Importance Of Pre-Acquisition Entries, Consolidated Financial Statements And Environmental Reporting Practices In Commonwealth Bank Of Australia

Relevance of Commonwealth Bank of Australia’s 2017 Annual Report for Potential Investors

Part A

Relevance and comparability

The annual report of Commonwealth Bank of Australia for the year 2017 is able to provide reliable information to the end users.  Using this annual report the users can make informed decisions regarding investing in the bank (Commbank.com.au, 2018). This report has successfully provided information about the customers of the bank and how the organization is able to provide satisfaction to their customers. It also provides a detailed knowledge about the shareholders of the bank. The report also provides a detailed information about the performance of the bank, in terms of their earnings, total dividends.  It also shows how the net margin of the bank has increased in the few years.  This information is relevant to the potential investors and customers of the bank.  As the customer satisfaction statistics of the bank is high, a number of customers can think of engaging with the bank (Wang, 2015). These customers can use this information to decide whether to choose this bank for investment or not.

The level of commitment of the organization towards their customers is mentioned in the report.  This is a relevant information to the customers as they will want to engage with a bank which focuses on providing best customer care services (Ijiri, 2018). They also provide an insight into the future, which is of considerable relevance to the potential investors of the bank. These potential investors will want to explore the growth potential of the bank. They will want to engage with a bank, which has a potential for business growth in the future. The annual report of the bank for 2016, provides an example of comparability.  In order to make an informed decision, the potential investors would want to have access to data which will provide comparability. Comparability is defined as the main aspects of accounting information of an organization.  The annual report provides a detailed information about the performance of the bank in the previous years. It provides a detailed information about the total balance of the bank at the end of years 2014, and 2015.  It allows the investors to compare the growth of the organization in the recent years (Dickinson Wangerin, and Wild, 2016).  They will able to make an informed decision whether to invest in the bank or not. The total income of the bank is also shown in the report so that the investors have more access to the detailed financial information of Commonwealth Bank of Australia.                                     

Explanation of Pre-Acquisition Entries and Their Importance in Consolidated Financial Statements

Environmental reporting practices

The annual report of Australia’s Commonwealth Bank for both 2017 and 2016 has provided information about the environmental practices of the organization. According to the report of 2017, the organization is actively engaged in activities to protect the surrounding environment. They are dedicated to serving best customer service to their customers along with protecting the environment (Chen, Collins, Kravet and Mergenthaler, 2018).  They have declared a Climate Policy Position Statement in order to participate in eco-friendly activities.  This report also reveals about the various mandates, risk assessments employed by the organization to ensure a safe environment in their surroundings. They have implemented sustainable and ethical strategies to reduce the amount of carbon footprint of the organization.  They have also targeted the use of energy in the workplace and they are dedicated to decreasing the level of energy consumption of the organization.  The annual report of Australia’s Commonwealth bank for 2016 also provides an insight into the various environmental practices employed by the organization. They have employed various strategies to reduce the level of carbon emission by the company. They have also implemented strategies to reduce the amount of waste generated within the organization. They have also developed mandates and policies to become more energy efficient.              

Evaluation of the information disclosed

These annual reports of Australian Commonwealth Bank have successfully provided information regarding the performance of the organization in these years. They have disclosed data about the number of customers of the bank, and how this number is gradually increasing over the years. These reports also provide a detailed information about the total balance and income of the organization in the recent years. These reports also discuss the various environmental strategies employed by the organization (Puhakka, 2017). This information will enable the potential investors to make an informed decision while deciding whether to participate in the business transaction with the bank or not. The annual reports have furnished a detailed information about the various business operations performed within the organization.  It also gives an insight on how the bank has been planning to improve their performance over the next few years. Thus, these annual reports are able to meet the standards of comparability and relevance to the potential investors and the customers of the bank. They will be able to measure and compare the success of the bank with the performance of other banks as well, to make a right decision.       

Evaluation of Disclosed Environmental Reporting Practices

Recommendations 

The management of Australia’s Commonwealth Bank should implement the following strategies while disclosing the information in their annual reports. They should improve the relevance of their annual reports by focusing on the content. The quality of communication within the organization plays a significant role in developing a clear and concise annual report. They should also focus on improving the comparability issue of the annual reports (Rabier, 2017). They should provide more detailed knowledge about the profits and losses of the organization. They should also provide a detailed information on how the company is looking to overcome their weaknesses and improve their strengths. It should also provide more information about the environmental practices employed by the organization. They should also focus on improving the materiality of these annual reports. Their annual reports should also discuss the strengths and weaknesses of these strategies and how they can improve their environmental practices. They can improve the layout of the annual report to make it look more clear and attractive to the potential customers.  They should also more information on the corporate social responsibility of the organization (Pacter, 2014).  Applying these methods, the management of the bank can improve the quality of their annual reports. A well-developed annual report will play a crucial role in attracting more customers by providing valid details to them.                              

Part B

Purpose of pre-acquisition entries in consolidated financial statements 

Preparation of pre-acquisition entry is considered to be an important step in preparing consolidated financial statements of an organization. The purpose of pre-acquisition entry are as follows:

• To identify any profit on bargain purchase
• To identify any goodwill on bargain purchase on consolidation
• To recognize the acquired assets of an organization
• To recognize the acquired liabilities of a company
• Prevention of double counting of assets and equities of the business firm  

An example can be used to explain the purpose of pre-acquisition entry in preparing consolidated financial accounts (Harris, 2015). An organization X Pvt. Ltd has acquired the assets of another business organization Y Pvt. Ltd for 150 dollars.  The financial statement of both these organizations after an acquisition is as follows:

                                                                                        Table 1: Financial statement of X Pvt. Ltd. and Y Pvt. Ltd.

In this table X has the total equity of 300 dollars, which indicates the net assets of the company including its shares in Y.  In order to include both the equity of the parent company and the subsidiary company in the financial statements, the equity of the subsidiary is counted twice. Thus the asset is counted twice while preparing the financial statement. By developing a consolidated financial statement, the equity of the subsidiary is eliminated.

Recommendations to Improve Quality of Annual Reports

Conditions to consider while preparing pre-acquisition entries

Mainly there are two ways by which a subsidiary can pay a dividend at the acquisition date, either on the basis of cum dividend or ex-dividend basis. If the shares of a company are acquired through cum dividend basis, then the acquiring entity has the right to the dividends declared at the acquisition date. In case an organization X acquires the shares of another company Y worth 50,000 dollars. This acquisition has recorded that a dividend of 15,000 dollars is payable at the acquisition date. In acquiring the firm Y, X is not only acquiring the shares of the company, they also have the right to receive the dividend. The acquiring company is purchasing the dividend in order to receive it. X has the asset of receiving the dividend and Y has the liability to pay it (Kim, Li, Lu and Yu, 2016). Two things should be considered while preparing the pre-acquisition statement of a company, one of them is the dividend receivable by the acquiring organization (Ruhnke and Schmidt, 2014). Another thing which should be considered is the amount of investment in the subsidiary company, or in this case, company Y.  However, if consolidation is performed in the acquisition date, both dividend payable and receivable is eliminated from the financial statement of the company.            

Reasons to distinguish between pre-acquisition and post-acquisition dividends

A pre-acquisition dividend is usually declared from the pre-acquisition profit of a company, which is later received by the acquiring or the purchasing company. This type of dividend is deducted from the cost of investment of the acquiring firm.  Dividend received by a firm with respect to post-acquisition profit is termed as post-acquisition dividend. Pre-acquisition dividends are generally associated with the cost of recovery of a firm, while post-acquisition is associated with income of the company (Lang and Stice-Lawrence, 2015). Both these dividends play a significant role in increasing the shares of the organization. Pre-acquisition dividends are usually viewed as the credit from cost by the organization. It will increase the efficiency of goodwill calculation, by reducing the cost of investment of the parent company.  These are the main reasons to distinguish between these dividends.  

Effects of subsidiary goodwill on the preparation of pre-acquisition entries

Goodwill is considered as an intangible asset of an organization, which develops when a company acquires another firm for a premium price. This is also known as acquired goodwill of a business organization. Brand name, customer base etc. are some of the examples of goodwill generated by an organization. Internally generated goodwill of a firm cannot be expressed in the financial statement of the organization (Chan, Watson and Woodliff, 2014). These goodwill attributes are generated by an organization during the course of their business. Internally generated goodwill can be easily converted to acquired goodwill if the company is acquired by another business entity. During preparation of pre-acquisition entries, the intangible asset of goodwill is not usually identified. While calculating the net fair value of the assets, some adjustments must be performed to calculate the goodwill acquired by the group. Due to this adjustment, however, the fair value of the net assets of the organization is reduced to a great extent (Banhalmi-Zakar, 2016).  While preparing a consolidated balance sheet, the group goodwill can be recognized. The total goodwill includes the goodwill recognized by the subsidiary company and the goodwill recognized during consolidation.    

Reasons behind making adjustments of assets in consolidated financial statements  

The identifiable and tangible assets of the subsidiary organization must be displayed in their fair values in the balance sheet.  It will allow the business entity to provide relevant data to the users, regarding the assets and liabilities of the organization. The only asset of an organization which cannot be measured at its fair value is the goodwill of the organization (Lee and Parker, 2014).  This is one of the reasons why adjustment has to be made in order to incorporate goodwill of the group. In this method, it is not necessary to record the identifiable and tangible assets and liabilities of the organization at cost.  This approach allows the organization to identify any purchase on the bargain conducted by the organization. The adjustment should be made to maintain the level of profit of the organization. The fair value of the assets are not modified and the excess is considered as the gain for the organization (Erel, Jang, and Weisbach, 2015). Thus the organization can develop better financial statement as they will have access to better information regarding the assets and liabilities of the organization. The adjustments can be made to increase the amount of profit of the organization.

References:

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Commbank.com.au. (2018). Personal banking including accounts, credit cards and home loans – CommBank. [online] Available at: https://www.commbank.com.au/ [Accessed 30 May 2018].

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Kim, J.B., Li, L., Lu, L.Y. and Yu, Y., (2016). Financial statement comparability and expected crash risk. Journal of Accounting and Economics, 61(2-3), pp.294-312.

Lang, M. and Stice-Lawrence, L., (2015). Textual analysis and international financial reporting: Large sample evidence. Journal of Accounting and Economics, 60(2-3), pp.110-135.

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