Cynthia Fortin, CPA, CMA FALL 2018 Group Financial Reporting ACF 202 PART 3 Intercompany current accounts Provision for unrealised profits (purp) Cynthia Fortin, CPA, CMA FALL 2018

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

goods in transit Goods in transit refers to merchandise and other types of inventory that have left the shipping dock of the seller, but not yet reached the receiving dock of the buyer. Seller P Buyer S GOODS ARE ON THEIR WAY

Cash in transit Cash that is in between two entities. A transfer has been initiated, but not completed leaving the cash in transit.

Intercompany transactions P sells material to S, what happens to P’s accounts? Debit to interco receivables Credit to interco sales What happens to S’s accounts? Debit to inventory Credit to interco payables

Inter-company transactions 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

Let’s do Vietnam, then Turkey

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

Calculate the purp. 50/150= 33.33% * 900 = $300 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. 50/150= 33.33% * 900 = $300 Show the accounting treatment of the purp if the parent company is the seller. Unsold 900 – 150 = 750 * 33.33% = 250 R.E. Parent in W5 reduced by 250 Inventory in cross casting reduced by 250. Show the accounting treatment of the purp if the subsidiary company is the seller. R.E. Subsidiary at year-end in W2 by 250. Inventory in cross casting reduced by 250 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

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. Price – Cost = profit 2,500-2,000=500 purp 2 years ago Depreciation 500/5*2 years = $200 depreciation, therefore still $300 left of profit in the carrying amount. Or 2500/5 years = 500 per year depreciation. Carrying cost after 2 years = 1500 * 20% = $300. Retained earnings reduced by $300 and PPE reduced by $300. Clendon p. 107

Let’s do Thomas Sweeney Then Wales

Homework Questions about Wales Why are Cardiff’s net assets higher by $500 at date of acquisition then at year-end decreased by $25? What is the amount of provision for unrealized profits? Who is doing the buying? Why is it deducted from the subsidiary’s year end profits? Why do we deduct depreciation from the subsidiary’s profits at year end and not at the date of acquisition?

Homework continued Why is the differed consideration discounted? What is the amount of the post acquisition profits and why does it not go 100% to Wales? Why is it necessary to unwind the differed consideration? Where are the numbers accounted in the Group Wales? Why is the impairment loss split between Wales and Cardiff? Why are Wales profits reduced by $75 in Group retained earnings? Why do we create W5’?

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