Lecture 13

Deloitte: Consolidation a real life perspective

AASB10:
- Consolidation is based on control
- Control may be obtained in various manners, and not solely as a result of
the power to direct the financial and operating policies
- Exposure to risk/rewards is one the factors necessary in order to control,
but it is never the determining factor AASB10 requires extensive use of
judgement (AASB12 requires disclosure of areas of judgement)
Why consolidation?
- Accounting is all about giving a true and fair view of the current situation
The issues facing consolidation accounting
- Changing accounting standards
- Accounting systems
- Timeliness of results
- Segment performance may not be fully disclosed
- Completeness of information
- The accounting standards have adapted to mitigate these flaws in the
concept through increased disclosures
Overview of the ideas and issues raised by Deloitte
- what Deloitte said was they dont share that information because
shareholders are not interested in it. Matt doesnt agree with this because
this kind of information may still be used by the CODM and therefore
should be disclosing this kind of information
- maybe there are some separate levels of financial information the CODM
may only just use the summarised version
value of segment reporting very much from the perspective of
shareholders pool that they are investing in therefore the pool they
are interested in segment reporting shows how that pool has been
utilised while matt considers segment reporting to be the disclosure of
necessary information to go through the risks associated with the
investments/projects of the company
Consolidation is important because shareholders want to know
everything. However matt argues that its not everything because the
information is so aggregated
AASB10 do we have the current ability to direct? Deloittes judgement
(Sarah) stated given past attendance at AGM this doesnt tell us a lot
what attendance might be like this year (as opposed to last year) at least
I would use qualifying language we have some strong evidence not
outrightedly stating it.
Drawing into the essay in the final exam as we know for Woolworths
there are not a lot inter-company transactions and so how does that add
to our argument? Whether the issue of eliminating intra-group
transactions is a problem or a good thing?
Comment that Will made consolidation doesnt tell us the performance
in regards to the subsidiary however these days in presentations to
shareholders management commonly give the information to
shareholders about individual subsidiaries more forthrights hwoever
matt questions why are you doing it in a separate form of
communication -= why is this not included in the annual report
o People in practice not just talking to shareholders- also to
creditors
o Key argument dont worry creditors because cross-guarantees
Perculiar mechanism in Australia hwoever not always
perfect Patricks example some of the subsidiaries were
excluded from the cross guarantee look at this note in
Qantas attempts to describe the state of the cross
guarantee note check this e.g. imagine if you are a creditor
from Jetstar cross guarantee looking at this will this
convince you?
Power if you are a little creditor trying to operate with a subsidiary in
a large group power is a key issue do you have the power to ask?
Do the standard setters bear in mind the feasibility of these accounting
standards and then having to audit them? Yes they do, meaningful dissection of
everything that comes into the annual report as everything consolidates up
into segment notes and statements
- however key issue is that we dont give these dissections to the users
the consolidation worksheet is the full dissection should we also
supplement our annual reports by providing the full consolidation
worksheets? Information overload may be a main issue as Will from
Deloitte mentions in his presentation
You are investing in the entire group so we should show you the groups
hwoever as a shareholder we are only investing in the parent entity (as matthew
dispute) the parent is then investing into a bunch of other subsidiaries. You are
not investing into a group but a legal entity

True and Fair view
- An accurate reflection of reality; performance and position
- Providing information that leads to the right decisions
- Equal utility to all users
Exam hints: one of the essay style questions on the exam will raise the issue of
true and fair and will be in regards to the alignment of one of the accounting
methods more based on your perspective
Matt thinks true and fair needs a true reflection of the performance and position
of the company I want a clear explaination of a poor or good performance we
want leading information not misleading information as a shareholder I want
to get out because this group may be dangerous and there are big risks within it
if this decision is the best decision to make I should know im going to decide
to get out quickly another idea is fair I know the conceptual frameowkr states
that no user group is better than any other user group its very hard to justify
that all this information provided reflects this.
The big picture of a third year unit
- Complying with A-IFRS
- Appreciate the politics, debate, compromise and (sometimes) the mess
involved in the standard setting process
- Appreciate that those standards are rarely use din the absence of
professional judgement. IFRS is said to be principles based
- Are you now able to move through the standards with efficiency? The
paragraphs in bold, the additional guidance, the purpose, the definitions,
etc.
- The required structure for a reporting entitys financial statements:
o AASB101 para10:
A statement of financial position
A statement of comprehensive income
A statement of changes in equity
A statement of cash flows
Notes to the accounts
- The conceptual framework tells me that no user group is more important
than another if we are producing a document that is not useful for
powerless creditors then are we really upholding this
responsibility/framework/duties
- W10 helps us appreciate that the accounting standards are flawed and
that they are not aligned at all with the public interest not clear more
forced does not address public interest accounting is an opportunity
for organisations to look good and deliver to themselves a wealth effect if
they can and therefore there is a lot of politics, debate and compromise
involved int the development of accounting standards there is strong
evidence of regulatory capturre and at different levels e.g. your opinion
of an accounting standard is of Regularoy capture more accounting
standards at least have some elemnts to address public interest
sometimes even right down to single paragraphs well abit of what they
paragraph is trying to do is public interest however there are options to
withdraw and to do other things looks like a bit or regulatory capture
construction has gone on as well in separate parts
- Is professional judgement a good or bad thing> what is your perspective?
Is it good to have a rules based approach? E.g. 50% ownership of the
share consider control? We have been forced to look at the entire
circumstances ot he relationship between the parent and the investment.
However can be manipulated to determine judgement in the best interest
of the organisation.
- A lot of the accounting standards have a light gray shading through the
paragphs because a lot the disclosure requirements are not required
unless you are more of a material entity structure 4 statements we
need to have and the notes to the account we have both qualitative
and quantitative

Exam coverage
Speak the language of accounting in explaining things try to avoid
mathematical terms
Talk about recognising, realising, presenting, disclosing, amortising,
depreciating, impairing, transferring, providing, expensing and
capitalising
Talk about issues of understand-ability, consistency, relevance, reliability
(or we not talk of faithful representation), comparability
What about more colloquial terms like, to move or wash (e.g. the
deferred tax asset was washed to the profit and loss when the inventory
was sold)
When we use words like this, we hearly need to use Dr, or Cr
Can you now understand the simple accounting instructions?
o Impair the goodwill by XXX
o Restate the foreign currency payable at todays spot rate
o Transfer the hedging gain previously recognised in equity to the
non-financial asset
Coverage in 3011
What on the exam? Fundamentally focused on weeks 6 to 12. However to
address the issues covered in the second half, you need to appreciate all of the 12
weeks. More of a revision lecture covering 12 weeks:
- The existence of groups and entities operating cohesively and
undertaking material transactions between each other suggests value in
presenting the performance and position of these entities in one
combined report, eliminating those potentially non-commercial
transactions
- But are they really operating cohesively? Control?
- And what are the boundaries of the group? What should the group and
the legal entities in it recognise? what is the nature of the NCI? Consider
social and environmental impacts
Group accounts:
- add the final trial balances of every party under common control together
in a non permanent accounting record on a line by line basis regardless of
ownership interests
- restate the assets and liabilities of the subsidiaries at fair value (if
necessary at the date of acquisition)
- The residual - see Wines, Dagwell and Windsor
- Eliminate other inter-company transactions, balances and unrealised
profits
- Provide some insight into the quantum of group profits and equity
attributable to non controlling interest
Week 6 NCI
What is it and how is it represented in the financial statements?
The entity concept requires consolidation in full. And so we can say that
some of the equity is attributable to the NCI
Total group = PI + NCI and so in this sense, NCI is a part of the group. But
distinguish; of course the entity that owns those other shares, is not a part
of the group
Be prepared to do an acquisition analysis, do the slightly varied
consolidation journal entries when we dont own 100%, NCI
memorandum, and both partial and full method of goodwill
Consider also critical reflection; decision usefulness to ultimate
shareholders, the NCI themselves, and other users
Week 7 some accounting standards that complement AASB1-
and 128
Segment reporting seeks to address concerns with aggregation and the
elimination of potentially trouble transactions
The standard setters were cognisant of those concerns (public interest
theory must have some role!) and so we have some accounting standards
that attempt to complement group accounts;
o AASB 8 operating segments
o The purpose to provide insights into the risks and returns within
the reporting entity. To aid forecasting
o AASB 124 related party disclosures
o The purpose to draw attention to the possibility that profit might
have been affected by non-arms length transactions. To reassure
users that management have acted in the best interests of users
Week 7 segment disclosures
1. Obtain the dissection of the groups accounting records as it is regularly
reviewed by the Chief Operating Decision Maker at reporting date
2. Apply the 3 10% tests to the segment data
3. Those segments that pass are reportable
4. But first, does the external revenue of those reportable segments
comprise more than 75% of the total revenue
5. Prepare a segment note that discloses the revenues, profits, assets,
liabilities and some other bits and pieces for each of those reportable
segments
6. Provide reconciliations to the group accounts
7. Also provide some dissected detail of the geographical segments in which
you operate
8. Consider the utility of this data. Comparability, consideration of higher
risk segments (in 2014 this might have included retail, mining, property)
needs of ethical investors.
Week 7 how effective are AASB 8 and AASB 124
Segment
- It is unlikely that AASB 8 will provide insight into the performance and
position of any subsidiary
- We have seen examples of failure to comply with the spirit of segment
reporting (e.g. IBM, Qantas). Woolworths enables limited ratio analysis
- Do the new CODM requirements align segments with what we report
internally and overcome a fear of disclosue?
Related party
- an interesting accounting standard that actually tries to modify behaviour
- reporting entities tend to push this note to the back of their financial
statements
- consider Qantas related party disclosures arguably some failure to
disclose full details of related party transactions
Week 8 the standard setting process
- Explaining the three traditional theories. Be specific.
- Remember, here we are accounting academics, not standard setters or
report preparers
- How well do those theories fit the IFRS era?
o Weve moved beyond the national boundary
o Who now are the consumers, producers and government?
o Logically, who is capable of having some influence over the
standard setting process now?
o What influence does the AASB now have?
o And on the other side, what are the IASBs motivations?
o The Ram and Newberry paper (need to read this one for the exam
as it is highly likely a question will be asked again) presents an
interesting insight into understanding something about the IASBs
motivations. Due process as stated does not always seem to
efficiently address the concerns of users.
o Ram and Newberry used theory in the sense that they sought to
contribute to the arguments of Richardson and Everlein (2011)
and Botzem (2012). They could have adapted and used the old
theories however, it is the research question that drives the theory
choice.
Week 9 associates (and joint ventures)
Associates and joint ventures. We dont consolidate. Instead we will
effectively revalue our investment in those entities by the extent to which
their equity has grown since the date of acquisition
o Start with investment at cost
o Add our share of post acquisition increments to the equity of
associate
o Less our share of post acquisition decrements to equity of
associate
o +/- other odd adjustments (strictly speaking these are not
elimination):
Our share of unrealised profit
consequential depreciation
o Be guided by the complexity in the lecture and the tute examples
Examples:
o Original cost journal entries, equity accounting entries, and tax
effect entries
o Calculate equity carrying value at the end of the year, and
o Reconcile to the net assets of the associate
Week 9 equity accounting
- Equity accounting has been called one-line consolidation however, thats
misleading
- Equity accounting is really a clever measurement method for a particular
group of financial assets
- But are we accruing for income we many never receive in cash?
o Contingent future cash claims
- If we didnt apply equity accounting, what measurement method would
we use:
o Probably available for sale financial assets (measured at fair value)
o Or maybe wed consider the investment to be controlled
o Both of these alternatives have merit so why not just scrap
equity accounting?
- All alternatives are based on professional judgement and all present
significantly different accounting outcomes
Week 10 issues in consolidation
- Be able to explain accounting differences under AASB 10 and 128
- Arguments with respect to the merits and shortcomings of consolidation:
o Substance versus form
o The needs of specific user groups
o Aggregated and lost data
o Artefacts so what?
o Do AASB 124 and 8 make up for the shortcomings? What about
cross guarantees?
- No specific exam questions on the 2 alternatives proposed by Clarke and
Dean
- A key concern seems to be that in many cases, the more appropriate
accounting information for decision making would be financial
statements for individual separate legal entities:
o Does Qantas provide financial statements for its subsidiaries on its
website?
o All companies must lodge financial statements with ASIC but
Cross guarantees
- Use Clarke, Dean, Egan chapter as a supplement
- Consider also the more general problems with financial reports; released
2-3 months after balance date; historical rather than perspective; long
and complex
Week 10 the 14% essay on the exam
- Explain each of the 3 features. Contrast strengths and weaknesses. Users
perspectives not report preparers
- Remember with any writing, its irrelevant what the exam marks may or
may not know; the purpose of an exam is for you to demonstrate your
knowledge and writing skills so explain all concepts clearly
- Consider brief introduction, structure, examples? Bold (not wishy washy)
analysis and conclusions
- 14% = 17 MINUTES 3-4 paragraphs
Week 11 Financial instruments, hedge accounting and foreign
currency transactions
A cash flow hedge that qualifies for hedge accounting
Step 1
The secondary instrument will usually exist before the primary instrument. Mark
the secondary instrument to fair value at reporting date as required. The other
side of the journal entry will be to hedging gain or loss taken to equity
Step 2
At the date that the primary instrument transaction occurs, first remark the
secondary instrument to its current fair value. Again, the other side of the
journal entry will be to hedging gain or loss taken to equity
Step 3
Then recognise the primary instrument transaction at spot rate
Step 4
AASB139 then allows us to transfer the hedging gain or loss previously
recognised in equity to either any non-financial asset, liability or sale, or to the
profit and loss. In this unit, your instruction will always be to adjust any non-
financial asset, liability of sale.
Step 5
At settlement, remark the secondary instrument to its current fair value. The
other side of the journal entry is now to gain or loss (P&L) because it has now
become a fair value hedge (because it is not the hedge of exposure to changes in
fair value of [recognised] asset or liability)
Step 6
At settlement remark the primary instrument to its current spot rate
Step 7
Settle both instruments

Week 11 Financial instruments, hedge accounting and foreign
currency transaction
Potential exam questions:
- doing the journal entries for qualifying and non qualifying hedges
- explain hedge accounting and the journal entries
- explaining the differences between qualifying and non qualifying
- commenting on the complexity of the standard including qualifying,
recognition issues and disclosure issues, and the factors contributing to
that complexity
- presenting your perspectives on the alignment of hedge accounting with
true and fair
- explaining the advantages of hedging and of hedge accounting for
reporting entities and explaining the challenges that hedge accounting
creates for users. In the tutes we sought to do this by arguing about
alignment to the concept of truth. Li and QBE argue that coming changes
will better align hedge accounting with truth, maybe but where do Li and
QBE fit in Lecture 8; government, producers or consumers?
Week 12 Social and environmental reporting and Joint
Operations
Potential exam questions:
o Commenting on an extract from a social and
environmental/sustainability report; considering its usefulness, to
whom, how it could be improved and also the organisations
motivating for disclosing it
o A general description of the potential scope of disclosures that an
organisation could provide on both its social and environmental
impacts and on any activities it has undertaken to address those
impacts
o Is it accounting?
o Is it a job for accountants?
o Advantages and disadvantages of providing voluntary disclosures
Theres a few right or wrong answers here. In marking any exam
question here, wed simply be looking to see that you have engaged with
the material and developed your own perspective.
Joint Operations:
o Be able to understand basic journal entries, explain what we mean
by proportional consolidation, and consider the mertis and
shortcomings of this method.
The utility of Qantas example accounts
The lectures encouraged you to look at the example Qantas accounts
throughout the semester
Have you reviewed?
o Non-controlling interest in P&L and BS
o Goodwill
o Investments accounted for using the equity method (and examine
the associated reconciliations in the notes)
o The notes that lists all of the Qantas subsidiaries
o Selected significant accounting policies (note 1)
o The detail and utility of the segment disclosure
o The detail and utility of the related party disclosure
o The parent entity disclosures (note 37)
o The cross guarantee note
Linking ideas?
How do group accounts in which all subsidiaries are wholly owned differ
from group accounts where some subsidiaries are not wholly owned?
(weeks 1-6 to week 9)
How do segment disclosures and related party disclosures address the
limitations of group accounts? (week 7 to week 10)
How can the three theories of standard setting be used to explain the
development of AASB 3, 10, 128, 124, 8 and 139? (week 8 -> most other
weeks).
Why are reporting entities voluntarily disclosing social and
environmental impacts when we know that they seek to disclose as little
as possible in response to A-IFRS (week 12- week 8)
Should we be developing social and environmental accounting when we
still have so many challenges with financial accounting? (week 12 ->
Leibler)
General exam comments
50/50 written/numerical (technical) questions I seem to have gone for a
strong critical thinking perspective this semester! The challenge here is to show
your engagement with the material
Common FinB essay style questions:
o Discussing the utility and limitations of an accounting practice or
issue or disclosure
o Explain the purpose of, and reporting required by, an accounting
standard
o Explain journal entries or accounting techniques
o Explaining standard setting process, related theories and their
utility
Consider how such questions could be asked in relation to a number of
topics (e.g. group accounting, segment disclosures, hedge accounting etc)
How to get a good mark in such a question we do not just want
regurgitation of a list of pros and cons. Answer the questions. Provide a
logical narrative, explain concepts, examples? Be specific
Consider the value of illustrating with examples
Its not about the reporting entity, its about users
Allocate your time!