29-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Chapter 29.

29-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan

Chapter 29Further consolidation

Issues I: Accounting for Intragroup Transactions


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


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.


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 loansConsolidation adjustments for intragroup transactions• Typically eliminate these transactions by reversing the original

accounting entries made to recognise the transactions in the separate legal entities


Dividend payments from pre- and post-acquisition earnings

Dividend payments• 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


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)



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. 980-983—Dividend payments to a subsidiary out of post-acquisition earnings



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


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


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


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 periodAASB 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


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?



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


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)


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



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



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


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 soldDr Opening retained earnings

Cr Cost of goods sold

Higher profits lead to higher tax expenseDr Income tax expense

Cr Opening retained earnings

Consider Worked Example 29.4 (pp. 994 – 997)


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


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


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. 998-1001—intragroup sale

of a non-current asset


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)


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

29-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Chapter 29.

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craig deegan introduction

craig deegan journal

craig deegan objectives

craig deegan chapter

craig deegan journal

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