Corporate and Financial Accounting is considered as one of the major aspects for the success of the business organizations. The main area of concern for the financial accounting is to provide the summary, analysis and reporting of the financial truncations of the businesses so that the investors can become able in identifying the financial performance as well as position of the entities (Scott, 2015). At the time of the developing and presenting the financial statements, the requirement of the business organizations is to comply with the standards and principles of financial accounting so that they can possess the qualitative characteristics of financial reporting. Along with the financial aspects, it is required for the business organizations to make the disclosure of all of their activities related to sustainability (Warren & Jones, 2018). In today’s business world, the importance of environmental reporting cannot be ignored as it has become a major parameter for the investors before making investment decisions. It also needs to be mentioned that the companies are required to follow certain accounting regulation for business acquisition and consolidations. In order to carry on with this report, CSR Limited of Australia is taken into consideration.
The financial information of the business organizations must possess the qualitative characteristics in order to be purposeful for the investors. There are six qualitative characteristics of financial statements. Two of them are Relevance and Comparability.
Relevance: Relevant financial information has the ability to make difference in the decision-making process of the users. In order to be relevant, the financial information of the companies must have both predictive and confirmatory value. In the presence of confirmatory value, the users can obtain feedback from the previous evaluation (aasb.gov.au, 2018). On the other hand, predictive value helps the users in obtaining the correct financial information. From 2017 and 2016 Annual report of CSR Limited, it can be observed that the company provides the financial results of the previous year in the current year’s annual report so that the users can get feedback about the earlier financial performance of the company (Barth, 2013). In addition, CSR Limited has provided all the financial information about the economic phenomena of the company like assets, liabilities, equities, expenses, revenues and others that are most relevant (csr.com.au, 2018). In addition, the company has prepared and presented their financial statements as per the regulations of AASB, Corporations Act 2001, Australian Accounting Standards, IFRS and IASB (csr.com.au, 2018). The presence of all these aspects makes the financial information of CSR Limited relevant.
Comparability: It needs to be mentioned that the financial information of the business entities become more purposeful in case the investors can compare a set of information with the similar information about other entities and with the same information of the same entity for different period (Henderson et al., 2015). In case of CSR Limited, it can be observed that the company publishes two year’s financial results in one single annual report so that they can be easily compared. Apart from this, the users can compare the financial information of the company with the other companies by obtaining the financial reports from the company website. This aspect indicates towards the presence of comparability charatecrstcs (csr.com.au, 2018).
From the 2017 and 2016 Annual Report of CSR Limited, it can be observed that the company has disclosed information about their intuitive to reduce the negative effect of their business operation on the environment. Two examples related to this are provided below:
Based on the analysis of the 2016 and 2017 Annual Reports of CSR Limited, it can be said that the company has provided all the required financial information that is required for the purpose of investment decision making by the users. CSR Limited has used different financial statements to provide all this information; like statements of financial performance, comprehensive income, financial position, change in equity and cash flow. In addition, the company has also provides the necessary justification and clarification in the notes to the financial statements. In the presence of all these aspects, the users of the financial statements become able in comparing the financial information (Kim, Kraft & Ryan, 2013).
However, inadequacy can be seen from the company in environmental reporting. From the analysis of the environmental reporting of CSR Limited for 2017 and 2016, majority portion of it contains the details of the target that CSR Limited is required to achieve within a specific period. However, the company has put little focus on disclosing information about their taken environmental initiative along with their achieved results. It can be regarded as a major deficiency in the environmental reporting of the company (csr.com.au, 2018).
The following discussion shows two recommendations for CSR Limited related to the above-discussed issues:
It needs to be mentioned that there are certain purposes of the pre-acquisition entries in the preparation of consolidated financial statements. The first purpose is that it helps in the prevention of double counting of the assets of the business entities. At the same time, pre-acquisition entries provide assistance in the prevention of double counting of the companies. After that, pre-acquisition entries help the companies in recognizing any gain or goodwill on the process of bargain purchase at the time of consolidations. Lastly, the pre-acquisition entries help the business organizations in the recognition of acquired liabilities and assets within the business combination that the business entities in the group do not recognize (Lubatkin, 2013).
Companies are required to pay two types of dividends at the date of acquisition; they are cum div and ex div. The parent companies possess full right of the dividend declared in case cum div is used for acquiring shares at the acquisition date. Further, fair value of the consideration is required to take into consideration for the determination of dividend payable and thus, the companies are needed to make deduction on the cost of acquisition (La Rosa et al., 2013). For this reason, the companies are also required to consider the impact of the journal entries related to the acquisition of the parent entity under all the possible circumstances. It can be evaluated with a simple illustration. For example, Company R acquired all the shares of Company B for $400,000. Company B recorded $20,000 as dividend payable. Thus, the following conditions are required to be considered:
In the presence of certain aspects, it becomes necessity for the business organizations to distinguish between pre-acquisition dividends and post-acquisition dividends. This particular distinguish helps the business entities in obtaining explanation about the acquisition date and the value of the equity before and after the acquisition takes place. According to “Paragraph 38A of AASB 127”, a business entity can do the realization of the dividend from a subsidiary as the form of revenue in their income statement irrespective of the nature of the acquisition process (aasb.gov.au, 2018).
For recording goodwill at the date of acquisition, it is required for the companies to discover the variation between the internal generation of goodwill and at the time of acquisition; at the same time, the impact on goodwill calculation also required to take into consideration (Biondi & Zambon, 2013). For example, in case the subsidiary records $100 as goodwill and the parent company made acquisition of all the shares of the subsidiary company for $5000, thus, $4800 will be recorded as the subsidiary equity.
|
Parent |
Subsidiary |
Debit |
Credit |
Group |
|
|
Goodwill |
0 |
100 |
200 |
0 |
300 |
For the computation of the net value acquired of the identifiable liabilities and assets companies are needed to adjust the unidentified assets for the compuation of acquired goodwill. The realization of the acquired goodwill is done in the entries of valuation of the business combination. The entries of pre-acquisition in the would lead to the eradication of BCVR with the help of pre-acquisition entries (Biondi & Zambon, 2013). At the time of consolidation, the necessity is to include the required adjustments in specific columns in the worksheet in order to represent the goodwill in the consolidated statement of financial position of the group company. The amount can be obtained by adding the recognized goodwill of the subsidiary company at the date of acquisition and the realized goodwill in the process of consolidation.
“Paragraph 18 of AASB 3” states the necessity for the disclosure of all the identifiable assets and liabilities at the fair value as the users of the financial statements can obtain all the required information from these fair values (aasb.gov.au, 2018). In spite of the fact that it is required to allocate the cost of the business combination, these assets and liabilities cannot be disclosed at cost value as per this regulation. The acquired assets include goodwill and they are not presented in fair value. The required accounting for bargain purchase on business combination assists to put focus on the fair value method. There is not any accounting treatment in order to record those assets and liabilities in the cost value as they are required to recorded at fair value. For this reason, the fair values would not change and the additional amount would be realized in the form of gain (aasb.gov.au, 2018).
Conclusion
The above discussion shows that the financial information of CSR Limited possesses both the qualitative characteristics of financial information that are relevance and comparability and the main reason is the compliance of the company with all the required accounting standards. However, it can be observed that CSR Limited has not made full disclosure of the information about their environmental initiatives. It can also be seen from the above discussion that the business organizations are required to take into consideration certain aspects at the time of consolidation of the business organizations like pre-acquisition entries, dividend payable and others.
References
(2018). Aasb.gov.au. Retrieved 30 May 2018, from https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf
Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB127_08-11.pdf [Accessed 30 May 2018].
Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB3_03-08_ERDRjun10_07-09.pdf [Accessed 30 May 2018].
Adams, C. A. (2015). The international integrated reporting council: a call to action. Critical Perspectives on Accounting, 27, 23-28.
Annual Meetings and Reports. (2018). Corporate. Retrieved 30 May 2018, from https://www.csr.com.au/investor-relations-and-news/annual-meetings-and-reports
Barth, M. E. (2013). Measurement in financial reporting: The need for concepts. Accounting Horizons, 28(2), 331-352.
Biondi, Y., & Zambon, S. (Eds.). (2013). Accounting and business economics: Insights from national traditions. Routledge.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
Kim, S., Kraft, P., & Ryan, S. G. (2013). Financial statement comparability and credit risk. Review of Accounting Studies, 18(3), 783-823.
La Rosa, M., Dumas, M., Uba, R., & Dijkman, R. (2013). Business process model merging: An approach to business process consolidation. ACM Transactions on Software Engineering and Methodology (TOSEM), 22(2), 11.
Lubatkin, M. (2013). Merger strategies and stockholder value. In Mergers & Acquisitions (pp. 43-57). Routledge.
Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
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