MyNotes@2021

Consolidation books
FINANCIAL ACCOUBNTING 2B

5.1 INTRAGROUP TRANSACTIONS

Three types of intragroup sales

• Sales of inventories
• Sales of non-depreciable property
• Sales of depreciable property, plant and equipment

Intragroup balances

5.2 Elimination of intragroup balances

IFRS 10.B86(c) all intragroup assets, liabilities, equity, income and expenses
relating to transactions between entities of the group must be eliminated
on consolidation

Intragroup loans

Let say the parent offers a loan to the subsidiary

(DR) Loan from parent (S)(SFP) xxx

(CR) Loan to subsidiary (P)(SFP) xxx

Elimination of intragroup balances

Interest on loan to subsidiary

(DR) Interest income (P)(P/L) xxx

(CR) Interest expenses (S)(P/L) xxx

Elimination of intragroup interest (100,000x8%x12/12)

other transaction incurred between entities

(DR) Other income xxx

(CR) other expenses xxx

Elimination of intragroup rent

5.4 Bank overdrafts guarantees

On consolidation, the bank overdraft of one entity in the group should only
be set off against the favorable bank balance of another entity in the
group, if both entities have their accounts at the same bank and when all
of the following three conditions have been met:

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• lf both entities have bank accounts at the same financial institution;

• lf the bank itself would set off the two accounts against each other
in terms of an agreement between the two entities concerned and
the bank; and
• lf the group has the intention to settle the amounts on a net basis.

It is clear that the set off of bank accounts within a group does not
constitute intragroup transactions and requires special treatment.

THE DIRECT METHOD OF PREPARINT CONSOLIDATED FINANCIAL STATEMENTS

5.5 The direct method

The following are the abridged statements of financial position, statements

of profit or loss and other comprehensive income and statements of
changes in equity of P Ltd and the partially-owned subsidiary, S Ltd:

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.8

P LTD S LTD
ASSETS
PPE 80 000 150 000
Investment in S Ltd: 64 000 shares at fair value 120 000 -
(cost price: 90 000)
Investment in S ltd: Loan 50 000 -
Inventories 65 000 55 000
Trade receivables 55 000 35 000
Bank 30 000 -
Total assets 400 000 240 000
Equity and Liabilities
Share capital (100 000/80 000 shares) 100 000 80 000
Retained earnings 125 000 90 000
Mark to market reserve 30 000 -
Long-term borrowings 75 000 -
Loan from P ltd - 50 000
Trade and other payables 70 000 10 000
Bank overdraft - 10 000
Total equipment and liabilities 400 000 240 000

EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.8
P Ltd S Ltd
Profit 90 000 100 000
Dividends received from S Ltd 32 000 -
Profit before tax 122 000 100 000
Income Tax (36 000) (30 000)
Profit for the year 86 000 70 000

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Other comprehensive income for the year

Items that cannot reclassified to profit or loss
Mark to market reserve 5 000 -
Comprehensive income for the year 5 000 -
Total comprehensive income 91 000 70 000

EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY FOR THE YEAR

ENDED 31 DECEMBER 20.8
Mark to Retained earnings
market
reserve
P Ltd P Ltd S Ltd
Balance as at 1 Janualy 20.8 25 000 75 000 60 000
Change in equity for 20.8
Total comprehensive income for
the year
Profit for the year - 86 000 70 000
Other comprehensive income 5 000 - -
Dividents - (36 000) (40 000)
Balance at 31 December 20.8 30 000 125 000 90 000
On the 1 January 20.5, the date on which P Ltd acquired interest in S Ltd,
the equity of S Ltd was as follows:

Share capital…………………………………….N$80 000

Retained earnings……………………………..N$45 000

P ltd elect to measure the non-controlling interest in an acquiree at their

proportionate share of the acquiree’s identifiable net assets at acquisition
date.

P Ltd Classified equity in S Ltd under ifrs 9, and recognise fair value
adjustment in a mark-to-market reserve.

Ignore tax implications.

SOLUTION

ANALYSIS OF OWNER’S EQUITY OF S LTD

TOTAL P LTD 80% NCI,20%

AT SINCE
AT ACQUISITION (2/01/20.8)
Share capital 80 000 64 000 16 000

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Retained earnings 45 000 36 000 9 000

125 000 100 000 25 000
Gain from a bargain purchase (10 000) (10 000) -
Consideration plus NCI 115 000 90 000 25 000
ii) since acquisition
To begging of current year:
Retained earnings (60000- 15 000 12 000 3 000
45000) 28 000
Current year:
Profit for the year, and 70 000 56 000 14 000
Dividend (40 000) (32 000) (8 000)
160 000 36 000 34 000

debit credit
J1 Mark to market reserve-beg. Of year (P)(SCE) 25 000
Mark to market reserve (P)(OCI) 5 000
Investment in S (P)(SFP) 30 000
Reversal of fair value adjustment
J2 Loan from P Ltd (S)(SFP) 50 000
Investment in S Ltd:Loan (P)(SFP) 50 000
Elimination of intragroup loan
J3 Share capital (S)(SCE) 80 000
Retained earnings (S)(SCE) 45 000
Bargain purchase(SCE) 10 000
Investment in S Ltd (P)(SFP) 90 000
Non-controlling interest (SFP) 25 000
Elimination of owner’s equity at acquisition

J4 Retained earnings-Begg. Of the year (S)(SCE) 3000

Non-controling interest 3000
Recognition of non-controlling interest’s portion of
retained earning since acquisition to the beg. Of
current year.
J5 Non controling interest (P/L) 14 000
Non controlling interest (SFP) 14 000
Recognition of non-controlling interest in profit for
the year
J6 Divident received (P)(P/L) 32 000
Non controlling interest (SFP) 8 000
Dividend paid (S)(SCE) 40 000
Eliminating intragroup dividend and recognition of
non-controlling interests in the dividend.

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INTRAGROUP TRANSACTIONS

A group is regarded as one single entity, one cannot trade with oneself!!!

5.6 Intragroup sales of trading inventories and other assets

1. one reason for combine is synergies within the group

unrealised profits from intragroup transaction should be eliminated
first

Trading inventories

5.7 Unrealised profit in closing inventory

Revenue (seller)(P/L) 100 000

Cost of sales (Buyer)(P/L) 100 000

Elimination of intragroup sales

Cost of sales (SellER)(P/L) 10 000

Inventories (BUYER)(SFP) 10 000

Elimination of unrealised profit in closing

Inventories.

EXAMPLE 5.2 (CONSOLIDATION.PDF)

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UNREALISED PROFIT ON OPENING INVENTORIES

EXAMPLE 5.3 (CONSOLIDATION.PDF)

Let’s assume that S ltd purchase all its inventory from P ltd at cost plus
33.1/3%. The inventories on hand in the records of S ltd were as follows:

31 december 20.7………………N$20 000

31 December 20.8………………N$25 000

Total sales of inventories from P Ltd to S Ltd were as follows:

20.7………………..N$50 000

20.8………………..N$80 000

Tax ignored!

Solutions

31/12/2017

(DR) Revenue (P)(P/L) 50,000

(CR) Cost of sales (S)(P/L) 50,000

Elimination of group sales

(DR) CoGS (P)(P/L) 5,000

(CR) Inventories (S)(SFP) 5,000

Elimination of unrealised profit in closing

Inventories of S Ltd.

31/12/2018

(DR) Retained earnings- beginning of the year (P)(SCE)….5,000

(CR) COGS (P)(P/L)………………………………………………………5,000

Retained earnings adjustments

DR. revenue (P)(P/L)………………………………………………...80,000

CR. Cost of Goods Sold (S)(P/L)……………………………………..80,000

Elimination of group sales

DR. Cost of goods sold (P)(P/l)…………………………………..6,250

CR. Inventories (S)(SFP)…………………………………………………6,250

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Elimination of unrealised profit.

5.9 intragroup profit in inventories at acquisition date

Not part and parcel of the group.

5.10 losses on intragroup inventories

Added back to the value of inventory, unless NRV fall lower.

5.11 Inventories written down to NRV

As per the prescription of IAS 2 inventories should be valued at the lower of

and net realisable value. What need to be done in the case the carrying
amount of assets held for need to be written down to net realisable value

▪ if the amount to be wriiten down to NRV is equal or more than the

amount of unrealised profit contained in group selling price of closing
inventory, then the carrying amount is less than or equal the cost
price of inventory (excluding profit). No further adjustment.
▪ If the write-down to net realisable value is less than intragroup
unrealised profit, the difference between the NRV and Cost price
(Exclusive of markup) be eliminated.

Explanatory example

The subsidiary sells inventory to the parent at cost plus 25%. The closin
inventory in the records of the parent at 30 September 2021 are N$125,000.
On the same date the parent write down its inventory to a NRV equivalent
of N$99,999.99. ignore tax.

DR. Cost of sales (loss on inventory write

down/impairement)………….N$25,000

CR. Inventories (SFP)……………………………………………………………….N$25,000

Inventory write down to net realisable value in terms of IAS2.

HERE THE NRV OF N$25,000.01 IS GREATER THAN THE UNREALISED PROFIT OF

N$25,000. NO PRO FORMA JOURNAL WILL BE APPROPRIATE.

if we assume that the parent does write down inventory to NRV in their
book, and it is now apparent that the NRV is N$95,000, we have to
eliminate unrealised profit first and then write down to NRV.

DR. cost of sales (S)(P/L)…………………………………N$ 25,000

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CR. Inventories (P)(SFP)…………………………………………..N$25,000

Elimination of unrealised profit included in closing inventories

AND

DR. Cost of sale……………………………………………N$5,000

CR. Inventories (P)(P/L)…………………………………………..N$5,000

Inventory write down to NRV as per IAS2

5.12 Unrealised profit elimination and allocation of income tax

5.13 Allocation of tax and elimination of unrealised profit included in
closing inventories.
Example 5.5
S Ltd sold inventories for the first time to to its parent, P Ltd during
the reporting period ended 28 February 20.8, at a profit markup of
25% on cost price. On 28 february 20.8 inventories to the amount of
N$100,000 were still at hand. The company’s tax rate is 28%. Total
sales for the period was N$200,000.

Journal 1
Revenue (S)(P/L)…………………………………200,000
Cost of sales (P)(P/L)…………………………………..200,000
Elimination of intraroup sales
Journal 2
Cost of sales (S)(P/L)……………………………20,000
Inventories (P)(SoFP)…………………………………20,000
Elimination of unrealised profit on closing inventory
Journal 3
Deffered tax (S)(SoFP)…………………………..5,600
Income tax expenses……………………………….5,600
Recognition of deffered tax in unrealised profit

Elimination of income tax and elimination of unrealised profit in

opening and closing inventory.
In addition to example 5.5, lets assume at 28 february 20.9 the closing
inventory of P Ltd is N$150,000, acquired at the same cost plus
markup as of 20.8.
Sales for the period is N$300,000. Again assume a company tax rate of
28%.

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SOLUTION
Assume FIFO cost formula was applicable.
Journal 1
DR. Retained earnings- beginning of the year…………….14,400
DR. Deffered tax (S)(SFP)…………………………………….5,600
CR. Cost of sales…………………………………………………..20,000
Retained earnings adjustment
Journal 2
Dr. income tax expenses (S)(P/L)…………………………….5,600
CR. Deffered tax (S)(SoFP)………………………………………..5,600
Tax implication on realisation of unrealised profit on opening
inventory
Journal 3
Revenue (S)(P/L)……………………………………………………300,000
Cost of good sold (P)(P/L)………………………………………………..300,000
Elimination of intragroup sales
Journal 4
Cost of goods sold (S)(P/L)…………………………………………30,000
Inventories (P)(SoFP)…………………………………………………….30,000
Elimination of unrealised profit on closing inventories
Journal 5
Dr. deffered tax (S)(SoFP)…………………………………..8,400
Cr. Income tax expenses (S)(P/L)……………………………...8,400
Adjustment of deffered tax on 30,000 unrealised profit @28%

Allocation of income tax in respect of fair value adjustments on

financial asset at fair value through OCI.
On 2 January 20.17 P Ltd acquired an 80% interest in S Ltd at R8 000.
P Ltd classifies the investment in terms of IFRS 9 in its separate
financial statements and recognises fair value adjustments in a
mark-to-market reserve (other comprehensive income). On 31
December 20.17 the fair value of the investment in S Ltd was R9 500.
On 31 December 20.18 the fair value of the investment in S Ltd was
R10 000. Assume a company tax rate of 28% and that 66,6% of the
capital gain is subject to capital gains tax.
DR CR
Mark to market reserve -begg. Of year
(P)(SCE) 1 220
(1500x(100-28%x66.66%) 280
Deffered tax (P)(SoFP) (1500x66.66%x28%) 1 500
Investment in S Ltd (P)(SoFP) (9,500-8000)

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Reversal of fair value adjustment on

investment in S ltd at beginning of reporting 500
period. 500

Mark to market reserve (P)(OCI) (10,000-9,500)

Investment in S Ltd (P)(SoFP) 93
Revesal of fair value adjustment during the 93
year

Deffered tax (P)(SoFP) (500x66.66%x28%)

Income tax expenses (P)(OCI)
Deffered tax effect on reversed fair value
adjustment

Property, plant and equipment held by entities in the group 5.15 Disclosure of
the carrying amount of property, plant and equipment in the consolidated
statement of financial position.

5.16 Property, plant and equipment acquired from other entities in the group

~ depreciable assets

~non deprewciable assets

Intragroup gain on non-depreciable PPE

Should any entity within the group sell asset to another at a gain, the full
intragroup gain should be eliminated as long as the asset is held in the
group.

This gain will be realised when the asset is sold to outside entities. Non
depreciable assets gain are subject to capital gain tax implications but not
income tax implication

P Ltd sold a property (which initially cost N$100,000) to S Ltd, a wholly-

owned subsidiary for N$150,000 on 2 January 20.7. S Ltd sold the property
at N$250,000 on 30 June 20.8 to a third party. P ltd’s financial year runs
January to December.

31 december 20.7

DR. Other Income (P)(P/L) 50,000

CR. PPE (S)(SoFP) 50,000

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Elimination of unrealised intragroup gain included on PPE of S LTD

31 December 20.8

DR. retained earnings- Beginning of the year (P)(SCE)

50,000

CR. PPE (S)(SoFP)

50,000

Adjusting retained earnings at the beginning of the year to be in

agreement with consolidated retained earnings at 31 Dec 20.7

5.18 Intragroup gain on depreciable PPE.

Example 5.10: sale of PPE to a partially owned subsidiary

At 31 december 20.8, the end of the reporting period, P Ltd holds an interest
of 80% in S Ltd. On 2 January 20.18, P Ltd sold certain equipment which
originally cost R10 000 to S Ltd for R15 000. S Ltd recognises depreciation
on this equipment on a straight-line basis at a rate of 20% per annum.

<<SOLUTIONS>>

Elimination of intragroup gain

Other Income (Gain on Sale of Equipment)(P)(P/L) 5,000

Equipment (S)(SoFP) 5,000

Elimination of intragroup gain on Equipment to S Ltd

THIS GAIN IS REALISED THROUGH DEPRECIATION WHEN THE DEPLETED

PORTION OF FUTURE ECONOMIC BENEFIT IS TO BE WRITTEN OF!!!

DR. Accumulated depreciation (S)(SoFP) 1,000

CR. Depreciation (other expenses)(P)(P/L) 1,000

Recognition of the portion of unrealised intragroup gain realised

by depreciation

ADJUSTMENT OF RETAINED EARNINGS AT THE BEGINNING OF THE YEAR

DR. Retained earning-beginning of the year (P)(SCE) 4,000

DR. Accumulated depreciation (S)(SoFP) 1,000

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CR. Equipment (S)(SoFP) 5,000

Adjusting retained earnings at the beginning of the year

EXAMPLE 5.13: ALLOCATION OF INCOME TAX AND INTRAGROUP TRANSACTIONS

P Ltd acquired a 70% interest in S Ltd on 1 January 20.15 for R24 500, when
the retained earnings of the latter amounted to R25 000. P Ltd was of the
opinion that the assets of S Ltd were shown at fair values at this date. The

following are the abridged financial statements of the two entities at 31

December 20.18:

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S Ltd, a manufacturer of plants, sold a plant with a manufacturing cost of

R6 000 to P Ltd for R10 000 on 1 January 20.17. P Ltd recognises
depreciation on the plant on the straight-line basis at a rate of 20% per
annum.

P Ltd sells trading inventories to S Ltd at a profit mark-up of 25% on cost.

The following figures relate to these intragroup inventories transactions:

Intragroup inventories included in the inventories of S Ltd (also inventories

in the records of P Ltd):

At 1 January 20.18 N$6,000

At 31 December 20.18 N$5,000

Sales of inventories by P Ltd to S Ltd during 20.18 amounted to R10 000. l

It may be assumed that the inventories on hand at 1 January 20.18 were
sold during 20.7.

Assume a company tax rate of 28% and that 66,6% of a capital gain is
subject to capital gains tax. .

P Ltd classified the equity investment in S Ltd under IFRS 9 in its separate
financial statements and recognised fair value adjustments in a mark-to-
market reserve (other comprehensive income).

P Ltd elected to measure any non-controlling interests in an acquiree as its

proportional share of the acquiree’s identifiable net assets at acquisition
date. Assume that the identifiable assets acquired and the liabilities
assumed at acquisition date are shown at their acquisition-date fair
values, as determined in terms of IFRS 3.

Required: Prepare the extract from the consolidated books of P Ltd Group
for the year ended December 20.8.

Show your workings

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PRO-FORMA CONSOLIDATED JOURNALS

ANALYSIS OF OWNER’S EQUITY OF S LTD

P LTD 70% NCI

TOTAL AT SINCE 30%
At Acquisition (01/01/20.5
Share capital 10,000 7,000 3000
Retained Earnings 25,000 17,500 7500

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35,000 24,500 10,500

Purchase difference - - -
Consideration and NCI 35,000 24 500 10,500

ii) Since acquisition

to beginning of current year-
retained earnings (10,000-2 304 (J4)) 7,696 5,388 2,308
current year: 12,808
Profit for the year ( 3,600+800(J5)- 4,176 2,923 1,253
224(J6)) 46,872 8,311 14,061

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COMMENTS:

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