointly controlled entities A jointly controlled entity is a joint venture which involves the establishment of a corporation, partnership or other entity (create a separate entity) in which each venturer has an interest. The capital contribution on the participating venturers, profit sharing and operating policies of the venture are governed by the joint venture arrangement. The entity has its own organizational structure and its legal form maybe either corporation, partnership, or any other form of business organization. The entity operates in the same way as other entities, except that an arrangement between the venturers establishes joint control over the activity of the entity. An example is when an entity commences a business in a foreign country in conjunction with a goverSageent or other agency in that country, by establishing a separate entity which is jointly controlled by the entity and the goverSageent or agency in the foreign country. A jointly controlled entity maintains its own accounting records and prepares and presents financial statements in the same way as other entities in conformity with the appropriate accounting standards. Generally, jointly controlled entities maybe divided into two forms: a. Incorporated and b. Unincorporated a. Incorporated The incorporated entities, i.e. corporations are juridical persons. An incorporated entity owns assets, incurs liabilities and expenses, and earns revenues in its own name and for its own account. Being a legal person, an incorporated entity has the right to enter into contract in its own name, it can sue and it can be sued. b. Unincorporated Ordinarily, an unincorporated entity is not treated as a legal person. Although the unincorporated entity can in its name acquire assets, incur liabilities and conduct business operations, from a legal point of view, the owners of the entity are directly and proportionately in control of all the assets and liabilities.

2. Jointly Controlled Operation In this situation no separate entity is formed. Instead, parts of the venturers’ existing enterprise work on a common project and coordinate their activities. The organizational structure remains flexible. In some case joint “project teams” are formed, in others responsibilities are delegated as and when the need arises. The distinctive feature of this type of joint venture is that the assets and expertise assigned by each venturer for the joint venture activity remain under the direct control of the venturer who assigns them. The participating venturers perform their respective parts of the joint venture actively using their own resources. The benefits are shared by the venturers on an agreed basis. Examples of joint venture operations include those joint venture arrangements under which the venturers jointly produce, market and distribute a particular product using each venturer’s resources such as its property, plant and equipment, technical expertise and employees. 3. Jointly Controlled Assets Although these are not separate legal entities, the resources contributed by the participating venturers are combined together for the purpose of a joint venture project which is managed either by one venturer typically known as operator, or by a joint managements team. The joint venture agreements define the responsibilities and obligations, of the operator, the interest of the parties etc. The distinctive feature of a joint venture of this type ...