1. INTERCOMPANY FIXED ASSET TRANSFERS SECTION
CHAPTER 10
INTERCOMPANY
FIXED ASSET TRANSFERS
SECTION

2. FOCUS OF CHAPTER 10
Changing From The New Basis of Accounting to The Old Basis of Accounting in Consolidation
The Additional Complexities of Fixed Asset Transfers in Relation to Inventory Transfers

3. Summary of GAAP Requirements for Preparing Consolidated Statements
ALL intercompany transactions must be eliminated in consolidation.
ALL unrealized intercompany profit or gain must be eliminated.
The gross profit (full gain) is eliminated.
Income taxes (benefit) on such profits or gains (or losses) must also be deferred.
Sharing the deferral with NCI shareholders is allowed.

4. The Consolidated Perspective
From a consolidated viewpoint, the reported amount for a fixed asset cannot change merely because the asset has been moved to a different location within the consolidated group.
Saxco
Paxco
Saxco
Consolidated Group

5. The Consolidated Perspective
What applies to intercompany fixed asset transfers applies equally as well to transfers of:
Inventory
Patents
Copyrights
Capitalized software
Other assets

6. Changing from the New Basis to the Old Basis in Consolidation
The Objective of Changing to the Old Basis of Accounting in Consolidation:
To report amounts based on the SELLING ENTITY’S historical cost for the:
Fixed asset’s cost.
Related accumulated depreciation.
Related depreciation expense.
To defer recognizing unrealized profit/gain. #1 #2 #3

7. Developing Fixed Asset Consolidation Entries: The Classic Approach
Compare WWD with WWWHBD:
WHAT WAS DONE WHAT WE WISH HAD BEEN DONE
Use the differences for the consolidation entry.
This approach is the same as that used
for preparing CORRECTING entries.

8. Developing Fixed Asset Consolidation Entries: The Classic Approach
STEP #1: Obtain the balances that exist on the BUYING entity’s books at the balance sheet date. (WWD)
STEP #2: Perform a pro forma calculation of the balances that would have existed if the transfer had been made at the SELLING entity’s carrying value. (WWWHBD)
STEP #3: Use the differences between steps 1 and 2 for the consolidation entry.

9. Using the Right Depreciable Life: What’s Relevant and What’s NOT
In performing the pro forma calculation in STEP #2, use the relevant life:
What’s NOT Relevant:
The OLD remaining life at the transfer date.
What’s Relevant:
The NEW assigned remaining life (if different from the old remaining life).

10. Review Question #1
On 4/1/06, Potax reported a $24,000 gain on equipment sold to Sotax (100% owned), which extended the then remaining life of 2 yrs. to 3 yrs. The adjustment to depreciation expense in consolidation at 12/31/06 is: A. $6,000 B. $8,000 C. $9,000 D. $12,000 E. None of the above.

11. Review Question #1 With Answer
On 4/1/06, Potax reported a $24,000 gain on equipment sold to Sotax (100% owned), which extended the then remaining life of 2 yrs. to 3 yrs. The adjustment to depreciation expense in consolidation at 12/31/06 is: A. $6,000 ($24,000/3 x 3/4 yr.) B. $8,000 C. $9,000 D. $12,000 E. None of the above.

12. Review Question #2
On 7/1/06, Pilax had a $24,000 gain on equipment sold to Silax (100% owned) for $144,000. Silax extended the then remaining life of 3 yr. (original life was 10 yrs.) to 4 yrs. What is the consolidated accumulated depr. at 12/31/06 ? A. $295,000 B. $296,000 C. $300,000 D. $310,000 E. $316,000

13. Review Question #2 With Answer
On 7/1/06, Pilax had a $24,000 gain on equipment sold to Silax (100% owned) for $144,000. Silax extended the then remaining life of 3 yr. (original life was 10 yrs.) to 4 yrs. What is the consolidated accumulated depr. at 12/31/06 ? A. $295,000 ($280,000 + [$120,000/4 x 1/2 yr.]) B. $296,000 C. $300,000 D. $310,000 E. $316,000

14. End of Chapter 10
Time to Clear Things Up—Any Questions?