Identification of the questioned accounting treatment
The Australian Securities and Investment Commission (ASIC) is an Australian regulator that undertakes surveillance on financial reporting. 2017 was the year that ASIC raised concerns over Australian company Chapman’s Limited (ASX code: CHP) about some of the transactions reported in financial reports ending 31 December 2016. Chapman was tasked to address the various questions arising from accounting treatment. The issue amended was announced to the general Australian market on 18th August 2017 (Bhopal, 2016). The summary of the adjustments were included in the half year ending 30 June 2017.
- Accounting treatment for joint ventures
The minimum permissible rate of return for an absorption project is determined by the cost of the investor’s capital, adjusted for the level of risk of the project. In the context of the development of market relations in Australia, the process of joint entrepreneurship has intensified, including the creation of joint ventures, which, after registration, acquire the right of a legal entity. However, many of them, approximately every second joint venture, discontinue their activities in a year or two for various reasons. The procedure for the liquidation of joint ventures is regulated by the Civil Code of the Australian Federation, in particular Art. 61, 63, 252. In the field of accounting for transactions related to the liquidation of joint ventures, no single methodology has yet been developed (Blayney, Kalyuga, & Sweller 2015 p. 223).
In all cases, the JV members prepare and approve the liquidation commission in advance, which develops, approves and executes the work plan for the liquidation of the legal entity – joint venture – and acts on behalf of the person being liquidated in court and other organizations.The liquidation commission places a publication on the liquidation in the mass media (media), simultaneously notifies the shareholders in writing about the terms of liquidation of the joint venture, reconciles with debtors and creditors, takes measures to receive accounts receivable and pay accounts payable (Christopher, Phillips, & Schertzer 2015 p. 34).
In accounting, business transactions related to the liquidation of a joint venture may be reflected in the following entries:
- a) when selling materials:
-“Other incomes and expenses”, “Materials”;
-“Other incomes and expenses”, “Calculations under taxes and tax collections”;
- b) financial result from the sale:
“Profits and losses”, “Balance of other incomes and expenses” – the loss;
“Balance of other incomes and expenses”, “Profits and losses” – profit;
- c) when selling fixed assets:
One of the main problems arising in the process of acquiring a company by another company or merging two or more firms (that is, their reorganization) is the regulation of monetary relations. Within the framework of this problem, it is possible to formulate more specific aspects of the role of corporate finance in the process of mergers and mergers of joint-stock companies (Dopson& Hayes 2016 p. 56):
- The advantages of absorption are determined by the extent to which this process corresponds to the strategic goals of the corporation. These advantages can be estimated with a sufficient degree of accuracy using the discounted cash flow method.
- When a company absorbs another company (the target firm), it is necessary to take into account a number of factors: legal, tax, accounting,
- Absorption is used by shareholders as a tool to control the actions of the company’s management. Sometimes the takeover is the result of a conflict between managers and shareholders and the decision to change the directorate as a result of the takeover serves as a means to resolve it(Garvey, Esteban, & Angulo, 2017).
- Mergers and acquisitions are often unfriendly operations and do not always end with calm negotiations between companies. An absorbed (target) firm can resist an investor company and take a defensive position.
The concept of joint activities, its aspects and accounting features
Thus, the acquiring company should evaluate:
♦ cash flow, which will result from the purchase of the target company;
♦ possible changes in the return on equity;
♦ estimated payment for the merger – cash, own shares, other securities or a combination thereof.
♦ valuation of target companies;
♦ participation in the financing of mergers;
♦ use of the tactics of “poisoned pills” and other financial instruments to repel attacks of potential investor companies. “Poisoned pills” make the purchase of the target company not only unprofitable, but also meaningless.
In order to determine the financial effectiveness of the takeover or merger project, a standard method is used, which is based on the Discounted Cash Flow (DCF) technique. This method includes the following steps:
- Defining the parameters that are necessary for calculating the cash flow of the company being absorbed when considering various scenarios for growth in sales volume and profitability.
- An estimate of the minimum permissible rate of return for an absorption project;
- Calculation of the maximum allowable purchase price for different scenarios with the minimum allowable rate of profitability of the project(Granof., Khumawala, Calabrese, & Smith, 2016 p.67).
- Definition of the rate of return that an investor will receive under different scenarios of growth and profitability.
If, after satisfying the creditors’ claims, the property remains, it is distributed among the founders: Then the capital is distributed among the founders and reflected in the account in the accounts:After carrying out all the calculations, a liquidation balance sheet is created, which is approved by the founders, and an obligatory audit is carried out with the formulation of the relevant conclusion.
The concept of joint activities, a contractual agreement
The agreement on joint activities is often used in Australia business practice. The purpose of concluding such a contract is to combine efforts and means of entrepreneurs, and to optimize taxation.
As a rule, speaking of the joint activity of entrepreneurs, we mean the contract of simple partnership, concluded with the purpose of making profit. Members of a simple partnership can only be registered individual entrepreneurs or commercial organizations, whereas common activities without profit can be done by ordinary people or, for example, non-profit partnerships.
An essential condition for a simple partnership agreement is making contributions to the common cause. The value of deposits, their monetary value is made by agreement of partners and can be specified in the contract. If this is not done, the contributions are assumed to be equal in value.
Unification of two or more persons. In the latter case, the contract is a multilateral transaction;
Association does not lead to the formation of a legal entity.
The tax inspection, the committee for the management of state or municipal property, etc., the association is associated with the personal participation of each of the comrades in their joint activities. At the same time, the importance of a personal, trusting factor is quite high: for joint activity, comrades contribute and merge their contributions, the association is created to generate profit or to achieve another goal that does not contradict the law (joint construction of a house, roads, participation in the privatization of an enterprise, etc.). In cases where the purpose of the contract is a permanent activity for the extraction of profit (entrepreneurial activity), the parties can only be individual entrepreneurs and (or) commercial organizations (Marshall, 2016 p.99).
At present, as the crisis phenomena decrease, the processes of integration of the Australian economy into the global economy are activated, therefore the rules of Australian accounting are brought in line with the norms of IFRS. Australian tax legislation in terms of corporate income tax is the first step in the convergence of accounting and tax accounting rules in Australia.
We give a conditional example of taxation before and after the transition of a group of taxpayers, whose activities are characterized by the presence of intra-group transactions between participants, to the consolidated taxation regime. We compare the tax on profits of companies that are members of the mining companies group taking into account and without taking into account the consolidated taxation system if there are loss-making enterprises in the group of companies (Oulasvirta, 2016 p.54).
In this case, the financial result will be reflected only by the group company that sells the goods to third parties.With this method of adjustment, the financial result will be reflected only in the last company of REAG selling the goods to third parties. In a number of countries (for example, the USA), in order to avoid such artificial displacement of profit (loss) in tax accounting, the corresponding part of the profit (loss) is reflected in each participant of REAG, but only at the moment of sale of the goods to third parties. This method seems more logical for both accounting and control purposes.Example: income tax in the case when not all companies of a consolidated group are profitable
Consider the calculation of the taxation of this consolidated group, but with an appropriate reflection of the profit and loss of each member of the group (the method of excluding profits and losses on intra-group transactions), provided that not all companies of the group are profitable, since this situation is more true.
If at least one of the group companies is unprofitable, then there is a positive effect from the use of Chapman financial results. As can be seen from the aggregate amount of tax payable was 137 million cu. It is important to note that in the absence of the possibility of summing up the profits and losses of the participants of (that is, within the current tax legislation), the cumulative income tax would be 161 million USD. Thus, it is possible to talk about the existence of savings from offsetting losses for companies forming the Chapmans, in the presence of a loss-making company (Schaltegger & Burritt, 2017 p.34).
- Accounting treatment for intra companies transactions
It should be disregarded that it is very difficult for the members of the chapmans group to perform intra-group profit adjustments by excluding the group’s profit (loss) from intra-group transactions (following from the current text of draft article 278 of the Tax Code). So, as can be seen from the above example the enterprise must have information on the profits received by the concentrating mill that sold the ore when making the adjustments; metallurgical plant – information on the correction of profit generated by the concentrator for the purpose of compiling consolidated statements, that is, with a large number of participants in Chapman and a significant amount of intra-group transactions between them, the exchange of reliable information will be quite labor-intensive (Sithole & Abeysekera, 2017.p. 33).
As an alternative correction option, the author suggests using the mechanism of compiling consolidated reporting by the method of exclusion within
With the adoption in 2010 of IFRS 10 “Consolidated financial statements”, for the first time there is a requirement to separately reflect the non-controlling interest in the structure of the consolidated report. A similar requirement is advanced by IFRS 3: “Sometimes, in cases of reverse acquisition, some owners of a legally-owned subsidiary (the buyer for accounting purposes)
The Parent Company consolidates all subsidiaries and recognizes non-controlling interests in relation to shares in its consolidated statements and the possibility of changing the return on investment (the right to variable return on investment, including the possibility of changing the returns on investments for subsidiaries). The possibility of changing the return for an actual agent that is not part of the group will usually be reflected as an non-controlling interest (Sabla, & Mahmoud, 2017 p.77).
– assess all components of non-controlling interests at fair value in a manner similar to other components of the controlling interest in the consolidated share of the entity;
– assess non-controlling interests at their pro rata value in the net identifiable assets at the acquisition date.
The first option for estimating the non-controlling interest is, of course, more accurate, but it will require a full revaluation of all the assets and liabilities of the subsidiary at fair value. This can be done to achieve comparability in the valuation of assets and liabilities for all members of the group.
Moreover, in addition to shares belonging to “other” shareholders of the subsidiary, other components of the subsidiary’s capital not purchased by the parent company are also subject to recognition and valuation: options and warrants, capital components of convertible equity instruments and equity related to remuneration.
The regulations for the generation of the statement of income and other comprehensive income are contained in IFRS (1A8). Presentation of Financial Statements”. In IAS 1, a definition of the total (or total) cumulative financial result (total aggregate income – depending on the transfer) and other aggregate financial result (other comprehensive income – depending on the transfer) is given. The total (or total) cumulative financial result (income) (total comprehensive income) is the change in equity during the period as a result of the operations performed and other events that is different from those that arise as a result of the transactions with owners (owners).
For chapman Ltd the following are submitted to the tax inspection: an application (of the established type), an order for liquidation (or other administrative document), the procedure and deadlines for liquidation, the appointment of a liquidation commission, an application in the press, the liquidation balance approved by the founders, an audit report, a list of branches, registration cards and a letter on the assignment of TIN (taxpayer identification number). After that, the tax inspection appoints the day of inspection.
The enterprise subject to liquidation must withdraw from the accounts in all off-budget funds and the tax inspection, close settlement and currency accounts, then it is removed from the accounting records in the statistics bodies (a statement, a certificate from
New business conditions have led to significant changes in the methodology and organization of accounting.
The powers of organizations to reflect their own economic operations have significantly expanded. They independently choose methods for assessing production reserves and methods for calculating the cost of work, developing accounting policies, determining specific methods, forms and techniques for maintaining and organizing accounting. In other words, at the present time only general accounting rules are centrally established, and their specification and implementation mechanism are developed in each organization, independently on the basis of the conditions of its activity (Smith, 2017 p. 34).
Conclusion
In the conditions of a market economy, the basis of economic development is profit, the most important indicator of the efficiency of the enterprise, the sources of its vital activity. The growth of profit creates a financial basis for the implementation of the expanded reproduction of the enterprise and the satisfaction of the social and material needs of the founders and employees (Yan, & Luo, 2016p. 45). Due to profits, the enterprise’s obligations to the budget, banks and other organizations are fulfilled. Therefore, the reliability of the calculation and distribution of a positive financial result (accounting profit) becomes the most important task of accounting.
Recently, a rather complicated political and economic situation has developed in Australia. To solve many problems that arise, it is necessary to reconsider and reassess the advantages and disadvantages of our national economy, as well as to find and study new promising directions and forms of activity (Zeff, 2016p. 98). When the revitalization of our economy is becoming real, attracting foreign direct investment and setting up joint ventures (JVs) in the country are becoming especially relevant.
References
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Christopher, J.R., Phillips, M.A. & Schertzer, S., 2015. An Exploratory Study of Color Accounting: A New Way to Teach and Learn Accounting. Journal of Higher Education Theory & Practice, 15(7)pp. 556.
Dopson, L.R. & Hayes, D.K., 2016. Managerial accounting for the hospitality industry. Wiley Global Education pp.34-66.
Garvey, A.M., Esteban, L.P. & Angulo, J.A.G., 2017. The assimilation of complex accounting concepts using the Cognitive Load Theory as a framework. Educade: revista de educación en contabilidad, finanzas y administración de empresas, (8), pp.35-55.
Granof, M.H., Khumawala, S.B., Calabrese, T.D. &Smith, D.L., 2016. Government and Not-for-Profit Accounting, Binder Ready Version: Concepts and Practices. John Wiley & Sonspp. 56.
Marshall, D., 2016. Accounting: what the numbers mean. McGraw-Hill Higher Education pp.43-44
Oulasvirta, L., 2016. Accounting Principles. Global Encyclopedia of Public Administration, Public Policy, and Governance, pp.1-9.
Sabla, Y. and Mahmoud, M., 2017. Accounting for central and distributed zero liquid discharge options in interplant water network design. Journal of cleaner production.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.
Sithole, S.T.M. and Abeysekera, I., 2017. Accounting education: a cognitive load theory perspective. Routledge.
Smith, M., 2017. Research methods in accounting. Sage.
Yan, A. and Luo, Y., 2016. International Joint Ventures: Theory and Practice: Theory and Practice. Routledge.
Zeff, S.A., 2016. Forging accounting principles in five countries: A history and an analysis of trends. Routledge.
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