Advanced Accounting Problems and Solution

Question: Discuss about theAdvanced Accounting for Problems and Solution. Answer: Introduction: Control Criterion AASB 127 As per the provisions contained in AASB 127, the consolidated financial statements comprise the assets, liabilities, equity, and income of the all the companies in group. The parent company is required to consolidate the financial statements of all the subsidiary companies (AASB 127, 2011). The subsidiary company which is to be considered for such consolidation is the one in which the parent company has majority control. Primarily, the majority control is measured with reference to the interest in equity held by the parent company. This implies that the if one company holds more than 50% stake in equity whether directly or indirectly, the later would be subsidiary of the former. However, the interest in equity is not the only criteria that are applied to measure the control of the parent company. There are other considerations as well, which are needed to be taken into account at the time of deciding the existence of subsidiary and parent relationship (AASB 10, 2011). Among such other considerations, one is the control and supervision of the board of a company by another company whether directly or indirectly. This implies that if a company has the power to supervise or direct the board of another company, that another company would be considered to be subsidiary of the former (AASB 10, 2011). In the current case, Ezee Ltd. Holds 25% stake in the equity of Alpha Ltd, which implies that applying the stake holding criteria, there does not exist any parent-subsidiary relationship between Ezee Ltd and Alpha Ltd. However, it also noted further that Ezee Ltd. Controls the majority of the board of Alpha Ltd as three seats out of total five are occupied by it. Thus, considering the fact that Ezee Ltd has the power to control the board of Alpha Ltd, it could be inferred that Ezee Ltd is a subsidiary company of Alpha Ltd. As there exists a relationship of parent-subsidiary between Ezee Ltd and Alpha Ltd, therefore, the financial statements are required to be consolidated. Consolidation Goodwill or Excess On consolidation of the financial statements, the assets and liabilities of the subsidiary are added to the assets and liabilities of the parent company. It should be noted that the equity share capital held by parent in the subsidiary company is not carried to the consolidated financial statements. Along with this, the eliminations are also made in respect of the carrying value of the investment held in the subsidiary by the parent company. Thus, there arises a need to make an adjustment for these eliminations in the consolidated financial statements (AASB 10, 2011). In order to make adjustment in this regard, the amount of equity share capital of subsidiary held by the parent is deducted from the carrying value of the investments in subsidiary as shows in the balance sheet of the parent. If the results of this computation are positive, the same is regarded as goodwill and if the results are negative, the same is regarded as capital excess (Dagwell, Wines, and Lambert, 2011). Intra-group Transactions The intra group transactions emanate as a result of the financial transactions between the group companies. For example, the goods sold by parent to subsidiary or vice a versa would give rise to the intra group transaction. The intra group transactions represent unrealized profit, thus, an adjustment is needed to eliminate these transactions and presented a true and correct picture of the state of affairs (Dagwell, Wines, and Lambert, 2011). If the intra group transactions are not eliminated, the balance sheet of the group would be overloaded with unnecessary items, which have no bearing on the true worth of the business. References AASB 10. 2011. Consolidated Financial Statement. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Accessed on 08 September 2016]. AASB 127. 2011. Separate Financial Statement. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB127_08-11.pdf [Accessed on 08 September 2016]. Dagwell, R., Wines, G., and Lambert, C. 2011. Corporate Accounting in Australia. Pearson Higher Education AU.