advanced financial accounting: chapter 4 group reporting iii: consolidation under ias 27 tan &...
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Advanced Financial Accounting: Chapter 4
Group Reporting III:
Consolidation under IAS 27
Tan & Lee Chapter 4 © 2009
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Learning Objectives
1. Understand the principles underlying elimination of intragroup
balances and transactions;
2. Understand the rationale for consolidation adjustments to opening
retained earnings (RE);
3. Appreciate the significance of upstream vs downstream sales &
the impact on non-controlling interests (NCI); and
4. Pass the appropriate consolidation adjustments to eliminate
unrealized profit or loss from transfers of fixed assets and
inventory.
Tan & Lee Chapter 4 © 2009
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Content
Tan & Lee Chapter 4 © 2009
1. Elimination of intragroup transactions and balances
2. Elimination of realized intragroup transactions
3. Elimination of intragroup balances
4. Adjustment of unrealized profit or loss arising from intercompany
transfers
5. Impact on non-controlling interests arising from adjustments of
unrealized profit or loss
6. Special considerations for intercompany transfers of fixed assets
7. Special accounting considerations when intragroup transfers are
made at a loss
1. Elimination of intragroup transactions and balances
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Elimination of Intragroup Transactionsand Balances
• Operational and financial interdependencies within the group entities– Lead to intragroup transactions and balances
• Intragroup transactions include:– Buying or selling of inventory; – Transferring of long lived assets; – Rendering or procuring of services; and– Providing financing among the companies within the group
• Transfer of assets within the group usually includes a profit margin:– Risks and rewards of ownership of assets remain in the group– Profit is unrealized until the asset is sold to a 3rd party– The time lag between purchase and resale of assets results in
overstatement/understatement of group profit/loss and assets
Tan & Lee Chapter 4 © 2009
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Elimination of Intragroup Transactionsand Balances
• Intragroup balances arise from unsettled balances of intragroup transactions– E.g. Loan receivable/ payable to or from group companies , Dividend
receivable/payable, Accounts receivable/payable to or from group companies
• From an economic perspective, an entity is not able to transact with itself– All intra-group transactions and balances are to be eliminated during
consolidation– Elimination adjustments are made in relation to the original entries
passed in the separate financial statements
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Principles Governing Elimination
• Outstanding balances due to or from companies within a group are
eliminated
• Transactions in the income statement between the group
companies are eliminated
• Unrealized profit or loss included in assets are eliminated in full
(both parent’s & NCI’s share)
• Tax effects on unrealized profit or loss included in assets should be
adjusted according to IAS 12 Income Taxes
• Balances with associates (“significant influence”) are not eliminated
– Associates are not part of the group
Tan & Lee Chapter 4 © 2009
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Content
Tan & Lee Chapter 4 © 2009
1. Elimination of intragroup transactions and balances
2. Elimination of realized intragroup transactions
3. Elimination of intragroup balances
4. Adjustment of unrealized profit or loss arising from intercompany
transfers
5. Impact on non-controlling interests arising from adjustments of
unrealized profit or loss
6. Special considerations for intercompany transfers of fixed assets
7. Special accounting considerations when intragroup transfers are
made at a loss
2. Elimination of realized intragroup transactions
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Elimination of Realized Intragroup Transactions
• “Offsetting” effect on the group’s net profit from realized transactions– Profit recorded by the selling company offsets the expense recorded by
the buying company– However, elimination is still required to avoid overstatement of individual
line items
Examples:
1. Transactions relating to interest:– No time lag in the recognizing of interest by borrower and lender– Interest income exactly offsets the interest expense– Elimination entry:
Tan & Lee Chapter 4 © 2009
Dr Interest Income
Cr Interest Expense
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Elimination of Realized Intragroup Transactions
2. Transactions relating to services provided– Provision and consumption of services are simultaneous– Transactions are recorded in the same period by both parties– Elimination entry:
3. Transfers of inventories that are resold to 3rd party in the same period– Profit recorded by selling company offsets the higher cost of sale
recorded by buying company– Elimination entry:
Tan & Lee Chapter 4 © 2009
Dr Service Income
Cr Service Expense
Dr Sales
Cr Cost of Sales
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Content
Tan & Lee Chapter 4 © 2009
1. Elimination of intragroup transactions and balances
2. Elimination of realized intragroup transactions
3. Elimination of intragroup balances
4. Adjustment of unrealized profit or loss arising from intercompany
transfers
5. Impact on non-controlling interests arising from adjustments of
unrealized profit or loss
6. Special considerations for intercompany transfers of fixed assets
7. Special accounting considerations when intragroup transfers are
made at a loss
3. Elimination of intragroup balances
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Prior to Elimination
• Reconciliation is carried out when the balances recorded in both companies differ
• Usually, reconciling items are due to:
Tan & Lee Chapter 4 © 2009
Problems Reconciliation adjustments
In-transit items (recorded by only one company)
Either adjusted out or recognized in a
manner consistent with the other party’s
treatment
Errors and omissions Correct the error or pass entry to record
the omitted entry
Dispute on the transaction
Either recognized by the disputing party
or adjusted out by the party that recorded
the items in books
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Reconciliation
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Reconciliation of balances between Sub A and Sub B
$
Amount owing by B in A’s book as at 31 December 20X5 40,000
Less: Items in A’s book but not in B’s books:
Disputed (note 1) (1,500)
Goods received on 29 December 20X5 (note 2) (3,200)
Repair for goods not under warranty (note 3) (300)
Less: payment made in December 20X5 by B not recorded by A (note 4) (17,000)
Amount owing to A in B’s book as at 31 December 20X5 18,000
Reconciliation of intercompany balances
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Reconciliation
Note 1: Either Sub A had to reverse the sale or Sub B had to accrue for the invoice
Note 2: Since goods were received before the year end, Sub B had to record the inventory
Note 3: Since repairs were not covered under warranty, Sub B had to record the repair costs
Note 4: Follow –up action is necessary to ascertain the reason for the non-clearance. If the cheque is lost, Sub B is required to reverse the
payment entry
Dr Inventory 3,200
Cr Payable to A 3,200
Dr Repair costs 300
Cr Payable to A 300
Dr Bank 17,000
Cr Payable to A 17,000Tan & Lee Chapter 4 © 2009
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Content
Tan & Lee Chapter 4 © 2009
1. Elimination of intragroup transactions and balances
2. Elimination of realized intragroup transactions
3. Elimination of intragroup balances
4. Adjustment of unrealized profit or loss arising from intercompany
transfers
5. Impact on non-controlling interests arising from adjustments of
unrealized profit or loss
6. Special considerations for intercompany transfers of fixed assets
7. Special accounting considerations when intragroup transfers are
made at a loss
4. Adjustment of unrealized profit or loss arising from intercompany
transfers
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Intragroup Transfers of Inventory and Fixed Assets
• Unrealized profit and loss in asset (arising from intragroup transaction) should be eliminated in full
• If the transferred asset is an inventory:– It should be carried at original cost and not the transferred price– Adjustments are made to:
Eliminate the profit element Recognize profit only when the inventory is sold to 3rd party
• If the transferred asset is a fixed asset:– The asset should be carried at original cost less accumulated
depreciation – Subsequent depreciation is based on original cost and not the
transferred price
Tan & Lee Chapter 4 © 2009
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Adjustment to Opening Retained Earnings (RE)
• When a transaction is recognized by a legal entity in one period and by the economic entity in another period– Consolidation adjustments are passed through opening RE– Consolidated opening RE should be the same as the consolidated
closing RE of the previous period
• The summation of the opening RE of the legal entities in the group will not be equal to the consolidated Opening RE– Consolidated adjustments that have a “one-sided effect” on RE (i.e.
elimination adjustments are not fully offsetting) must be re-enacted to opening RE of the next period
– E.g. Unrealized profit from intragroup balances in the previous year are adjusted against opening RE in the subsequent year
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Adjustments to Eliminate Unrealized Profit
Tan & Lee Chapter 4 © 2009 17
In the current period:
Dr Sales
Cr Cost of sales
Cr Inventory
In the following period (if unsold):
Dr Opening RE
Cr Inventory
In the following period (if sold):
Dr Opening RE
Cr Cost of sales
Inter-company sales is reversed
(1) Eliminate realized cost of sales
(2) Reverse unrealized cost of sales
Unsold % x Unrealized profit
Remove unrealized profit in inventory
Adjust cost of sales from transfer price to original cost
Assuming no NCI effect
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Tax Effects on Adjustments to Eliminate Unrealized Profit (Loss)
• Consolidated tax expense must reflect the tax effects of the consolidated profit before tax (assuming no NCI)
• When unrealized profit is eliminated:– Profit is taxable for the legal entity but not the economic entity– A deferred tax asset arises (i.e. in the form of a prepaid tax)– Consolidation adjustment:
– The tax expense is recognized when the asset is sold to 3rd party
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In the current period:
Dr Deferred tax asset
Cr Tax expense
In the following period (if unsold):
Dr Deferred tax asset
Cr Opening RE
In the following period (if sold):
Dr Opening RE
Cr Tax expense
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Illustration 1:Upstream Sale • S is a wholly owned subsidiary of P• On 1 April 20X1, S sold inventory costing $7,000 to its P for $10,000• On 5 Jan 20X2, P sold the inventory to external party for $15,000• Tax rate was 20% . Year-end is 31 Dec 20X1
Q1 What are the consolidation journal entries as at YE 31 Dec 20X1 ?
Dr Sales (S’s I/S) 10,000
Cr Cost of sales (S’s I/S) 7,000
Cr Inventory (P’s B/S) 3,000
This entry is to reduce current year profits and overstatement of inventory for the unrealized profit of $3,000
Dr Deferred tax asset (Group B/s) 600 (3,000 * 20%)
Cr Tax expense (S’s I/S) 600
Tax effects of profit adjustmentTan & Lee Chapter 4 © 2009
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Illustration 1:Upstream SaleQ2: What are the consolidation entries as at 31 Dec 20X2?
Dr Opening RE (S’s B/S) 3,000
Cr Cost of sales (P’s B/S) 3,000
This entry is to reduce previous year profit through opening RE and recognize profit in the current year when the inventory is sold to a 3rd party
Dr Tax expense (group’s I/S) 600
Cr Opening RE 600
Since the profit is realized in this year, the tax expense should be recognized in the group’s income statement in the current year
OrDr Deferred tax asset 600
Cr Opening RE 600
Dr Tax expense 600
Cr Deferred tax asset 600Tan & Lee Chapter 4 © 2009
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Content
Tan & Lee Chapter 4 © 2009
1. Elimination of intragroup transactions and balances
2. Elimination of realized intragroup transactions
3. Elimination of intragroup balances
4. Adjustment of unrealized profit or loss arising from intercompany
transfers
5. Impact on non-controlling interests arising from adjustments of
unrealized profit or loss
6. Special considerations for intercompany transfers of fixed assets
7. Special accounting considerations when intragroup transfers are
made at a loss
5. Impact on non-controlling interests arising from adjustments of
unrealized profit or loss
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Downstream Sale
Tan & Lee Chapter 4 © 2009
Parent
Subsidiary
90 % owned
Sales were made from parent to subsidiary
Unrealized profit resides in Parent’s book
In downstream sale, NCI’s share of profit of the subsidiary is not affected because the adjustment affects the parent’s profit not the subsidiary
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Upstream Sale
Tan & Lee Chapter 4 © 2009
Parent
Subsidiary
90 % owned
Sales were made from subsidiary to parent
Unrealized profit resides in Subsidiary’s book
In upstream sale, the unrealized profit resides in the subsidiary. Thus, NCI’s share of the unrealized profit or loss needs to be adjusted from the carrying amount of the asset (IAS 27 Para 21)
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Illustration 2:Upstream and Downstream Sales
• P invested in 70% of shares of S• Intercompany transfers of inventory are as follows:
• Tax rate: 20%• Net profit after tax of S: $800,000 (31 Dec 20X3)
$900,000 (31 Dec 20X4)
Tan & Lee Chapter 4 © 2009
20X3 20X4
Sale of inventory from P to SOriginal cost of inventoryGross profitPercentage unsold to 3rd party at year end
$60,000$(50,000)$10,000
10% 4%
Sale of inventory from S to POriginal cost of inventoryGross profitPercentage unsold to 3rd party at year end
$200,000$(170,000)
$30,00030% 0%
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Illustration 2:Upstream and Downstream Sales
31 Dec 20X3
1) Eliminate intercompany sales and adjust unrealized profit in inventory
Tan & Lee Chapter 4 © 2009
Dr Sales 60,000
Cr Cost of sales 59,000
Cr Inventory 1,000
(Elimination of intercompany sales and adjustment of unrealized profit from downstream sale)
Unrealized profit x percentage unsold
Dr Sales 200,000
Cr Cost of sales 191,000
Cr Inventory 9,000
(Elimination of intercompany sales and adjustment of unrealized profit from upstream sale)
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Illustration 2:Upstream and Downstream Sales
2) Adjust the tax effects on unrealized profit
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Dr Deferred tax asset 200
Cr Tax expense 200
(Elimination of intercompany sales and adjustment of unrealized profit from downstream sale)
Unrealized profit from unsold inventory x 20%
Dr Deferred tax asset 1,800
Cr Tax expense 1,800
(Adjustment for tax effects on unrealized profit in inventory from upstream sale)
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Illustration 2:Upstream and Downstream Sales
3) Allocate share of current profit and RE to NCI
Tan & Lee Chapter 4 © 2009
* Note: No adjustment is required for the unrealized profit from downstream sale as profit resides in parent income
Dr Income to NCI 237,840
Cr NCI 237,840
Net profit after tax of S * 800,000
Less: Unrealized profit from upstream sale (9,000)
Add: Tax on unrealized profit 1,800
Adjusted profit 792,800
NCI’s share (30%) 237,840
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Illustration 2:Upstream and Downstream Sales
31 Dec 20X4
1) Adjust opening RE and adjust unrealized profit in inventory
Tan & Lee Chapter 4 © 2009
Dr Opening RE 1,000
Cr Cost of sales 600
Cr Inventory 400
(Adjustment of unrealized profit in RE from downstream sale in 31 Dec 20X3)
Dr Opening RE 6,300
Dr NCI 2,700
Cr Cost of sales 9,000
(Adjustment of unrealized profit in RE from upstream sale in 31 Dec 20X3)
Need to adjust NCI’s share of unrealized profit from upstream sale
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Illustration 2:Upstream and Downstream Sales
2) Adjust the tax effect
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Dr Tax expense 120
Dr Deferred tax asset 80
Cr Opening RE 200
(Adjustment for tax effects on unrealized profit from downstream sale in RE)
Dr Tax expense 1,800
Cr Opening RE 1,260
Cr NCI 540
(Adjustment for tax effects on unrealized profit in inventory from upstream sale)
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Illustration 2:Upstream and Downstream Sales
Tan & Lee Chapter 4 © 2009
3) Allocate share of current profit and RE to NCI
Dr Income to NCI 272,160
Cr NCI 272,160
Net profit after tax of S * 900,000
Add: Unrealized profit from upstream sale 9,000
Less: Tax on unrealized profit (1,800)
Adjusted profit 907,200
NCI share (30%) 272,160
* Note: Adjustments to current year profit:
1) Realized profit & tax from prior years is added back
2) Unrealized profit & tax from unsold inventory in current year is deducted (none in this year)
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Content
Tan & Lee Chapter 4 © 2009
1. Elimination of intragroup transactions and balances
2. Elimination of realized intragroup transactions
3. Elimination of intragroup balances
4. Adjustment of unrealized profit or loss arising from intercompany
transfers
5. Impact on non-controlling interests arising from adjustments of
unrealized profit or loss
6. Special considerations for intercompany transfers of fixed assets
7. Special accounting considerations when intragroup transfers are
made at a loss
6. Special considerations for intercompany transfers of fixed assets
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Transfers of Fixed Assets
• When fixed assets (FA) are transferred at a marked-up price– The unrealized profit must be eliminated from the carrying amount of FA– It is as though the transfer did not take place from the group’s
perspective
Tan & Lee Chapter 4 © 2009
Acc. Dep.
NBV
Original cost
Before Transfer After Transfer
Transfer price
Mark up
$40,000+Acc. Dep.
NBV
Profit on sale
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Adjustments of Transfers of Fixed Assets
Tan & Lee Chapter 4 © 2009
1. Restate the FA carrying amount to the NBV at the point of transfer
2. Profit on sale of FA is adjusted out of:
Consolidated income statement if sale occurred in the same period
Opening RE if sale occurred in the previous period
3. Subsequent depreciation is based on original cost of asset &
estimated useful life (including revision of estimate)
The difference between the old and new depreciation is adjusted to:
Consolidated income statement for current year
Opening RE for prior year accumulated depreciation
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Adjustments of Transfers of Fixed Assets
Tan & Lee Chapter 4 © 2009
4. The profit or loss on transfer of FA is realized through the higher or lower
depreciation charge subsequently
5. Tax effect must be adjusted on the unrealized profit and subsequent
corrections of depreciation
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Impact on NCI When an Unrealized Profit Arises from an Intragroup Transfer of FA
• Downstream sales:– No impact on NCI
• Upstream sales:– NCI is adjusted for:
Unrealized profit on sale of FACorrection of over/under-depreciationTax effect on unrealized profitTax effect on correction of over/under-depreciation
Tan & Lee Chapter 4 © 2009
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Illustration 3:Downstream Transfer of Fixed Assets
• 1 Jan 20X2: P sold equipment to S for $360,000• The original cost of the equipment was $400,000• The remaining useful life was 10 years from the original purchase
date• The remaining useful life is 8 years from the date of transfer• Assume a tax rate of 20%
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Status Quo With sale Amount to be
restored/adjusted
Cost of assetAcc. DepCurrent DepProfit on sale
$400,000$120,000
40,000-
$360,000$45,000
45,000$40,000
$40,000$75,000
5,000$40,000
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Illustration 3:Downstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
CJE 1: Adjustment of unrealized profit
Dr Equipment (S) 40,000
Dr Profit on Sale (P) 40,000
Cr Accumulated depreciation (S) 80,000
31 Dec 20X2
Reversal of these entries:
In P’s Books
Dr Cash 360,000
Dr Acc. dep 80,000
Cr Equipment 400,000
Cr Profit on sale 40,000
In S’s Books
Dr Equipment 360,000
Cr Cash 360,000
Dr Dep 45,000
Cr Acc. Dep 45,000
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Illustration 3:Downstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
CJE 2: Reverse tax on profit on sale
Dr Deferred tax asset (group’s BS) 8,000
Cr Tax expense (P) 8,000
$40,000
$20,000$60,000
Acc. Dep.
$40,000
NBV: $315,000
NBV: $280,000
Depreciation
Depreciation
$360,000
$320,000
8 yrs
8 yrs
Transfer
No Transfer
Dep exp: $45,000
Dep Exp: $40,000
Excess5K
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Illustration 3:Downstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
CJE 3: Correct the over-depreciation on unrealized profit included in equipment
Dr Accumulated depreciation (S) 5,000
Cr Depreciation (S) 5,000
Old depreciation 40,000
New depreciation 45,000
Over-depreciation 5,000
CJE 4: Increase in tax arising from correction of over-depreciation
Dr Tax expense (S) 1,000
Cr Deferred tax asset (group’s BS) 1,000
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Illustration 3:Downstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
When the equipment is fully depreciated:
CJE 5: Reinstate to original cost, accumulated depreciation and reverse profit
Dr Equipment (S) 40,000
Dr Opening RE (P) 40,000
Cr Accumulated depreciation (S) 80,000
CJE 6 : Correction of past excess depreciation
Dr Accumulated depreciation (S) 40,000
Cr Opening RE (S) 40,000
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Illustration 3:Downstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
CJE 7: Tax effects on unrealized profit on sale of fixed assets
Dr Deferred tax asset 8,000
Cr Opening RE (P) 8,000
CJE 8: Tax effects on unrealized profit on sale of fixed assets
Dr Opening RE (S) 8,000
Cr Deferred tax asset 8,000
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Illustration 4:Upstream Transfer of Fixed Assets
• Assume illustration 3, except that S transfers to P• 1 Jan 20X2 S sold equipment to P for $360,000• The original cost of equipment was $400,000• The remaining useful life is 8 years from date of transfer• Net profit after tax of S for YE 31 Dec 20X2 : 500,000
YE 31 Dec 20X3 : 800,000• Assume a tax rate of 20%
Original cost
$400,000
Before Transfer After Transfer
Transfer price$360,000
40,000
Profit on sale
Tan & Lee Chapter 4 © 2009
Acc Dep. = $80,000
Net book value = $320,000
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Illustration 4:Upstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
CJE 1: Adjustment of unrealized profit
Dr Equipment (S) 40,000
Dr Profit on Sale (P) 40,000
Cr Accumulated depreciation (S) 80,000
31 Dec 20X2
CJE 2: Reverse of tax on profit on sale
Dr Deferred tax asset (group’s BS)
8,000
Cr Tax expense (S) 8,000
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Illustration 4:Upstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
CJE 3: Correct the over-depreciation on unrealized profit included in equipment
Dr Accumulated depreciation (P) 5,000
Cr Depreciation (P) 5,000
Old depreciation 40,000
New depreciation 45,000
Over-depreciation 5,000
CJE 4: Increase in tax arising from correction of over-depreciation
Dr Tax expense (P) 1,000
Cr Deferred tax asset (group’s BS) 1,000
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Illustration 4:Upstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
CJE 5: Allocation of current year profit
Dr Income to NCI 47,200
Cr NCI 47,200
Net profit after tax of S 500,000
Less: Unrealized profit on sale (after-tax) (32,000)
Add: Over-depreciation (after-tax) 4,000
Adjusted net profit 472,000
NCI’s share (10%) 47,200
* Note: Upstream sale of FA will affect NCI’s share of profit as unrealized profit resides in S
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Illustration 4:Upstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
31 Dec 20X3
CJE 1: Adjustment of unrealized profit in prior year
Dr Equipment (P) 40,000
Dr Opening RE (S) 36,000
Dr NCI 4,000
Cr Accumulated depreciation (P) 80,000
CJE 2: Reversal of tax on profit on sale in prior year
Dr Deferred tax asset (group’s BS) 8,000
Cr Opening RE (S) 7,200
Cr NCI 800
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Illustration 4:Upstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
CJE 3: Correct the over-depreciation for prior and current year
Dr Accumulated depreciation (P) 10,000
Cr Depreciation (P) 5,000
Cr Opening RE (P) 4,500
Cr NCI 500
CJE 4: Increase in tax arising from correction of over-depreciation in prior and current year
Dr Tax expense (P) 1,000
Cr Opening RE (P) 900
Cr NCI 100
Cr Deferred tax asset (group’s BS) 2,000
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Illustration 4:Upstream Transfer of Fixed Assets
Tan & Lee Chapter 4 © 2009
CJE 5: Allocation of current year profit to NCI
Dr Income to NCI 80,400
Cr NCI 80,400
Net profit after tax of S 800,000
Add: Over-depreciation (after-tax) 4,000
Adjusted net profit 804,000
NCI’s share (10%) 80,400
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Content
Tan & Lee Chapter 4 © 2009
1. Elimination of intragroup transactions and balances
2. Elimination of realized intragroup transactions
3. Elimination of intragroup balances
4. Adjustment of unrealized profit or loss arising from intercompany
transfers
5. Impact on non-controlling interests arising from adjustments of
unrealized profit or loss
6. Special considerations for intercompany transfers of fixed assets
7. Special accounting considerations when intragroup transfers are
made at a loss
7. Special accounting considerations when intragroup transfers are
made at a loss
50
Transfers of Assets at a Loss
• Need to reassess whether the loss is indicative of impairment loss
• If it is indicative of impairment loss:– Unrealized loss is not adjusted out of the carrying amount of asset– Only reverse the sales and cost of sale (to the extent of the sales) for
inventory– Only reverse the excess over cost and accumulated depreciation (to the
extent of the sales) for FA
• If it is not indicative of impairment loss:– Same treatment as with unrealized profit– Unrealized loss is adjusted out of the carrying amount of asset– Realized only when the inventory is sold to 3rd party or under/over-
depreciation of FA is corrected
Tan & Lee Chapter 4 © 2009
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Illustration 5:Unrealized Loss Arising From Intragroup Transfers
• Parent transferred inventory to subsidiary during the year ended 31 Dec 20X6
• The loss on transfer indicated an impairment loss on the inventory
What is the consolidation journal entry?
Tan & Lee Chapter 4 © 2009
Transfer price $60,000
Original Cost $80,000
Gross loss ($20,000)
Dr Sales 60,000
Cr Cost of Sales 60,000
Eliminate the transfer of Inventory – no adjustment is made to remove the unrealized loss
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Illustration 5:Unrealized Loss Arising From Intragroup Transfers
• Parent transferred fixed asset to subsidiary during the year ended 31 Dec 20X6
Transfer price $120,000Original Cost $200,000Acc. Dep ($ 50,000)NBV $150,000Loss on transfer $ (30,000)
• The loss on transfer indicated an impairment loss on the fixed asset
What is the consolidation journal entry?
Dr Fixed assets 80,000
Cr Accumulated depreciation 80,000
Eliminate the transfer of fixed asset – loss of $30,000 is not eliminated
Subsequent depreciation will take into account any revision in useful life of the impairment in value
Tan & Lee Chapter 4 © 2009
Conclusions
• Only transactions with 3rd parties should be shown in consolidated financial statements
• Intra-group transactions and balances must be eliminated after reconciliation of balances
• Unrealized profit or loss in inventory or fixed assets must be adjusted
• Upstream transfers will impact NCI• Tax effects on profit adjustments must be made• Special considerations for transfers at a loss