The main purpose of this assessment is to analyse the provisions of AASB 10 in relation to preparation of consolidated financial statements. The objective of this standard is establishing principles that are prepared and presented in relation to consolidated financial statements. This standard is applying in relation to financial statements that are held for the purpose of assessing general financial statements. This assessment aims to advise the finance director of Northern Australian Global Investments Ltd( NAGIL) . This assessment is to advise the director of this concerned company for the purpose of including investments that are made by the concerned business during this concerned period. The company has made lots of investments regarding this period. These investments related to consolidation with other business entities. These particular investments will be assessed in relation to the provisions of AASB 10 during the aforementioned period(Grossi and Pepe 2013)
As per the case , Northern Australian Global Investments provided a loan to Struggle Ltd . This loan was later converted to equity fund because the latter company, Struggle Ltd , due to the financial difficulties was unable to pay back the loan amount. This provided Northern Australia Global Investments a 70 percent holding interest in the business of Struggle Ltd. As per the provisions of Para 5 of AASB 10 ,the standard needs to determine whether the company is parent company on the basis of control that the business have over investee(Howieson 2013). As per Para 7, a control over business is established when certain conditions are met. These conditions relate to determining the power that the investing company has over the investee company, the exposure or rights that the investing company will get from being involved in the business of the investee company and the power to affect the returns that are made by the investee(Grossi and Pepe 2013). As per para 8, the investing company needs to consider the facts and situations in relation to whether the investing company controls the investee company or not(Carlin 2014). The investing company shall make a reassessment if it finds that there are certain facts and situations indicating the changes on one of the three elements of control that are listed in paragraph 7 of the AASB. An investing company also has the power over an investee company when the investing company has existing rights that give the investing company an ability to direct related activities, which means that the business activities of both companies needs to be related. They should be in the same line of business activity. These activities are these activities that significantly affect the returns of the investee company.
In the above case study , Northern Australia Global investments is not actively involved in the day to day operations of the company . They are not also involved in the daily decision making of the company as well. The company has no clear management structure that affects decision making(Bisogno, Santis and Tommasetti 2015) . It has no board of directors that can effectively help in decision making. The management is hence ineffective in decision making and promoting a sound managerial structure. It takes no part in the financing and operating decisions of the company as well. Lack of these decisions will greatly cost the company in increasing their return on an investment and acquiring a major competitive advantage(Aasb.gov.au. 2018). Hence we can clearly see that the management of the company is ineffective of getting the business objective done(Türel and Türel 2014). Therefore the company should not involve such investments in the consolidation of the business.
While studying the above case study, it is evident that after assessing it, Northern Australian Global Investments provided a loan to Very Big Company Limited during the period. The management of Northern Australia has not invested in the shares of the company Very Big company Limited . It has provided a loan to the same company. The company , because of financial difficulties has not been able to repay the loan amount(Lombrano and Zanin 2013) .Due to the loan amount not getting repaid in full due to financial difficulty, a bailout package is initiated . This bailout package is like a compensation package that is provided to the companies since it cannot make the payments unless the same is approved by Northern Australian Global Investments .Since these investments are not a part of equity investments the same investments are not a part of Australian Accounting Standards Board since the company Northern Australian Global Investments is considered to be the parent company of Very Big Company limited(Juárez 2013). The board of Northern Australia Global Investments would control all payments as part of the bailout package that the company will provide to the Very Big company Limited. as a part of the bailout package. Another mandate that the bailout package has is that there are no payments that would be approved without the prior approval of the board of directors of northern Australia Global Investments . Hence for the reasons mentioned above, the management of Northern Australia Global Investments should consider the same as loan for the business.
This case study is related to the company of Medium sized Company limited( MSCL) which is a subsidiary of both Northern Australia Global Investments and Sharp Players. The companies mentioned in this case hold an equal share of ownership and the rights of ownership that is associated in the business. These two companies also provide an equal share of finance and resources to fund Northern Australia Global Investments. As per the provisions of AASB 10, para 9 states that in case an investee company is controlled by two investors together then the same cannot be controlled by any one business. hence the companies need to only account for the interest which it has in the investee account(Erel and Weisbach 2015).
In the case of Medium sized company limited, the management of Northern Australia global investments needs to consider a couple of things. One of the things would be the interest of loans of Northern Australia Global investments that will take place. Another thing that the management needs to consider is the management fees which is to be paid out of the net profits. This management fee will be paid out of ASCL’s net profits after providing all of NAGIL’s loan interest payments . However when MSCL does not make a profit for interest payments , the required management fees will be paid. So in case of losses, the management of MSCL only needs to incur interest expenses and not pay the management fees to the business considered(Müller 2014).
In the above case study that is provided in the assessment , it is evident from the assignment that the management of Northern Australia Global Investments holds an approximate 40% of holdings of CrocsRUs and the remaining 60 % of the holdings, which is the majority portion of the holdings is held by the owners. the case study provides that the management of the aforementioned company is handled by Northern Australian Global Investments Ltd. further in addition to taking management responsibility, the company also takes care of other management decisions as well. As per the provisions of para 7 of AASB 10, it states that in order for a business to be in control of the investee company, the investor business sjould possess a power over the investee(García and Vazquez 2013). The investor company should have variable rights on the returns of the business. These rights are accrued to the business for taking an active role in the management of the investee company(Aasb.gov.au. 2018). The investor company should also have the ability to use its power over the investee company to affect the amount of the returns of the investor. All these three conditions stated above are needed to be satisfied for the business to have control.
In the case of CrocsRUs , the management of Northern Australia Global Investments have the overall majority control over the business. the management of this company also takes the major decisions and hence they need to consolidate the investments in the balance sheet
Conclusion
The above discussion shows the various investments and loans which are provided to different businesses during this period, including investments made in other subsidiary companies. The assessment shows the applications of the provisions of AASB 10 in order to determine whether the finance director of the company should incorporate the transaction in reporting the consolidated financial statement of the business. The AASB 10 deals with the reporting requirements of investments made in other business and the various provisions that are associated with the investments made by the parent companies in the subsidiary companies . The AASB 10 assesses whether all the relevant provisions of the standard are complied with or not. This assessment deals with the reporting requirements that are made by businesses investing in other businesses . It makes an assessment of the case studies in question and assesses the requirements that are needed in order to provide a solution that benefits the management of the companies in question.
References:
Aasb.gov.au. 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf [Accessed 30 Sep. 2018].
Bisogno, M., Santis, S. and Tommasetti, A., 2015. Public-Sector consolidated financial statements: An analysis of the comment letters on IPSASB’s exposure draft no. 49. International Journal of Public Administration, 38(4), pp.311-324.
Brüggemann, U., Hitz, J.M. and Sellhorn, T., 2013. Intended and unintended consequences of mandatory IFRS adoption: A review of extant evidence and suggestions for future research. European Accounting Review, 22(1), pp.1-37.
Carlin, T.M., 2014. Debating the impact of accrual accoxunting and reporting in the public sector. Financial Accountability & Management, 21(3), pp.309-336.
Erel, I., Jang, Y. and Weisbach, M.S., 2015. Do acquisitions relieve target firms’ financial constraints?. The Journal of Finance, 70(1), pp.289-328.
García-Herrero, A. and Vazquez, F., 2013. International diversification gains and home bias in banking. Journal of Banking & Finance, 37(7), pp.2560-2571.
Grossi, G. and Pepe, F., 2013. Consolidation in the public sector: a cross-country comparison. Public Money & Management, 29(4), pp.251-256.
Howieson, B., 2013. Defining the Reporting Entity in the Not?for?Profit Public Sector: Implementation Issues Associated with the Control Test. Australian Accounting Review, 23(1), pp.29-42.
Juárez, F., 2013. Chaos and complexity in financial statements. In Chaos and complexity theory for management: Nonlinear Dynamics (pp. 1-33). IGI Global.
Lombrano, A. and Zanin, L., 2013. IPSAS and local government consolidated financial statements—proposal for a territorial consolidation method. Public Money & Management, 33(6), pp.429-436.
Müller, V.O., 2014. The impact of IFRS adoption on the quality of consolidated financial reporting. Procedia-Social and Behavioral Sciences, 109, pp.976-982.
Türel, A. and Türel, A., 2014. The effect of derivatives on the financial positions of banks in Turkey and in EU: a comparative analysis. International Journal of Critical Accounting, 6(2), pp.166-186.
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