Consolidation∶ intragroup transactions.pptVIP

* * * * * * * * * * * * * * * * * * * * * * * Chapter 17 Consolidation: intragroup transactions Prepared by Emma Holmes Rationale for adjusting intragroup transactions Intragroup transactions - transactions that occur between entities in the group They must be eliminated on consolidation because, from a group viewpoint, they do not occur AASB 10 requires intragroup balances, transactions, income and expenses to be eliminated in full AASB10 also requires tax effect accounting to be applied where temporary differences arise due to the elimination of profits and losses The broad effect of intragroup sales and purchases of inventory can be illustrated by reference to the diagram below Transfers of inventory Subsidiary Parent Purchases inventory for $100 on 1 June 2012 Sells inventory for $150 on 25 June 2012 All inventory still held by the parent at 30 June 2012 The subsidiary would record sales of $150 and COGS of $100 - recognising a profit of $50 The parent would record inventory of $150 The $50 profit made by the subsidiary is considered to be unrealised at 30 June 20, as the inventory is yet to be sold to an external party To determine how to eliminate the effects of this transaction it is helpful to consider the journal entries that would have been recorded in the subsidiary and parent’s books respectively Unrealised profit in ending inventory Subsidiary Parent 1 June 2012 Dr Inventory 100 Cr A/C Payable 100 25 June 2012 Dr Cash 150 Dr Inventory 150 Cr Sales 150 Cr Cash 150 Dr COGS 100 Cr Inventory 100 Dr ITE 15 Cr CTL 15 Unrealised profit in ending inventory (i) Eliminate intragroup sale Dr Sales 150 Cr COGS 150 (ii) Eliminate unrealised profit and adjust overstated inventory Dr COGS 50 Cr Inventory 50 From a consolidated viewpoint, there is NO sale, NO COGS (and therefore no profit). In addition, inventory must be shown at the cost to the group (i.e. $100 not $150) (iii) Reco