Assume: Wesfarmers proposal to acquire Kidman is only accepted by 50% of Kidmans shareholders on 30 September

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Question:

Assume:

Wesfarmers proposal to acquire Kidman is only accepted by 50% of Kidman’s

shareholders on 30 September 2019 for a transaction value of $388 million;

The ultimate parent entity will directly acquire the 50% interest in Kidman;

The equity accounting method for investment in associates will be adopted by Wesfarmers in their consolidated financial statements;

Kidman’s interest in the Mt Holland mine project, concentrator and Kwinana refinery (Wesfarmers, 2019, May 2, a, Thompson 2019, May 23, p.2) will be funded by a $700 million interest free loan from Wesfarmers during the year ended 30 June 2020. Wesfarmers will use its existing balance sheet cash balances to finance this transaction;

During the year ended 30 June 2020 the Wesfarmers group will provide Kidman significant non cash chemical processing management services; and

All other Kidman acquisition information and future transactions and events remain the same.

“Wesfarmers is not a speculative investor but happy to put its balance sheet to work when it sees value” (Thompson, 2019, June 13, p 4).

Discuss from a financial reporting perspective whether the 50% investment in Kidman should be accounted for as an associate or as a subsidiary in Wesfarmers consolidated financial statements.

One (1) for argument point for the preferred accounting treatment that will bring the most significant value to the Wesfarmers consolidated financial statements;

and One (1) alternative argument point that explains why the other accounting treatment will bring, to a lesser extent, value to the Wesfarmers consolidated financial statements.