1. Topic: Consolidation: intragroup transactions
Week 11- Lecture 1
Topic: Consolidation: intragroup transactions
Reference: Text; Leo & Hoggett:
Chapter 16
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

2. Rationale for adjusting intragroup transactions
Intragroup transactions - transactions that occur between entities in the group
They must be eliminated on consolidation because, from a group viewpoint, they do not occur
AASB 127 requires intragroup balances, transactions, income and expenses to be eliminated in full
AASB127 also requires tax effect accounting to be applied where temporary differences arise due to the elimination of profits and losses
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

3. Eg; Transfers of inventory Purchases inventory for $100 on 1 June 2009
The broad effect of intragroup sales and purchases of inventory can be illustrated by reference to the diagram below
Sells inventory for $150 on June 2009
Parent
Purchases inventory for $100 on 1 June 2009
All inventory still held by the parent at 30 June 2009
Subsidiary
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

4. Unrealised profit in ending inventory
The subsidiary would record sales of $150 and COGS of $100 - recognising a profit of $50
The parent would record inventory of $150, despite the fact that this inventory cost the group $100
The $50 profit made by the subsidiary is considered to be unrealised at 30 June 2009, as the inventory is yet to be sold to an external party
To determine how to eliminate the effects of this transaction it is helpful to consider the journal entries that would have been recorded in the subsidiary and parent’s books respectively
The journal entries processed by each entity and the consolidation journal adjustments required are shown on the following slides
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

5. Unrealised profit in ending inventory
Subsidiary Parent
1 June 2009
Dr Inventory 100
Cr A/C Payable 100
25 June 2009
Dr Cash Dr Inventory 150
Cr Sales Cr Cash 150
Dr COGS 100
Cr Inventory 100
Dr ITE 15
Cr CTL 15
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

6. Unrealised profit in ending inventory
Consolidation journal adjustments are required at 30 June 2009 for the following:
Note: Transactions (i) and (ii) can be combined into a single entry as follows:
Dr Sales
Cr COGS
Cr Inventory
(i) Eliminate intragroup sale
Dr Sales 150
Cr COGS 150
(ii) Eliminate unrealised profit and adjust overstated inventory
Dr COGS 50
Cr Inventory 50
From a consolidated viewpoint, there is NO sale, NO COGS (and therefore no profit). In addition, inventory must be shown at the cost to the group (i.e. $100 not $150)
(iii) Recognise tax effect of profit elimination
Dr DTA 15
Cr ITE 15
No profit and therefore no tax expense, from group viewpoint. In future, when inventory sold by parent the group will recognise the tax expense
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

7. Unrealised profit in ending inventory
Notes:
1. Inventory is now recorded at the original $100 cost to the group
2. All impacts on the Profit and Loss resulting from the interentity sale have been removed
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

8. Unrealised profit in ending inventory
What if the purchaser (i.e the parent), subsequently sells some of the inventory to external parties before the end of the year?
Sells inventory for $150 on 25 June 2009
Parent
Purchases inventory for $100 on 1 June 2009
Sells 40% of the inventory for $100 on 30 June 2009
Subsidiary
The journal entries processed by each entity and the consolidation journal adjustments required are shown on the following slides
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

9. Unrealised profit in ending inventory
Subsidiary Parent
1 June 2009
Dr Inventory 100
Cr A/C Payable 100
25 June 2009
Dr Cash 150 Dr Inventory 150
Cr Sales Cr Cash 150
Dr COGS 100
Cr Inventory 100
Dr ITE 15
Cr CTL 15
30 June 2009
Dr A/C Rec 100
Cr Sales 100
Dr COGS 60
Cr Inventory 60
Dr ITE 12
Cr CTL(30% of $40) 12
COGS calculated as 40% of the inventory purchased (i.e. 40% of $150) = $60
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

10. Unrealised profit in ending inventory
Consolidation journal adjustments are required at 30 June 2009 for the following:
As with the previous example, journals (i) and (ii) can be combined if desired
(i) Eliminate intragroup sale
Dr Sales 150
Cr COGS 150
The WHOLE amount of the sale is eliminated regardless of the amount subsequently disposed of by the parent.
(ii) Eliminate unrealised profit and adjust overstated inventory
Dr COGS 30
Cr Inventory 30
From a consolidated viewpoint the UNREALISED portion (ie 60% of $50) of the profit needs to be eliminated.
(iii) Recognise tax effect of profit elimination
Dr DTA 15
Cr ITE (30% of $50) 15
Note that the Dr is recorded against the DTA, not the CTL (as was done in the sub’s books)
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

11. Unrealised profit in opening inventory
If inventory is sold between entities within the group one year and not sold by the end of the year, then we need to consider how this affects the following year’s consolidated accounts
The profit will become realised when the inventory is sold to an external party (in the next financial year)
As inventory is a current asset you should assume (unless specifically told otherwise) that it is sold to external parties within 12 months of being acquired by the group
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

12. Unrealised profit in opening inventory
Go back to our original example (where all inventory was still held by the parent at 30 June 2009)
Sells inventory for $150 on 25 June 2009
Purchases inventory for $100 on 1 June 2009
Parent
Sells 100% of the inventory for $175 on 30 July 2009
Subsidiary
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

13. Unrealised profit in opening inventory
To carry forward the net effect of last year’s consolidation journals the following entry would be required in the year ended 30 June 2009 (refer back to slide 7):
Dr Retained earnings 35
Dr DTA 15
Cr Inventory 50
As the inventory has now been sold during the current year (and the profit therefore realised) the above entry must be amended to reflect the following:
Dr ITE 15
Cr COGS 50
Sales, COGS, ITE adjustments closed to R/E
No entry required in future years as the profit has been “realised”. (All accounts will close to retained earnings)
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

14. Transfers of property, plant & equipment
Consider the following example
Subsidiary purchases machine for $100 on 1 July 2008
Depreciates asset at 10% per year
On 30 June 2009, it sold the machine to Parent for $150
The tax rate is 30%
The journal entries processed by each entity and the consolidation journal adjustments required are shown on the following slides
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

15. Intragroup sale of depreciable assets
Subsidiary Parent
1 July 2008
Dr Machine 100
Cr Cash
30 June 2009
Dr Dep’n expense 10
Cr Accum Dep’n
Dr Cash Dr Machine
Dr Accum Dep’n Cr Cash
Cr Machine
Cr Gain on sale
Dr ITE
Cr CTL
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

16. Intragroup sale of depreciable assets
Consolidation journal adjustments are required at June 2009 for the following:
Re-instate accumulated depreciation of asset
Dr Machine 10
Cr Accumulated depn 10
(ii) Eliminate unrealised profit and reduce asset to group written down value
Dr Gain on sale 60
Cr Machine 60
(iii) Recognise tax effect of profit elimination
Dr DTA 18
Cr ITE 18
Note that the Dr is recorded against the DTA, not the CTL (as was done in the sub’s books)
Transactions (i) and (ii) can be combined into a single entry as follows:
Dr Gain on sale 60
Cr Machine
Cr Accum. Depn
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

17. Intragroup sale of depreciable assets
Notes:
1.The machine is now recorded at the original cost (and corresponding accum depn)
2. All impacts on the Profit and Loss resulting from the interentity sale have been removed
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

18. Intragroup sale of depreciable assets
The parent (being the purchaser) will depreciate the asset but at different value than the subsidiary would have depreciated.
On consolidation, necessary to reduce depreciation (back to what it originally should have been), and record related tax effect
Subsidiary
(originally)
Parent
(now)
Diff.
WDV at date of transfer 90
150 60
Remaining useful life
9 years
Dep’n p.a. 10
16.67
6.67
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

19. Intragroup sale of depreciable assets
The net effect of the 3 journals recorded on slide 17 will be carried forward to future years as follows:
Dr Retained earnings 42
Dr DTA
Cr Accum. Depn
Cr Machine
In addition to the above, one year after transfer (30 June 2010) the entry would be as follows:
Dr Accum Dep’n 6.67
Cr Depreciation Expense 6.67
Dr ITE 2
Cr DTA 2
Note that it is the DTA which is credited (not the DTL) as the entry recognises the realisation of part of the unrealised profit (and corresponding DTA) through the use of the asset
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

20. Intragroup sale of depreciable assets
In addition to the first entry on the previous page, two years after transfer (30 June 2011) the entry would be as follows:
Dr Accum Dep’n
Cr Depreciation Expense adj
Cr Retained Earnings adj
Dr ITE 2
Dr Retained Earnings 2
Cr DTA 4
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

21. Transfers between inventory and non-current assets
When items are transferred between entities within a group it is possible that that the transferring entity will classify the asset differently to the transferor entity. Possible scenarios include:
Transfers from inventory to plant (refer page 778 of text)
Transfers from plant to inventory (refer page 780 of text)
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

22. Intragroup services
Quite 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
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

23. Intragroup post-acquisition dividends
Last week, elimination of dividends paid from pre-acquisition profits was discussed. This week, need to consider dividends paid from post-acquisition profits
Assume B (a wholly owned subsidiary) declared a dividend of $100 to A (parent) out of post acquisition profits
Journal Entry in B Journal Entry in A
DR Div. declared DR Cash 100
CR Cash 100 CR Div. Revenue
Journal Entry on consolidation
DR Div. revenue
CR Div. declared
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

24. Intragroup post-acquisition dividends
Where post acquisition dividends are declared (but not yet paid) the treatment is as follows:
Journal Entry in B Journal Entry in A
DR Div. declared DR Div. receivable 100
CR Div. payable CR Div. revenue 100
Journal entries on consolidation
DR Div. revenue
CR Div. declared 100
DR Div. payable 100
CR Div. receivable 100
P&L effects
B/S effects
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

25. Intragroup post acquisition dividends
What if A only owned 60% of B?
Assume B declared a dividend of $100 (in total) out of post acquisition profits
Journal Entry in B Journal Entry in A
DR Div declared DR Cash
CR Cash CR Div. revenue
Journal Entry on consolidation
DR Div. revenue
CR Div. declared
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

26. Intragroup borrowings
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
Compiled By: Mrs. Maheshwari Chand, Tr2,2014

27. Thank You
Compiled By: Mrs. Maheshwari Chand, Tr2,2014