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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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Presentation on theme: "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."— Presentation transcript:

1 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 Further consolidation Issues I: Accounting for Intragroup Transactions

2 29-2 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

3 29-3 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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.

4 29-4 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 loans Consolidation adjustments for intragroup transactions Typically eliminate these transactions by reversing the original accounting entries made to recognise the transactions in the separate legal entities

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

6 29-6 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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) DrDividends payable (balance sheet) CrDividends proposed (statement of changes in equity) Journal entry to eliminate dividends receivable (in consolidation journal) DrDividend income (income statement.) CrDividend receivable (balance sheet)

7 29-7 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Dividend payments pre- and post- acquisition (cont.) 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 Dividend payments to a subsidiary out of post- acquisition earnings

8 29-8 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Dividend payments pre- and post- acquisition (cont.) 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

9 29-9 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Journal entries to record dividends from pre-acquisition profits Journal entry made in accounts of parent entity (not in consolidation journal) DrDividends receivable CrInvestment in subsidiary

10 29-10 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Journal entry to eliminate intragroup dividend payable/receivable To eliminate dividend payable and receivable (in consolidation journal) DrDividends payable CrDividends receivable Refer to Worked Example 29.2 on pp. 983–86 Dividends paid out of pre-acquisition earnings

11 29-11 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan intragroup sale of inventory From the groups 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 period AASB 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

12 29-12 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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?

13 29-13 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan

14 29-14 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 groups 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

15 29-15 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 DrSales CrCost of goods sold (perpetual) or purchases (periodic)

16 29-16 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 –DrCost of goods sold (perpetual) or closing inventoryP&L (periodic) CrInventory

17 29-17 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan intragroup sale of inventory (cont.) 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 groups perspective, represents prepayment of tax –DrDeferred tax asset CrIncome tax expense Refer to Worked Example 29.3 on pp. 988–93Unrealised profit in closing inventory

18 29-18 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan intragroup sale of inventory (cont.) Unrealised profit in opening inventory The cost of opening inventory held by one of the entities within the group will be overstated from the groups 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

19 29-19 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 sold DrOpening retained earnings CrCost of goods sold Higher profits lead to higher tax expense DrIncome tax expense CrOpening retained earnings Consider Worked Example 29.4 (pp. 994 – 997)

20 29-20 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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

21 29-21 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 DrGain on sale DrAsset CrAccumulated depreciation –recognise deferred tax asset DrDeferred tax asset CrIncome tax expense

22 29-22 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 DrAccumulated depreciation CrDepreciation expense –partial reversal of deferred tax asset to reflect depreciation adjustment DrIncome tax expense CrDeferred tax asset Refer to Worked Example 29.5 on p intragroup sale of a non-current asset

23 29-23 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 statementsintragroup 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 groups perspective)

24 29-24 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan 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 entitythis 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


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