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ACCT3011 Lecture 1 - ACCT3011 Financial Accounting B Yang...

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ACCT3011 Financial Accounting B Yang Xu (307198650) WEEK 1 SUMMARY - INTRODUCTION TO CONSOLIDATION AND THE CONCEPT OF CONTROL < <1.2>> INTRODUCTION TO ACCOUNTING FOR INTERESTS IN OTHER ENTITIES Purpose of Consolidation : To provide company stakeholders with information of how the investor company’s degree of influence over the investee’s economic resources might affect the investor firm’s profits and financial position. For example: Subsidiary Effects on Parent: 1. Parent owns equity therefore if subsidiary wounds up, parent is entitled to all profits and surpluses after any liability settlements 2. Subsidiary profits run to shareholders -> which is parent company 3. Parent entity’s cash flow is influenced by the subsidiary’s cash distribution Accounting for the Extended Group in Australia : More Contr ol Type of Investmen t Subcategory Accountin g Technique Account ing Standar d Description 1. Investme nts in Controlle d Entities/ Subsidiar ies N/A Consolidatio n Accounting AASB 127 Benefits of Group Structure : - Vertical/ Horizontal Intergration - Increase Market Share - Increase Scale of Operations - Undertake New Opportunities - Reducing Commercial Risk - To keep assets in one company for ease of management - To increase diversification - Lowering the risks of legal liability - Providing better security for proposed loans - To comply with regulatory requirements eg. China - Attracting capital without forgeiting control - For beneficial tax rate scaling (in 1970s) - However, may attract abuses of structure eg Standard Oil of USA 2. Investme 2.1) Jointly Controlled Entity Equity Method AASB 128 Difference Between Shared and Joint Control - Shared Control becomes joint control only when there is a contract between Page 1 of 7 GROUP PARENT Subsidiary 100% Owned
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ACCT3011 Financial Accounting B Yang Xu (307198650) nts in Jointly Controlle d Entities and Operatio ns (Joint Control does not have to be equal) the controlling parties Line by Line Method - The line by line method (AASB 131) applies for joint ventures involving joint venture operations. The line by line method involves recognising individual company’s proportionate share in each asset, liability and expense. Joint Control Benefits - For helping manage projects of a large scale - To reduce business risk - To benefit from each firm’s competitive advantage - To share economic resources 2.2) Jointly Controlled Assets Line-by-Line Method AASB 131 2.3) Jointly Controlled Operation Line-by-Line Method AASB 131 3. Significa ntly Influence d Entities (Associat es) N/A Equity Method AASB 128 Formation - Associates normally arise when one entity has a substantial ownership interest in another entity Equity Method - The equity method involves the initial recognition of the investment at cost. - For associates, the investment asset is then increased or decreased by the investor’s percentage share of the post-acquisition profits and other reserves - The equity method reports income and investment asset values that provide more information in investment performance and value comparative to the historical cost method 4.
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