ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
Подождите немного. Документ загружается.
Chapter 19: Consolidated accounts: intra-group adjustments
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 405
If the consolidated statement of financial position is prepared by adding all the
assets of the group and all the liabilities of the group, the total assets will include the
$50,000 loan (of P) and the total liabilities will also include the $50,000 loan (of S).
However, looking at the group as a whole, the loan is an internal loan that does not
affect the assets of the group of companies as a unit. The consolidated statement of
financial position should therefore exclude the $50,000 from both assets and
liabilities.
Adjustments should be made for several types of intra-group transaction:
to eliminate any element of double-counting, and also
to eliminate any credit for profit (on intra-group sales) that has not yet been
realised by a sale outside the group.
Paper F7: Financial reporting (International)
406 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Intra-group sales and intra-group balances
Intra-group sales
Intra-group balances
Intra-group balances: items in transit
2 Intra-group sales and intra-group balances
2.1 Intra-group sales
The consolidated statement of comprehensive income shows the total sales and the
total cost of sales for the group as a whole during a financial period.
If entities within the same group sell goods or services to each other, these intra-
group transactions will be included:
in the revenue of the entity making the sale
as a cost of sale of the entity making the purchase.
Looking at the group as a single operating unit, however, there has been no sale and
no purchase. The intra-group sale, for the group as a unit, is simply a transfer of
goods or services within the group.
The revenue from intra-group sales and the cost of intra-group purchases must
therefore be eliminated from the consolidated profit or loss for the year.
No inventories of intra-group sales items
Provided that the items sold and bought internally have been used to make a sale
outside the group, so that there are no inventories of intra-group sales items, the
adjustment is made in consolidated profit or loss by:
deducting the revenue from intra-group sales from the total revenue for the
group, and
deducting the same amount from the cost of sales.
Example
A parent company and its subsidiary had the following revenue and cost of sales in
the year just ended. The parent has owned the subsidiary for several years.
ParentP SubsidiaryS
$000 $000
Revenue 500 300
Costofsales 200 200
–
––
–
––
Grossprofit 300 100
–
––
–
––
Chapter 19: Consolidated accounts: intra-group adjustments
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 407
Included in these figures are sales of $50,000 by subsidiary S to parent P. The cost of
these sales for subsidiary P was $30,000. P has used all the items bought from S to
make sales outside the group.
The revenue of subsidiary S includes $50,000 of sales within the group to P. The cost
of sales of P includes $50,000 for the items bought from S. The total profit of the
group is unaffected, but the double-counting in revenue and the cost of sales must
be eliminated.
The figures for the consolidated statement of comprehensive income are calculated
as follows
ParentP SubsidiaryS
Adjustforintra‐
groupsales
Consolidated
profit
$000 $000 $000 $000
Revenue 500 300 ‐50 750
Costofsales 200 200 ‐50 350
–––
–
––
–
––––––––
–
––
Grossprofit 300 100 nochange 400
–––
–
––
–
––––––––
–
––
The gross profit of the group is unaffected, because all the intra-group items have
been sold outside the group. However the group revenue and the group cost of
sales must exclude the intra-group transactions.
When there are inventories of intra-group sales items
A different situation arises when, at the end of the financial year, some intra-group sales
items are still held as inventory by the group entity that bought them. This is because
the inventory includes some ‘unrealised profit’. This problem is explained later.
2.2 Intra-group balances
When entities within a group sell goods to other entities in the same group, the terms of
trading are normally similar to those for sales to external customers. The selling group
company will expect payment in cash for the goods sold, but will give credit terms to
the buying group company.
When this happens, group entities will include other group entities within their
trade receivables (for intra-group sales) and trade payables (for intra-group
purchases).
The trade receivables of the selling group entity should equal the trade payables of
the buying group entity. These ‘intra-group balances’ or ‘inter-entity balances’ must
be eliminated on consolidation and excluded from the consolidated statement of
financial position.
For example, if subsidiary S sells goods to parent P for $6,000 and P has not paid for
the goods as at the end of the financial year, the statement of financial position of
parent P will have a payable for $6,000 and subsidiary S will have a trade receivable
for $6,000. These intra-group balances should be eliminated, and neither of them
should appear in the consolidated statement of financial position.
Paper F7: Financial reporting (International)
408 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Example
The statements of financial position of Entity P and Entity S at 31 December Year 2
are as follows. Entity P owns 90% of the shares of Entity S.
ParentP SubsidiaryS
Assets $ $
Property,plantandequipment 400,000 250,000
InvestmentinS 200,000 ‐
Currentassets
ReceivablesbalancefromS
25,000 ‐
Othercurrentassets 125,000 200,000
–
––––––
–
––––––
Totalassets 750,000 450,000
–
––––––
–
––––––
Equityandliabilities
Sharecapital:equitysharesof$1each 100,000 50,000
Retainedearnings 600,000 300,000
–
––––––
–
––––––
700,000 350,000
Liabilities
PayablesbalancewithP
‐ 25,000
Otherliabilities 50,000 75,000
–
––––––
–
––––––
Totalequityandliabilities 750,000 450,000
–
––––––
–
––––––
The shares in subsidiary S were acquired when the net assets of S were $150,000
(represented by share capital of $50,000 and retained earnings of $100,000).
The accounting policy of Entity P is to value non-controlling interests in S at a
proportionate amount of the net identifiable assets of the subsidiary. There has been
no impairment in goodwill since acquisition.
The parent and subsidiary trade with each other: the parent sells goods to the
subsidiary. At the end of the reporting period (31 December Year 2), the subsidiary
owed $25,000 to the parent.
However, the subsidiary held no inventory of items bought from the parent.
Required: Prepare a consolidated statement of financial position.
Answer
$
NetassetsinSacquired(=90%×$150,000) 135,000
CostoftheinvestmentinS 200,000
–
––––––
Purchasedgoodwill 65,000
–
––––––
Chapter 19: Consolidated accounts: intra-group adjustments
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 409
$
RetainedearningsofSat31DecemberYear2 300,000
Pre‐acquisitionretainedearningsofS 100,000
–––––––
Retainedpost‐acquisitionprofitsofS 200,000
–––––––
Parent’sshareofretainedpost‐acquisitionprofitsofS(90%) $180,000
The receivable of $25,000 from S in the statement of financial position of P is the
payable of $25,000 in the statement of financial position of S. These items should be
cancelled out, and must not appear in the consolidated statement of financial
position.
The non-controlling interest in S should be calculated as a percentage of the net
assets of S, including the debt payable to P.
Non‐controllinginterests
$
TotalassetsofS 450,000
LiabilitiesofS(25,000+75,000) (100,000)
–
––––––
NetassetsofSat31DecemberYear2** 350,000
–
––––––
(**=sharecapitalplusreserves)
Non‐controlllinginterests(10%) $35,000
–
–
–––––
The consolidated statement of financial position can now be prepared.
PGroup
Consolidatedstatementoffinancialpositionat31DecemberYear2
Assets $
Property,plantandequipment(400,000+250,000) 650,000
Goodwill 65,000
Currentassets(125,000+200,000) 325,000
––––––––
Totalassets 1,040,000
––––––––
Equityandliabilities
Equityattributabletoownersoftheparent
Sharecapital:equityshares$1 100,000
Retainedearnings(600,000+180,000) 780,000
––––––––
880,000
Non‐controllinginterests 35,000
––––––––
Totalequity 915,000
Liabilities(50,000
+75,000) 125,000
––––––––
Totalequityandliabilities 1,040,000
––––––––
Paper F7: Financial reporting (International)
410 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
2.3 Intra-group balances: items in transit
At the year-end, there might be a difference in the intra-group balances due to
goods in transit or cash in transit. When cash or goods are in transit, they are in the
process of being transferred from one group entity to another. The entity sending
the cash or goods will have recorded the transaction in its ledger accounts.
However, the entity receiving the cash or goods has not yet received anything, and
so has not yet recorded the transaction in its accounts.
Goods in transit
One group entity might have sent goods to another entity in the group. The entity
making the sale will therefore have recorded the sale, the cost of goods sold and a
profit. It will also have reduced its inventory and recorded a trade receivable. If the
goods are in transit, the entity making the purchase will not yet have recorded the
purchase, the inventory received or the trade payable in its ledger accounts.
Cash in transit
One group entity owing money to another group entity might have made a
payment and recorded the payment in its accounts, by crediting cash and debiting
the trade payable. However, the other group entity might not yet have received the
payment, and so will not have recorded the cash received or the reduction in its
total trade receivables.
Differences in the intra-group balances caused by items in transit must be removed
for the purpose of consolidation.
Adjusting for items in transit
When the transaction is between a parent and a subsidiary, the difference will be
due to goods or cash in transit either from the parent to the subsidiary or from the
subsidiary to the parent. The adjustment should be made in the accounts of the
parent, regardless of the direction of the transfer.
For example:
If cash is in transit from the parent to a subsidiary, the following adjustment
should be made to the statement of financial position of the parent:
− Debit: Cash (= increase cash in the parent’s statement of financial position)
− Credit: Amount payable to the subsidiary (= increase the total amount
payable to the subsidiary)
The parent therefore reverses the transaction for the cash in transit, as though
the payment has not yet been made.
If cash is in transit from a subsidiary to the parent, in the statement of financial
position of the parent:
− Debit: Cash (= increase cash in the parent’s statement of financial position).
− Credit: Amount receivable from the subsidiary (= reduce the total amount
owed to the parent as trade receivables from the subsidiary).
Chapter 19: Consolidated accounts: intra-group adjustments
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 411
The parent therefore records the receipt of the cash payment from the
subsidiary, even though the cash has not yet been received.
Having made the adjustment for the item in transit, the normal rules can then be
applied to prepare the consolidated financial statements.
Example
The statements of financial position of a Parent and its Subsidiary at 31 December
Year 6 are as follows.
Parent Subsidiary
Assets $ $
Property,plantandequipment 300,000370,000
InvestmentinSubsidiary 220,000 ‐
Currentassets
Receivables:BalanceontheaccountwithParent‐30,000
Othercurrentassets 60,00040,000
–
–––––––––––––
Totalassets 580,000440,000
–
–––––––––––––
Equityandliabilities
Sharecapital:equityshares$1 180,000100,000
Retainedearnings 312,000290,000
–
–––––––––––––
492,000390,000
Liabilities
Payables:BalanceonaccountwithSubsidiary 18,000 ‐
Otherliabilities 70,00050,000
–
–––––––––––––
Totalequityandliabilities 580,000440,000
–
–––––––––––––
Parent acquired 75% of the equity shares of Subsidiary some years ago, when the
net assets of Subsidiary were $240,000.
The difference in the intra-group balances is due to a cash payment by Parent to
Subsidiary, which has been recorded in the accounts of Parent but has not yet been
recorded in the accounts of Subsidiary.
The accounting policy of Parent is to value non-controlling interests in Subsidiary at
a proportionate amount of net identifiable assets. There has been no impairment in
goodwill since the acquisition of Subsidiary.
Required
Prepare a consolidated statement of financial position as at 31 December Year 6.
Paper F7: Financial reporting (International)
412 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Answer
First, eliminate intra-group balances.
The cash in transit is $12,000 ($30,000 – $18,000). Adjust for the cash in transit in the
statement of financial position of Parent as follows:
Debit: Cash $12,000
Credit: Payables: Balance on account with Subsidiary $12,000.
The intra-group balances (in the statements of financial position of Parent and
Subsidiary) are now both $30,000 and are eliminated on consolidation.
The current assets of Parent increase by $12,000 (cash) from $60,000 to $72,000.
Having eliminated the intra-group balances, carry out the normal five steps for
preparing a consolidated statement of financial position.
Step 1. Calculate the group share (parent company share) and the NCI share of the
equity of Subsidiary.
%
Parent’sshare 75
Non‐controllinginterest 25
–
––
100
–
––
Step 2. Calculate the net assets of S at acquisition and at the end of the reporting
period.
Atendof
reporting
period
At
acquisition
Post
acquisition
$
Equityshares 100,000 100,000‐
Retainedearnings 290,000 140,000 150,000
–
––––––
–
––––––
390,000 240,000
–
––––––
–
––––––
Step 3. Calculate the goodwill.
$
Costoftheacquisition 220,000
Parent’sshareofsubsidiary’snetassetsatacquisition
(75%(Step1)×$240,000(Step2))
180,000
––––––
Goodwill 40,000
––––––
Chapter 19: Consolidated accounts: intra-group adjustments
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 413
Step 4. Calculate the non-controlling interest.
Non-controlling interest share of net assets of the subsidiary at the end of the
reporting period
= 25% (Step 1) × $390,000 (Step2) = $97,500.
Step 5. Calculate consolidated retained earnings.
$
Parent’sretainedearnings 312,000
Parent’sshareofsubsidiary’spoat‐acquisitionprofts
(=75%(Step1)×$150,000(Step2)) 112,500
–––––––
Consolidatedretainedearnings 424,500
–––––––
Consolidated statement of financial position
The consolidated statement of financial position is prepared as follows.
ParentGroup
Consolidatedstatementoffinancialpositionat31DecemberYear6
Assets $
Property,plantandequipment(300,000+370,000) 670,000
Goodwill(Step3) 40,000
–––––––
710,000
Currentassets(60,000+12,000cashintransit+40,000) 112,000
–––––––
Totalassets 822,000
–––––––
Equityandliabilities
Equityattributabletoownersoftheparent
Sharecapital:equityshares$1 180,000
Retainedearnings(Step5) 424,500
–––––––
604,500
Non
‐controllinginterests(Step4) 97,500
–––––––
Totalequity 702,000
Liabilities(70,000+50,000) 120,000
–––––––
Totalequityandliabilities 822,000
–––––––
Paper F7: Financial reporting (International)
414 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP
Unrealised profit in inventory
The nature of the problem
Unrealised profit: 100%-owned subsidiary
Unrealised profit: partly-owned subsidiary
3 Unrealised profit in inventory
3.1 The nature of the problem
When entities within a group trade with each other, the selling entity makes a profit on
the goods that it sells. Provided that all the goods are eventually sold outside the group,
the internal profit does not matter for consolidation, because the revenue of the selling
entity is a cost of sale for the buying entity. The matching revenue and cost of sale are
both deducted from consolidated revenue and cost of goods sold, as described earlier,
and the gross profit on consolidation is not affected.
A different situation arises, however, when some of the inventory sold by one group
entity to another group entity is still held as inventory by the buying entity at the
end of the reporting period.
When intra-group sales are still held as inventory:
the entity that made the sale has recorded a profit on the sale, but
this profit is included within the inventory valuation of the entity that made the
purchase, because inventory is valued at the purchase cost to the buying entity.
The inventory is still held within the group, so the group as a unit has not made an
external sale. The profit made by the selling entity is included in the cost of the
closing inventory of the buying entity. The profit on the sale of this inventory must
be eliminated on consolidation. It is unrealised profit.
3.2 Unrealised profit: 100%-owned subsidiary
The following rules should be applied for a 100%-owned subsidiary.
Unrealised profit is eliminated from the consolidated statement of financial
position by:
reducing the consolidated retained earnings by the amount of the unrealised
profit, and
reducing the valuation of the inventory by the amount of the unrealised profit.
In the consolidated statement of comprehensive income/income statement:
reduce consolidated revenue by the amount of the intra-group sales (= R)