Company Accounting, Print and Interactive E-Text

Preface xiii

About the authors xiv

Chapter 1 Nature and regulation of companies 1

Introduction 1

1.1 The nature of a company 2

1.2 Different types of companies 3

1.3 Forming a company 6

1.4 Administering a company 8

1.5 Funding a company 9

1.6 Background to the Corporations Act 2001 12

1.7 Accounting regulation of companies 13

1.8 Other important regulatory organisations 24

1.9 General purpose financial reports and the reporting entity concept 26

Summary 31

Key terms 31

Review questions 32

Case study 1 32

Case study 2 32

Case study 3 32

Case study 4 32

Case study 5 33

Case study 6 33

Case study 7 33

Websites 33

References 33

Acknowledgements 34

Chapter 2 Disclosure: legal requirements and accounting policies 35

Introduction 36

2.1 General purpose financial statements 36

2.2 Annual reporting requirements 37

2.3 Half-year financial report 44

2.4 Accounting policies 45

2.5 Changes in accounting estimates 52

2.6 Errors 54

2.7 Impracticability in respect of retrospective adjustments for accounting policy changes or correction of errors 58

2.8 Materiality 58

2.9 Events occurring after the end of the reporting period 60

Summary 62

Key terms 62

Demonstration problem 1 63

Demonstration problem 2 63

Review questions 64

Case study 1 65

Case study 2 65

Case study 3 65

Case study 4 65

Practice questions 65

References 68

Acknowledgements 68

Chapter 3 Disclosure: presentation of financial statements 69

Introduction 69

3.1 A complete set of financial statements 70

3.2 General features of a complete set of financial statements 71

3.3 Statement of financial position 75

3.4 Statement of profit or loss and other comprehensive income 85

3.5 Statement of changes in equity 96

3.6 Notes 99

3.7 Future developments 103

Summary 108

Key terms 108

Demonstration problem 1 109

Demonstration problem 2 113

Review questions 116

Case study 1 116

Case study 2 117

Case study 3 117

Case study 4 117

Case study 5 117

Practice questions 117

Websites 127

References 127

Acknowledgements 127

Chapter 4 Accounting for company income tax 128

Introduction 128

4.1 The benefit of information on current and deferred tax 129

4.2 Income tax in the financial statements 130

4.3 General principles of accounting for income tax 132

4.4 Taxable profit 134

4.5 Current tax 137

4.6 Deferred tax 141

4.7 Tax bases of assets and liabilities 144

Tax base of an asset 144

Tax base of a liability 146

4.8 Temporary differences 147

Excluded temporary differences 149

4.9 Recognition and reversal of deferred tax 150

Deferred tax liabilities 150

Deferred tax assets 151

Summary 159

Key terms 159

Demonstration problem 1 159

Demonstration problem 2 163

Review questions 166

Case study 1 167

Case study 2 167

Case study 3 167

Case study 4 167

Case study 5 167

Case study 6 168

Practice questions 168

Chapter 5 Property, plant and equipment 178

Introduction 178

5.1 The nature of property, plant and equipment 179

5.2 Initial recognition of property, plant and equipment 180

5.3 Initial measurement of property, plant and equipment 182

5.4 Measurement subsequent to initial recognition 187

5.5 The cost model 188

5.6 The revaluation model 195

5.7 Choosing between the cost model and the revaluation model 206

5.8 Derecognition 208

5.9 Disclosure 209

Summary 212

Key terms 212

Demonstration problem 1 212

Demonstration problem 2 215

Review questions 218

Case study 1 219

Case study 2 219

Case study 3 219

Case study 4 219

Case study 5 219

Case study 6 219

Case study 7 220

Case study 8 220

Case study 9 220

Practice questions 220

References 227

Acknowledgements 227

Chapter 6 Foreign currency transactions and forward exchange contracts 228

Introduction 229

6.1 The need for translation of foreign currency amounts 230

6.2 The means of translation: exchange rates 232

6.3 Foreign exchange differences 233

6.4 Accounting for foreign currency monetary items 235

6.5 Exchange differences for non-monetary items 243

6.6 Foreign exchange risk 247

6.7 Forward exchange contracts without hedging 248

6.8 Forward exchange contracts with hedging 252

6.9 Disclosures 259

Summary 261

Key terms 261

Demonstration problem 1 262

Demonstration problem 2 263

Review questions 264

Practice questions 264

Acknowledgement 269

Chapter 7 Business combinations 270

Introduction 270

7.1 The nature of a business combination 271

7.2 Accounting for a business combination — basic principles 273

7.3 Accounting in the records of the acquirer 276

7.4 Recognising and measuring assets and liabilities 277

7.5 Accounting in the records of the acquirer 282

7.6 Accounting by the acquirer: shares acquiredin an acquiree 292

7.7 Accounting in the records of the acquiree 293

7.8 Subsequent adjustments to the initial accounting for a business combination 296

7.9 Disclosure — business combinations 299

Summary 304

Key terms 304

Demonstration problem 1 304

Demonstration problem 2 306

Review questions 309

Case study 1 309

Case study 2 310

Case study 3 310

Case study 4 310

Case study 5 310

Practice questions 311

References 320

Acknowledgements 320

Chapter 8 Impairments of assets 321

8.1 Introduction to AASB 136/IAS 36 321

8.2 When to undertake an impairment test 323

8.3 Impairment test for an individual asset 325

8.4 Cash-generating units — excluding goodwill 333

8.5 Cash-generating units and goodwill 339

8.6 Reversal of an impairment loss 344

8.7 Disclosure 348

Summary 352

Key terms 352

Demonstration problem1 352

Demonstration problem 2 354

Review questions 356

Case study 1 356

Case study 2 356

Case study 3 356

Case study 4 357

Case study 5 357

Case study 6 357

Case study 7 358

Case study 8 358

Case study 9 358

Case study 10 358

Case study 11 359

Case study 12 359

Case study 13 359

Practice questions 359

References 366

Acknowledgements 366

Chapter 9 Consolidation: controlled entities 367

Introduction 367

9.1 Consolidated financial statements 368

9.2 Control as the criterion for consolidation 370

9.3 Preparation of consolidated financial statements 376

9.4 Investment entities 378

9.5 Business combinations and consolidation 379

9.6 Disclosure 381

IFRS 12 381

Summary 384

Key terms 384

Review questions 384

Case study 1 385

Case study 2 385

Case study 3 385

Case study 4 385

Case study 5 386

Case study 6 386

Case study 7 386

Case study 8 386

Case study 9 386

Case study 10 387

Case study 11 387

Case study 12 387

Case study 13 388

Case study 14 388

Case study 15 388

Case study 16 388

Acknowledgements 388

Chapter 10 Consolidation: wholly owned subsidiaries 389

Introduction 389

10.1 The consolidation process 390

10.2 Consolidation worksheets 391

10.3 The acquisition analysis 392

10.4 Worksheet entries at the acquisition date 396

10.5 Worksheet entries subsequent to the acquisition date 401

10.6 Revaluations in the records of the subsidiary at acquisition date 412

10.7 Disclosure 413

10.8 Reverse acquisitions 415

Summary 418

Key terms 418

Demonstration problem 1 418

Demonstration problem 2 422

Review questions 426

Case study 1 427

Case study 2 427

Case study 3 427

Case study 4 427

Case study 5 428

Practice questions 428

Acknowledgement 434

Chapter 11 Consolidation: intragroup transactions 435

Introduction 436

11.1 Rationale for adjusting for intragroup transactions 436

11.2 Transfers of inventories 438

11.3 Transfers of property, plant and equipment 446

11.4 Transfers between inventories and non-current assets 453

11.5 Intragroup services 456

11.6 Intragroup dividends 458

11.7 Intragroup borrowings 461

Summary 465

Key terms 465

Demonstration problem 1 465

Demonstration problem 2 471

Review questions 475

Case study 1 475

Case study 2 476

Case study 3 476

Case study 4 476

Practice questions 476

Acknowledgements 487

Chapter 12 Consolidation: non-controlling interest 488

Introduction 488

12.1 Nature of the non-controlling interest (NCI) 489

12.2 Effects of NCI on the consolidation process 492

12.3 Calculating the NCI share of equity 500

12.4 Effects of intragroup transactions on NCI 510

12.5 Gain on bargain purchase 514

Summary 516

Key terms 516

Demonstration problem 1 516

Review questions 526

Case study 1 527

Case study 2 527

Case study 3 527

Case study 4 527

Practice questions 528

Acknowledgements 537

Chapter 13 Consolidation: indirect ownership interests 538

Introduction 538

13.1 Wholly owned groups with multiple subsidiaries 539

13.2 Direct and indirect non-controlling interest 542

13.3 Calculating the NCI share of equity where the group has DNCI and INCI 543

13.4 The effects of goodwill on the calculation of NCI 548

13.5 The effects of the business combination valuation entries on the calculation of NCI 550

13.6 The effects of intragroup transactions on the calculation of NCI 554

13.7 The effects of dividends on the calculation of NCI 556

Summary 559

Key terms 559

Demonstration problem 1 559

Demonstration problem 2 571

Review questions 576

Case study 1 576

Case study 2 576

Case study 3 577

Practice questions 577

Acknowledgement 587

Chapter 14 Consolidation: the statement of cash flows 588

Introduction 588

14.1 Format of the statement of cash flows 590

14.2 Cash and cash equivalents 592

14.3 Classification of cash flows 593

14.4 The reconstruction of accounts approach 596

14.5 Reconciliation of profit for the year to net cash from operating activities (indirect method of presentation) 605

14.6 Consolidated statement of cash flows following acquisition of a subsidiary 607

14.7 Consolidated statement of cash flows following disposal of a subsidiary 613

14.8 Note disclosures 619

14.9 Additional issues 620

Summary 625

Key terms 625

Demonstration problem 1 625

Review questions 631

Case study 1 632

Case study 2 632

Case study 3 632

Case study 4 633

Practice questions 633

References 651

Acknowledgements 651

Chapter 15 Consolidation: translation of financial statements into functional and presentation currency 652

Introduction 652

15.1 Why translating financial statements is necessary 653

15.2 Functional and presentation currencies 656

15.3 From functional currency to translation process to translation method 661

15.4 Translation into the functional currency — the temporal method 662

15.5 Translation from the functional currency into the presentation currency — the current rate method 669

15.6 Translation of cash flows 674

15.7 Consolidation of translated financial statements 676

15.8 Disclosure 677

Summary 679

Key terms 679

Demonstration problem 1 679

Review questions 683

Case study 1 683

Case study 2 683

Case study 3 684

Case study 4 684

Case study 5 684

Practice questions 685

References 695

Acknowledgements 695

Chapter 16 Joint arrangements: accounting for joint operations 696

Introduction 696

16.1 The characteristics of joint arrangements 698

16.2 The classification of a joint arrangement 700

16.3 Accounting for joint arrangements 705

16.4 Accounting by the joint operation itself 707

16.5 Accounting by a joint operator 709

16.6 Disclosure 720

Summary 722

Key terms 722

Demonstration problem 1 722

Review questions 725

Case study 1 725

Case study 2 725

Case study 3 726

Case study 4 726

Practice questions 726

References 734

Acknowledgements 734

Chapter 17 Accounting for associates and joint ventures 735

Introduction 735

17.1 Identifying associates and joint ventures 737

17.2 The equity method of accounting: rationale and application 741

17.3 Applying the equity method: basic principles 743

17.4 Applying the equity method: goodwill and fair value adjustments 748

17.5 Applying the equity method: inter-entity transactions 755

17.6 Share of losses of the associate 763

17.7 Applying the equity method: other issues 765

17.8 Disclosure 769

Information in the financial statements 771

Information in the financial statements 771

Summary 774

Key terms 774

Demonstration problem 1 774

Review questions 780

Case study 1 780

Case study 2 781

Case study 3 781

Case study 4 781

Practice questions 781

References 791

Acknowledgements 791

Chapter 18 Insolvency and liquidation 792

Introduction 792

18.1 Insolvency and administration 793

18.2 Winding up in insolvency and by the court 796

18.3 Voluntary winding up 798

18.4 Powers of the liquidator 804

18.5 Proof of debts 805

18.6 Priority of payment of debts 805

18.7 Rights of contributories (members or shareholders) 808

18.8 Accounting for liquidation 812

18.9 Receivership 817

Summary 820

Key terms 820

Demonstration problem 1 821

Demonstration problem 2 823

Demonstration problem 3 826

Review questions 828

Case study 1 829

Case study 2 829

Practice questions 829

Acknowledgements 841

Index 842