Cynthia Fortin, CPA, CMA Spring 2017 Group Financial Reporting ACF 202 PART 3 Intercompany current accounts Provision for unrealised profits (purp) Cynthia Fortin, CPA, CMA Spring 2017

Inter-company transactions Group companies Even if amounts are not equal they still have to be eliminated. Transactions must be eliminated because they do not sell to the outside. Trade with each other Receivables/Payables Goods or cash in transit Inter-company transactions

Inter-company transactions Include cash and goods in transit Exclude current inter-company account balances Are eliminated in cross casting We assume that Goods in transit Cash in transit Are received Inter-company transactions

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Provision for unrealised profits (purps) Can you make a profit by selling to yourself? No you cannot. The same applies to Parent and Subsidiary. So remember there is no profit between P and S.

Inter-company transactions Provision for unrealised profit (purp) Even if amounts are not equal they still have to be eliminated. At consolidation we treat P and S as if one entity. P is the seller Profits of P are reduced in retained earnings via W5. Adjust to eliminate the profit in P and the cost in S to bring it back to the original cost S is the seller Profits of S are reduced in retained earnings via W2 by splitting it between P and NCI in W5. Inter-company transactions

PURPS P sells goods to S @ $100 Cost 75 Profit 25 S has therefore goods in inventory @ $100. At consolidation we treat P and S as if one entity. An adjustment must be made to eliminate the profit in P and the cost in S to bring it back to the original cost. We must adjust to eliminate $25 profit for the seller and reduce inventory for the buyer by $25.

Inter-company transactions PURPs With a markup convert to margin % With a margin Mark-up 100 + mark-up = margin % Price * margin % = profit Inter-company transactions

PURPs with a margin P sells goods $200 to S @ a margin of 20% P is the seller Margin means profit = 20% * 200 = $40 Therefore $40 is eliminated in S’s inventory because S is the buyer to bring it back to original cost via cross casting during consolidation. $40 is eliminated in P’s profit via retained earnings in W5 because P is the seller, the one making the profit.

PURPs with a mark-up P sells goods $200 to S @ a mark-up of 25% mark-up 100 + mark-up Apply 20% margin to $200 = $40 profit = 25 = 0.20 or 20% 125

Exemple There were inter-company sales of $900 at a gross profit mark-up of 50%. At the year-end the buying group company had sold $150 of these goods. The parent has an 80% interest in the subsidiary. Required Calculate the purp. Show the accounting treatment of the purp if the parent company is the seller. Show the accounting treatment of the purp if the subsidiary company is the seller. Clendon p. 106

Example Two years ago an item of property plant and equipment (PPE) with a carrying value of $2,000 was sold from one group company to another for $2,500. At the date of the transfer the asset had a remaining useful life of 5 years. Required Calculate the net purp adjustment required in the group accounts. Clendon p. 107

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References Clendon, Tom (2013), “A Student's Guide to Group Accounts, 2nd Ed.”, Kaplan Publishing UK ISBN: 9780857327642 chapters 8, 9.