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2 Introduction When a holding company (parent) purchases the share capital of its subsidiary (or subsidiaries), each company in the group: remains a legal.

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Presentation on theme: "2 Introduction When a holding company (parent) purchases the share capital of its subsidiary (or subsidiaries), each company in the group: remains a legal."— Presentation transcript:


2 2 Introduction When a holding company (parent) purchases the share capital of its subsidiary (or subsidiaries), each company in the group: remains a legal entity in its own right; and is bound to maintain separate accounting records The parent company must present to its shareholders its own financial statements and consolidated financial statements. Exceptions – NZ IFRS 10 para 4 A parent prepares consolidated financial statements using uniform accounting policies for like transactions and other events in similar circumstances (para 19).

3 3 Consolidation (NZ IFRS 10) In consolidation the parent entity combines like its items of assets, liabilities, equity, income, expenses and cash flows with those of its subsidiaries (para B86 (a)) The carrying amount of the parent's investment in each subsidiary should be offset against the parent's portion of equity of each subsidiary (para B86 (b)) Intragroup balances, transactions, income and expenses shall be eliminated in full (para B86(c)) A parent presents non-controlling interests in its consolidated statement of financial position within equity, separately from the equity of the owners of the parent (para 22).

4 Consolidation journals Adjustments for the purposes of consolidation are made through consolidation journal entries. These consolidation journals are ONLY prepared for the purposes of consolidation. (There are no consolidated ledger accounts) They are posted onto the consolidation worksheet only – they are NOT recorded in the books of the parent or the subsidiary As a result, some consolidation adjustments are repeated every time consolidated financial statements are prepared 4

5 Consolidation journals are posted into the consolidation worksheet in “adjustment” columns as follows: Consolidation Worksheets Parent Subsidiary Add down for sub-totals Purpose: to remove the parent’s investment in the subsidiary and the effect of all inter- entity transactions so that the final column shows an “external view”

6 6 Steps in Consolidation The principal entry on consolidation is to: Eliminate the investment in the subsidiary We need to do this same consolidation journal entry each year until it becomes immaterial, or we sell the subsidiary. Journal entry recorded in a consolidation journal: DrShare Capital DrRetained Earnings DrGoodwill CrInvestment in Subsidiary Ltd Eliminate investment in S. Ltd

7 7 Further Steps in Consolidation Step 1 Agree any inter-company transactions Step 2 Eliminate inter-company transactions such as sales/purchases, fees paid/received, rent paid/received, etc. This is important to prevent “double-counting” Remember that such items would not exist if the transactions were made by a single accounting entity.

8 8 Steps in Consolidation - 3 & 4 Step 3 Eliminate inter-company balances – they wouldn’t exist if the two companies were a single entity. Step 4 Eliminate unrealised inter-company profits because such profits are illusory until realised outside the group.

9 9 Unrealised Profit - Closing Inventory Having eliminated inter-company sales and purchases, any profit component in closing inventory needs elimination. Example: In its closing inventory S Ltd had inventory bought from H Ltd for $120,000. The inventory had cost H Ltd $100,000.

10 10 Unrealised profit cont’d Eliminate the $20,000 unrealised profit: Dr Cost of sales (Closing inventory) $20,000 Cr Inventory on hand (Bal. Sheet) $20,000 Elimination of unrealised profit on closing inventory If this related to the year ended 31 March 2012, we would then have to consider the effect on the following income year – ended 31 March 2013

11 11 Unrealised Profit - Opening Inventory The 2012 group profit was reduced by $20,000 – this was the effect of debiting closing inventory (shown as part of Cost of sales). So debiting Cost of sales increases it and therefore reduces Gross Profit, Net Profit, and ultimately the closing balance in Retained Earnings

12 12 Unrealised Profit (cont’d) So Retained Earnings for the group at 31 March 2012 will decrease by $20,000. So on consolidation at 31 March 2013 the opening balance of Retained Earnings (on 1 April 2012) will also need to be reduced by $20,000. Consolidation journal entry at 31 March 2013: Dr Opening Ret’d Earnings $20,000 Cr Opening inventory (COGS) $20,000 Eliminate last year’s unrealised profit from opening inventory

13 13 Shifting the unrealised profit The credit to opening inventory for 2012/13 in Cost of sales has the effect of increasing gross profit for that year - and eventually Retained Earnings. So the adjustment for unrealised profit last year is reversed the following year. This shifts the unrealised profit into the year that it will be sold outside the group. Profit is realised in that following year.

14 14 Unrealised Profit – Non-current Asset Transfers If a non-current asset is transferred between companies in the group, then where sale price = book value, no further adjustment is required. But what if the asset is sold above or below book value? There needs to be a restatement of the position, as if the asset had been transferred at book value.

15 15 Asset Transfers - Example H Ltd sold S Ltd a truck which had cost H Ltd $140,000 some years ago. On 1 April 2011 the truck was sold to S Ltd for $58,000, but it had a carrying value of $48,000, with accumulated depreciation of $92,000. In S Ltd.’s books: Dr Truck58,000 Cr Bank58,000 Purchase of truck

16 16 Asset Transfers (cont’d) And in H Ltd’s books: Dr Accum. depn. 92,000 Dr Bank 58,000 Cr Truck140,000 Cr Gain on disposal 10,000 Sale of truck with gain on sale And on consolidation: Dr Truck 82,000 Dr Retained Earnings 10,000 Cr Accum. depn. 92,000 Consolidation adjustment eliminating gain on sale

17 17 Depreciation Adjustment S Ltd will depreciate the truck for the 2011/12 and 20012/13 income years. Assuming a common depn. rate (say 30% D.V.), in S Ltd.’s books: 2011/12: Dr Depn. expense 17,400 Cr Accum. depn. 17,400 Depreciation charge (58,000 @ 30% DV) 2012/13: Dr Depn. expense 12,180 Cr Accum. depn. 12,180 Depreciation charge (40,600 @ 30% DV)

18 18 Depreciation (cont’d) However, if the asset had not been sold to S Ltd then H Ltd would have continued to depreciate it as follows: 2011/12: Dr Depn. expense 14,400 Cr Accum. depn. 14,400 Depreciation charge (48,000 @ 30% DV) 2012/13: Dr Depn. expense 10,080 Cr Accum. depn. 10,080 Depreciation charge (33,600 @ 30% DV)

19 19 Depreciation (cont’d) The depreciation expense overcharge for the group in 2011/12 and 2012/13 needs to be eliminated – being depreciation charged against the unrealised profit component of this non- current asset. Year Depn. Shown Non-adjusted Difference 2011/12 17,400 14,400 3,000 2012/13 12,180 10,080 2,100

20 20 Depreciation (cont’d) Alternatively, based on the unrealised profit component of $10,000 the overcharge is: 201210,000 @ 30% DV = 3,000 2013 7,000 @ 30% DV = 2,100 Consolidated Journal entry in 2013: Dr Accum. depn. 5,100 Cr Opening Ret’d Earnings 3,000 Cr Depn. expense2,100 Depreciation adjustment for current and prior periods

21 21 Steps in Consolidation - 5 Step 5 Eliminate inter-company dividends paid/received, otherwise the holding company is effectively paying dividends to itself! Only dividends paid externally should be shown in consolidated financial statements

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