25-1 copyright 2006 mcgraw-hill australia pty ltd ppts t/a new zealand financial accounting 3e by...

25-1 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant SamkinSlides prepared by Grant Samkin and Annika Schneider

Accounting for intragroup transactions and minority

interests

Chapter 25


Learning objectives

• Understand how and why to eliminate inter-entity dividends on consolidation

• Understand how to account for inter-entity sales of inventory

• Understand how to account for inter-entity sales of non-current assets

• Understand what minority interests represent and how minority equity interests should be disclosed within consolidated financial statements


Introduction to accounting for consolidation issues

Overview

• During a financial period it is common for separate legal entities within an economic entity to transact with each other

• In preparing consolidated accounts, the effects of all transactions between entities within the economic entity are eliminated in full, even where the parent entity holds only a fraction of the issued equity

(Continues)


Introduction to accounting for consolidation issues (cont.)

Examples of inter-entity transactions• Payment of dividends to group members• Payment of management fees to a group member• Inter-entity sales of inventory• Inter-entity sales of non-current assets• Inter-entity loans

Consolidation adjustments for inter-entitytransactions• Typically eliminate these transactions by reversing

the original accounting entries made to recognise the transactions in the separate legal entities


Dividend payments pre- and post-acquisition

Dividend payments• In consolidation process it is necessary to eliminate:

– all dividends paid/payable to other entities within the group– all dividends received/receivable from other entities within the

group

• Only dividends paid externally should be shown in consolidated financial statements

NZ IAS 27 (par. 24)• On consolidation intragroup balances, transactions,

income and expenses are all be eliminated in full

(Continues)


Dividend payments pre- and post-acquisition (cont.)

Dividends paid from post-acquisition profits

• Only dividends paid externally should be shown in the consolidated financial statements

• Journal entry to eliminate dividends payable (in consolidation journal):Dr Dividends payable (balance sheet)

Cr Dividends proposed (income statement)

• Journal entry to eliminate dividends receivable (in consolidation journal):Dr Dividend income (income statement.)

Cr Dividend receivable (balance sheet) (Continues)



Dividends paid from post-acquisition profits (cont.)• Journal entry to eliminate dividends receivable (in

consolidation journal):Dr Dividend income (income statement.)

Cr Dividend receivable (balance sheet)

• Note: consolidation journal entries (Ch 26) are not written in the journals of either company but are entered in a separate consolidation journal

• Refer to Worked Example 25.1, 'Dividend payments to a subsidiary out of post-acquisition earnings', pp. 1005–8

(Continues)



Dividends out of pre-acquisition profits• If an entity pays dividends out of profits earned

before acquisition, it is effectively returning part of the net assets originally acquired (return of part of investment in subsidiary)

– not to be accounted for as revenue of investor

– if dividends are received from pre-acquisition reserves including from pre-acquisition retained earnings, the amount of purchase consideration is correspondingly reduced


Journal entries to record dividends from pre-acquisition profits

• Journal entry made in accounts of parent entity (not in consolidation journal):

Dr Dividends receivable

Cr Investment in subsidiary


Journal entry to eliminate inter-entity dividend payable/ receivable

• To eliminate dividend payable and receivable (in consolidation journal):

Dr Dividends payable

Cr Dividends receivable

• Refer to Worked Example 25.2, 'Dividends paid out of pre-acquisition earnings', pp. 1008–11


Inter-entity sale of inventory• From the group’s perspective, revenue should

not be recognised until inventory is sold to parties outside the group

• Need to eliminate any unrealised profits from the consolidated accounts

– Unrealised profits result from stock, which is sold within the group for a profit, remaining on hand within the group at the end of the period

• NZ IAS 27 (par. 25)– Intragroup balances and transactions, including income,

expenses and dividends, are eliminated in full. Profits and losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full

(Continues)


Inter-entity sale of inventory (cont.)

• Each member of group taxed individually on its income, not the group collectively

• If tax has been paid by one member of the group, from the group’s perspective this represents a prepayment of tax (deferred tax asset)

• This income will not be earned by the economic entity until inventory is sold outside the group

(Continues)



Journal entry to eliminate inter-company sales

• To eliminate total sales as no sales have occurred

from perspective of group:

Dr Sales

Cr Cost of goods sold (perpetual) or

purchases (periodic)

(Continues)



Journal entry to eliminate unrealised profit in closing stock • Inventory must be valued at lower of cost and

net realisable value and on consolidation must reduce value of closing inventory to the cost to the economic entity:

– Dr Cost of goods sold (perpetual) or

closing inventory — P&L (periodic)

Cr Inventory

(Continues)



• Consideration of tax paid on inter-entity sale of inventory

– Any tax paid by members of the group related to inter-entity

sales where full amount of revenue has not been earned

from the group’s perspective, represents prepayment of tax:

– Dr Deferred tax asset

Cr Income tax expense

(Continues)



• Recognition of impairment of goodwill (AASB 3 ‘Business Combinations’)

– Prohibition on amortisation of goodwill acquired in business combination

– Goodwill required to be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired (in accordance with NZ IAS 36 ‘Impairment of Assets’)

– Per NZ IFRS 3 (par. 54): After initial recognition, the acquirer shall measure goodwill

acquired in a business combination at cost less any accumulated impairment losses

(Continues)



• Recognition of impairment of goodwill (cont.)– Journal entry to recognise impairment loss: – Dr Impairment loss

Cr Accumulated impairment losses — goodwill

• Refer NZ IFRS 3 (par. 74):– An entity shall disclose information that enables users of its

financial report to evaluate changes in the carrying amount of goodwill during the period

– Refer to NZ IFRS 3 (par. 75) regarding operationalising the requirements of par. 74

• Refer to Worked Example 25.3, 'Unrealised profit in closing inventory', pp. 1013–17

(Continues)



Unrealised profit in opening inventory

• The cost of opening inventory held by one of the entities within the group will be overstated from the group’s perspective

• In consolidated adjustments need to shift income from the previous period, in which inventory still on hand, to period in which inventory ultimately sold to external parties

(Continues)



• Unrealised profit in opening inventory (cont.)• Consolidation entries: unrealised profits in

opening inventory• Reducing opening inventory reduces cost

of goods sold:Dr Opening retained earnings

Cr Cost of goods sold

• Higher profits lead to higher tax expense:Dr Income tax expense

Cr Opening retained earnings

• Refer Worked Example 25.4, 'Unrealised profit in opening inventory', pp. 1019–22


Sale of non-current assets within

the group

• Assets of the group need to be valued as if the inter-entity sale had not occurred

• Need to reinstate the non-current asset to the original cost or revalued amount

– Eliminate any unrealised profits on sale– Adjust depreciation– May be tax on profit of sale, which represents

a temporary difference

(Continues)


Sale of non-current assets within the group (cont.)

• Consolidation journal entries to eliminate sale of non-current asset

– Reverse gain and reinstate accumulated depreciation:

Dr Gain on sale

Dr Asset

Cr Accumulated depreciation

– Recognise deferred tax asset:

Dr Deferred tax asset

Cr Income tax expense

(Continues)


Sale of non-current assets within the group (cont.)

• Consolidation journal entries to eliminate sale of non-current asset (cont.)

– Adjust depreciation to reflect correct amount:Dr Accumulated depreciation

Cr Depreciation expense– Partial reversal of deferred tax asset to reflect

depreciation adjustment:Dr Income tax expense

Cr Deferred tax asset

• Refer to Worked Example 25.5, 'Intragroup sale of a non-current asset where useful life remains unchanged', pp. 1023–31

• Refer to Worked Example 25.6, 'Intragroup sale of a non-current asset where useful life changes', pp. 1032–33


Minority interests

Example:

• Company A (parent entity) owns 75% of Company B

• Remaining 25% held by investors who are not part of the economic entity

• Outside investors referred to as ‘minority interests’

Minority interests (under NZ IAS 27)• That portion of the profit or loss and net assets

of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent

(Continues)


Minority interests (cont.)

• Where subsidiary partly owned by parent entity (i.e. less than 100% interest), both the parent entity and the minority interests will have an ownership interest in the subsidiary’s profits, dividend payments, and share capital and reserves

• As part of consolidation process, need to work out the amount to be attributed to minority interests

(Continues)



• NZ IAS 27 (par. 22) in relation to the steps in preparing a consolidated financial report– In preparing a consolidated financial report, an entity

combines the financial reports of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses. In order that the consolidated financial report presents financial information about the group as that of a single economic entity, the following steps are then taken:

a) the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated (NZ IFRS 3, which describes the treatment of any resulting goodwill);

(continues)



– NZ IAS 27 (par. 22) in relation to the steps in preparing a consolidated financial report (cont.):b) minority interests in the profit or loss of consolidated subsidiaries

for the reporting entity are identified; and

c) minority interests in the net assets of consolidated subsidiaries are identified separately from the parent shareholders’ equity in them

– Minority interests in the net assets consist of:a) the amount of those minority interests at the date of the original

combination calculated in accordance with NZ IFRS 3

b) the minority’s share of changes in equity since the date of combination

(Continues)



Disclosure requirements: minority interests• NZ IAS 27 requires separate disclosure of the

minority interest’s share of capital, retained profits or accumulated losses

• NZ IAS 27 (par. 33)– Minority interests shall be presented in the consolidated

balance sheet within equity, separately from the parent shareholders’ equity. Minority interests in the profit or loss of the group shall also be separately disclosed

– Refer to Worked Example 25.7, 'Consolidated financial statement presentation in the presence of minority interests', pp. 1036–42


Summary• The chapter considered the consolidation process and,

in particular, how to account for inter-entity transactions (e.g. dividend payments, sales of inventory, sales of non-current assets) and minority interests

• Only dividends paid externally should be shown in the consolidated financial statements — inter-entity dividends paid by one entity within the group are to be offset against the dividend revenue recorded in other entity

• The liability associated with dividends payable is to be offset against dividend receivable (as recorded by other entities within the group)

• Where inter-entity sales of inventory have taken place and inventory remains on hand at year end, consolidation adjustments are required to reduce the consolidated balance of closing inventory (inventory valued at lower of cost and net realisable value from the group’s perspective)

(Continues)


Summary (cont.)• Where there is sale of non-current assets within the group,

consolidation adjustments are required to eliminate any inter-entity profit on sale and to adjust the cost of the asst to reflect the cost of the asset to the economic entity — this may also require adjustments to depreciation expense

• Where less than 100% ownership is held, the consolidated financial statements will show a minority interest

• NZ IAS 27 requires separate disclosure of the minority interests in the profits, share capital and reserves of the various subsidiaries within the group

• If minority interests, the effect of inter-entity transactions will be eliminated in full even though the parent entity might hold only a proportion of the capital of the respective subsidiaries

25-1 copyright 2006 mcgraw-hill australia pty ltd ppts t/a new zealand financial accounting 3e by...

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