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