Mid-Semester Test Notes PDF

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Summary

Overview of Inter-Entity Relationships & Accounting for Simple InvestmentsNo special relationship (passive shareholding)Significant Influence Joint Control ControlInvestor Investor Joint Operators Joint Venturers Parent Simple Investment Associate Joint Arrangement Subsidiary Investment AASB...

Description

TOPIC 1 Overview of Inter-Entity Relationships & Accounting for Simple Investments No special relationship (passive shareholding)

Significant Influence

Investor

Investor

Simple Investment

Associate

Investment AASB 9

Equity method AASB 128

At amortised cost or fair value

Proportional share of Associate’s profits

Joint Control

Control

Joint Venturers Joint Arrangement Proportional Equity method consol. AASB 128 AASB 11 Proportional share of JA’s A & L and Rev & Exp Joint Operators

Parent Subsidiary Consolidation AASB 10 Combination of all entities’ financial statements

Simple Investment - AASB 9:  Recognise financial asset when entity becomes party to the contract/transaction  date shares purchased  Measurement:

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Q1: Subsequent Measurement: Amortised Cost or Fair Value?

Q2: Fair Value through P&L or OCI?

Q3: Initial Measurement: include acquisition costs?

Classification of Financial Assets

Choice of Fair Value through OCI over P&L

Initial Measurement

At Amortised Cost (4.1.2)

N/A

At cost (FV at acquisition) + Direct Transaction Costs

At Fair Value through OCI (4.1.2A)

Elect OCI (5.7.1(b), 5.7.5): if not held for trading = e.g. short-term or speculative selling & purchasing

At cost (FV at acquisition) + Direct Transaction Costs

At Fair Value through P&L (4.1.4)

By default (5.7.1)

At cost (FV at acquisition) [no Transaction costs]

Managers prefer OCI to minimise fluctuations in profit (company perceived as less risky; shareholders demand lower return) Direct transactions costs = brokerage, stamp duty (not staff time)

FV through P&L: Dr Shares in co. Cr Bank Dr Brokerage Expenses Cr Bank 30 June Dr Shares in co. Cr Gain on investments (P&L)

FV through OCI: Dr Shares in co. Cr Bank Dr Shares in co. Cr Bank (Brokerage costs) 30 June Dr Shares in co. Cr Gain on investments (OCI)

TOPIC 2 Pre-Business Combination: Due Diligence & Takeover Laws 1. Value Proposition  Protective value (market competition)  Synergistic value (linking value chain/economies of scale)  Growth value (access new markets)  Underperformance value (e.g. remove poor management)  Risk management (diversification) 2. Due Diligence  Investigation conducted by a potential purchaser of a business prior to the acquisition of another business  Assess risks  normal business risk, financial risk (unrecognised liabilities), tax risk, legal risk  Identify value proposition  Operational aspects e.g. integration of accounting information systems  What the company is worth  value in exchange or value in use  Evaluate strategic advantages & disadvantages 3. Takeover Laws

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Corporations Act (2001)

Competition and Consumer Act (2010)

ASIC

ACCC

Ensures procedural fairness during the takeover process Protecting shareholders and capital market participants (esp. of target companies)

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Prohibits monopoly or anti-competitive mergers Protecting competition in the market & consumers

Foreign Acquisitions and Takeovers Act (1975) Foreign Investment Review Board (FIRB)  Protecting national interests

Tax Law ATO 

Concerned with Corporate and Investor taxation issues

Corporations Act: General Prohibition  s 606 - prohibits the acquisition of ‘relevant interest’ in a company’s voting shares if it results in an increase in voting power o from 20% or below to >20% o from a starting point >20% & FVINA = goodwill  CT < FVINA = gain on bargain purchase Asset Purchase Acquirer  fair values: Dr Assets Cr Liabilities Cr Cash Cr Gain on Bargain Purchase

Acquiree  book values: Dr Cash Dr Liabilities Cr Assets Cr Gain on sale of assets/business (Acquiree can continue as company or liquidate)

Share Purchase Acquirer Dr Investment in co. Cr Cash

Acquiree * no journal entries required on acquisition date

* Note: Accounts receivable journal entry: Dr Accounts receivable (book value) Cr Allowance for doubtful debts

(book value - FV)

TOPIC 4 Consolidation Introduction: Control AASB 10:  Para 4 - an entity that is a parent shall present consolidated financial statements  Para 5 - determine whether a parent by assessing whether it controls the investee  Para 7 - all 3 elements must be present for control to exist  Para 8 - consider all facts & circumstances 1. Power over investee - para 10 

Existing rights that give the investor o Voting rights from shares - para 11 o Other examples of rights - para B15  Potential voting rights  B47 - must consider potential voting rights arising from options, only if rights are substantive  B22 - ‘substantive’ = holder must have practical ability to exercise rights  B23 - factors: o barriers preventing holder from exercising rights  financial penalties/incentives; exercise/conversion price o mechanism enabling multiple parties to exercise the rights collectively o whether the party would benefit from exercising the rights (in-the-money)  B48 - consider purpose & design of instrument  Protective rights ≠ power (para 14, B27)  App. A - designed to protect the interest of holders  B26 - relate to fundamental changes to activities or apply in exceptional circumstances  B28 - examples: o lender can restrict borrower from certain activities o non-controlling shareholder to approve unusually large capital expenditure o rights of lender to seize assets of borrower in event of default  To appoint, reassign or remove key management personnel  To appoint or remove another entity that participates in management decisions  To direct the investee to enter into, or veto, transactions

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Current ability to direct - para 10 o Might or might not be currently exercised - para 12

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Relevant activities - para 10 o Activities of the investee that significantly affect the investee’s returns o Examples:  B11(a) - selling & purchasing goods & services  B11(b) - managing financial assets  B11(e) - determining funding structure or obtaining funding  B12(b) - appointing, remunerating & terminating key management personnel o B13 - which investor is able to direct activities that most significantly affect returns  can change over time

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Para B35 - 50% presumption (indicator, but not conclusive - para B36-B37) o B36 - voting rights must be substantive  through determining operating & financing policies o B36-B37 - if another entity has power (e.g. government, administrator, receiver, liquidator, regulator) as a result of a contract or liquidation/administration  investor has no power despite majority shareholding

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Power without majority - para B38-B42 o B42(a) - size & dispersion of other shareholding o B42(d) - attendance at AGMs/voting patterns o B42(c), B40 - existence of contracts o problems = temporary control; friendly relationship can turn unfriendly

2. Exposure, or rights, to variable returns from involvement with investee - para 15-16

 investor’s returns have the potential to vary as a result of investee’s performance (investor’s wealth tied to investee’s performance)  B57 - examples: o dividends o increase in investment value o ‘synergy’: cost savings, economies of scale o sourcing scarce products

3. Ability to use power to affect returns - para 17-18  parent must have ability to increase its benefits & limit its losses from subsidiary’s activities  Principal  Control  Agent (delegated power)  No Contol  B60 - factors: o scope of decision-making authority  broad or narrow / small interest = agent o rights held by other parties  ability to dismiss decision-maker = agent o remuneration  market based = agent o exposure to variability of returns from other interests  provides guarantee regarding investee’s performance...