To: Mr. John Au
Report on Consolidation issues regarding Yung Limited Group
Early 2011, Yung Limited acquired 75% interest in Chum Limited. This is the first time of Yung Limited preparing the consolidated statement. A few issues regarding to the first consolidated financial statement have been raised up. This report is used to solve the raised issues and explain general principle of consolidation accounting.
Before the acquisition, Yung and Chum was a competitor to each other. Their financial statement only reflects their own financial position. Thus, the balance and transaction would state in the financial statement. The reason is that they are viewed as two entities from different aspect.
However, after the acquisition, Yung and Chum became a single combined entity as Yung held 75% interest in Chum. It means Yung can direct business decision of Chum according to its preference. This view would be reflected in the consolidated financial statements. Since the consolidated financial statements view Yung and Chum as a single combined entity, the balance due to each other would be eliminated as a result. As Yung and Chum are the single entity, the amount due to Yung is set off by the amount due from Chum. One entity cannot lead money to itself in order to create a liability or asset.
As Yung and Chum are a single entity, transactions with each other are just a transfer of assets or liabilities, or a relocation of assets, this would not recognise as a transaction in the consolidated financial statements. Generally, profit margin is added to those transactions. These profit margins would raise book value of assets in the transactions. The common example is inventory and non-current assets. Those profit margins can only be realised in the sales or disposal to external parties. Thus, the consolidated financial statements would eliminate those unrealised profit also.
According to the above statement, Yung gets the power of control in the Chum. It means every...
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