1. Further consolidation Issues I: Accounting for Intragroup Transactions
Chapter 29
Further consolidation Issues I: Accounting for Intragroup Transactions
Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan
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2. Objectives Understand the nature of intragroup transactions
Understand how and why to eliminate intragroup dividends on consolidation
Understand how to account for intragroup sales of inventory
Understand how to account for intragroup sales of non-current assets
Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan
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3. Introduction to accounting for consolidation issues
Overview
During a financial period it is common for separate legal entities within an economic entity to transact with each other
In preparing consolidated accounts, the effects of all transactions between entities within the economic entity are eliminated in full, even where the parent entity holds only a fraction of the issued equity. Specifically, paragraph 29 of AASB 127 states
Intragroup balances, transactions, income and expenses shall be eliminated in full.
Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan
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4. Introduction to accounting for consolidation issues (cont.)
Examples of intragroup transactions
Payment of dividends to group members
Payment of management fees to a group member
intragroup sales of inventory
intragroup sales of non-current assets
intragroup loans
Consolidation adjustments for intragroup transactions
Typically eliminate these transactions by reversing the original accounting entries made to recognise the transactions in the separate legal entities
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5. Dividend payments from pre- and post-acquisition earnings
In consolidation process it is necessary to eliminate
all dividends paid/payable to other entities within the group
all dividends received/receivable from other entities within the group
Only dividends paid externally should be shown in consolidated financial statements
AASB 127 (par. 24)
On consolidation of intragroup balances, transactions, income and expenses are all be eliminated in full
Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan
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6. Dividend payments pre- and post-acquisition (cont.)
Dividends paid from post-acquisition profits
Only dividends paid externally should be shown in the consolidated financial statements
Journal entry to eliminate dividends payable (in consolidation journal)
Dr Dividends payable (balance sheet)
Cr Dividends proposed (statement of changes in equity)
Journal entry to eliminate dividends receivable (in consolidation journal)
Dr Dividend income (income statement.)
Cr Dividend receivable (balance sheet)
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7. Dividend payments pre- and post-acquisition (cont.)
Note
Consolidation journal entries are not written in the journals of either company but are entered in a separate consolidation journal
Refer to Worked Example 29.1 on pp —Dividend payments to a subsidiary out of post-acquisition earnings
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8. Dividend payments pre- and post-acquisition (cont.)
Dividends out of pre-acquisition profits
If an entity pays dividends out of profits earned before acquisition, it is effectively returning part of the net assets originally acquired (return of part of investment in subsidiary)
not to be accounted for as revenue of investor
if dividends are received from pre-acquisition reserves including from pre-acquisition retained earnings, the amount of purchase consideration is correspondingly reduced
Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan
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9. Journal entries to record dividends from pre-acquisition profits
Journal entry made in accounts of parent entity (not in consolidation journal)
Dr Dividends receivable
Cr Investment in subsidiary
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10. Journal entry to eliminate intragroup dividend payable/receivable
To eliminate dividend payable and receivable (in consolidation journal)
Dr Dividends payable
Cr Dividends receivable
Refer to Worked Example 29.2 on pp. 983–86—Dividends paid out of pre-acquisition earnings
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11. intragroup sale of inventory
From the group’s perspective, revenue should not be recognised until inventory is sold to parties outside the group
Need to eliminate any unrealised profits from the consolidated accounts
Unrealised profits result from inventory, which is sold within the group for a profit, remaining on hand within the group at the end of the period
AASB 127 (par. 25)
Intragroup balances and transactions, including income, expenses and dividends, are eliminated in full. Profits and losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full
Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan
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12. Illustration of intragroup sale of inventory
Let us assume that Company A controls Company B and
Company A sells $200,000 of inventory to Company B (see diagram next page)
Company B in turn sells the inventory to an external organisation, Company C, for $350,000
What amount of sales should be recorded in the consolidated financial statements?
Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan
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13. Company A Economic entity $200,000 $350,000 Company B Company B
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14. intragroup sale of inventory (cont.)
Each member of group taxed individually on its income, not the group collectively
If tax has been paid by one member of the group, from the group’s perspective this represents a prepayment of tax (deferred tax asset) to the extent that the inventory remains within the group (meaning that the related profit is unrealised from the perspective of the economic entity)
This income will not be earned by the economic entity until inventory is sold outside the group
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15. intragroup sale of inventory (cont.)
Journal entry to eliminate inter-company sales
To eliminate total sales as no sales have occurred from perspective of group
Dr Sales
Cr Cost of goods sold (perpetual) or
purchases (periodic)
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16. intragroup sale of inventory (cont.)
Journal entry to eliminate unrealised profit in closing stock
Inventory must be valued at lower of cost and net realisable value and on consolidation must reduce value of closing inventory to the cost to the economic entity
Dr Cost of goods sold (perpetual) or
closing inventory—P&L (periodic)
Cr Inventory
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17. intragroup sale of inventory (cont.)
Consideration of tax paid on intragroup sale of inventory
any tax paid by members of the group related to intragroup sales where full amount of revenue has not been earned from the group’s perspective, represents prepayment of tax
Dr Deferred tax asset
Cr Income tax expense
Refer to Worked Example 29.3 on pp. 988–93—Unrealised profit in closing inventory
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18. intragroup sale of inventory (cont.)
Unrealised profit in opening inventory
The cost of opening inventory held by one of the entities within the group will be overstated from the group’s perspective
In consolidated adjustments need to shift income from the previous period, in which inventory still on hand, to period in which inventory ultimately sold to external parties
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19. intragroup sale of inventory (cont.)
Unrealised profit in opening inventory (cont.)
Consolidation entries: Unrealised profits in opening inventory
Reducing opening inventory reduces cost of goods sold
Dr Opening retained earnings
Cr Cost of goods sold
Higher profits lead to higher tax expense
Dr Income tax expense
Cr Opening retained earnings
Consider Worked Example 29.4 (pp. 994 – 997)
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20. Sale of non-current assets within the group
Assets of the group need to be valued as if the intragroup sale had not occurred
Need to reinstate the non-current asset to the original cost or revalued amount
eliminate any unrealised profits on sale
adjust depreciation
may be tax on profit of sale, which represents a temporary difference
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21. Sale of non-current assets within the group (cont.)
Consolidation journal entries to eliminate sale of non-current asset
reverse gain and reinstate accumulated depreciation
Dr Gain on sale
Dr Asset
Cr Accumulated depreciation
recognise deferred tax asset
Dr Deferred tax asset
Cr Income tax expense
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22. Sale of non-current assets within the group (cont.)
Consolidation journal entries to eliminate sale of non-current asset (cont.)
adjust depreciation to reflect correct amount
Dr Accumulated depreciation
Cr Depreciation expense
partial reversal of deferred tax asset to reflect depreciation adjustment
Dr Income tax expense
Cr Deferred tax asset
Refer to Worked Example 29.5 on p —intragroup sale of a non-current asset
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23. Summary
The chapter considered the consolidation process and, in particular, how to account for intragroup transactions (e.g. dividend payments, sales of inventory, sales of non-current assets)
Only dividends paid externally should be shown in the consolidated financial statements—intragroup dividends paid by one entity within the group are to be offset against the dividend revenue recorded in other entity
The liability associated with dividends payable is to be offset against dividend receivable (as recorded by other entities within the group)
Where intragroup sales of inventory have taken place and inventory remains on hand at year end, consolidation adjustments are required to reduce the consolidated balance of closing inventory (inventory is to be valued at lower of cost and net realisable value from the group’s perspective)
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24. Summary
Where there is sale of non-current assets within the group, consolidation adjustments are required to eliminate any intragroup profit on sale and to adjust the cost of the asset to reflect the cost of the asset to the economic entity—this may also require adjustments to depreciation expense
If minority interests, the effect of intragroup transactions will be eliminated in full even though the parent entity might hold only a proportion of the capital of the respective subsidiaries
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