1. Prepare the acquisition analysis at 1 January 2017 2. Prepare the business combination valuation entries and pre-acquisition entries at 1 Januart 2017 3. Prepare the business combination valuation entries and pre-acquisition entries at 31 December 2017
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2.pptxConsolidation– Intragroup Transactions
WORKSHOP
Corporate Reporting
La Trobe Business School
La Trobe Business School
Ch 26 & 27.
1
Topic intended learning outcomes
explain the need for making adjustments for intragroup transactions
prepare worksheet entries for intragroup sales of inventory
prepare worksheet entries for intragroup sales of property, plant and equipment
prepare worksheet entries for intragroup services
prepare worksheet entries for intragroup dividends
prepare worksheet entries for intragroup borrowings
La Trobe Business School
La Trobe Business School
Consolidated financial statements are statements of the group presented as a single economic entity.
These financial statements show only transactions with external parties.
Adjustments are required to eliminate the effects of intragroup transactions so that financial position and performance are not under or overstated in the consolidated statements.
The need for intragroup adjustments
La Trobe Business School
La Trobe Business School
LO1
3
Intragroup transactions - transactions that occur between entities in the group.
The purpose of consolidated financials is to provide information on the group as a result of its dealings with external parties.
AASB 10/IFRS 10 requires:
Intragroup balances, transactions, income and expenses to be eliminated in full.
Tax effect accounting to be applied where temporary differences arise due to the elimination of profits and losses.
The adjustment process
La Trobe Business School
La Trobe Business School
LO2
4
The broad effect of intragroup sales and purchases of inventory can be illustrated by reference to the diagram below:
Sells inventory for $10000 on 1 Jan 2013
Parent
Subsidiary
All inventory still held by the parent at 30 June 2013
Purchases inventory for $8000
Transfers of inventory
La Trobe Business School
La Trobe Business School
LO3
5
Sales of inventories in the current period:
current period accounts will be affected in the worksheet adjustment entries
from group perspective, no sale made to external parties
tax effect adjustment required.
Realisation of profits:
profit will only be recognised by the group when inventory has been sold to external parties.
Inventories
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La Trobe Business School
LO3
6
Sales of inventories in the prior period:
opening retained earnings contains profit relating to inventories on hand at beginning of period
the group would report sales to external parties and COS adjustments
zero effect on retained earnings (closing balance) so no consolidated adjustment to inventories in future periods required
tax effect of the adjustment is recorded.
Inventories
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La Trobe Business School
LO3
7
Realisation of profits for sales of inventories in the prior period:
group’s retained earnings (op bal) less than retained earnings of legal entities (unrealised profit in beginning inventories eliminated from prior period profits)
group’s current period after tax profit greater than current year after tax profit of legal entity (unrealised profit in beginning inventories realised in current period)
no unrealised profit remaining so no need for future period worksheet adjustments.
Inventories
La Trobe Business School
La Trobe Business School
LO3
8
What if the Parent subsequently sells some of the inventory to external parties before the end of the year?
Purchases inventory for $8000
Sells inventory for $10 000 on 1 Jan 2016
Sells $7500 of the inventory for $14000 by 30 June 2016
Parent
Subsidiary
Unrealised profit in ending inventory
La Trobe Business School
La Trobe Business School
LO3
9
The subsidiary would record sales of $10 000 and COGS of $8 000 - recognising a profit of $2 000.
The parent would record inventory of $10 000.
The $2 000 profit made by the subsidiary is considered to be unrealised at 30 June 2016, as the inventory is yet to be sold to an external party.
Unrealised profit in ending inventory
La Trobe Business School
La Trobe Business School
LO3
10
Consider the following example of a transfer in the current year:
Subsidiary purchases machine for $18,500 on 1 July 2016.
Machine cost parent $20,000 when acquired 1 year ago.
Subsidiary depreciates asset at 6% per year.
Parent depreciates asset at 10%.
The tax rate is 30%.
Property, plant and equipment
La Trobe Business School
La Trobe Business School
LO4
11
The journal entries in the records of the parent and subsidiary at the date of sale, 1/7/16 are:
| Parent | |||||
| Cash | 18500 | ||||
| Proceeds from sale of plant | 18500 | ||||
| Carrying amount of plant sold | 18000 | ||||
| Accumulated depreciation | 2000 | ||||
| Plant | 20000 | ||||
| Subsidiary | |||||
| Plant | 18500 | ||||
| Cash | 18500 | ||||
| Consolidation adjustment entry: | |||||
| Proceeds from sale of plant | 18500 | ||||
| Carrying amount of plant sold | 18000 | ||||
| Plant | 500 | ||||
| Deferred Tax Asset | 150 | ||||
| Income tax expense | 150 |
Property, plant and equipment
La Trobe Business School
La Trobe Business School
LO4
12
In the years after the transfer, the journal entries take the following form:
| Retained earnings (opening balance) | XXX | |||||
| Property, Plant & Equipment | XXX | |||||
| Deferred Tax Asset | XXX | |||||
| Retained Earnings (opening balance) | XXX |
Property, plant and equipment
La Trobe Business School
La Trobe Business School
LO4
13
Sale of property, plant and equipment:
Worksheet adjustment entries required to:
adjust for any profit or loss on transfer of assets
adjust for depreciation on assets after transfer (if asset is depreciable)
realisation of profit by group only if asset sold to external party.
Property, plant and equipment
La Trobe Business School
La Trobe Business School
LO4
14
Property, plant and equipment
Depreciation and realisation of profits:
The appropriate depreciation rate for the group is the rate used by the entity holding the asset.
Prior or current period transaction?
What has been recorded by the legal entities.
Adjust to get from legal entities to group amounts.
Adjust for tax effects.
La Trobe Business School
La Trobe Business School
LO4
15
Property, plant and equipment
Realisation of profit or losses:
normally occurs when asset is sold to external parties
with depreciable assets this can also occur as asset is depreciated.
La Trobe Business School
La Trobe Business School
LO4
16
Often in a group, one entity (normally the parent) provides services (such as accounting, HR, IT) to the other entities (normally the subsidiaries) to reduce duplication.
Provider normally charges a management fee to the user. This must be eliminated on consolidation as follows:
DR Services revenue xxx
CR Services expense xxx
If payable/receivable balances also exist, these balances must be eliminated on consolidation.
Intragroup services
La Trobe Business School
La Trobe Business School
LO5
17
Assume on 25th June a subsidiary declares a dividend of $10 000 which remains unpaid at the end of the period:
Journal Entry in Sub Journal Entry in Parent
DR Div. declared 10 000 DR Div. receivable 10 000
CR Div. payable 10 000 CR Div. revenue 10 000
Journal entries on consolidation
DR Div. revenue 10 000
CR Div. declared 10 000
DR Div. payable 10 000
CR Div. receivable 10 000
P&L effects
B/S effects
Intragroup dividends – declared but not paid
La Trobe Business School
La Trobe Business School
LO6
18
Assume on 25th June a subsidiary declares a dividend of $10 000 which is paid in the current period:
Journal Entry in Sub Journal Entry in Parent
DR Div. paid 10 000 DR Cash 10 000
CR Cash 10 000 CR Div. revenue 10 000
Journal entries on consolidation
DR Div. revenue 10 000
CR Div. paid 10 000
Intragroup dividends – declared and paid in current period
La Trobe Business School
La Trobe Business School
LO6
19
The consolidation journal entry to eliminate intragroup balances in payable and receivable accounts is:
DR Payable (loan) xxx
CR Receivable (loan) xxx
To eliminate interest revenue and expense recorded during the year by each entity:
DR Interest revenue xxx
CR Interest expense xxx
Intragroup borrowings
La Trobe Business School
La Trobe Business School
LO7
20
Super retail group case study
Obtain a copy of the most recent annual report of the Super Retail Group.
Identify and review the information on the subsidiaries included within the Super Retail GROUP.
Select one subsidiary.
Identify examples of possible transactions that could occur between this subsidiary and the parent.
How would the effects of these transactions be eliminated on consolidation?
Why is this elimination necessary?
La Trobe Business School
La Trobe Business School
Workshop Case study
La Trobe Business School
La Trobe Business School
La Trobe Business School
conclusion
In this topic we learn how to make adjustments for intragroup transactions and prepare worksheet entries for intragroup sales of inventory, intragroup sales of property, plant and equipment, worksheet entries for intragroup services.
We also focus how to prepare worksheet entries for intragroup dividends and worksheet entries for intragroup borrowings.
Next week’s topic will focus on non-controlling interests.
La Trobe Business School
La Trobe Business School
