8/26/2008. Chapter 16 Consolidation: intragroup transactions. Rationale for adjusting intragroup transactions. Transfers of inventory

Transcription

1 Chapter 16 Consolidation: intragroup transactions Prepared by Emma Holmes 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 Transfers of inventory The broad effect of intragroup sales and purchases of inventory can be illustrated by reference to the diagram below Purchases inventory for $100 on Sells inventory for $150 on 25 June 2009 All inventory still held by the parent at 30 June

2 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 Dr Inventory 100 Cr A/C Payable June 2009 Dr Cash 150 Dr Inventory 150 Cr Sales 150 Cr Cash 150 Dr COGS 100 Cr Inventory 100 Dr ITE 15 Cr CTL 15 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: (i) Eliminate intragroup sale Dr Sales 150 Dr Sales 150 Cr COGS 100 Cr Inventory 50 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 2

3 Sub Adjustments Group Balance Sheet EXTRACT - Accounts Receivable Inventory (ii) Deferred Tax Asset (iii) Accounts Payable Current Tax Liability Profit & Loss EXTRACT Sales (i) COGS (ii) 50 (i) Gross Profit Income Tax Expense 0 15 (iii) 15 0 Profit / (Loss) after tax DR CR 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 What if the purchaser (i.e the parent), subsequently sells some of the inventory to external parties before the end of the year? Purchases inventory for $100 on Sells inventory for $150 on 25 June 2009 Sells 40% of the inventory for $100 on 30 June 2009 The journal entries processed by each entity and the consolidation journal adjustments required are shown on the following slides Dr Inventory 100 Cr A/C Payable June 2009 Dr Cash 150 Dr Inventory 150 Cr Sales 150 Cr Cash 150 Dr COGS 100 Cr Inventory 100 Dr ITE 15 Cr CTL 15 COGS calculated as 40% of the inventory purchased (i.e. 40% of $150) = $60 30 June 2009 Dr A/C Rec 100 Cr Sales 100 Dr COGS 60 Cr Inventory 60 Dr ITE 12 Cr CTL 12 3

4 Consolidation journal adjustments are required at 30 June 2009 for the following: As with the previous example, (i) Eliminate intragroup sale journals (i) and (ii) can be Dr Sales 150 combined if desired 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 the profit needs to be eliminated. (iii) Recognise tax effect of profit elimination Dr DTA 15 Cr ITE 15 Note that the Dr is recorded against the DTA, not the CTL (as was done in the sub s books) 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 Unrealised profit in opening inventory Go back to our original example (where all inventory was still held by the parent at 30 June 2009) Purchases inventory for $100 on Sells inventory for $150 on 25 June 2009 Sells 100% of the inventory for $175 on 30 July

5 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 Sales, COGS, ITE adjustments closed to R/E 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 Retained earnings 35 Dr ITE 15 Cr COGS 50 No entry required in future years as the profit has been realised. (All accounts will close to retained earnings) Transfers of property, plant & equipment Consider the following example purchases machine for $100 on 1 July 2008 Depreciates asset at 10% per year On 30 June 2009, it sold the machine to 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 1 July 2008 Dr Machine 100 Cr Cash June 2009 Dr Dep n expense 10 Cr Accum Dep n 10 Dr Cash 150 Dr Machine 150 Dr Accum Dep n 10 Cr Cash 150 Cr Machine 100 Cr Gain on sale 60 Dr ITE 15 Cr CTL 15 5

6 Consolidation journal adjustments are required at 30 June 2009 for the following: (i) 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 50 Cr Accum. Depn 10 Sub Adjustments Group DR CR Balance Sheet EXTRACT - Cash (150) Machine (i) 10 (ii) Accumulated 0 0 (i) 10 (10) Depreciation Deferred Tax Asset (iii) Income Tax Liability Profit & Loss EXTRACT Gain on sale of Machine 0 60 (ii) 60 0 Depreciation Gross Profit Income Tax Expense 0 15 (iii) 18 (3) Profit after Tax 0 35 (5) 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 The parent (being the purchaser) will depreciate the asset but at different value than the subsidiary would have depreciated. (originally) (now) On consolidation, necessary to reduce depreciation (back to what it originally should have been), and record related tax effect Diff. WDV at date of transfer Remaining useful life 9 years 9 years 9 years Dep n p.a

7 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 18 Cr Accum. Depn 10 Cr Machine 50 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 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 6.67 Cr Retained Earnings 6.67 Dr ITE 2 Dr Retained Earnings 2 Cr DTA 4 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) 7

8 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 Intragroup post-acquisition dividends Last week, elimination of dividends paid from preacquisition 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 100 DR Cash 100 CR Cash 100 CR Div. Revenue 100 Journal Entry on consolidation DR Div. revenue 100 CR Div. declared 100 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 100 DR Div. receivable 100 CR Div. payable 100 CR Div. revenue 100 Journal entries on consolidation DR Div. revenue 100 CR Div. declared 100 DR Div. payable 100 CR Div. receivable 100 P&L effects B/S effects 8

9 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 100 DR Cash 60 CR Cash 100 CR Div. revenue 60 Journal Entry on consolidation DR Div. revenue 60 CR Div. declared 60 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 9