Accounting for groups part 2 ( week 6)

Question 1

What does IFRS 10 say about intra group transactions?

Answer 1

requires the elimination of all intragroup transactions before the consolidated financial statements are presented, whether or not there is NCI, because there could be manipulation.

Question 2

What are the 5 intragroup transactions we will look at.

Answer 2

1) Payment of dividends to group members ( if it is external it would be allowed)
2) Intragroup sales of inventory
3) Intragroup sales of NCA
4) Payment of management fees to group member
5) Intragroup loans

Question 3

How do you deal with consolidation adjustments for intragroup transactions ( HINT there might be something else?

Answer 3

1) Typically eliminate these transactions by reversing the
original accounting entries made to recognise the
transactions in the separate legal entities.
2) Such eliminations can also introduce temporary tax
differences into the consolidated financial statements in
the form of deferred tax liabilities and deferred tax assets.

Question 4

2) Such eliminations can also introduce temporary tax
differences into the consolidated financial statements in
the form of deferred tax liabilities and deferred tax assets.
What is important about this?

Answer 4

Tax base is based on individual entity.
Carrying amount based on group
Group doesn’t pay taxes, its individual entities, hence there are temporary differences

Question 5

Lets look at Dividend payments from post acquisition earnings, when are dividends not recognised in CBS and when are they recognised ?

Answer 5

Question 6

Firstly lets work it out solely so when Dividends of £50000 declared/paid by B Ltd come from profits earned since 1 April 2020, what is the Debit and credit of B and what is the debit and credit of A?
Why do we need to know the individual entries?

Answer 6

for B reducing RE in SoCiE

We need to know the entries the individual entities made attateched so we can reverse them ( eliminate them)

Question 7

What is the Debits and credits for the reversals. ( HINT ITS A LITERALLY A REVERSE) AND REMEMBER WHAT DO WE ELIMINATE IN THE FIRST STEPS TOO?

Answer 7

1) Eliminate Investment, share capital of subsidiary too and RE at point of acquisition of subsidiary too.

Question 8

Make all the adjustments.

Answer 8

Question 9

Now lets look at intragroup sale of inventory
Questions
1) From the group’s (or economic entity’s) perspective,
revenue should not be recognised until inventory……
2) When goods are sold between entities in a group and
remain in the inventory of the buying entity at the end
of a reporting period….
3) This adjustment also reduces the inventory to….

Answer 9

1) sold to parties outside the group.
2) an adjustment is made to remove the unrealised profit from the consolidated financial statements.
3) the original cost when a group entity first purchased it
(group’s perspective).

Question 10

Answer 10

$150000 - external.

Question 11

We are going to look at the Tax issues: Intragroup sale of inventor, what is the tax base of unsold inventory based on ( HINT THERE IS NO SUCH THING AS GROUP TAXES ) ?

Answer 11

The tax base ( TAX BASE WILL BE HIGHER BECAUSE OF PROFIT ATTACHED TO SALE OF INVENTORY) of the unsold inventory will be based on individual entity’s accounts, so will be at the higher transfer price. From group perspective we need to reverse the unrealised profit, so inventory goes back to original cost.

Question 12

What is there as an implication that the If tax has been paid/recognised by one entity of the group due to sale of inventory , from the group’s perspective

Answer 12

There is a deferred tax asset ( prepayment of tax as tax base > carrying value), so that group income tax will become lower, as income tax is high already. ( overpayment of tax). The deferred tax asset, will either be a current asset ( if inventory sold in 12 months) or a current asset if inventory is sold after 12 months )

Question 13

What are the Debts and Credits to memorise when dealing with intragroup sales of inventory?

Answer 13

Question 14

Use the debts and credits to reverse this.

Answer 14

Question 15

Now lets look at sale of NCA within the group. What are the principles of this?

Answer 15

1) Assets of the group need to be valued as if the
intragroup sale of NCAs had not occurred.
2) Need to reinstate the NCAs to the original cost
or revalued amount:
– Eliminate any unrealised gains on sale of NCAs
– Adjust depreciation
– There may be tax on gain of sale of NCAs, which
will represent a temporary difference in the
consolidated financial statements.

Question 16

What are the Debits and Credits for sale of NCA within the group ? from group perspective?

Answer 16

Question 17

(HARD) Workout the first 2 debts and credits

Answer 17

Question 18

( HARD PART 2) WORK OUT LAST 2 ADJUSTMENTS.

Answer 18

Question 19

What are 2 ways of saying net assets?

Answer 19

Shareholders fund

Shareholders equity and reserve = net assets.

Question 20

When being asked a question on consolidated balance sheets what must we do?
And what does Debiting sales revenue mean?
What does Dr cost of sales mean?
What does it mean if you dr and cr an expense?
What is a gain in disposal a credit or debit and how do we reduce a gain?
Reducing AD means what?

Answer 20

We must copy the statement we are asked to do first.
Reducing sales revenue
Increasing cost of sales
When you debit an expense you increase it and when you create an expense you reduce it
Gain in dispoal is a cr, to reduce gain we debit
Reducing AD means Debit