HA2032 Corporate & Financial Accounting

Instructions:
1. This assignment needs to be submitted in accordance with assessment policy stated in the Unit Outline and Student Handbook.
2. It is the responsibility of the student who is submitting the work, to ensure that the work is in fact her/his own work. Incorporating another’s work or ideas into one’s own work without appropriate acknowledgement is an academic offence. Students should submit all assignments for plagiarism checking on Blackboard before final submission in the subject. For further details, please refer to the Unit Outline and Student Handbook.
3. Maximum marks available:
4. Assignment should be of 2,000 words. Please use “word count” and include in report. Presented in font size 12
5. Due date of submission: Week 11, Sunday at 11.59 p.m. Format of the Report
1. You at least should have the following details:
a. Assignment Cover page clearly stating your name and student number
b. A table of contents, executive summary
c. A brief introduction or overview of what the report is about.
d. Body of the report with sections to answer the sections required and with appropriate section headings
e. Conclusion
f. List of references.
2. Diagrams and tables clearly labelled and explained.
3. Ensure all materials are correctly referenced. Plagiarism will be severely penalised.

PART A

Background:

Choose one (1) company listed on the Australian Stock Exchange (ASX) and register the company with your Lecturer. Students are not to select the same company with any other student in their class.

Use two (2) recent years of your chosen company’s annual report, and answer the following questions. You must state the 2 years you are analysing in your report.

Required:

Based on the two-year annual reports of your chosen company, including its financial statements and notes to the financial statements, answer the following:

1. For each of the following, provide two (2) examples, as evidence of your chosen company fulfilling these issues:

a. providing qualitative characteristics of relevance and comparability (1 example for each characteristic); and

b. disclosing environmental reporting practices (2 examples)

2. In your opinion, are the information and disclosures provided by your company in (1) adequate? Explain.

3. Provide at least two (2) recommendations to the top management of your chosen company, to strengthen its compliance with these disclosure issue(s) in future reporting periods.

PART B

i. Explain the purpose of the pre-acquisition entries in the preparation of consolidated financial statements.

ii. When, at acquisition date, there is a dividend payable by the subsidiary, under what conditions should the existence of this dividend be taken into consideration in preparing the pre-acquisition entries?

iii. Why is it necessary to distinguish pre-acquisition dividends from post-acquisition dividends?

iv. If, at acquisition date, the subsidiary has recorded goodwill in its records, how does this affect the preparation of the pre-acquisition entries?

v. If, at the date the parent acquires a controlling interest in a subsidiary,the carrying amounts of the subsidiary’s assets are not equal to fair value, explain why adjustments to these assets are required in the preparation of the consolidated financial statements.

Please prepare the above answers in your own words to demonstrate that you know how to explain consolidation entries.

considered in providing interim reporting. For the purpose of verifying the qualitative features of the financial reporting, the financial statements have been analysed with reference to the disclosure made and the necessary information provided in the said financial statements. For the furtherance of this report, the company – Woolworths Limited has been selected. The company has been one of the top hundred of the ASX listed companies. The report has started with the verification of the presence of the qualitative features of the financial reporting with the help of the financial statements. Along with the financial Statements of the company, the environment reporting has also been verified and analyzed as to whether the company has been disclosing the information which will be relevant for the investors. Then the adequacy of the disclosures made or information provided have been checked in detail and thereon the recommendation  has been provided to the management in order to further increase the disclosure requirements. Then the detailed analysis of the accounting of the pre acquisition transaction has been made with respect to clarification on every part with respect to its accounting treatment and reasons for its differences. The report has then ended with the appropriate conclusion.

For the purpose of making the study, the group has chosen the Woolworths Limited. The company is registered in stock exchange of Australia and is one of the top hundred listed companies. It has been founded in the year of 1920 and has its headquarters based in New South Wales Australia. The company has been into the retail sector since its inception. The areas of the business of the company has been into the chain of the departmental stores where every product of the house can be purchase the items which are required for the running of the household, then the company also have the liquor chains and the stores which supplies the fresh food and dairy products. With the focus on the customer’s satisfaction, the company has been into the business for the last so many years. For the purpose of analysis, the annual report for the year ending 2017 and 2016 has been selected (Woolworths Limited, 2017).      

Although there are four features which enhance the quality of the financial reporting, but under this section, two features will be discussed in relation to the annual report of the company. These are as follows:

Relevance – It states that the information so disclosed in the annual report shall be relevant to the stakeholders so that the accordingly decision can be made (Beyer, 2012). Thus, the information, the omission of which will affect the decision of the users of the financial statements will be referred as the relevant. As per the annual report of the company, the relevant information has been the exit of Home Improvement business of the company (Schroeder, 2011). The company has declared on the 18^th of January 2016 that business of the home improvement shall be discontinued in the future year and therefore, the same has been classified as the operation which has been discontinued during the year. All the events that have happened in the series have been detailed in the annual report as:

• Home Timber and the hardware group has been soled
• Then the inventory of the masters has been sold
• Payment of the amounts to the employees and settling the obligations
• The accounting treatment and the presentation of the transaction relating to the home consortium.

As due to the above exit, the cash flows have been increased by 22.30 million dollar and covers all the details and hence is relevant.

Comparability – This features states that the financial statements shall be presented in such a manner that information for the one year shall be compared with that of the other accounting periods in order to provide the stakeholders with the required information (Lennard, 2016). Apart from the statement of the profit and loss and the statement of affairs the example that is worth to mention is the condensed five year summary of the profit and loss, balance sheet, cash flow and the notes to accounts has been given (Gibbins, 2013). 

The first example of the disclosure is that in the director’s statutory report, the company has disclosed that the operations of the group are subject to the different regulations for the environment as per the law of common wealth of Australia. Also the group has to comply with the relevant laws and regulations for the licensing and at the end has disclosed that no liability has been incurred in this regard (Woolworths Limited, 2016).

The second example is from corporate social responsibility report of the company. It has been disclosed that the company recognizes the environmental impact across the network of the operations so that the healthy product shall be delivered to the customers and that is why they have mentioned in the report as company is planet where there will be the healthy environment (Beest, 2015). 

Yes, in our opinion, the information and the disclosures that the company has made is adequate in accordance with the nature and size of the business of the company. The adequacy comes from the end of the readers and the users of the financial statements of the company. If they are satisfied then it will be said that the adequate information and disclosures have been made.

In the annual report following justifies that the disclosure is adequate:

• The major information regarding the exit of the Home improvement business and the impairment charged on the Big W business has been disclosed in detail.
• The key audit matter has been disclosed in accordance with the ASA 701 which requires the attention of the management as well as the users.
• Corporate social responsibility along with the disclosure of the corporate governance principles and practices.

Impairment has been the area which in our opinion is not adequate as the future cash flows estimation have not been detailed. 

It is recommended for the top management of the company to estimate the future cash flows in the better manner with the proper and due care. Second recommendation is to provide the disclosure of the reasons for the transaction like exit of the Home Improvement business.     

PART B

No company is required to be selected for this part and hence it has been presented independently. Under this part accounting discussion has been made with regard to the consolidated financial statement as to how the same has been dealt with the following concepts. 

There are major four purposes for which the pre acquisition entries are made for the preparation of the consolidated financial statements. These are:

• It helps in the prevention of the situation where the asset is required to be counted and it has been read as twice wrongly. In other words, it avoids the counting of the same asset twice.
• It helps in the prevention of the situation where the equity is required to be derived and it has been read as twice wrongly. In other words, it avoids the counting of the equity twice.
• It helps the entity in accounting for the gain if any received on the bargain purchase (Shizhong, 2014).
• It helps in the recognition of those assets and liabilities which has been acquired by the entity in the course of the business combination and which has not been recognized by the entities in the whole group separately. 

If on the acquisition date, in the books of accounts of the subsidiary company, the dividend payable has been existing then the same shall be considered in the preparation of the consolidated financial statements only in the case where the share purchased are cum dividend. Shares cum divided extends the right to receive the dividend immediately on the purchase of the share that is in this the shares carries the dividend with him (Shalev, 2011). Thus, the acquirer will receive the dividend on its purchase and the necessary treatment has been explained with the example.

X Limited acquires all the shares of Z Limited for the amount of $100000. On the date of the acquisition Z Limited has the following balances:

Cash Balance - $100000

Dividend payable - $5000

Share Capital - $95000

Now, the consideration amount of $100000 will be separated into two parts. First one will deal with the amount of the dividend which will be received separately which is equal to $5000 and the second one deal with the amount of consideration amounting to $95000. Therefore the pre acquisition entry will be:

Share Capital                          Debit                           $95000

     To Investment in Z Ltd                                                                 $95000

As X Ltd has the asset of dividend receivable and the Z Ltd has the corresponding liability and the balances are removed by passing the elimination entry by debiting the dividend payable and crediting the dividend receivable by $5000.   

The acquisition date has been defined as the date on which the acquirer entity gains the control over the other entity. It occurs when the acquiring entity transfers the amount of consideration to other entity in lieu of the acquisition of the assets and liabilities (Holthausen, 2016)  

Pre acquisition dividend is the amount of the dividend which will be received from the pre acquisition of the profits and post acquisition dividend is the amount of the dividend which will be received from the pre acquisition profits.

It is necessary to differentiate between the two dividends because of the fact that the pre acquisition dividend is deducted from the amount of the investment that the acquirer made and the post acquisition dividend is credited as income in the statement of the profit and loss account.   

Goodwill as recorded by the subsidiary in its record is very essential in pre acquisition entries because of the following reasons:

• While arriving at the figure of the fair value of the assets and liabilities, some adjustment come for unidentifiable assets known as goodwill which is required to calculate the goodwill of the whole company group. In this case the pre acquisition entries will nullify the effect of Business Combination Valuation Reserve which will treated as the equity of pre acquisition.
• Secondly the recorded goodwill help the group to recognized that in the consolidated financial statements and hence will be the part of the pre acquisition entries.

In accordance with the provision of the Australian Accounting Standard number three, all the assets and the liabilities which are identifiable shall be measured at the fair value as it is considered as the most relevant and valuable for the stakeholders of the company (Schipper, 2013). Although it also states that the cost shall be allocated of business combination but it does not require in any manner the valuation of identifiable assets and liabilities at cost. The consolidation consists of the assets which only recorded at fair value is the amount of the goodwill. Fair values are kept as constant and the gain is recognized. In this manner, the adjustments are required (Davis, 2012).

Every company is required to follow the qualitative features of the financial reporting and shall be reflected from the financial report of the company. For the first section of the report dealing with these features, the company – Woolworths Limited has been selected and it has been identified that the company has been following the qualitative features of the financial reporting and as well as in the environmental reporting. In the second section the consolidated financial statements have been discussed with regard to the pre acquisition and how the same have been done as per the mentioned five heads. In order to conclude the report, it has detailed the importance of each and every item of the financial reporting and has been identified as useful for the management and the stakeholders of the company.