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Corporate Takeover Decision Making and the Effects on Consolidation Accounting


Executive Summary

The individual assignment, highlight the various method to accounting of investments in associated business entities, basically the initial past of this business report states about two methods of investments such as equity method and second one is consolidated accounting. While second part of this project report is about the inter group transection and computation of profit for non-controlling interest groups. As such second and third part of this project report is interconnected to each other and states the same things related to inter group transection and earning for non-controlling interest groups. This project report is good in a way to learn the legislative requirements in company formation and how to account for equity, capital and distributions, improve your knowledge and sharp your experience to prepare a consolidated financial statements.


Table of Contents

Executive Summary. 1

Introduction. 2

Part –A.. 2

Part – B.. 3

Part –C. 5

Conclusion. 6

References. 7



Every business initiate its operation with intention to covert its visionary beliefs in the reality, to covert the vision statement in real term the responsible persons of the corporation, divided the vision statements in to the mission statements. Eventually business start its expend its operation by making various business entities, these investments are further divided into the controllable and non-controllable investments, the initial part of this project summaries the methods of accounting to give an accounting treatments for investment in association, while the second part of this project stateaccounting treatments for inter group transection and non-controlling interest, finally the last part of this report state about the ways to furnished the quantitative and qualitative information in financial statements.(Financial Statements. (2012). 

Part –A

Investments basically, divided into two parts such as short term investment and the long term investments, the short term investment are those investments which are invested for short term only that is less than 12  months where in case of long term investment, the investment are made with intention to hold such investment for more than 12 months. The concept of short and long term investment is equally applied for individual as well as groups investors, and for the body and non-body corporates. the investments of body corporates are further classified as equity investment or the consolidation investment, where one gives a controlling interest and another empower the invested business entity to influence the decision of investee body corporate, where such decision impact over interest such investment groups. (AAO Consolidated Financial Statements 2018. (2018). 

As a part of corporate restructuring strategy, many smart and leading body corporate make an investment in other body corporates, and enhance its operation. Such invested requires the adoption of AASB, such as AASB -3, AASB 128 and AASB 10. As part of fair accounting treatments and in order to meet the requirements of stakeholders associated with corporation.

What is Consolidation Accounting?

The Consolidation is a type of investments accounting, specifically used for consolidation of financial statements of majority ownership investments.  This method of accounting will be applicable or will be used only in case where the investor company is in the position to control the activities or investee company or subsidiary company. Such accounting method shows the combine result of two or more body corporations.    ( (2019). 

Illustration of Consolidation Accounting 

The Company namely XYZ Corporation make investment in other body corporation namely, TYZ Limited, the investment shows the holding of XYZ limited, in TYZ Limited total 51.10 %, such holding of 51.10 % of TYZ limited by XYZ limited show the voting and controlling right of XYZ limited over the TYZ limited, here the investment of XYZ limited in TYZ limited, requires to prepare a consolidated financial statements at the end of income year.  The controlling interest of XYZ limited over the TYZ limited requires to adoption of consolidation method.

What is Equity method of Accounting?

The equity method of accounting will be applies when the one company make a small investment or acquires minor stake of other body corporation.Here purchasing firm known as the investor, while the company in which investment were made is known as the investee company. Here the investor does not own the controlling interest over the investee company, hence any earning or loss from the investment, are reflected in the profit and loss account of the investor company, further the inverts company owns only minor and not controlling stake over the other company.(Marquis, R. and Santos, A. (2018).

 Illustration -2

Same as above stated company XYZ limited acquires a stake or make investment in TYZ limited , which shows the total holding of 5 %  XYZ limited In TYZ limited, than here Equity method of accounting will be applied for XYZ limited and any profit or loss make from the investment are shown in the profit and loss accounts of XYZ limited.

Part – B

AASB 127 consolidation and separate financial statements, states that, an associated, business entity should prepare the financial statement individually by following the same accounting policy and on same day. That means the first state to prepare a consolidated financial statements, first of all we have to prepare the accounts of the all associated business entities, by following the uniform accounting policy, than after can prepare a consolidated financial statements, here while preparing the consolidated financial statements, the intercompany transection such as transection between the holding and subsidiary company should be eliminated, fully. (Corporate Finance Institute. (2019). 

The reason for elimination of intercompany transection is that such transection are noting but shifting of fund from one hand to another hand and such inter groups transection some day or some time motivates to manipulation of financial statements, hence it is advisable and in the best interest of stakeholder to eliminate the intercompany transactions, further such actions will result in to reflection of true and fair view of the state of affairs of company and clear picture of corporate culture.

AASB 127, intergroup balances as well as intergroup transections, such as transections related to income, expenses, dividends and other should be eliminated fully, further any profit and losses occurred from the intergroup trisections, which was recognised in the assets, such as in inventories, fixed assets and other shall also be eliminated in fully. Intragroup losses may indicate an impairment that requires recognition in the consolidated financial statement.  Any tax liability or assets arise from the intergroup transection, should be treated by following the AASB 112 income taxes. 

Intercompany investments.: same as above, the intergroup investments are also be eliminated, where the group companies hold investment in each other’s, such action will enhance the reliability and transparency of financial statements.

Replay to current case questions:

Regarding the profit earn by the subsidiary company on account of sales of goods and providing of professional service should be eliminated in full, as stated in the AASB 127,  the elimination of intergroup transection and earning will affect the non-controlling interest parties, if we ignore the portion of earning or profit in intergroup transection, here AASB 127 states, while computing the earning available for non-controlling interested parties, we have to consider the inter groups transections and profit made there to, to the extent of portion of non-controlling interested stakeholders that mean we have to compute the individual profit both for controlling party and for non-controlling investments groups.   (AAO Consolidated Financial Statements. -2019)

The best illustration for inter group transaction are as follows.

Here in current case the subsidiary company sales the goods and provided the professional services to the holding company, and if such transactions are executed on credit terms, than in the financial statement of both the company the debtors and creditors are created. Such debtors and creditors shows the inter groups transection and required adjustment while preparing the consolidated financial statements. Similarly the stock available at the end of income year, is also required adjustments, to eliminate the profit merging of subsidiary company and to show the closing inventory at the cost price.       

Part –C

The presentation of consolidated financial statement is governed by AASB 127 and AASB 101. AASB 127 highlights the procedure to be adopted for consolidation of financial statement.      

According to the AASB 127, the management must ensure true and proper disclosure of non-controlling interest (NCI). The non-controlling interest must be reported at proper place and at proper value. This standard deals with two aspects namely reporting of non-controlling interest at proper place and its correct valuation.

While preparing consolidated financial statement the non-controlling interest must be shown as separate item under the head owner’s equity. This is because the non-controlling stakeholders are the outsiders who have contributed funds in the corporation and corporation owes liability towards them as they owes towards its own equity shareholder. However it should not be clubbed with the equity of the owners of parent company.

According to this standard the profit and loss along with all comprehensive income must be divided into two parts attributable to parent company and attributable to non-controlling interest in the ratio of their respective holding in the subsidiary company. Part of profit and loss account and other comprehensive income attributable to non-controlling interest must be added to the value of non-controlling interest even if its value becomes negative. In case if the subsidiary company has issued cumulative preference share and of it is classified as equity shares than the parent company must compute share attributable to non-controlling interest and must be added to value of non-controlling interest. According to standard in this case the value of both controlling and non-controlling interest must be adjusted to highlight the changes in their respective equity interest. The standard requires that the difference between fair value of consideration paid and the amount with which the non-controlling interest is adjusted must be recorded in the equity portion attributable to owners of the holding company.

While preparing consolidated financial statement, the profit element of the intercompany transaction attributable to the parent company should be eliminated and the profit element attributable to the non-contorting interest must be added to the value of non-controlling interest. Moreover it is obligatory for the management to identify net asset attributable to non-controlling interest in the net asset of the subsidiary company. The non-controlling interest must be disclosed at the proper value and must include the value of equity shares and profit element attributable to them. ( (2019). 

The standard further requires that the consolidated financial statement must be prepared by adopting uniform accounting policy. In case where the financial statement of parent company and subsidiary company are prepared by following different accounting policy them the necessary adjustment must be made to the financial statement to make financial statement uniform. The carrying value of financial statement of the subsidiary company must be adjusted by making necessary adjustment. The uniform accounting policy must be ensured to present the true and fair view of consolidated financial statement. In this process the financial statement of subsidiary company should be adjusted as per the financial statement of the subsidiary company. The fact of change in accounting policy and its quantifiable effect must be disclosed in the consolidated financial statement. ( (2019). 

The basic objective behind the disclosure of non-controlling interest as separate item in the financial statement is to reflect the true position of consolidated financial statement. The users of the financial statement can get the idea that the whole asset and profit of the subsidiary company is not exclusively available with the parent company. It highlights the portion of the asset and liability of the subsidiary company available with the parent company.    ( (2019). 

AASB127, states that a financial statement of associated company requited same accounting policies, hence if the financial statements are prepared with differ accounting policy required management of financial statements, in order to meet the requirement of consolidation of financial statements.

Replay to the current case:

AASB 127 is equivalent to IAS 27 Consolidated and Separate Financial Statements issued by the IASB.  Paragraphs that have been added to this Standard (and do not appear in the text of the equivalent IASB Standard) are identified with the prefix “Aus”, followed by the number of the relevant IASB paragraph and decimal numbering

If the both associated company had prepared a financial statements with uniform accounting policy and with going concerns assumption, than no change in financial statements are required as such. Here in current case the process adopted for presentation of non-controlling interest is correct and for that no change is required, however, if the information presented by the accountant of subsidiary company does not complied with the requirement the aspects of uniform accounting policy than we need to make required change in financial statement of parent or subsidiary company in order to meet the requirements of similar accounting policy.    

The governing accounting standers, state clear disclose of the material information at single place in the annual account of the company, hence here in current case we will adopt the same accounting practice, any change we have made while preparing the consolidated financial statements, and while preparing the non-controllable interest, should be disclose at single place, so that it will highlight among the users groups.  


At this junction, we can states that the equity method of accounting is deal with the non-controlling investments, while the consolidation method of accounting will applied where the investor company owns a controllable stake over the other company, further while preparing the consolidated financial statements the intergroup transection between the associated business entities are eliminated, but this will not applied while computing the earning available for non-controlling interest groups. It is always essential to follow the AASB while preparing the consolidation financial statements, and computing the non-controlling interest and intergroup transection. The most important learning part of this project is the computation of earnings available for the non-controlling interest groups.


  • AAO Consolidated Financial Statements 2018. (2018). Ophthalmology, 125(11), pp.F1-F32.
  • AAO Consolidated Financial Statements. (2017). Ophthalmology, 124(11), pp.F1-F27.
  • Corporate Finance Institute. (2019). Consolidation Method - Accounting for Majority Control Investments. Available at: [Accessed 2 Jun. 2019].
  • Financial Statements. (2012). Review of Income and Wealth, 58(4), pp.774-785.
  • (2019). AASB issues new standards on consolidation, joint arrangements and disclosures. Available at: [Accessed 2 Jun. 2019].
  • (2019). AASB 127 - Consolidated and Separate Financial Statements - July 2004. Available at: [Accessed 2 Jun. 2019].
  • Marquis, R. and Santos, A. (2018). Impacts of the elimination of the proportionate consolidation on Itapúa financial statements. Revisit Contabilidade & Finanças, 29(77), pp.213-228.
  • (2019). Consolidation vs. Equity Method of Accounting. Available at: [Accessed 2 Jun. 2019].

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