ACCT 6010 final version.docVIP

Faculty of Economics and BusinessThe University of SydneyGroup Assessment Cover Sheet(To be completed by students, signed, dated and attached to front of assessment)Group Name: _ Assessment title: ACCT6010 Group Assignment 1: Case Study on Business Combinations_ Word limit of assessment:_4 pages_ Word count: _ 4 pages_ Unit of Study code & name: ACCT 6010_Advanced Financial Reporting_ _Lecturer/Tutors name: _ Louise Luff Lecture/Tutorial day/time: _2 pm 5 pm Tuesday Due date:_11 am, Monday 7 September 2009_Time and date submitted:_11am Monday_7th Sep After marking, this assessment will be collectedby: _Shasha Jiang _Academic HonestyAll forms of plagiarism and unauthorised collusion are regarded as academic dishonesty by the University, resulting in penalties including failure of the unit of study and possible disciplinary action. If you are in doubt about academic honesty, please consult with the unit coordinator.DeclarationTick each box We have all completed the online academic honesty module.We have read and understood the University of Sydney Student Plagiarism: Coursework Policy and Procedure.We understand that failure to comply with the above can lead to the University commencing proceedings against me for potential student misconduct under Chapter 8 of the University of Sydney By-Law 1999 (as amended).We certify that this work is substantially our own, and where any part of this work is not our own, we have indicated as such by acknowledging the source of that part or those parts of the work.The assessment has not been submitted previously for assessment in another unit.The assessment conforms to the requirements in the Unit of Study Outline. We have retained a duplicate copy of the assessment.Student Name SID Email Contact number Signature Shasha Jiang308089332S.au0402020946Shasha JiangLi Li308227212L.au0425166658Li LiChen Chen308229738C.au0430331216Chen ChenDing Li308246721L.au0430231888Ding LiPart A (i) In CMHs 08 annual report, CPH was only quoted as “entity which has significant influence over the group”. However, CPH can control CMH if it has the power to govern CMHs operating and financial policies and obtain benefits from its activities (AASB 127 para.4). Though CPH holds less than 50% of the shares in CMH, AASB 127 para.13 provides CPH the following factors to demonstrate its “control” over CMH: 1) whether CPH has over 50% of the voting rights by an agreement with other investors in CMH; 2) whether CPH has power to govern CMHs financial and operating policies under statute or agreement; 3)whether CPH can appoint or remove majority of members of CMHs board of directors; or 4) whether CPH can cast the majority of votes at meetings of CMHs board of directors. Eg.1 Four out of eight directors in CMHs board are closely related to CPH. John Alexander, the executive chairman and one of directors, used to be the CEO of companies controlled by the Packers family business and can be viewed as a loyal employee of the Packers family empire instead of an independent chairman. Packer, Johnston and Jalland are CPH-affiliated directors as well as executives in CPH. So there is a strong indicator showing that CPH can cast the majority of votes at board meetings. Eg.2 The recent selling of Seek and an office in Sydney CBD by CMH can show that CPH has power to govern policies of CMH. The sole purpose of the sales was to raise cash for a share buy-back plan launched by Packer, aiming purely to block the hostile takeover started by Seven. The two sales are not ordinary business of CMH, and cannot be explained other than “actions under the will of CPH”. Thus, it is clear that CPH has the power to direct CMHs operating and financing decisions.(ii) CMH owns 25% stake in Foxtel (with potential further holdings from the coming force-sale of Telstra) and 50% in Premier Media Group, enabling CPH to maximise probable returns through CMH with dividends from the highly profitable and fast growing media investment industry. By being a “cash cow”, CMH can provide CPH with considerable cash to make other potential acquisitions. Furthermore, from the vertical and horizontal perspectives, CMH (i.e. Ticketing, Media sector) can complement CPHs current portfolios (e.g. Theatre, film-making sector) in terms of lower cost and stronger competence.(iii) Both CMH and CPH are public companies and therefore are required by the Corporations Act to prepare financial statements. AASB 127 Aus 10.1 provides that the ultimate Australian parent shall present consolidated financial statements when either the parent or the group is a reporting entity or both are reporting entities. SAC 1 para.40 defines the concept of “reporting entity”: all entities that it is reasonable to expect the existence of users dependent on GPFR for information which will be useful to them for making and evaluating decisions. The separation of management from ownership (SAC 1.20), economic/political influence (SAC 1.21) and financial characteristics (SAC 1.22) are defined as three badges of reporting entities. As a listed company, CMH is obviously a reporting entity due to so many investors who rely on CMHs financial information to make decisions. Although CPH is unlisted, its still a reporting entity by being a considerably large company whose financial information can significantly impact on the benefits of shareholders, employees and customers. Assuming CPH is the ultimate parent in Australia of the group, it must prepare consolidated financial statements, since both CPH and CMH are reporting entities (AASB 127 Aus 10.1). Part B (i) All acquirers are required by AASB 3(2008) para.18 to measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values so that the measurements of goodwill can be made correctly. Here are three items identified from CMHs balance sheet, which are most likely to be affected by fair value adjustments on 15 July 2009. Available-for-sale financial assets: According to CMHs annual report, this item consists of listed & unlisted shares and other available-for-sale financial assets. Although these assets were already recorded at fair value in CMHs balance sheet, fair value adjustments still should be made for the financial instruments traded in an active market such as listed shares, based on the current market values. For the unlisted available-for-sale investments, fair value adjustments should be based on estimated fair values, using valuation techniques and assumptions. Licences and mastheads: Being one of CMHs important intangible assets, this item includes television licences, casino licence and magazine mastheads which are all recorded at cost. Licences and mastheads should be recognized and affected by fair value adjustments since its identifiable, separable from goodwill and assuming its fair value can be measured reliably. AASB 3 (2008) B31 says if an intangible asset meets the separability criterion or the contractual-legal criterion, it is identifiable. The item of licences and mastheads is identifiable because its capable of being separated, sold, transferred, licenced or exchanged (AASB 3(2008) B33). Without fair value adjustments to the licences and mastheads, goodwill will be calculated incorrectly. Contingent liability: Although under AASB 137, contingent liabilities are defined as possible liabilities, for the purpose of business combination, AASB 3(2008) para.23 requires contingent liabilities to be recognized at fair value on acquisition date if present obligations exist and fair value can be measured. Assuming present obligations exist due to past events and fair values can be measured reliably, this item should be revalued on 15 July 2009.(ii) Assuming tax rate is 30%, the C-journal entries recording FV adjustments at 15 July 2009: Unrecorded assets$10,000,000Dr Assets (unrecorded) $10,000,000 Cr Fair value adjustment $7,000,000* Cr Deferred tax liability $3,000,000Recorded assets$25,000,000 upwardsDr Assets (recorded) $25,000,000 Cr Fair value adjustment $17,500,000* Cr Deferred tax liability $7,500,000Contingent liabilities$5,000,000Dr Fair value adjustment $3,500,000*Dr Deferred tax asset $1,500,000 Cr Provision for contingent liability $5,000,000(iii) Assuming CPHs controls 40.9% of CMH, the percentage of non-controlling interest (CNI) is (1-40.9%)=59.1%, then the amount of NCI in CMH at 15 July 2009 is calculated as: Fair value(Full goodwill)The NCI proportionate share in the identifiable net assets (partial goodwill)In terms of AASB 3(2008) B44:1) Share price of CMH on 15/7/09 =$2.64 2) Ordinary shares not held by CPH=689,676,925shares*59.1%=407,599,063 shares (assume no. of shares unchanged)3)NCI=407,599,063*$2.64=$1,076,061,5251) Gross amount of fair value adjustment:$7,000,000*+$17,500,000*-$3,500,000*=$21,000,000 (from ii)2) Fair value of identifiable net assets: $112,145,000+$21,000,000=$133,145,0003)NCI=$133,145,000 * 59.1%=$78,688,695(iv) AASB 3(2008) para.19 provides that NCI can be measured either at fair value or at the NCI proportionate share of the acquirees identifiable net assets. As can be seen in (iii), the amount of NCI is greater by using fair value method and the difference represents the goodwill owned by NCI. For CPH, although fair value method is relatively costly, it should be preferred for these reasons: 1) by using fair value, CPH groups goodwill includes the NCIs goodwill, providing higher reported net assets on the CPH consolidated balance sheet (also higher impairment of goodwill). 2) For goodwill impairment testing, it may be easier under fair value method, as there is no need for CPH to add goodwill from partially owned CMH. 3) If the NCI in CMH is later purchased by CPH, there will be a lower difference between the consideration paid for the NCI and its recorded value, and thus a smaller reduction in equity. Part C (i) CMHs equity can be divided into parent entity interest (PI) and non-controlling interest (NCI). Accordingly, CMHs shareholders would be separated into two groupsshareholders whose interestsare represented by PI and NCI. Although CMHs equity is fully consolidated in the groups financial report, the level of relevance of each equity component to different categories of CMHs shareholders differs significantly. “From a shareholder perspective, the shareholders of a parent entity in a group are interested in the earnings that could ultimately flow to them in the form of dividend.” This means that the only relevant equity for the shareholders whose interestsare represented by PI is the PI part of equity in the CFS, because other equity would be attributed to non-controlling shareholders and never forms part of the parent company. On the other hand, for those heterogeneous interest shareholders of CMH, the consolidated report of equity is useless and misleading. They are only interested in CMH alone, which means that only the equity controlled solely by CMH is relevant to these NCI shareholders. The information about the group as a whole, or the parents equity would be out of their interest.(ii) A regulator focusing on the competition and industry concentration analysis in the media industry would highlight on company sizes, market shares and proportional outputs of the few biggest corporations in the industry. Therefore, financial reports containing total assets value, sales volumes and net profits would certainly be preferred by regulators. Generally, a consolidated report would contain more information than single entitys report: 1) Consolidated report profiles the groups situation as a whole, preventing the situation where parent and subsidiaries together lead to industry monopoly. 2) All the related parties transactions would be eliminated but disclosed in the consolidated report, making it difficult to manipulate accounting outcome. 3) Through the whole view of the group, a regulator can forecast the potential trends and plans of certain groups in the industry. However, in our case, the parent company CPH, which itself runs no business, controls two substantially different subsidiaries in two unrelated industriesCMH in media business and Crown in gambling area. If using the consolidated report to analyze what is happening in media industry, the consolidated number would be severely distracted by Crowns outcome. Although a total view become available, it is combined by two isolated components. Thus, in order to focus on media industry, we suggest that a regulator should use CMHs separate financial report only.Part D Team members and main responsibility for each memberName of studentDate JoinedBrief description of role or responsibility% of contributionExplanation if not equal contribution1) Chen Chen 01/08/09Mainly be responsible for draft of part A, and also do research for the other parts of the assignment, such as information of CPH and CMH.25%2) Shasha Jiang01/08/09Mainly be responsible for providing draft of part B, modifying other parts, and being in charge of the arrangements of group meetings25%3) Li Ding 01/08/09Be responsible for providing draft of part C, and part A (i), searching information, and helping solve tough problems in other parts.25%4)Li Li01/08/09Be responsible for preparing draft of part B (ii) (iii) and part C (i), doing research and facilitating arrangements of group meetings.25%Summary of MeetingsDate and place of meetingAttendeesDiscussions held & decisions madeOther comments2 p.m. 4 p.m., Sunday, 23 AugLocation: meeting room in SciTech libraryAll membersTook brief discussions of each part of the assignment, pointed out the confusing part and allocate each part to a specific member. Agreed to prepare the draft except the unlearned part (eg: non-controlling interest part)2 p.m. 5 p.m. Sunday, 30 Aug, Location: SciTech libraryAll membersMai