Consolidated Finance Statement Public Sector – Case Study Analysis

Introducation

Discuss About The Consolidate Finance Statement Public Sector?

This case study that has been provided in this paper has the sole purpose of understanding whether Knapp Ltd is a subsidiary of Leo Ltd or not. With respect to this question, it can be said Knapp Ltd being a subsidiary to Leo Ltd would depend on whether Leo Ltd tries to control Knapp Ltd.

In this scenario, as Leo Ltd has a hold on the convertible debentures it does not provide the full power of controlling Knapp ltd to them. It is due to the fact that Mr. Hang has the actual control over Knapp Ltd according to AASB 10, which states that the controlling concept is the capability to control and management, it is even a power to govern and supervise the concept rather than an real controlling concept.

In this scenario, it is seen that Leo Ltd has selected Mr Wang in order to lead the team for the manufacturing of a new product line. Mr Wang is therefore named the Managing Director of Knapp Ltd. He is paid an annual salary of $100,000 and $ 10,000 out of the overall money is paid to Mr Wang during the establishment of Knapp Ltd. The amount of $10,000 is invested by Mr Wang in the project and thereby gains the initial issue of 10 shares for the organization and the voting of the ordinary shares. It is even seen that according to this scenario, in accordance to AASB 10, Mr Wang is the authority to control, manage and govern Knapp Ltd as he holds 10 initial issues of voting ordinary shares. Therefore, he would be person has the authority tom take control over the operations of the company and undertake decisions according to his wish in order to develop the new product and establish the company. Mr Wang even has the actual control over Knapp Ltd, but according to AASB 10, the concept of control is the capability to control and the authority to govern the mechanism and not the actual concept of control (Aasb.gov.au. 2017). It can be seen when Leo Ltd transfers $500,000 to Knapp Ltd for 7% 10 year debentures convertible during any point of time into 500 shares of Knapp Ltd which are voting ordinary shares. If Leo Ltd converts these debentures into shares, they would hold the power to control and govern the concept as they would fulfil the obligations of Knapp Ltd of undertaking decisions. It is due to the fact that the constitution of Knapp Ltd ascertains powers for the voting ordinary share holders and the holders of the securities convertible into voting ordinary that is in need of the majority of every class of voting independently (Perera and Chand 2015).

Analysis of the case

The difference between actual control and the capacity to control can be understood properly as it is seen that even though Mr Wang has been chosen for controlling Knapp Ltd, Knapp Ltd may overrule this scenario by converting their debentures into voting ordinary shares. In this respect the actual control would be in the hands of Leo Ltd and the capacity of control would levy on Mr Wang as long as Leo Ltd does not convert their debentures to ordinary voting shares of Knapp Ltd.  

In this scenario Leo Ltd would be considered as a passive controller. It is due to the fact that Mr Wang, the holder of Knapp Ltd is currently exercisable instrument has the power and the capability to control. Mr Wang has the independent capability to employ the instrument and hereby gain the authority to determine the operating and the financial policy (Pacter 2017). Leo Ltd is considered to be passive controller as they would have the ability to control the proceedings of Knapp Ltd once they convert their convertible debentures in to ordinary voting shares of Knapp Ltd. Once the conversion is completed Leo Ltd would become the active controller.

Leo Ltd not implementing the conversion option means that Leo Ltd has implicitly accepted the policies that have been determined by Knapp Ltd. A correlation can be constructed with the delegated authority Mr Wang. Mr Wang has the knowledge that if he fails to gain the acceptance of Leo Ltd for his duties, then Leo Ltd can exercise their control by assistance of converting their debentures (Grossi 2015).

The final conclusion that can be concluded that Mr Wang has the controlling power until Leo Ltd chooses not to implement the conversion operations. Leo Ltd does not have the power to make any decisions related to the policy of Knapp Ltd. They have first implement the conversion option of their convertible debentures. Leo Ltd may never incorporate this strategy. In that scenario, Mr Wang has the authority to construct all the policies of Knapp Ltd. Mr Wang hs the present capability to manage and control, this situation would only change if Leo Ltd incorporated their options. Until this action is being taken, Leo does not have the present ability to control. As it is seen that Leo Ltd has not implemented the strategy, there lies a question whether the shareholders of Knapp Ltd requires the information about the mixed entity about both the companies.

Another discussion point is whether the chances of implementation of the conversion option should is a segment of the decision making process. With respect to AASB 10, the rights require to be substantive in order to control for their existence. For instance, due to the economic situations Knapp ltd may not require to incorporate the options. If it is unfavourable to the holder of the options to incorporate the options, the holder does not have any control over the other body.     

Acquisition Analysis:
Particulars	Carrying Amount	Fair Value	Net Fair Value
Share Capital			$125,000
General Reserve			$31,250
Retained Earnings			$25,000
Plant & Machinery	106250	112500	6250
Net Fair Value of Identifiable Assets & Liabilities			$187,500
Purchase Consideration			$200,000
Goodwill			$12,500

In the Books of Dean Ltd.
Journal Entries
Particulars	Amount	Amount
Business Combination Valuation Entries:
Accumulated Depreciation A/c.	Dr.	$18,750
To,	Plant & Machinery A/c.		$12,500
To,	Deferred Tax Liability A/c.		$1,875
To,	Business Combination Valuation Reserve A/c.		$4,375
Depreciation Expense A/c.	Dr.	$625
Retained Earnings (1/1/17) A/c.	Dr.	$2,500
To,	Accumulated Depreciation A/c.		$3,125
Deferred Tax Liability A/c.	Dr.	$938
To,	Income Tax Expenses A/c.		$188
To,	Retained Earnings (1/1/17) A/c.		$750
Goodwill A/c.	Dr.	$12,500
To,	Business Combination Valuation Reserve A/c.		$12,500
Pre-Acquisition Entries:
Share Capital A/c.	Dr.	$125,000
General Reserve A/c.	Dr.	$31,250
Retained Earnings (1/1/13) A/c.	Dr.	$25,000
Business Combination Valuation Reserve A/c.	Dr.	$18,750
To,	Shares in Diane Ltd. A/c.		$200,000
Share Capital A/c.	Dr.	$125,000
General Reserve A/c.	Dr.	$31,250
Retained Earnings (1/1/17) A/c.	Dr.	$25,000
Business Combination Valuation Reserve A/c.	Dr.	$18,750
To,	Shares in Diane Ltd. A/c.		$200,000
Sale & Profit in Closing Inventory:
Sales Revenue A/c.	Dr.	$25,000
To,	Cost of Sales A/c.		$23,875
To,	Inventory A/c.		$1,125
Deferred Tax Assets A/c.	Dr.	$338
To,	Income Tax Expenses A/c.		$338
Profit in Opening Inventory:
Retained Earnings (1/1/17) A/c.	Dr.	$14,000
Income Tax Expenses A/c.	Dr.	$6,000
To,	Cost of Sales A/c.		$20,000
Sale of Equipment:
Profit on Sale of Assets A/c.	Dr.	$42,000
Deferred Tax Assets A/c.	Dr.	$18,000
To,	Machine A/c.		$60,000
Accumulated Depreciation A/c.	Dr.	$5,000
To,	Depreciation Expenses A/c.		$5,000
Income Tax Expenses A/c.	Dr.	$1,500
To,	Deferred Tax Assets A/c.		$1,500
Computer Service Cost:
Computer Services Cost A/c.	Dr.	$36,000
To,	Service Revenue A/c.		$36,000
Accounts Payable A/c.	Dr.	$3,000
To,	Accounts Receivable A/c.		$3,000
Sale of Plant:
Retained Earnings (1/1/17) A/c.	Dr.	$5,600
Deferred Tax Assets A/c.	Dr.	$2,400
To,	Plant A/c.		$8,000
Accumulated Depreciation A/c.	Dr.	$1,600
To,	Retained Earnings (1/1/17) A/c.		$800
To,	Depreciation Expenses A/c.		$800
Income Tax Expenses A/c.	Dr.	$240
Retained Earnings (1/1/17) A/c.	Dr.	$240
To,	Deferred Tax Assets A/c.		$480
Final Dividend Declared:
Dividend Revenue A/c.	Dr.	$10,000
To,	Dividend Declared A/c.		$10,000
Dividend Payable A/c.	Dr.	$10,000
To,	Dividend Receivable A/c.		$10,000
Goodwill Impairment:
Retained Earnings (1/1/17) A/c.	Dr.	$1,250
Impairment of Goodwill A/c.	Dr.	$3,000
To,	Accumulated Impairment-Goodwill A/c.		$4,250

References

Aasb.gov.au. (2017). Australian Accounting Standards Board (AASB) – Home. [online] Available at: https://www.aasb.gov.au [Accessed 18 Sep. 2017].

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.

Grossi, G., 2015. Consolidated financial statements in the public sector. Public sector accounting, pp.63-76.

Pacter, P., 2017. IASB Corner. The International Journal of Accounting.

Perera, D. and Chand, P., 2015. Issues in the adoption of international financial reporting standards (IFRS) for small and medium-sized enterprises (SMES). Advances in Accounting, 31(1), pp.165-178.

Sinclair, R., Northcott, D. and Hooper, K., 2014. Can sector-specific standards economics the comparability of Third sector organisations’ financial statements?. Third Sector Review, 20(2), p.27.