Week 6 - Accounting for groups (cont.)

Question 1

How do we account for intra-group transactions? And why?

Answer 1

IFRS 10 requires all intra-group transactions to be FULLY ELIMINATED, regardless whether or not there are NCIs. - No proportioning and usually by reversing the original accounting entries.
> Intra-group transactions must be eliminated to ensure that the sales are NOT INFLATED & no MANIPULATION through internal transfer price (see W5 flashcards also)

• Such eliminations can also introduce temporary tax differences into the consolidated fin. stt.s in the form of deferred tax asset/liability

Question 2

5 examples of intra-group transactions

Answer 2

1. Payment of dividends to group members (from post-acquisition earnings)
2. Intra-group sales of inventory
3. Intra-group sales of NCAs
   - note that machines can be NCA or inventory, depending on the Q
4. Payment of management fees to a group member
5. Intra-group loans

Question 3

How do we treat intra-group sales of inventory?
Consolidation process: 3 steps

Answer 3

• From group’s perspective, revenue should not be recognised until inventory is sold to EXTERNAL parties
• When goods are sold and REMAIN in the inventory of the buying entity, an adjustment is made to REMOVE the UNREALISED PROFIT from the consolidated fin. stt.s
• Reduce the inventory to the ORIGINAL COST when a group entity FIRST purchased it

1. Eliminate total intra-group sales (and Cost of sales) as if no sales occurred from group’s perspective
   - Dr Sales revenue
   - Cr Cost of sales // purchases
2. Eliminate unrealised profit in closing inventory
   - Dr Cost of sales // closing inventory
   - Cr Inventory
3. Consideration of tax paid/recognised on intra-group sale of inventory
   - Dr Deferred tax asset
   - Cr Income tax expense

Question 4

How do we treat intra-group sales of non-current assets?
Consolidation process: 4 steps

Answer 4

REINSTATE the NCAs to the original cost/revalued amount as if the intra-group sale never happened by:
- eliminating any unrealised gains on sale of NCAs
- adjusting depreciation
- there may be tax on gain of sale of NCAs, which will represent a temporary difference in the consolidated fin. stt.s

1. Reverse gain and reinstate accumulated depreciation
   - Dr Gain on sale
   - Dr Non-current asset
   - Cr Accumulated depreciation
2. Recognise deferred tax asset
   - Dr Deferred tax asset
   - Cr Income tax expense
3. Adjust depreciation to reflect correct amount
   - Dr Accumulated depreciation
   - Cr Depreciation expense
4. Partially reverse deferred tax asset to reflect depreciation adjustment
   - Dr Income tax expense
   - Cr Deferred tax asset

Question 5

Where is Dividend income included in the SoCI?
What about Dividend payable & Dividend receivable in the SOFP?

Answer 5

1. Dividend income included in Profit before tax
2. Dividend payable usually included in Accounts payable
3. Dividend receivable usually included Accounts receivable

Question 6

How to calculate the Group’s retained earnings?

How to calculate the Group’s tax expense?

Answer 6

Group R/E = Parent’s R/E + subsidiary’s POST-ACQuisition earnings

Group tax expense = Parent’s + subsidiary’s tax expense & adjust for intra-group transactions, unearned income

Question 7

Do dividends have tax implications? Why or why not?

Answer 7

No tax implications b/c dividends are paid after tax.
(Corporations are not liable for tax; the shareholders are)

Question 8

How do we treat Dividend payments from post-acquisition earnings?
Consolidation process: 3 steps

Answer 8

1. Eliminate entry for dividends DECLARED by subsidiary & dividends receivable by parent
   - Dr Dividend payable
   - Cr Dividend declared (SoCiE)

• Dr Dividend income (SoCI)
• Cr Dividend receivable

2. Eliminate entry for dividends PAID by subsidiary
   - Dr Dividend revenue (SoCI)
   - Cr Dividend paid (SoCiE)