Report on Accounting for Grand Progressive- myassignmenthelp

Question: Discuss about theReport on Accounting Standards for Grand Progressive. Answer: Introduction The issue presented in the question is that the company Grand Progressive Ltd has a 33% interest in the share capital of Massive Dynamic Ltd. The founders of the company Massive Dynamic Ltd., Mr. and Mrs. Bell own the rest of the shares and have allotted three out of five seats in the Board of Directors to the Grand Progressive Limited. Grand Progressive Ltd takes the lead on all decisions but the business is closely monitored by Mr. and Mrs. Bell who hold the other two board positions. Now it has been asked in the question to advise the directors of Grand Progressive Ltd on the basis of the laid down regulations of Australian Accounting Standards Board (AASB). Advise to the Directors of Grand Progressive Limited According to the laid down structure and regulations of the AASB 127, it is mentioned that if an entity holds twenty percent or more of the shares in the share capital of the company that is if it has twenty percent or more voting power in the company then it may exert significant influence over the control of the company. In order to evidence the influence of the entity over the company whose shares are purchased, certain common occurrences may be followed like representation of the shareholding company in the board of directors; participation in the decision making processes of the company; transactions which are material in nature between the investee and the entity; personnel interchange between the entity and investee and also obtaining required technical information from the entity. However the provision of significant influence does not really depend on the percentage of shares owned by the entity. The case may be such that the majority of the shares may be owned by some other entity but the significant influence might be exercised by another entity (Howieson 2013). The above conditions or situations mentioned, is matching with the provisions provided to Grand Progressive Limited to by Massive Dynamic Limited. The directors of Grand Progressive Limited, though own only 33% of the share capital (which is more than 20%) , represent majority of the members of the Board. Thus it is evident that the company has a significant control over the control of Massive Dynamic Limited. The directors of Grand Progressive Limited should also be aware of the fact that the potential voting rights of the company might also be reduced or increased as the case may be. This may be done by converting the shares into other financial instruments (Carey, Potter and Tanewski 2014). If the investment in preferred shares is assumed to be same as the investment in ordinary shares then the entity may have significant influence thus the particular investment should be accounted for using the equity method. The investment done by Grand Progressive Limited on Massive Dynamic Limited has to be accounted by equity method. This is because the investor irrespective of the percentage of shares owned by it in the share capital has displayed enough control in the decision making process of the investee company. For an instance the Grand Progressive Limited holds three seats in the total of five seats in the Board of Directors. This significantly indicates that the shareholdings by the entity are to be accounted by equity method (AASB, C.A.S., 2015). But according to AASB 127, the directors of Grand Progressive Ltd have to publish separate financial statements in addition to consolidated financial statements. Though it has been mentioned above that the shares owned by the entity that is Grand Progressive Ltd may be most probably in the nature of preferred shares, therefore has significant control over Massive Dynamic Ltd but as it is not a proven fact, that is why according to AASB 127 the entity has to prepare separate financial statements (AASB, C.A.S., 2014). The separate financial statements that are to be prepared are to be done in accordance with the standards as set in AASB 9 or by following the equity method as states in AASB 128 or at cost. The directors of Grand Progressive Ltd should keep in mind that the entity will have to apply the similar accounting for all categories of investments. Investments treated at cost or with the help of equity method will have to be accounted for in line with the laid down rules and regulations as in AASB 5 Non-current Assets Held for Sale and Discontinued Operations when these investments are categorized as held for sale or for the purpose of distribution (Hughes and Hoy 2013). The entity, Grand Progressive Ltd will have to undertake the application of all relevant standards when disclosures are provided in the separate financial statements. An entity if at any time becomes the parent company then it may make a choice of not preparing the consolidated financial statements and only prepare the separate financial statements. When the parent company is preparing the financial statements then it should be kept in mind that this fact should be very importantly mentioned in the disclosures that this is the only financial statements prepared by the entity and no other consolidated financial statements are prepared (CRSTEA and CIOLOMIC 2014). As mentioned in the question the directors of Grand Progressive Ltd though occupy the majority of the number of Board members in the Massive Dynamic Ltd and take a lead on the decision making processes but the business is closely monitored by the founders of Mr. and Mrs. Bell. This should be noted by the directors of the Grand Progressive Ltd. This is because as the Grand Progressive Ltd takes a lead in every major decision making process of the business, therefore the directors should take serious initiative in observing the proceedings of business closely and then provide required input in the decision making process. Another proceeding of the AASB 127 that has to be kept in mind is that when an entity is preparing separate financial statements then it shall be done in accordance to the standards laid down in AASB 10, AASB 11 or AASB 128 whichever the case may be. In the separate financial statements prepared by the entity the fact that only the separate financial statements are prepared and also the reasons as to why this decision of preparing separate financial statements is taken. Other obligations like the name of the investee, the primary place of business, the percentage of ownership of the entity in the investee company and the details of the method that is used in order to treat the particular investment that is incurred. Thus as it can be understood from the above descriptions the directors of Grand Progressive Ltd should be more efficient and sincere in executing the duties on behalf of the Massive Dynamic Ltd and should strictly follow the standards as mentioned in the AASB 127 (Taylor, Richardson and Taplin 2015). Why is it necessary to make adjustments for intra-group transactions? It is necessary to make adjustments for intra-group transactions especially while only preparing separate financial statements. But before understanding the reason behind it, at first the term intra-group transaction needs to be understood. The term intra-group transaction refers to the transaction that takes place in between entities that are in the same group. While preparing consolidated financial statements the intra-group transactions are not required. This is because from the perspective of a group, they do not arise hence eliminated. According to AASB 127 the intra-group balances, expenses and income and transactions should be totally eliminated. It is also mentioned in AASB 127 that if incase temporary disparities or differences arise due to the fact that the profits and losses have been eliminated then the tax effect accounting might be utilized (Gordon 2012.). In much more simple terms intra-group transactions take place when one part of an entity is engaged in a transaction with another art or unit of the same entity. These transactions may arise due to a vast number of reasons including the normal course of business transactions that occur between two partner firms or parent subsidiary firms or an entity holding a certain portion of shares in the investee company. If two subsidiary firms or firms which are in any way related belong to the same domain of industry then it is very easily possible for entities to interchange or exchange inventory provided that it is a consolidated entity. Again assets transferred such as plan asset between two entities will definitely recorded in the books of both the entities as transaction with third parties and they would also get the added benefit of changing the inventory in accordance to the current demand in the market. If observed from the perspective of a consolidated entity, the transaction that ha s taken place intra-group is still not recognized because of the fact that unrelated parties are not involved therefore the disclosure included in the consolidated financial statements should not display any intra group balance (Grossi 2015). There are certain journal entries that are required in order to adjust the intra-group balance. This might be done by eliminating the intra-group sales by debiting the sales account with the amount of sales and crediting the Cost of Goods Sold account with the same amount. In order to remove the unrecognized profit and adjust the inventory that has been overstated the Cost of Goods Sold account has been debited with the amount of profit or loss that is incurred and the inventory account is credited with the same amount. The effect on tax that would be resultant from the removal of profit can also be adjusted between the two entities (Director I, Director M.K.S.L.E. and Director M.J.K.S 2014). Therefore the consolidated financial statements are essentially the statements of the group which is again an economic entity that constitutes of the parent and its subsidiaries. This is why the consolidated financial statements has the capacity to only have assets and liabilities, profits that are linked with parties who are outside the group. Adjustments for intra-group transactions are absolutely necessary as they are the internal affairs of the economic entity. This concept is also applicable to a consolidated entity. Therefore transactions between these parties which are intra-group in nature will have to be totally adjusted as because they are treated as a single unit. Hence the adjustments for intra-group transactions are absolutely necessary and must be done on highest priority (Carey, Knechel and Tanewski 2013). Conclusion Thus the directors of Grand Progressive Ltd should be aware of the above mentioned facts and act accordingly. They should be more vigilant towards monitoring the various operations of business and should be well informed about the duties that they have to perform. Moreover the laid down standards in AASB 127 should be strictly followed by the directors. References Howieson, B., 2013. Defining the Reporting Entity in the Not?for?profit Public Sector: Implementation Issues Associated with the Control Test. Australian Accounting Review, 23(1), pp.29-42. AASB, C.A.S., 2015. Investments in Associates and Joint Ventures. AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77. Carey, P., Potter, B. and Tanewski, G., 2014. AASB Research Report No. Hughes, M. and Hoy, S., 2013. Two Steps Backward and One Step Forward: The IASB's Response to Off-Balance Sheet Financing Through Investments in Other Entities. CRSTEA, A. and CIOLOMIC, I.A., 2014. Public Sector Consolidated Financial StatementsArea and Methods. AMIS 2014, p.594. Taylor, G., Richardson, G. and Taplin, R., 2015. Determinants of tax haven utilization: evidence from Australian firms. Accounting Finance, 55(2), pp.545-574. Carey, P., Potter, B. and Tanewski, G., 2014. Application of the reporting entity concept in Australia. Abacus, 50(4), pp.460-489. Gordon, I., 2012. Superannuation in Society: What are the Accountability Relationships and is there a Role for (Group) Accounting?. Australian Accounting Review, 22(2), pp.142-154. Grossi, G., 2015. Consolidated financial statements in the public sector. Public sector accounting, pp.63-76. Director, I., Director, M.K.S.L.E. and Director, M.J.K.S., 2014. Company Secretary. Paul Schultz HEAD OFFICE REGISTERED OFFICE Level, 1, p.91. Carey, P., Knechel, W.R. and Tanewski, G., 2013. Costs and Benefits of Mandatory Auditing of For?profit Private and Not?for?profit Companies in Australia. Australian Accounting Review, 23(1), pp.43-53.