ACCT7104

Corporate Accounting
Seminar Four: Consolidation Intra-group Transactions
S01 2017 Week Date Lecture Reading Set Work Assessment
1 27/02 Introduction to Consolidation Arthur et al Chapter 1 and 2; AASB 10 Consolidated
Q1.1; Q1.2; Q1.3; Q1.9;
Financial Statements; AASB 12 Disclosure of Interests
Q1.11.
in Other Entities
2 06/03 Consolidation: Basic Principles Arthur et al Chapter 1 and 2; AASB 3 Business Q2.3; Q2.4; Q2.5; Q2.6; Case Study and rubric
Combinations; AASB 13 Fair Value Measurement E2.1; E2.2; E2.8; E2.10. available this week
3 13/03 Consolidation: Fair Value Arthur et al Chapter 3; AASB 112 Income Taxes; AASB Q3.1; Q3.3; Q3.6; Q3.8;
Adjustments and Tax Effects 6 Exploration for and Evaluation of Mineral Resources. E3.3; E3.7.
4 20/03 Consolidation: Intra-Group Arthur et al Chapter 4; AASB 102 Inventories; AASB Q4.2; Q4.3; Q4.11; E4.1;
Transactions 116 Property, Plant & Equipment E4.5; E4.7.
5 27/03 Consolidation: Partly Owned Arthur et al Chapter 5; AASB 101 Presentation of Q5.1; Q5.3; Q5.8; E5.1; E5.3;
Subsidiaries (DNCI) Financial Statements E5.9.
6 03/04 or Mid-Semester Exam (30%) In-Class exam. Students must attend their sinet (Census #1 date)
07/04 registered seminar session. Mid semester exam
Good Friday 14/04. 7 10/04 Consolidation: Partly Owned Arthur et al Chapter 6; AASB 127 Separate Financial
Q6.1; Q6.5; Q6.6; Q6.8;
No Friday seminar this Subsidiaries (INCI) Statements; AASB 1024 Consolidated Accounts.
E6.1; E6.3; E6.8,
week.
Easter Monday 17/04 Semester break: no classes or
17/04 consultation this week
Anzac Day Tuesday 25/04 8 24/04 Accounting for Joint Arthur et al Chapter 8; AASB 11 Joint Arrangements Q8.2; Q8.3; Q8.6; Q8.7;
(Census #2 date)
Arrangements/Joint Ventures E8.1; E8.5; E8.8.
May Day 9 01/05 The Equity Method Arthur et al Chapter 9; AASB 128 Investments in Q9.1; Q9.2; Q9.4; Q9.9;
Monday 01/05 Associates and Joint Ventures E9.2; E9.3; E9.8.
No Monday seminar this
week.
10 08/05 Foreign Currency Translation Arthur et al Chapter 10; AASB 121 The Effects of Case Study due Thursday
Q10.1; Q10.3; E10.2; E10.6
Changes in Foreign Exchange Rates 11 May.
11 15/05 Segment Reporting Arthur et al Chapter 11; AASB 8 Operating Segments. QQ11.1; Q11.8; Q11.11;
E11.1; E11.6.
12 22/05 External Administration and Dagwell et al Chapter 20 available at Q20.2; Q20.3; Q20.4;
Liquidation http://www.library.uq.edu.au/lr/acct7104 Problem 20.9;
Comprehensive Exercise
20.13.
13 29/05 Review and sample paper Sample final paper available on Blackboard Centrally organised final
walkthrough exam during exam period
SWOTVAC
 Seminar 4 Objectives 3

Understand why intra-group transactions must be eliminated on

consolidation
Be able to prepare consolidation adjustments for a range of intra-group
transactions, including those involving inventories and long term assets
Understand the impact of intra-group transactions in both the current and
future reporting periods
Be able to prepare consolidation adjustments where the intra-group
transaction has long term effects
Be able to record the tax effects of consolidation adjustments for intra-
group transactions
Seminar 4 Reading and Set Work 4

Reading: Arthur et al Chapter 4; AASB 102 Inventories; AASB 116 Property,

Plant and Equipment

Questions and problems from Arthur et al: Q4.2; Q4.3; Q4.11; E4.1; E4.5;
E4.7.
 Why do we need to eliminate intra-
group transactions? 5

Entities within a group frequently transact with each other, for

example, a parent entity providing finance to a subsidiary

As separate legal entities, these transactions are recorded by the

individual entities in the group

From the group viewpoint, these transactions should not be reported as

they are not arms length transactions but merely internal movements
of resources

On consolidation, intra-group transactions are analysed and their

impact eliminated from the group accounts
Tax effects of intra-group transactions 6
AASB 112 Income Taxes applies to the group accounts

The tax effects of eliminations of intra-group transactions must

therefore be recorded

We assume the tax consolidation regime has not been adopted

Tax effects are not recorded for consolidation eliminations

involving:
Goodwill (permanent difference)
Intra-group dividends (assumptions re tax)
Any elimination that does not change group equity
Consolidation accounting principles 7

A group entity cannot invest in itself so intra-group investments

are eliminated

A group entity cannot have payables to itself or receivables from

itself so intra-group payables and receivables are eliminated

A group entity cannot derive revenue by trading with itself, so

intra-group sales and purchases are eliminated
Consolidation Accounting Principles (cont) 8

A group entity cannot derive revenue by trading with itself, so

intra-group dividend revenue and dividends paid or declared are
eliminated

A group entity cannot earn profits by trading with itself, so

profits earned solely through intra-group trading (unrealised
profits) are eliminated
Revenue from Intra-Group Services 9
Group member entities may provide intra-group services

These services may be in marketing, administration or

technological areas (e.g. Head Office costs)

Charges for intra-group services result in a transfer of equity

between member entities.

Since a group cannot derive revenue trading with itself, the intra-
group revenue and expense must be eliminated
Example 1: Intra-Group Services 10

During the year ended 30 June 20X6, Augustus Ltd charged its
wholly owned subsidiary Octavius Ltd with management fees of
$500,000, for which payment was received before 30 June 20X6.

Augustus Ltd recorded the fee charged as revenue

Octavius Ltd recorded the fee as expense

The charge has resulted in a transfer of equity from Octavius Ltd

to Augustus Ltd of $500,000 but does not change group equity
Example 1 (cont)
consolidation adjustment 11

Consolidation adjustment to eliminate intra-group services

charges:

Consolidation Adjustments
30 June 20X6
Dr Management Fees Revenue 500,000
Cr Management Fees Expense 500,000

Note- no consolidation adjustment is needed for tax because the above

adjustment does not affect group equity (profit) nor did it affect assets or
liabilities
Intra-Group Services:
12
Management Considerations
A subsidiary may have non-controlling shareholders (i.e. the parent
owns < 100% of the subsidiary)

Where there are non-controlling shareholders, directors have an ethical

responsibility to ensure that management fees are soundly based

Management fees charged by the parent will result in a transfer of

equity from the non-controlling interests to the parent

Management fees may also create profits for distribution as dividends

 Example 2: Intra-Group Services 13

For the year ended 30 June 20X6, Cicero Ltd and its wholly owned
subsidiary Brutus Ltd incurred losses of $200,000 and $300,000
respectively

If Cicero Ltd now charges Brutus Ltd with a management fee of

$400,000, Cicero Ltd will now report a profit and Brutus Ltd a larger loss

The intra-group management fee revenue and expense will be

eliminated on consolidation and so has no effect on the group which has
same total loss

But as a single entity Brutus Ltd now reports a larger loss equity has
been transferred from Brutus Ltd to Cicero Ltd
Example 2:
14
Intra-Group Services

CICERO BRUTUS GROUP

Losses before management
fee (200,000) (300,000)
(500,000)
Management Fee Revenue 400,000 --
Management Fee Expense (400,000) --
Revised Profit $200,000 200,000
Revised Loss $(700,000) (700,000)
Group Profit/(Loss) (500,000)
Example 3:
Intra-Group Services 15

During the year ended 30 June 20X6, Augustus Ltd charged its
wholly owned subsidiary Octavius Ltd with management fees
of $500,000, for which payment was received before 30 June
20X6 (from Example 1)

Now assume that the management fees were not paid but
accrued at 30 June 20X6

Show the consolidation adjustments to eliminate the

management fees at 30 June 20X6
Example 3 (cont):
Intra-Group Services 16

Consolidation Adjustments
30 June 20X6
Dr Management Fees Revenue 500,000
Cr Management Fees Expense 500,000

Dr Management Fees Payable 500,000

Cr Management Fees Receivable 500,000
 Intra-Group Services:
17
Income Tax Effects

Normally, there is no need to adjust for consolidated income

tax effects on intra-group service charges

The revenue earned by one entity is equal to the expense

recognised in the other entity

Thus, no change in equity arises, so no tax effect accounting

required
 Example 4: Intra-group Loans
18

Lets look now at another example of an intra-group transaction that

requires elimination on consolidation:

During the year ended 30 June 20X6, Vatutin Ltd loaned $500,000 to
its subsidiary Kursk Ltd

The interest expense incurred on the loan in the year ended 30 June
20X6 was $30,000

The interest paid and received in the year was $20,000, with $10,000
payable on 3 July 20X6
 Example 4 (cont): Intra-Group Loans 19

Consolidation adjustment to eliminate intra-group loan:

Consolidation Adjustments
30 June 20X6
Dr Loan Payable 500,000
Cr Loan Receivable 500,000
Example 4 (cont):Intra-Group Loans 20

Consolidation adjustments to eliminate interest revenue and

expense and the related payable and receivable:
Consolidation Adjustments
30 June 20X6

Dr Interest Revenue 30,000

Cr Interest Expense 30,000

Dr Interest Payable 10,000

Cr Interest Receivable 10,000
Intra-Group Sales of Merchandise 21

A group cannot derive revenue or profit through intra-group

transactions

All intra-group sales revenue and cost of goods sold in a period

must be eliminated

If any profit derived through an intra-group transaction is

unrealised at balance date, that profit must be eliminated
 Intra-Group Sales of Merchandise:
Perpetual or Periodic Model? 22

Before adjusting entries can be made for intra-group sales of

merchandise inventory, it must be determined whether the Group
using a Perpetual or a Periodic inventory model
This material already covered in previous courses (like ACCT7101)
so very briefly revised here

You must determine which method applies & only use that method
Any question will explicitly or implicitly advise which is to be
used
For example, look at the format of the Income Statement
 Intra-Group Sales of Merchandise:
Perpetual or Periodic Model? 23

The perpetual method calculates COGS and inventory on a continuous

basis and all entries are directly to Inventory or a generic COGS (COGS =
Costs Of Good Sold)

Remember: Perpetual is perpetually calculating INVENTORY and COGS

Under the perpetual method, COGS appears as a one line item in the
Income Statement
 Intra-Group Sales of Merchandise:
Perpetual or Periodic Model? 24

Under the periodic method, inventory is valued at each period end after
a physical stock-take

COGS = opening inventory + purchases closing inventory

Adjustments must be made to the individual specific COGS categories,

not to a generic COGS

Under the periodic method, the calculation of COGS is shown on the

Income Statement
 Example 5: Intra-group sales of
merchandise 25

During year ended 30 June 20X6, Danzig Ltd sold merchandise to its
parent entity Gdansk Ltd for $500,000

The cost of this merchandise (purchased in the year) was $400,000

During the year ended 30 June 20X6, Gdansk Ltd sold the this
merchandise for $700,000 to an entity outside the group

Show the consolidation adjustments to eliminate the effects of the

intra-group sale
Example 5: Intra-group sales of
merchandise 26

Consolidation Adjustments (for perpetual system)

30 June 20X6
(a)
Dr Sales Revenue 500,000
Cr Cost of Goods Sold 500,000
Example 5: Intra-group sales of
merchandise 27

Consolidation Adjustments (for periodic system)

30 June 20X6
(a)
Dr Sales Revenue 500,000
Cr Purchases 500,000
 Example 5: Intra-group sales of
merchandise 28

From the group viewpoint merchandise had been acquired at a cost of

$400,000 and sold externally for $700,000 (thus there is no unrealised
profit remaining in the Group)

Note that because all the transactions occurred in the same period,
there was no opening or closing inventory to account for, and that, as
the final sale was outside the group, there was no unrealised intra-
group profit to deal with and therefore no tax effects

Both solutions are provided above, that is, either Cr COGS in Perpetual
or Cr Purchases in Periodic these are alternative solutions, we need
to determine which of the perpetual or periodic method is in use in
the group before completing the adjustment
Example 5 (cont): consolidation 29
adjustments perpetual method

Consolidation worksheet extract 30 June 20X6 ($000):

Danzig Gdansk Adjustments Group

Ltd Ltd Dr Cr
Sales revenue $500 $700 500(a) $700
Less cost of goods sold 400 500 500(a) 400
Example 5 (cont): consolidation
adjustments periodic method 30

Consolidation worksheet extract 30 June 20X6 ($000):

Danzig Gdansk Adjustments Group
Ltd Ltd Dr Cr
Sales revenue $500 $700 500(a) $700
Less cost of goods
sold:
Opening inventory
Add purchases 400 500 500(a) 400
Closing inventory
Intra-group sale of merchandise:
elimination of unrealised profits 31

Any profits or losses recorded on intragroup transactions are viewed

as unrealised profits from the consolidated entitys viewpoint and
must be eliminated
For transactions involving the transfer of services within the group,
the consolidation elimination will dispose of any intra-group profits
or losses
Where the exchange involves goods and some or all of the goods are
held in inventory, then additional adjustments are needed to
eliminate any unrealised profits or losses in inventory
Inventory and cost of goods sold are normally measured at cost in
the group context this means cost to the group
Intra-group sale of merchandise
elimination of unrealised profits 32

AASB 10 requires elimination of any unrealised profit as a

consolidation adjustment

A group financial report has only information content and

adjustments do not affect distributable profits

Although profits may be unrealised from a group viewpoint,

they are available for distribution as dividends. That is, the
solvency test for dividends is applied at the single entity level
 Example 6: elimination of unrealised
profits 33

During year ended 30 June 20X6, Danzig Ltd sold merchandise to its
parent entity Gdansk Ltd for $500,000
The cost of this merchandise (purchased in the year) was $400,000
(same data as Example 5)
Prior to sale, the inventory was carried in the accounts of Danzig Ltd at
cost $400,000
The merchandise was still held in the inventory of Gdansk Ltd at 30
June 20X6
The income tax rate is 30%
 Example 6 (cont): Effects of the
transaction - perpetual method 34

Danzig would report sales revenue of $500,000, cost of goods sold of

$400,000 and gross profit of $100,000

Gdansk reports the merchandise received from Danzig Ltd in inventory at

$500,000

The inventory is carried at $100,000 in excess of group cost (that is, cost
when the merchandise was first acquired by the Group)

The group cost is the price paid by Danzig Ltd to an outside vendor for
the merchandise or its recoverable production cost
Example 6 (cont): Effects of the
transaction - perpetual method 35

Exactly as in Example 5, the sales revenue has to be

eliminated as it is internal to the Group, therefore at 30
June 20X6:
Consolidation Adjustments
(a)
Dr Sales Revenue 500,000
Cr Purchases 500,000

Danzigs recorded profit is $100,000 (sales 500 COGS 400). The tax
incurred on this is 30% = $30,000, and reported in Danzig. But the profit
is unrealised (not sold externally) and must therefore be eliminated from
the consolidated statements, along with related tax effects.
Example 6 Elimination of unrealised
profit perpetual method 36

Consolidation adjustment to eliminate the profit

unrealised at 30 June 20X6 of $100,000 (tax $30,000):
Consolidation Adjustments
(b)
Dr Cost of Goods Sold 100,000
Cr Inventory 100,000

Dr Deferred Tax Asset 30,000

Cr Income Tax Expense 30,000
Example 6 Elimination of unrealised
profit perpetual method 37

Gdansk is holding inventory at the value it was purchased from Danzig,

which includes an element of intra-group unrealised profit

Unrealised profits must be excluded from the consolidated accounts until

the inventory is sold external to the group

The value of net assets/equity is changing in the consolidated accounts, so

there will also be associated tax effects
 Example 6 (cont):
consolidation worksheet excerpt($000) 38

Danzig Gdansk Adjustments Group

Ltd Ltd Dr Cr
Sales revenue 500 500(a) --
Less cost of goods sold 400 100(b) 500(a) --

Income tax expense 30 30(b) --

Inventory 500 100(b) 400

Deferred tax asset 30(b) 30
Example 6 (cont): effect of the
transaction on the group 39

From the group viewpoint, there is no sales transaction

The inventory is still held by the group

The inventory will be reported in the group statement of financial

position at group cost - $400,000

The income tax has been paid by Danzig Ltd on the unrealised
profit and is a prepayment from the group viewpoint
Example 6 (cont): effects of the
transaction - periodic method 40

Danzig Ltd would report the sales revenue of $500,000

Assuming that the merchandise is purchased in the current

year, the purchases account in cost of goods sold would be
$400,000

The gross profit on the transaction is $100,000

The tax incurred on this profit is 30% of $100,000 = $30,000

Example 6 (cont): effect of the
transaction - periodic method 41

The merchandise received from Danzig Ltd is carried in Gdansk

Ltds inventory at $500,000

The unrealised profit in closing inventory in the cost of goods sold

is $100,000

That is, inventory is carried at $100,000 in excess of group cost

The group cost is the price paid by Danzig Ltd to an outside

vendor for the merchandise or its recoverable production cost
Example 6 (cont): Effects of the
transaction - perpetual method 42

Exactly as in Example 5, the sales revenue has to be

eliminated as it is internal to the Group, therefore at 30
June 20X6:
Consolidation Adjustments
(a)
Dr Sales Revenue 500,000
Cr Purchases 500,000
Example 6 (cont): elimination of
unrealised profit - periodic method 43

Consolidation adjustment to eliminate the unrealised profit

at 30 June 20X6 of $100,000 (tax $30,000):

Consolidation Adjustments
(b)
Dr Closing Inventory (I/S) 100,000
Cr Inventory (B/S) 100,000
Dr Deferred Tax Asset 30,000
Cr Income Tax Expense 30,000
Example 6 (cont): consolidation
worksheet excerpt ($000) 44
Danzig Gdansk Adjustments Group
Ltd Ltd Dr Cr
Sales revenue 500 500(a)
Less cost of goods sold
Opening inventory
Add purchases 400 500 500(a) 400
Less closing inventory 500 100(b) 400

Income tax expense 30 30(b)

Inventory 500 100(b) 400

Deferred tax asset 30(b) 30
 Example 6 (cont): effect of the transaction
on the group periodic method 45
From the group viewpoint, there is no sales transaction

The merchandise purchases is shown as $400,000 and the closing inventory

$400,000

The inventory is still held by the group.

The inventory will be reported in the group statement of financial position at

group cost - $400,000

The income tax has been paid by Danzig Ltd on unrealised profit and thus is a
prepayment from the group viewpoint.
 Realisation of unrealised profits
46

The consolidation adjustment eliminating unrealised profits reduces

the group profit for the year and the group retained earnings at the
end of the year

In the following year, the retained earnings at the beginning of the

year is reduced by the after tax profits eliminated

The eliminated profits are recognised as earnings in the year in

which they are realised i.e. sold outside the group
 Example 7: realisation of unrealised
profits 47

During year ended 30 June 20X6, Danzig Ltd sold merchandise to its
parent entity Gdansk Ltd for $500,000

Prior to sale, the inventory was carried in the accounts of Danzig Ltd
at cost $400,000

The merchandise was still 100% held in the inventory of Gdansk Ltd at
30 June 20X6 (so far, exactly as Example 6)
 Example 7: realisation of unrealised
profits 48

Half of the inventory purchased from Danzig Ltd by Gdansk Ltd in

year ending 30 June 20X6 was still held as inventory by Gdansk Ltd at
30 June 20X7

The income tax rate is 30%

Show consolidation adjusting entries for y/e 30 June 20X7

Example 7 (cont): realisation of unrealised
profit 30 June 20X7 - perpetual method 49

Consolidation adjustment to recognise the realisation of the

unrealised profit at 30 June 20X7 of $70,000 after tax:
Consolidation Adjustments

Dr Retained Earnings 1 July 20X6 70,000

Dr Income Tax Expense 30,000
Cr Cost of Goods Sold 100,000
Example 7 (cont): realisation of unrealised
profit 30 June 20X7 - periodic method 50

Consolidation adjustment to realise the profit after tax

of $70,000 unrealised at 30 June 20X7:
Consolidation Adjustments

Dr Retained Earnings 1 July 20X6 70,000

Dr Income Tax Expense 30,000
Cr Opening Inventory (I/S) 100,000
Example 7 (cont): elimination of unrealised
profit 30 June 20X7 - perpetual method 51
Consolidation adjustment to eliminate the unrealised profit at 30 June
20X7 of $50,000 (tax $15,000):

Consolidation Adjustments
Dr COGS 50,000
Cr Inventory 50,000
Dr Deferred Tax Asset 15,000
Cr Income Tax Expense 15,000
Example 7 (cont): elimination of unrealised
profit 30 June 20X7 - periodic method 52

Consolidation adjustment to eliminate the unrealised profit at

30 June 20X7 of $50,000 (tax $15,000):

Consolidation Adjustments

Dr Closing Inventory (I/S) 50,000

Cr Inventory (B/S) 50,000
Dr Deferred Tax Asset 15,000
Cr Income Tax Expense 15,000
Intra-group sales: non-depreciable
non-current assets 53

Any profit earned on the intra-group sale of non-depreciable

assets that is still held in the group is eliminated

Deferred tax is recognised on the eliminated profit

 Intra-group sales: non-depreciable
non-current assets 54
Example:
Subsidiary sells land to parent at profit of $100,000 on 1 February 2017.
What consolidation adjustments are required for the 2017 financial year?

Consolidation Adjustments

Dr Gain on sale 100,000

Cr Land 100,000
Dr Deferred Tax Asset (30%) 30,000
Cr Income Tax Expense 30,000
Intra-group sales: depreciable assets 55

If a depreciable asset such as plant is sold within the group at a profit,

that profit is unrealised at the date of sale
The plant is depreciated by the buyer over its remaining useful life
From the viewpoint of the group, the plant has not been sold
The group continues to depreciate the assets original carrying amount
over its remaining useful life
Unrealised profits on the intra-group sale are eliminated
Example 8: intra-group sale of
depreciable asset 56

On 1 July 20X5, Gaius Ltd sold an item of plant to its wholly owned
subsidiary Caligula Ltd for $500,000
At the date of sale, the carrying amount was $200,000, being cost
$1,000,000 less accumulated depreciation $800,000
The estimated remaining useful life was 5 years with a zero
residual value
The income tax rate is 30%

Required:
Consolidation adjustments @ y/e 30 June 20X6 and 20X7
 Example 8: intra-group sale of
depreciable asset y/e 20X6 57

GAIUS CALIGULA
Before sale: Cost $1,000,000 0
Accumulated Depreciation (800,000) 0
Carrying Amount 200,000 0

After sale: Cost 0 $500,000

Accumulated Depreciation 0 0
Carrying Amount 0 500,000

Gain on sale (300,000)

Income Tax expense 90,000
Example 8: intra-group sale of
depreciable asset y/e 20X6 58

Consolidation Adjustments
30/6/X6
Adjustment 1: reversal of gain on sale
Dr Gain on sale 300,000
Cr Plant 300,000
Dr DTA 90,000
Cr ITE 90,000

Adjustment 2: re-instate acc. depreciation

Dr Plant 800,000
Cr Acc. Depreciation 800,000
Example 8: intra-group sale of
depreciable asset y/e 20X6 59

Caligula Ltd will charge depreciation for the current

year based on the $500,000 it paid for the plant

Group wants depreciation charges based on $200,000

as original cost to group

Thus, too much depreciation is being charged in group

by ($500,000 - $200,000) / 5 years useful life

That is, $60,000 excess depreciation per year

Example 8: intra-group sale of
depreciable asset y/e/20X6 60

Consolidation Adjustments
30/6/X6

Adjustment 3: excess depreciation in Group

Dr Accumulated depreciation 60,000

Cr Depreciation Expense 60,000

Dr ITE 18,000
Cr DTA 18,000
Example 8 (cont): consolidation
worksheet excerpt 30/6/X6 ($000) 61

Gaius Caligula Adjustments Group

Ltd Ltd Dr Cr
Depreciation expense 100 60(3) 40
Gain on sale of plant 300 300(1) -
Income tax expense 90 - 30 18(3) 90(1) - 12

Plant 500 800(2) 300(1) 1,000

Accumulated depn 100 60(3) 800(2) 840
Deferred tax asset 90(1) 18(3) 72
Example 9: intra-group sale of depreciable
asset- year ended 30 June 20X7 (subsequent
62
year)

The question then moves the date of reporting forward

one year to 30 June 20X7
What will need adjusting?
1. Any Income Statement charges from y/e 30 June 20X6
will now need to be changed to retained earnings as
they now apply to a prior year
2. Any new adjustments for y/e 30 June 20X7 will need to
be added (for example, another years depreciation)
Example 9: intra-group sale of depreciable
asset- year ended 30 June 20X7
(subsequent year) 63

Consolidation Adjustments
30/6/X7
Adjustment 1: reversal of gain on sale:
Dr Retained Earnings 300,000
Cr Plant 300,000

Dr DTA 90,000
Cr Retained earnings 90,000
Adjustment 2: re-instate accum. depreciation:

Dr Plant 800,000
Cr Acc. Depreciation 800,000
Example 9: intra-group sale of depreciable
asset- year ended 30 June 20X7
(subsequent year) 64

Consolidation Adjustments
30/6/X7
Adjustment 3: excess depreciation in Group:

Dr Accumulated depreciation 120,000

Cr Depreciation Expense 60,000
Cr Retained Earnings 60,000

Dr ITE 18,000
Dr Retained Earnings 18,000
Cr DTA 36,000
 Example 9 (cont):
consolidation worksheet excerpt
65
30/6/X7 ($000)
Gaius Caligula Adjustments Group
Ltd Ltd Dr Cr
Depreciation expense 100 60(3) 40
Income tax expense - 30 18(3) - 12

Retained earnings 210 - 70 300(2) 90(2) - 28

18(3) 60(3)
Plant 500 800(1) 300(2) 1,000
Accumulated depreciation 200 120(3) 800(1) 880

Deferred tax asset 90(2) 36(3) 54

Time for a break

66

Forest, Cunningham's Gap

(1856)
Conrad Martens, (180178)
Watercolour, 30.5 x 42cm
Collection: Queensland Art
Gallery
 Comprehensive Example E4.7 67

On 30 June 20X3, Bridge Ltd purchased all of the issued shares of Chanel Ltd
for $850,000 cash plus transaction costs of $10,000.

At acquisition, the statement of financial position of Chanel Ltd was as

follows:
Comprehensive Example E4.7 (cont)
Chanel Ltd Statement of Financial Position as at 30 June 20X3
Assets: $000 68
Current assets:
Cash and cash equivalents 90
Trade and other receivables 30
Inventories 130
Total current assets 250
Non-current assets:
Land 250
Building 780
Accumulated depreciation (390)
Plant and equipment 400
Accumulated depreciation (80)
Total non-current assets 960
Total assets 1,210
Comprehensive Example E4.7 (cont)
Chanel Ltd Statement of Financial Position as at 30 June 20X3 (cont)
Liabilities: $000 69
Current liabilities:
Trade and other payables 40
Total current liabilities 40
Non-current liabilities:
Financial liabilities 500
Total non-current liabilities 500
Total liabilities 540
Net assets 670
Equity:
Issued capital 450
Retained earnings 220
Total equity 670
 Comprehensive Example E4.7 (cont) 70

Additional information:

At acquisition date, all identifiable assets and assumed liabilities of Chanel

Ltd were recorded at fair value in Chanel Ltds statement of financial
position except land which had a fair value of $340,000. The land has not
been revalued in Chanel Ltds accounts.

Impairment losses for goodwill arising on the acquisition of Chanel Ltd have
not been recognised in the prior years consolidated financial statements.
The directors of Bridge Ltd believe the goodwill relating to the acquisition
of Chanel Ltd has been impaired by $40,000 during the year ended 30 June
20X7.
 Comprehensive Example E4.7 (cont) 71

Additional information:

During the year ended 30 June 20X7, Bridge Ltd provided management
services to Chanel Ltd for $20,000. In Chanel Ltds financial statements,
management fee expense has been included as part of Other expenses.

Chanel Ltd provided Bridge Ltd with a loan of $200,000 on 1 January 20X4.
During the year ended 30 June 20 X7 Bridge Ltd paid interest of $16,000 of
 Comprehensive Example E4.7 (cont) 72
Additional information:

During the year ended 30 June 20X7, Chanel Ltd sold inventories to Bridge Ltd
for $630,000. The inventories had originally cost Chanel Ltd $525,000. On 30
June 20X7, 30% of the inventories remained in Bridge Ltds closing inventories.

On 30 June 20X7 Bridge Ltd still owed Chanel Ltd $30,000 for the purchase of
inventories.

Bridge Ltds inventories at 30 June 20X6 included inventories purchased from

Chanel Ltd for $144,000. these inventories had originally cost Chanel Ltd
$120,000.
 Comprehensive Example E4.7 (cont) 73

Additional information:

On 1 July 20X4 Bridge Ltd sold plant and equipment with a carrying value of
$280,000 to Chanel Ltd for $350,000. Bridge Ltd had originally purchased the
plant and equipment for $400,000 on 1 July 20X1. The original estimated
useful life of the plant and equipment was 10 years.

The company income tax rate is 30%

The statements of comprehensive income, changes in equity and financial

position of Bridge Ltd and Chanel Ltd for the year ended 30 June 20X7 follow:
Statements of comprehensive income for the year ended 30 June 20X7
Bridge Ltd ($000) Chanel Ltd ($000)
Sales 5,120 2,640
Opening inventories at 1/7/x6 (680) (630)
Purchases (4,100) (2,020)
Closing inventories at 30/6/x7 710 410
Gross profit 1,050 430
Depreciation expense (150) (86)
Finance costs (91) (35)
Other expenses (304) (49)
Dividend revenue 120 --
Interest revenue -- 16
Management fees revenue 20 --
Profit before tax 645 276
Tax expense (201) (87)
Profit for the year 444 189
Other comprehensive income -- --
Total comprehensive income for the year 444 189
 Comprehensive Example E4.7 (cont)
75
Bridge Ltd Statement of changes in equity for the year ended 30 June 20X7
Share Revaluation Retained Total equity
capital surplus earnings ($000)
($000) ($000) ($000)
Balance at 1/7/x6 800 210 770 1,780
Profit for the year 444
Other comprehensive income --
Total comprehensive income 444 444
Transactions with Bridge shareholders
Dividends paid (70) (70)
Dividends proposed (140) (140)
Balance at 30/6/x7 800 210 1,004 2,014
Comprehensive Example E4.7 (cont)
76
Chanel Ltd Statement of changes in equity for the year ended 30 June 20X7
Share Retained Total equity
capital earnings ($000)
($000) ($000)
Balance at 1/7/x6 450 436 886
Profit for the year 189
Other comprehensive income --
Total comprehensive income 189 189
Transactions with Chanel shareholders
Dividends paid (45) (45)
Dividends proposed (75) (75)
Balance at 30/6/x7 450 505 955
Statements of financial position as at 30 June 20X7
Assets: Bridge Ltd ($000) Chanel Ltd ($000)
Current assets:
Cash 78 117
Accounts receivable 72 35
Dividend receivable 75 --
Inventories 710 440
Total current assets 935 592
Non-current assets: (304) (49)
Land 720 250
Building 1,500 780
Accumulated depreciation (320) (494)
Plant and equipment 850 450
Accumulated depreciation (235) (210)
Investment in Chanel Ltd 850 --
Loan to Bridge Ltd -- 200
Total non-current assets 3,365 976
Total assets 4,300 1,568
Statements of financial position as at 30 June 20X7 (cont)
Bridge Ltd ($000) Chanel Ltd ($000)
Liabilities:
Current liabilities:
Current taxes payable 111 87
Accounts payable 292 50
Dividend payable 140 75
Total current liabilities 543 212
Non-current liabilities:
Loan from Chanel Ltd 200 0
Mortgage loan 1,453 401
Deferred tax liabilities 90 0
Total non-current liabilities 1,743 401
Net assets 2,014 955
Equity:
Share capital 800 450
Revaluation surplus 210 0
Retained earnings 1,004 505
Total equity 2,014 955
 Comprehensive Example E4.7 (cont) 79

Required:
Prepare the consolidated statements of comprehensive oncome, changes in
equity and financial position of the Bridge Ltd group for the year ended 30 June
20X7 as required by AASB 10. Show all relevant consolidation journal entries
(consolidation adjustments).

I want to complete the consolidation adjusting entries for this exercise with you
and leave it to you to complete the worksheet and consolidated financial
statements. Please note that we can determine that the Bridge-Chanel group
use the periodic inventory method by examining the format of the income
statement. If the perpetual method is in use, COGS would be one line on the
income statement.
 Comprehensive Example E4.7 (cont) 80

Preliminary checklist what information is needed before we start:

1. What % is the parent acquiring of the subsidiary?
2. What is the time line? Date of Acquisition, Date of Reporting, Prior & Current
Year considerations.
3. Tax Rate
4. What method of asset valuation is relevant? Cost or Revaluation?
5. What rates of depreciation are relevant? Do any factors change in the group
accounts?
6. What method of inventory valuation is relevant? Perpetual or Periodic?
 Comprehensive Example E4.7 (cont) 81

What consolidation adjustments are 8. Unrealised profits Opening

needed? Inventory
1. Fair value adjustment 9. Unrealised profits Closing
2. Elimination adjustment Inventory

3. Impairment of goodwill 10. Intra-group sale of depreciable

non-current asset
4. Intra-group dividends
5. Intra-group management fees
6. Intra-group loan
7. Intra-group sales of inventory
 Comprehensive Example E4.7 (cont) 82

The first thing to do is an investment, or acquisition, analysis of Bridge Ltds

investment in Chanel Ltd:
Acquisition Analysis 30 June 20X3 $ $
Cost of acquisition of investment in Chanel Ltd
Fair value of purchase consideration for 100% of Chanel Ltds 850,000
equity
Less fair value of identifiable net assets of Chanel Ltd
Recorded value of equity (equals carrying amount of
identifiable net assets)
Issued capital 450,000
Retained earnings 220,000 670,000
Add/subtract fair value adjustments to identifiable net assets
after tax: 63,000
Land (90,000*70%)
Fair value of identifiable net assets of Chanel Ltd acquired 733,000

Goodwill: cost of acquisition > fair value of identifiable net 117,000

assets
 Comprehensive Example E4.7 (cont) 84

Now we can go ahead and prepare the consolidation adjusting entries using
the information weve gathered. Well label each entry with a letter to keep
track:
Comprehensive Example E4.7 (cont)
Consolidation Adjustments 30 June 20X7 ($000)
(a)
Dr Land 90
Cr Fair value adjustment 63
Cr Deferred tax liability 27
(Fair value adjustment and tax effects)
(b)
Dr Share capital 450
Dr Fair value adjustment 63
Dr Retained earnings 1/7/x6 220
Dr Goodwill 117
Cr Investment in Chanel Ltd 850
(Elimination of investment against equity acquired note that the
transaction costs are an expense of Bridge Ltd and are not
included in acquisition cost)
 Comprehensive Example E4.7 (cont)
86
Consolidation Adjustments 30 June 20X7 ($000)

(c)
Dr Goodwill impairment loss 40
Cr Accumulated impairment - 40
goodwill
(To recognise current period impairment loss on goodwill)
(d)
Dr Management fees revenue 20
Cr Other expenses 20
(Elimination of intragroup management fee revenue and expense)
Comprehensive Example E4.7 (cont)
87
Consolidation Adjustments 30 June 20X7 ($000)

(e)
Dr Loan from Chanel Ltd 200
Cr Loan to Bridge Ltd 200
Dr Interest Revenue 16
Cr Finance costs 16
(Elimination of intra-group loan and interest)
Comprehensive Example E4.7 (cont)
88
Consolidation Adjustments 30 June 20X7 ($000)

(f)
Dr Sales revenue 630
Cr Purchases 630
(Elimination of intra-group sales)
 Comprehensive Example E4.7 (cont)
89
Consolidation Adjustments 30 June 20X7 ($000)

(g)
Dr Closing inventories 30/6/x7 31.5
Cr Inventories 31.5
(Elimination of URP in closing inventories [$630,000-$525,000] * 30%)

Dr DTA 9.45
Cr ITE 9.45
(Tax effect of URP closing inventories $31,500 * 30%)
 Comprehensive Example E4.7 (cont)
90
Consolidation Adjustments 30 June 20X7 ($000)

(h)
Dr Accounts payable 30
Cr Accounts receivable 30
(Elimination of intra-group payable and receivable)
(i)
Dr Retained earnings 1/7/x6 16.8
Dr ITE 7.2
Cr Opening inventories 1/7/x6 24
(Elimination of URP opening inventories including tax ([$144,000 -
$120,000] * 30%)
 Comprehensive Example E4.7 (cont)
91
Consolidation Adjustments 30 June 20X7 ($000)

(j)
Dr Dividend revenue 120
Cr Dividend paid 45
Cr Dividend proposed 75
(Elimination of intra-group dividends paid and proposed)
(k)
Dr Dividend payable 75
Cr Dividend receivable 75
(Elimination of intra-group dividend payable and receivable)
Comprehensive Example E4.7 (cont)
92

The final adjustment is for the plant and equipment sold

within the group

Several adjustments are required so lets analyse the effects

of the sale
Comprehensive Example E4.7 (cont)
93

Date Item Group $ Chanel Difference Tax effect

Ltd $ $ @30%
1/7/X1 Equipment acquired 400,000
30/6/X2 Depreciation (40,000)
30/6/X3 Depreciation (40,000)
30/6/X4 Depreciation (40,000)
1/7/X4 Equipment sold to Bridge 280,000 350,000 70,000 21,000
30/6/X5 Depreciation (40,000) (50,000) (10,000) (3,000)
30/6/X6 Depreciation (40,000) (50,000) (10,000) (3,000)
30/6/X7 Depreciation (40,000) (50,000) (10,000) (3,000)
160,000 200,000 40,000 12,000
 Comprehensive Example E4.7 (cont)
94

The previous table summarises the effects of the intra-group sale

of plant and equipment as follows:

An adjustment is needed for the gain on sale recorded on

1/7/X4
An adjustment is needed for the excess depreciation of
$10,000 charged annually since the date of sale
Both adjustments must be tax effected
Comprehensive Example E4.7 (cont)
95
Consolidation Adjustments 30 June 20X7 ($000)

(l)
Dr Retained earnings 1/7/x6 70
Dr Plant 50
Cr Accum. Depreciation P&E 120
(Elimination of profit on intra-group sale of plant)

Dr DTA 21
Cr ITE 21
(Tax effect of intra-group profit on sale of plant)
 Comprehensive Example E4.7 (cont)
96
Consolidation Adjustments 30 June 20X7 ($000)

(l)
Dr Accum. Depreciation P&E 30
Cr Depreciation expense 10
Cr Retained earnings 1/7/x6 20
(Depreciation adjustment on intra-group sale of plant)

Dr ITE 3
Dr Retained earnings 1/7/x6 6
Cr DTA 9
(Tax effect of excess depreciation)
 Wrapping up 97

Today we covered the second category of consolidation adjustments the elimination

of the accounting impact of intra-group transactions

We also looked at the tax effects of these adjustments

Some intra-group transactions require adjustments in the current and subsequent

periods

To help your learning on this material you should attempt the remaining set work
questions at home

Next week we look at direct non-controlling interests where the parent owns less
than 100% of the subsidiary
Thats all for now see you next
time! 98