Accounting for Business Combination and Ethics Assessment Essay

Early 2011, Yung Limited acquired 75% have-to doe with in Chum Limited. This is the inaugural time of Yung Limited preparing the unify p rangement. A few issues regarding to the first consolidated mo scratchary literary argument have been raised up. This report is used to solve the raised issues and explain general dogma of consolidation accountancy.Before the acquisition, Yung and Chum was a competitor to each other. Their monetary statement unaccompanied reflects their own financial position. Thus, the balance and transaction would state in the financial statement. The reason is that they atomic number 18 viewed as two entities from distinct 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 purpose of Chum according to its preference. This view would be reflected in the consolidated financial statements. Since the consolidated financial statements view Yung and Ch um as a single combined entity, the balance receivable to each other would be eliminated as a result. As Yung and Chum ar the single entity, the amount due to Yung is set off by the amount due from Chum. One entity can non lead money to itself in order to create a liability or asset.See moreCapital budgeting essayAs Yung and Chum are a single entity, proceeding with each other are unspoiled a transfer of assets or liabilities, or a relocation of assets, this would non recognise as a transaction in the consolidated financial statements. Generally, arrive at 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 office of control in the Chum. It means every transaction can be related to Yung and its decision. The relationship between Yung and Chum would be a parent-subsidiary, and not just similar to other associate as investor-investee. Therefore, it is required to channelise consolidated financial statement of Yung and Chum. The distinction between consolidation and uprightness foundation of accounting is power of control. Generally, if an entity holds more than 50% interest of other(prenominal) entity, the entity is required to consolidate the controlled entity.However, if an entity holds about 20% to 50% interest of another entity, the entity is required to practising the equity basis of accounting. Comparing with the two methods, consolidation basis of accounting would reflect a smaller net income if there are a large amount of inter-comp each transactions. Equity basis of accounting only show the share of profit in associate as an bare(a) item in the income statement of investor (parent in consolidation). Thus, i t would be a great net income unless there is a net liberation in the associate. In conclusion, different methods change the net income.The financial statements for equity basis of accounting are only included the investment in associates as non-current assets, and preserve as cost plus fair value adjustments in the net shares of equity. The consolidated financial statements are the combination of the parent and subsidiaries, and goodwill, excluding inter-company balance and cost of control. Thus, Yungs financial statements would be great value in statement of financial position if all investments were consolidated, but smaller value in income statement as there are large amount inter-company transactions between Yung and Chum. Equity basis of accounting could provide a greater asset value to Yung, but a smaller net income to Yung also. dear(p) Mr. Li,Memo regarding the tax cut-off problem of Yung LimitedAccording to the recent group discussion with John Au, President of Yung Limited, he reported that the sales of Yung Limited in 2010 incorrectly included sales in 2011. However, we did not discover this somatic error by our audit work. This material error overstated the profit of Yung in 2010 by 10%, but understated the profit of Yung in 2011 by the same rate. John Au also mentioned that he prefers to omit this error because he can get benefit from this error as the understated profit.Ignoring revenue cut-off problem leads to conflicts in honourable and nonrecreational. This conflicts with fundamental ethical principles, such as integrity, objectivity and professional behavior. In the integrity aspect, we should not disclose any untrue financial statements. In the objectivity aspect, our professional judgments should not be influenced by reputation of our audit firm and any potential legal sue. In the professional behavior, we should comply with relevant laws and regulations relating to this revenue cut-off problem.The following are some of my recomm endation on this revenue cut-off problem. The first recommendation would be reporting to the board of directors directly. This material error should be report the board of directors of Yung Limited. This report could take back directors chance to decide the treatment of this material error. They could estimate effect of this material error. The second recommendation would be following John Aus suggestion, ignoring this material error.This could be a way to accommodate our client. The third recommendation would be requiring John Au to correct this material error. This could reflect the true financial position of Yung Limited. The 4th recommendation would be convening an extra-ordinary general meeting with all shareholders of Yung Limited. This EGM could give shareholders opportunity to aware this material error, and understand the potential.Finally, I would recommend enquire John Au to correct this material error. Although this correction would make him loss of a bonus, this is a fair treatment to all stakeholders at all. Also, this resolution could reflect the professional position of our company.