Question

You are working as an accountant for Bronson, Lazenby & Dalton and the senior partner has asked you to prepare a report answering the following questions about consolidation procedures for a client: Follyfoot Ltd has a 33% interest in the share capital of Cue Ltd, which is a company involved in the same industry as Follyfoot Ltd. The remaining share capital is owned by Mr and Mrs Lewelyn who are the founders of Cue Ltd. Mr and Mrs Lewelyn have given Follyfoot Ltd three out of five seats available on the board of directors. Follyfoot Ltd takes the lead on all decisions but the business is closely monitored by Mr and Mrs Lewelyn who hold the other two board positions. Advise the directors of Follyfoot Ltd of the requirements of AASB 10 in respect of the control criterion and how they would apply to this investment. Why is it necessary to make adjustments for intra-group transactions? As the majority of the directors do not have an accounting background, your report answering the questions must be written to convey a clear understanding of consolidation accounting concepts (control vs significant influence) and other relevant accounting issues. (1500 words )

Answer 1

The Accounting Standard ,AASB-10 ( Consolidated Financial Statements ) issued by the Australian Accouting Standard board defines the Requirements of Consolidation, Priciples of Control for consolidation, Required Accouting adjustment and disclosures. and this standard is applicable with effect from the financial statements prepared from 01-07-2015 to 01-01-2022.

As per AASB 11- the Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

AS PER PARA B86, OF THE AASB 10, ITS REQURED TO eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group (profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full). Intragroup losses may indicate an impairment that requires recognition in the consolidated financial statements.AASB112Income Taxesapplies to temporary differences that arise from the elimination of profits and losses resulting from intragroup transactions.

PROFIT AND LOSS RESULTING FROM THE INTRA GROUP TRANSACTIONS SHALL BE AVOIDED FOR CONSOLIDATED REPORTS . SO IT HAS TO BE ADJUSTED .