China Concepts Stocks

1. Describe the meaning of ‘insolvency’ with regards to companies. Section 95A of the Corporations Act 2001 (the Corporations Act) provides a definition of solvent and insolvent with reference to a person, but the definition can be extended to a company, which is considered a legal person: (1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. (2) A person who is not solvent is insolvent. 2. Briefly describe the procedures through which the Corporations Act attempts to avoid liquidation of companies if possible. The main intention of the Corporations Act 2001 is to treat liquidation as a last resort. The Corporations Act 2001 provides extensive guidance on the rights of members and creditors whenever it is decided that the life of the company is in danger of drawing to a close due to financial difficulties. The Corporations Act also attempts to avoid the liquidation or winding up (these terms can be used inter...

Exercise 27.1 Acquisition analysis, acquisition date entries On 1 July 2019, Christina Ltd acquired all the issued shares of Adeline Ltd, paying $120 000 cash and transferring 100 000 of its own shares to Adeline Ltd’s former shareholders. At that date, the financial statements of Adeline Ltd showed the following information. All the assets and liabilities of Adeline Ltd were recorded at amounts equal to their fair values at the acquisition date. The fair value of Christina Ltd’s shares at acquisition date was $2 per share. Christina Ltd incurred $30 000 in acquisition‐related costs that included $5000 as share issue costs. Required 1.Prepare the acquisition analysis at 1 July 2019. 2.Prepare the journal entries for Christina Ltd to recognise the investment in Adeline Ltd at 1 July 2019. 3.Prepare the consolidation worksheet entries for Christina Ltd’s group at 1 July 2019. 1. Acquisition analysis at 1 July 2019: Net fair value of identifiable assets and liabilities acquired = $100 000...

Joint Arrangement 1. What is a joint arrangement? A joint arrangement is an arrangement of which two or more parties have joint control. A joint arrangement has the following characteristics: (a) The parties are bound by a contractual arrangement (see paragraphs B2–B4). (b) The contractual arrangement gives two or more of those parties joint control of the arrangement (see paragraphs 7–13). A joint arrangement is either a joint operation or a joint venture. 2. What is meant by joint control? See AASB 11/IFRS 11 para 3 and Appendix A. 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. 3. How does joint control differ from control as used in classifying subsidiaries? Under AASB 10/I...

Consolidation: other issues 1. Discuss the two types of NCI that may exist in a multiple subsidiary group structure. One feature of multiple subsidiary structures where a parent has an interest in a subsidiary that is itself a parent of another subsidiary is the need to classify the NCI ownership in the subsidiaries into direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI). A DNCI exists where the NCI owns shares in a subsidiary. An INCI exists in a subsidiary where that subsidiary is owned by a partially owned subsidiary in the group. The NCI in the partially owned subsidiary is the INCI in the other subsidiary. Example: 80% 60% P Ltd A Ltd B Ltd P Ltd 80% P Ltd 48% DNCI 20% DNCI 40% INCI 12% 2. Explain the difference in the calculation of the direct and indirect N Direct NCI receives a proportionate share of all equity of the subsidiary over which it has direct ownership interest. Indirect NCI receives a proportionate share of only th...

Associates and Joint Ventures 1. What is an associate entity? Paragraph 3 of AASB 128/IAS 28 defines an associate as: • an entity over which the investor has significant influence. The key criterion is the existence of significant influence, also defined in para. 3 defined as: • The power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. Note that an investor does not have to necessarily hold shares in an associate – yet the application of the equity method depends on such a shareholding. However, refer to the presumptions in para 6 of AASB 128/IAS 28. 2. 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 (AASB 10). • Joint ventures: a joint control relationship (AASB 11). • Associates: a significa...

1.Briefly describe the consolidation process in the case of wholly owned entities. The consolidation process in the process through which consolidated financial statements are prepared by adding together, line by line, the financial statements of the parent and its subsidiary to some very important consolidation adjustments. First, the financial statements that are added together must be comparable. Therefore, before undertaking the consolidation process it may be necessary to make adjustments in relation to the content of the financial statements of the subsidiary. Second, as part of the consolidation process, a number of other adjustments are made to the parent’s and the subsidiary’s statements, these being expressed in the form of journal entries. A worksheet or computer spreadsheet is often used to facilitate the addition process and to make the adjustments. 2.Explain the initial adjustments that may be required before undertaking the consolidation process. Before undertaking the c...

Consolidation: Non-Controlling Interest 1. What is meant by the term ‘non-controlling interest’ (NCI)? 2. Explain whether the NCI is better classified as debt or equity. NCI is the term used for the ownership interest in a subsidiary other than the parent. It is defined in AASB 10/IFRS 10 Consolidated Financial Statements as: • The equity in a subsidiary not attributable, directly or indirectly, to a parent. The non-controlling interest is still regarded as equity of the group. Hence there are effectively two equity parties in the group: the owners of the parent and the NCI. Classification of the NCI as equity affects both the calculation of the NCI as well as how it is disclosed in the consolidated financial statements. Measurement and disclosure of the NCI are mainly determined by AASB 10/IFRS 10 and AASB 101/IAS 1 Presentation of Financial Statements. 2. Explain whether the NCI is better classified as debt or equity. The non-controlling interest is regarded as equity of the group. H...