Company Accounting Solutions Manual Leo

Solutions Manual to accompany Company Accounting 10e prepared by Ken Leo John Hoggett John Sweeting Jeffrey Knapp Sue gcGowan © John Wiley & Sons Australia, Ltd 2015 Solutions manual to accompany Company Accounting 10e Chapter 23 – Associates and joint ventures REVIEW QUESTIONS 1. What is an associate entity?

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Paragraph 2 of AASB 128 defines an associate as: An entity, including an unincorporated entity such as a partnership, over which the investor has significant influence, and that is neither a subsidiary nor an interest in a joint venture. The key criterion is the existence of significant influence, also defined in para. Note that an investor does not have to hold shares in an associate – yet the application of the equity method depends on such a shareholding.

However, see the presumptions in para 6 of AASB 128. Why are associates distinguished from other investments held by the investor? The suite of accounting standards provides different levels of disclosure dependent on the relationship between the investor and the investee: Subsidiaries: a control relationship Joint ventures: a joint control relationship Associates: a significant influence relationship Other investments: no relationship Where there is a relationship, it relates to the ability of the investor to influence the direction of the investee, in comparison to a simple holding of shares as an investment. Where such a relationship exists, it is argued that the investor is affected, from an accountability perspective as well as a potential receipt of benefits perspective why get involved if there are no benefits to doing so?. These effects result in the need for additional disclosure about the relationship. Discuss the similarities and differences between the criteria used to identify subsidiaries and that used to identify associates.

A subsidiary is identified where another entity controls that entity. Control is defined in para 2 of AASB 128. An associate is identified where another entity has significant influence over that entity. Control Power over the investee Significant influence Power to participate Exposure or rights to variable returns From involvement in investee To participate in the financial and operating policy decisions Ability to affect returns through power - No ownership interest is necessary No ownership interest is necessary © John Wiley and Sons Australia Ltd 2015 23.2 Chapter 23: Associates and joint ventures 4. What is meant by “significant influence”? Para 2 of AASB 128 states: Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies Note: power to participate financial and operating policy decisions 5.

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What factors could be used to indicate the existence of significant influence? Note paras 6 and 7 of AASB 128: 6. If an investor holds, directly or indirectly (eg through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly (eg through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.

The existence of significant influence by an investor is usually evidenced in one or more of the following ways: (a) representation on the board of directors or equivalent governing body of the investee; (b) participation in policy-making processes, including participation in decisions about dividends or other distributions; (c) material transactions between the investor and the investee; (d) interchange of managerial personnel; or (e) provision of essential technical information. What is a joint venture? A joint arrangement is an arrangement between two or more entities so that two or more entities have joint control of another entity. Where a joint arrangement exists, the arrangement must be classified as either a joint operation or a joint venture. The classification depends on the rights and obligations of the parties to the arrangement. Joint ventures are accounted for under AASB 128 while joint operations are accounted for under AASB 11. A joint venture is described as an arrangement where the investor has a right to an investment in the investee.

The investee will have the following features: - the legal form of the investee and the contractual arrangements are such that the investor does not have rights to the assets and obligations for the liabilities of the investee; and - the investee has been designed to have a trade of its own and as such must directly face the risks arising from the activities it undertakes, such as demand, credit or inventory risks. © John Wiley and Sons Australia Ltd 2015 23.3 Chapter 23: Associates and joint ventures 7.

What is meant by joint control? 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. The key element of joint control is the sharing of control. In other words, there must be at least two investors who have shared control of the investee (AASB 128, para. How does joint control differ from control as applied on consolidation? Under AASB 10: An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

There are three investor-investee relationships which are based on different levels of control: Relationship Parent - subsidiary Investor-associate Joint arrangement - investee Level of control Dominant control Significant influence Joint control With a subsidiary there can be only one parent. With joint control there needs to be at least 2 entities that share control. Discuss the relative merits of accounting for investments by the cost method, the fair value method and the equity method.

Solutions Manual to accompany Company Accounting 10e prepared by Ken Leo John Hoggett John Sweeting Jeffrey Knapp Sue gcGowan © John Wiley & Sons Australia, Ltd 2015 Chapter 14: Disclosure: legal requirements and accounting policies Chapter 14 – Disclosure: Legal requirements and accounting policies REVIEW QUESTIONS 1. What do the terms ‘financial performance’ and ‘financial position’ mean and how do they relate to the objective of general-purpose financial reporting? Financial performance is discussed in the Conceptual Framework, paragraph OB16 as relating to the return that the entity has produced on its economic resources. Profit is frequently used as a measure of financial performance (Conceptual Framework paragraph 4.24). Information about income and expenses during a financial period plus changes in assets, liabilities and equities will enable users to assess past performance and make reasonable predictions about the ability of a company to continue to generate profits from its operating activities. Information about financial performance is largely contained in the statement of profit or loss and other comprehensive income and notes thereto. Its content is regulated by AASB 101 Presentation of Financial Statements.

Financial position is discussed in paragraph OB12 of the Conceptual Framework as relating to the entity’s economic resources, the claims against the entity and the effects of transactions and other events that change an entity’s economic resources and claims. Information about financial position is largely contained in the statement of financial position (or balance sheet) and notes thereto. Its content is also regulated by AASB 101 and provides information concerning:  Resources controlled. Predictions about the ability of an entity to continue to operate and generate positive cash flows are enhanced by information about assets.  Financial structure. Details of how the entity is financed – through debt or equity – help users determine future distributions of cash flows and the capacity of the entity to attract resources in the future. A debt-laden company has more of its future cash flows committed to interest and principal repayment than does a company largely financed by its shareholders.

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Such an entity will also have a more limited capacity to borrow additional funds should this become necessary.  Capacity to adapt. Information about the realisable value, current state of repair and any restrictions on use of assets enables users to assess the capacity of the entity to adapt to economic or environmental change.

 Liquidity The availability of cash in the near future after taking into account any financial commitments due over this period. © John Wiley and Sons Australia, Ltd 2015 14.2 Solutions manual to accompany Company Accounting 10e  2. Availability of cash over the longer term in order to meet debts when they fall due.

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The Corporations Act requires directors to ensure that financial reports give a true and fair view. What does the term ‘true and fair view’ mean? The requirement for a 'true and fair' disclosure of the financial position and performance of the company (and the consolidated financial position and performance if consolidated accounts are required) is a controversial one. A ‘true and fair’ view, according to s.297 and s.295(3)(c) of the Corporations Act, requires compliance with accounting standards and the provision of additional information in the notes to the financial statements where compliance with accounting standards does not give a ‘true and fair view. Notwithstanding secs.

297 and 295(3)(c), the term 'true and fair' is not defined in the Corporations Act and its precise meaning in the context of published financial statements is not stated, there have been calls for its abolishment and the substitution of 'present fairly' in accordance with accounting standards. However, it is generally agreed that 'true and fair' has a more philosophical connotation as it endeavours to place the requirement for truth and fairness in reporting on a higher, more ethical level than mere conformity with accounting standards. Presently, if there is any reason that the directors believe that the financial statements prepared in accordance with accounting standards do not present a 'true and fair' view, they are required to add such information in the notes in order to present such a view. The substitution of 'true and fair' with 'presently fairly' would enable directors to relinquish their responsibilities of determining this overriding requirement that financial reports be assessed for truth and fairness, which itself provides a greater credibility for users of reports. Following the postEnron era and sub-prime mortgage crisis in the US, the need to retain ‘true and fair’ is undoubtedly even more important as it underscores an ethical dimension of external reporting. What is comparative information and why must it be disclosed in financial statements? Comparative information is the presentation of data relating to the previous financial year (for all financial statements and notes thereto) alongside that of the current year's information.

The main purpose of its disclosure is to enable users to analyse and compare the company's previous results with current results. Cummins c160 service manual. Analysis of trends in historical results over several years is of benefit to many members and analysts wishing to assess the company’s likely future prospects.

Comparability of information is considered in paragraphs QC20QC25 of the Conceptual Framework to be a necessary qualitative characteristic that enhances the usefulness of information that is relevant and faithfully represented in general purpose financial statements. © John Wiley and Sons Australia, Ltd 2015 14.3 Chapter 14: Disclosure: legal requirements and accounting policies 4. (a) What should be included in the directors’ report and the auditor’s report?

Director's Reports. Under the Corporations Act, the annual financial report for a company, registered scheme or disclosing entity must be accompanied by a directors' report (s.298). Ginimum requirements for the annual directors' report are set down in ss.298-300A. The amount of detail necessary in the report depends on the nature of the company or registered scheme. The content of the report consists of two main parts – general information about operations and activities (required by s.299), and specific information (required by s.300).