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Revision Ntragroup Transactions Sundry Aspects Taxation
Revision Ntragroup Transactions Sundry Aspects Taxation
Revision Ntragroup Transactions Sundry Aspects Taxation
.
Debits
H Ltd
R
S Ltd
R
Property, plant and equipment 340 000 400 000
Investment in S Ltd at cost price 160 000 -
Inventories 150 000 120 000
Debtors 80 000 64 000
Bank 20 000 16 000
Cost of sales 300 000 240 000
Operating expenses 50 000 40 000
Income tax expense 56 000 44 800
Dividends paid 40 000 80 000
1 196 000 1 004 800
Credits R R
Share capital (R1 par value) 100 000 80 000
. Group
Statements
Example 5.2
PRO-FORMA JOURNAL ENTRIES
Note:
All transactions and
balances in the separate
records of P Ltd and S Ltd
are reversed in a PFJE
(except for BANK for which we
NEVER do PFJEs)
TRANSACTION COSTS
• In its separate AFS P Ltd recognise the transactions costs as an expense
(FV through p/l) or capitalise it in the investment (FV through OCI) in
terms of IFRS 9.
• In terms of IFRS 3, all acquisition related costs, which include transaction
costs, should be recognised as an EXPENSE.
• On consolidation all capitalised transactions costs should be recognised as
an expense:
• Elimination of transaction costs with the acquisition of the investment in the
subsidiary
In the separate financial records of S Ltd:
• H Ltd pays N$10 000 transactions costs in obtaining the investment in S
Ltd. H Ltd elected to classify the investment in S Ltd at FV trough OCI in
terms of IFRS 9.
• Journal entry is:Dr Investment in S (SofP)10 000 Cr Bank (SoFP)(10 000)
OR: 50 000 x
50/150
= 16 667
Group
Statements
Example 5.2
UNREALISED PROFIT IN OPENING
INVENTORY
• If the inter-company sales happened last year, the unrealised profit would have been
in the opening inventory
• The PFJEs will then change as follows:
If unrealised profit in closing inventory If unrealised profit in opening inventory
UNREALISED PROFIT IN OPENING INVENTORY
If the unrealised profit was in opening inventory, it would have been sold to 3 rd parties (realised) in the
current year (inventories are normally sold quickly)
Therefore, the journal in the previous slide needs to be reversed (no longer unrealised)
Therefore, the following journals need to be done IN ADDITION to the journal on the previous slide:
LONG
METHOD
(SHOW
BOTH
JOURNAL 1
AND 2)
COMBINED JOURNALS
Journals and on the previous 2 slides can also be combined as follows (textbook approach):
Combined
Group SHORTCUT
Statements METHOD
Example 5.3-
5.4
IMPACT OF UNREALISED PROFIT ON ANALYSIS
• S Ltd based its depreciation for the year on N$145 000 (the cost for S Ltd).
However, from a group perspective it should have been based on the carrying
amount for the group of N$120 000. From a group perspective the sale between
P Ltd and S Ltd did not take place; from a group perspective the asset had a
carrying amount of
N$120 000 on 1 Jan 2023.
LOGIC FOR REVERSAL
• Assume that P Ltd sold the PPE to S Ltd on 1 Jan 2021 instead of 1 Jan
2023.
• The PFJEs will then change as follows in respect of ELIMINATION OF
PROFIT:
(CONT)
If sold on 1 Jan 2021 & reporting Sold 2021 Reporting 31 December
31 Dec 2021 2023
X 2 yrs
(2021 &
2022)
(summary of what happened in 2021&2022)
Combined
SELLING NON-DEPRECIABLE PPE
REVALUATION
S
Group
Statements
Example 6.1-6.5
AT ACQUISITION DATE Group
Statements
Chapter 3.9
1. At acquisition date the buildings of S Ltd (with a carrying amount in the records of S Ltd
of N$170 000) were regarded not to be fairly valued. For this reason the buildings were
revalued N$70 000 higher than what they appeared at in the separate financial records of
S Ltd. S Ltd did not record this revaluation in its separate financial records. The buildings
had a remaining useful life of 30 years as at the acquisition date (31 December 2014).
2. At acquisition date the land of S Ltd (with a carrying amount in the records of S Ltd of
N$230 000) was regarded not to be fairly valued . For this reason the land was revalued
N$100 000 higher than what it appeared at in the separate financial records of S Ltd.
S Ltd did not record this revaluation in its separate financial records.
3. At acquisition date the inventories (trading stock) of S Ltd (with a carrying amount in the
records of S Ltd of N$90 000) was regarded not to be fairly valued. For this reason the
inventories were revalued N$8 000 higher than what it appeared at in the separate
financial records of S Ltd. S Ltd did not record this revaluation in its separate financial
records.
• Assume a normal tax rate of 28%
Prepare the pro-forma journal entries of the P Ltd group of companies for the year
ended 31 December 2015 in respect of only the above 3 transactions.
Also prepare the main elimination journal entry
SOLUTION BUILDINGS
DEFERRED TAX
The fact that the buildings are actually worth N$70 000 more than their
carrying amount in the records of S Ltd, means that S Ltd can sell them
at a profit of N$70 000 in future. S Ltd (and therefore the group) will
have to pay tax on this profit in future and therefore we provide for this
tax liability by crediting the “deferred tax (SoFP)” account.
SUBSEQUENT TREATMENT BUILDINGS
• REVALUATION OF BUILDINGS
• In the case of PPE, additional depreciation needs to be recognised for consolidation
purposes (because the group value of PPE is higher than the value of PPE in the separate
financial records of S Ltd (on which S Ltd based its depreciation))
Tip: the tax
• We therefore need to put through additional PFJEs (this will be illustrated and explained in adjustment is
more detail in the next couple of slides). always in the
OPPOSITE
DIRECTION
as the
adjustment to
profit (e.g. in
this case we
debited profit
(depr.) and
credited the
If we adjust profit, we always have to adjust the income tax expense as well, otherwise tax expense)
the group income tax expense will not correspond to the group profit (i.e. will not be at
28%). A corresponding deferred tax asset or liability is created because of the temporary
difference that arises between NamRa and the Group.
LOGIC BEHIND
I.e. a difference of N$2 333 per annum. The group therefore has to
increase its depreciation by N$2 333 per annum by way of a PFJE
(remember the starting point is the TB of S Ltd)
WHAT IF THE BUILDINGS WERE
SUBSEQUENTLY SOLD? Group
Statements
Example 6.4
• Assume that example 2 also said that the buildings were sold for N$300 000 on 31
December 2023. The following ADDITIONAL PFJEs need to be done:
The PPE and Accumulated Depreciation amounts are the balances as per the previous
PFJEs (but now journalised in the opposite direction to reverse the revaluation (same
reason as for inventories)).
1. At acquisition date the land of S Ltd (with a carrying amount in the records of S Ltd of N$230 000)
was regarded not to be fairly valued . For this reason the land was revalued N$100 000 higher
than what it appeared at in the separate financial records of S Ltd. S Ltd did not record this
revaluation in its separate financial records.
• The following journal entry is done BEFORE the main elimination journal:
• PPE (Land) 100 000
Revaluation surp 100 000
DEFERRED TAX
The reason why we generally provide for this tax liability is the same as for the
revaluation of the buildings. However, because NamRa does not grant any tax
allowances on land, the profit that will be made upon the future sale of the land
is a CAPITAL GAIN, and hence capital gains tax (CGT) applies. In NAMIBIA CGT rate
is 0% in terms of the CGT tax principles, (0%) of capital gains will be taxed. THIS
WILL ALWAYS BE THE CASE FOR LAND hence no DT.
WHAT HAPPENS AFTER ACQUISITION DATE? LAND
In the case of PPE, additional depreciation needs to
be recognized.
This is NOT done for LAND because land is not
depreciated
No further journal entries are required.
INVENTORY REVALUATION Group Statements
Example 6.7-6.8
.1.At acquisition date the inventories (trading stock) of S Ltd (with a carrying amount in the records of S
Ltd of N$90 000) was regarded not to be fairly valued. For this reason the inventories were revalued
N$8 000 higher than what it appeared at in the separate financial records of S Ltd. S Ltd did not record
this revaluation in its separate financial records.
Assume a normal tax rate of 28%.
• The following journal entry is done BEFORE the main elimination
journal:
DEFERRED TAX
In the case of inventories, we record the revaluation in Retained Earnings (at The reason why we provide for
acquisition). This is done to be consistent with the standard on inventories (IAS this tax liability is the same as for
2) which says that adjustments to the value of inventories are recorded in the revaluation of the buildings.
profit or loss. Retained Earnings at acquisition is an accumulation of S Ltd’s
profits up until the acquisition date.
WHAT HAPPENS AFTR ACQUISITION DATE
• INVENTORIES
• In the case of inventories, the revaluation needs to be reversed in the
Since Acquisition period because inventories are sold quickly. When
the inventories are sold we need to reverse the previous revaluation,
otherwise the group inventory balance will be overstated.
• We therefore need to put through additional PFJEs (this will be
illustrated and explained in more detail in the next couple of slides).
PFJE: REVERSAL OF INVENTORY
REVALUATION UPON SALE OF
INVENTORIES SINCE ACQUISITION
• The following journal entry is done AFTER the main elimination journal (i.e. in the since
acquisition period):
The RETAINED EARNINGS account is debited because the inventories were sold
BEFORE THE CURRENT YEAR. If they were sold in the current year, we would
have debited COST OF SALES
The RETAINED EARNINGS account is credited because the inventories were sold
BEFORE THE CURRENT YEAR. If they were sold in the current year, we would
have credited INCOME TAX EXPENSE
WHAT IS THE LOGIC BEHIND THE PREVIOUS
PFJE
Inventory balance for the Group (in
Inventory balance of S Ltd respect of S Ltd only)
At acquisition date
At acquisition date = 90 000 = 90 000 + 8 000 = 98 000
Balance of the same inventories now = Balance of the same inventories now
0 (all sold) = 98 000 – 90 000 = 8 000
(90 000 sold by S Ltd)
REQUIRED
Provide the pro-forma journals to eliminate the fair value adjustment as at 31
December 2023