Preparing Consolidated Financial Statements For A Group Of Companies Post-Acquisition Date (essay).

Prepare consolidated financial statements for a group of companies subsequent to acquistion date 

Part 1

The Financial Statements of a Company is  prepared by following the guidelines of the relevant Accounting Standards of the respective countries. Every Accounting Standards require Companies to disclose certain details pertaining to that Accounting Standard. These disclosures ensure that the important information are shared with the shareholders, investors, lenders, and so on. Such disclosures help avoid fraudulent practices entered into by people having corrupt intentions. These disclosures ensure that the annual accounts present the true and fair view of the company. Moreover, complying with these disclosure requirements ensures that the reputation of the company is not tarnished as their non-disclosure would invite unnecessary litigations on the company for not complying with the requirements and lead to loss of reputation and so on.  The report focuses on two different companies incorporated in Malaysia and following the Malaysian Financial Reporting Standards  (MFRS) in preparing the financial statements. The two companies are Bonia Corporation Berhad and IJM Corporation Berhad. Both the companies are financially sound and stable. The two companies follow MFRS while preparing the annual accounts of the company. The report focuses on compliance of the disclosure requirements of the two companies in respect of MFRS 12. MFRS 12 "Disclosure of Interest in Other Entities" deals with the disclosures that are required to be made when the companies have invested in companies without making it a subsidiary, that is to say, the Company becomes an Associate. An Associate Company is a company in which another company own significant portion of Voting Rights or shares. The significant portion ranges from 20% to 50%. These ranges vary with the requirements of the laws in different countries. In these cases, the company which acquired the shares do not consolidate the financial statement of the associate company. The owner companies show the investment as an Asset in their respective Balance Sheets. When a Company has made some investments in the Associate Companies, it is required to disclose all the relevant information with regard to interest in such Companies. The disclosures must be incorporated in the financial statements or notes to accounts of the owner company. Such owner companies are required to make certain disclosures. These are discussed in the later part of the report.

The two public listed companies chosen for analyzing the compliance of Malaysian Financial Reporting Standard 12 (MFRS 12) are given below in a Tabular form.

The primary purpose or the objective of MFRS 12 is to necessitate entities in disclosing the information that would facilitate the users of the financial statements assess the following:

1. Nature of  risks and  risks associated with the interest of the owner company in the other company, that is to say the associate company, and
2. Effects of interests of such associate company on the financial performance of the owner company as well as the effects on cash flows and financial position.

According to MFRS 12, entities should disclose the following-

1. For every associate which is significant and material to the entity reporting it, should disclose-
2. Name of the Associate Company,
3. Nature of Relationship with such Associate,
4. The Principal place from where such Associate conducts its business. However, if such place is not in the same country, then it should also disclose the details about the place or the country where it is incorporated.
5. The Owner Company or the Reporting Entity should disclose the percentage of the ownership structure in such Associate Company, if the percentage of shares held is different from the percentage of the voting rights.
6. Investment in such Associate Company  is to be measured at the fair value or as per the equity method.
7. A summary of the financial information of such Associate as per the requirements specified in paragraph B12 and paragraph B13.
8. If the value of the Investments in the Associate Company is measured using equity method, then the fair value of such investment in the Associate Company is to be disclosed. However, this would only be valid when the quoted market prices of the investments are available.
9. The entities having associates that are immaterial individually shall disclose separately, the aggregate amounts of the shares in those associates. The disclosures would include-
10. Profit or Loss from Continuing Operations,
11. Post-Tax Profit or Loss from discontinued operations,
12. Other Comprehensive Income, and
13. Total Comprehensive income.

According to MFRS 12, an entity should disclose the following-

1. The entity should disclose its commitments relating to such associates separately from its other commitments, and
2. The entity should also disclose the Contingent Liabilities relating to the interest in such associate separately from its other Contingent Liabilities.

According to MFRS 12, Bonia Corporation Berhad must disclose the risks that are related to the investments the company has made in such Associate Companies. It should also disclose all the relevant details about its interest in such associates like the Name of such Associate along with the nature of the relation with that associate, its country of incorporation and so on. Bonia Corporation Berhad has disclosed the following things.

Part 2

Bonia Corporation Berhad has interest in the following Associates ("Bonia Corporation Berhad Investor Relations", 2017). The details are given as follows-

The Summarized Financial Information of the Associates for the year 2015 and 2016 is given below-

Bonia Corporation Berhad has also disclosed a Statement showing the Reconciliation of Net Assets to the Carrying Amount of the Investments in such Associates. The Reconciliation Statement is given below-

Bonia Corporation Berhad also disclosed the Cash Flow Statement of the Group Company and highlighted the effects of its investments in the Associate Company. In the Cash Flow Statement, Bonia Corporation Berhad disclosed the following-

Impairment Loss in Interest in Associates for the year 2015 is RM 352000.

Reversal of Impairment Loss in Interest in Associates for the year 2015 is 0.00, whereas it is RM 4045000 for the year 2016 ("Company Announcements | Bursa Malaysia Market", 2017).

The analysis shows that the value of the investment of Bonia Corporation Berhad in the Associate Company suffered impairment; this can be seen from the difference in the value of such investments in the books of Accounts and its market value. However, this loss was later reversed when the market value increased in the year 2016. The value of investment in Makabumi Sdn. Bhd seems to be stagnant as their principal activities are no longer active and carry a dormant status. They do not generate any revenue for Bonia Corporation. This seems to be a dead investment for the company.

The total interest in Associates of Bonia Corporation Berhad as given in the Balance Sheet for the year 2015 is RM 97000 and RM 392000 for the year 2016. The details are as follows-

Thus, after analyzing the Annual Report of Bonia Corporation Berhad, it can be said that Bonia Corporation Berhad has disclosed all the information as required by MFRS 12. By disclosing all the details Bonia Corporation Berhad has avoided all the penal provisions that would have been attracted had they not fulfilled the requirements of the standard. The disclosure would also help the investors make better decisions regarding their investments. Such disclosure also helps the Investor understand the pattern of investment of the Company and the returns earned by the company on such investments. The owner company received the share of pre-acquisition profits in 2015 and the same has been reduced from the value of the investment in the particular year. The Owner Company has extended a loan of RM 4855000 in the year 2015 and the same has not yet been repaid. The value of investment in Associate Company increased from RM 97000 to RM 392000. However, this increase is because of the profits and increase in the market value of the Paris RCG Sdn. Bhd., because the other associate company has become a dormant company without any business activity. The Annual Report also contained a Directors Responsibility Statement (DRS). The Directors Responsibility Statement highlights the responsibility of the Directors with regard to complying with the requirements of the Malaysian Companies Act, 1965, MFRS and IFRS. The BDO (Chartered Accountants) and Law Kian Huat (Chartered Accountant) have audited the financial statements of Bonia Corporation. The Auditors have given an unqualified report, which means that the financial statements are depicting the actual picture of the current financial condition of the Company. The Unqualified Report also shows that Bonia Corporation Berhad has followed and complied with the requirements of MFRS and IFRS and of the Malaysian Companies Act, 1965.

Part 3

According to MFRS 12, IJM Corporation Berhad should disclose the risks that are related to the investments the company has made in such Associate Companies. It should also disclose all the relevant details about its interest in such associates like the Name of such Associate along with the nature of the relation with that associate, its country of incorporation and so on. IJM Corporation Berhad has disclosed the following things.

IJM Corporation Berhad has interest in the following Associates ("Annual Reports | IJM Corporation Berhad", 2017). The details are given as follows-

IJM Corporation Berhad disclosed the following summarized Balance Sheet in its Annual Report for the year 2016.

The Value of the Associates of IJM Corporation Berhad as per the latest Annual Report for the year 2015 is RM 266142000 and RM 368529000 for the year 2016. The share of other Comprehensive income or losses of Associates are RM -1039000 for the year 2015 and RM 3790000 for the year 2016. The Investing Activity of Cash Flow Statement of the Associates shows an outflow of RM 123936000 in the year 2015 and RM 2387000 in the year 2016. The Company received dividend from its Associates amounting to RM 8565000 in the year 2015 and RM 6344000 in the year 2016 ("Company Announcements | Bursa Malaysia Market", 2017). IJM Corporation Berhad received Repayments amounting to RM 357000 in 2015 and RM 6149000 in 2016. It advanced RM 189000 in 2015 and RM 2000 in 2016. IJM Corporation has further invested in Scomi Group Berhad in the year 2016. With this investment, their share in Scomi Group Berhad increased to 26%. The investments in Associates made by IJM Corporation are providing good returns. The associates are earning sufficient profits and are paying dividend from such profits. The market values of such interests have also increased. IJM Corporation Berhad also disclosed its summarized Segment Financial Information for the year 2016. The details are given below-

Thus, after analyzing the Annual Report of IJM Corporation Berhad, it can be said that IJM Corporation Berhad has disclosed all the information as required by MFRS 12. The disclosure would also help the investors make better decisions regarding their investments. By disclosing all the details, IJM Corporation Berhad has achieved the trust of its Stakeholders, Lenders, Investors, and Creditors and so on. Such disclosure also helps the Investor understand the investment patterns of the Company and the returns received on such investments of the company. IJM Corporation Berhad has diligently complied the requirements of MFRS 12. This can be said because the company has disclosed all the details of its investment in the associates and disclosed the financial information in the form of segment reporting. Every Annual Report of IJM Corporation Berhad is accompanied with a statement from the Directors of the Company. This Statement is called the Director’s Responsibility Statement (DRS). This Statement highlights the responsibilities concerning the preparation and presentation of the Annual Financial Accounts of the Company. It also states that it is the responsibility of the Director’s for ensuring that they comply with all the requirements of the relevant laws and accounting standards applied as per Malaysian Laws. Pricewaterhouse Coopers (Chartered Accountants) and Loh Lay Choon (Chartered Accountant) have audited the financial statements of IJM Corporation Berhad. The Auditors have given an unqualified report, which means that the financial statements are showing true and fair view of the company’s activities. The Unqualified Report also shows that IJM Corporation Berhad has followed and complied with all the requirements of MFRS and IFRS and of the Malaysian Companies Act, 1965.

Conclusion 

The primary focus and objective of any disclosure framework is improving the efficiency and effectiveness of the disclosures given in the financial statements and in notes to accounts of the company by clearly conveying the important information to the users of the financial statements. For achieving this objective, a framework needs to be developed that will promote the consistent decisions of the disclosure requirements taken by the Authorities and the complied by the reporting entities. These disclosures would make the companies keep transparency in their financial transactions that would increase the interest of the investors in such company. When the companies do not keep their financial transactions transparent or when their financial statements are manipulated, the investors do not trust such companies for the fear that their investments may be lost or they may not be optimally utilised. The companies may invest in plenty of places, investing in the shares or voting rights being one of them. These companies may buy the entire shares or more than half of the shares thereby becoming a holding company or else they may invest in less than 50% shares thereby making it an Associate Company. In Malaysia, the financial statements are prepared by following MFRS, IFRS and the Malaysian Companies Act, 1965.

Malaysian Financial Reporting Standard 12, states that the companies must disclose the relevant information of their interest in their Associates. After analysis both the companies namely, Bonia Corporation Berhad and IJM Corporation Berhad, it can be said that both these companies have been investment in different companies making such company its Associate Company. Both the companies have disclosed all the information as required by MFRS 12 thereby complying with the provisions of MFRS 12. However, the only thing the two companies  have not disclosed is the risk associated with their interests in their respective associates. The Market Value of the investments have increased for both the owner companies. IJM Corporation has made some fresh investments in the associate company in the year 2016. By complying with the requirements of the Accounting Standards both the owner companies have protected their reputations that would have affected the share values due to the actions that the authorities would have taken for such non-compliance.

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