Accounting for Business Combination and Ethics Assessment

981 Words Feb 17th, 2013 4 Pages
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
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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 ignore this error because he can get benefit from this error as the understated profit. Ignoring revenue cut-off problem leads to conflicts in ethical and professional. 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 recommendation 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 give 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 Au’s 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 fourth
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