XH-H 3e PPT Chap05
XH-H 3e PPT Chap05
XH-H 3e PPT Chap05
Chapter 5
Group Reporting IV:
Consolidation under
IFRS 10
Learning Objectives
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Content
1. EliminationofofIntragroup
Elimination IntragroupTransactions
Transactions and
and Balances
Balances
2. Elimination of Realized Intragroup Transactions
3. Elimination of Intragroup Balances
4. Adjustment of Unrealized Profit or Loss Arising from Intercompany
Transfers
5. Impact on Non-controlling Interests Arising from Adjustments of
Unrealized Profit or Loss
6. Special Considerations for Intercompany Transfers of Fixed Assets
7. Special Accounting Considerations When Intragroup Transfers Are
Made at a Loss
8. Consolidated Retained Earnings and their Components
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Content
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Examples:
1. Transactions relating to interest:
– Usually no time lag in the recognizing of interest by borrower and lender
i.e. interest income exactly offsets the interest expense
– Elimination entry:
Dr Interest Income (lender)
Cr Interest Expense (borrower)
Dr Interest Income
Cr Fixed assets in progress
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• Sum of the opening RE of the legal entities in the group will not be
equal to the consolidated opening RE
– Consolidated adjustments that have a “one sided effect” on RE (i.e.
elimination adjustments on buyer and seller entries are not fully off-
setting) must be re-enacted every year
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Example:
• Subsidiary Co. sells inventory to Parent Co. and makes a profit of
$20,000 in 20×1. Parent Co. resells 10% of the inventory to third
parties in 20×1 and 90% in 20×2. Only 10% of the profit is earned by
the group.
– Opening RE of Subsidiary Co. in 20×2 includes “unrealized” profit of
$18,000
– Consolidated RE at the end of 20×1 and beginning of 20×2 should only
include profit of $2,000 and not $20,000
– Re-enactment continue for as long as the asset remains in the group
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Content
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Transfer
price (TP) Unrealized profit
Original
cost Inventory amount in
(OC)* Inventory amount buying company’s
on consolidation books
*Assuming that the carrying amount prior to the transfer is the original cost
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Ex1
• Ngày 1/1/X1 Công ty mẹ mua hàng tồn kho với giá $30 và sau đó
bán cho công ty con với giá $50. Công ty con chưa bán lô hàng ra
bên ngoài tại thời điểm BC.
• Ngày 10/2/X1Công ty mẹ mua hàng tồn kho với giá $100 và sau đó
bán cho công ty con với giá $60. Công ty con chưa bán lô hàng ra
bên ngoài tại thời điểm BC.
• Mẹ sở hữu 80% vốn CP của công ty con. Thuế suất thuế TNDN
20%.
Yêu cầu:
Xác định lãi ( lỗ) chưa thực hiện trong hàng tồn kho cuối kỳ.
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EX2
• Công ty mẹ mua hàng tồn kho với giá $30 và sau đó bán cho công
ty con với giá $50.
(a) Trong kỳ BC công ty con đã bán toàn bộ lô hàng ra bên ngoài với
giá $60.
(b) Công ty con chưa bán lô hàng ra bên ngoài tại thời điểm BC.
(c) Công ty con bán 40% lô hàng ra bên ngoài với giá $25 tại thời
điểm BC.
Yêu cầu:
Thực hiện bút toán điều chỉnh giao dịch bán HTK nội bộ tập đoàn cho
năm 20X1.
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Content
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Downstream Sale
Unrealized profit
resides in Parent’s Parent
book
Sales were
made from
90 % parent to
owned subsidiary
Mark-up inventory
remains on Subsidiary
Subsidiary’s SFP
Upstream Sale
Mark-up inventory
remains on Parent’s Parent
SFP
Sales were
made from
90 % subsidiary to
owned parent
Unrealized profit
resides in Subsidiary’s Subsidiary
book
In upstream sale, the unrealized profit resides in the subsidiary. Thus, NCI’s
share of the unrealized profit or loss needs to be adjusted from the carrying
amount of the asset (IFRS 10 Para B86(c))
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Illustration 2:
Upstream and Downstream Sales
• P invested in 70% of shares of S
• Intercompany transfers of inventory are as follows:
20×3 20×4
Sale of inventory from P to S $60,000
Original cost of inventory $(50,000)
Gross profit $10,000
Percentage unsold to 3rd party at year end 10% 4%
Sale of inventory from S to P $200,000
Original cost of inventory $(170,000)
Gross profit $30,000
Percentage unsold to 3rd party at year end 30% 0%
• Tax rate: 20%
• Net profit after tax of S: $800,000 (31 Dec 20×3)
$900,000 (31 Dec 20×4)
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Illustration 2:
Upstream and Downstream Sales
31 Dec 20×3
CJE 1: Elimination of intercompany sales and adjustment
of unrealized profit from downstream sale
Dr Sale 60,000
Cr Cost of sales 59,000 Residual value
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Illustration 1:
Upstream and Downstream Sales
31 Dec 20×3
CJE 1: Elimination of intercompany sales and adjustment
of unrealized profit from downstream sale
Dr Sale 60,000
Cr Cost of sales 59,000 Residual value
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Illustration 1:
Upstream and Downstream Sales
CJE 1 is a composite of two sub-entries:
CJE 1(b): Reversal of unrealized sales and removal of profits from inventory
Dr Sales (P) 6,000 (10% × $60,000)
Cr Cost of sales (S) 5,000 (10% × $50,000)
Cr Inventory (S) 1,000 (10% × $10,000)
Reverses the sales, cost of sales and profit in inventory for the proportion of
inventory that remained unsold as at 31 Dec 20×3
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Illustration 2:
Upstream and Downstream Sales
CJE 2: Adjustment for the tax effects on unrealized profit
in inventory from downstream sales
Dr Deferred tax asset 200 Unrealized profit
from unsold
Cr Tax expense 200 inventory × 20%
Illustration 2:
Upstream and Downstream Sales
CJE 5: Allocation of current profit after tax to non-controlling interests
Dr Income to NCI 237,840
Cr NCI 237,840
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Illustration 2:
Upstream and Downstream Sales
31 Dec 20×4
CJE 1: Adjustment of unrealized profit from downstream sale in RE as at 1
Jan 20×4
Dr Opening RE 1,000 (10% × $10,000)
Cr Cost of sales 600 (6% × $10,000)
Cr Inventory 400 (4% × $10,000)
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Illustration 2:
Upstream and Downstream Sales
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Illustration 2:
Upstream and Downstream Sales
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Illustration 2:
Upstream and Downstream Sales
CJE 6: Allocation of current profit after tax to non-controlling interests
Dr Income to NCI 272,160
Cr NCI 272,160
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Content
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Mark up
Profit
$40,000
+ Transfer
Acc. Dep. on
Original Acc. Dep. price
sale
cost
NBV NBV
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• Upstream sales:
– NCI is adjusted against:
Unrealized profit on sale of FA
Subsequent depreciation to unwind the unrealized profit
Tax effect on profit and depreciation adjustments
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Ex3
• Công ty mẹ mua 100% cổ phần của công ty con, vào ngày 1/7/X1
công ty con mua 1 máy với giá $200,000, không có giá trị thu hồi và
khấu hao trong 5 năm cho KT và thuế. Ngày 1/7/X4 công ty con bán
cho công ty mẹ với giá 140,000 bằng tiền.
• 30/6/X6 máy này đã được thanh lý phế liệu. Tax 30%.
Yêu cầu:
1/ Thực hiện bút toán điều chỉnh năm X1, X4 và X5
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Illustration 3:
Downstream Transfer of Fixed Assets
• 1 Jan 20×2 P sold equipment to S for $360,000
• The original cost of equipment was $400,000
• The remaining useful life was 10 year from the original purchase
date
• The remaining useful life is 8 years from date of transfer
• Assume a tax rate of 20%
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Illustration 3:
Downstream Transfer of Fixed Assets
Acc. Dep.
Profit
$80,000 $40,000
Original on sale Transfer
cost NBV NBV price
$400,000 $320,000 $320,000 $360,000
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Illustration 3:
Downstream Transfer of Fixed Assets
Acc. Dep.
Profit
$80,000 $40,000
Original on sale Transfer
cost NBV NBV price
$400,000 $320,000 $320,000 $360,000
As at 31 Dec 20×2
Amount to be
Status Quo With sale restored/adjusted
Cost of asset $400,000 $360,000 $40,000
Acc. Dep. 120,000 45,000 75,000
Current Dep. 40,000 45,000 5,000
Profit on sale - 40,000 40,000
Tax on profit - 8,000 8,000
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Illustration 3:
Downstream Transfer of Fixed Assets
31 Dec 20×2
CJE 1: Adjustment of unrealized profit Reinstate cost of FA
Dr Equipment (S) 40,000 to original historical
cost; reinstate acc.
Dr Profit on sale (P) 40,000
dep. since date of
Cr Accumulated depreciation (S) 80,000 original acquisition
Reversal of these entries: from third party
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Illustration 3:
Downstream Transfer of Fixed Assets
CJE 2: Reverse tax on profit on sale
Dr Deferred tax asset (Group’s SFP) 8,000
Cr Tax expense (P) 8,000
Depreciation
Dep Exp: $40,000
No Transfer
$320,000
8 yrs
NBV: $280,000
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Illustration 3:
Downstream Transfer of Fixed Assets
CJE 3: Correct the over-depreciation on unrealized profit included in equipment
Dr Accumulated depreciation (S) 5,000
Cr Depreciation (S) 5,000
Illustration 3:
Downstream Transfer of Fixed Assets
When the equipment is fully depreciated:
CJE 5: Reinstate to original cost, accumulated
depreciation and reverse profit
Dr Equipment (S) 40,000
Dr Opening RE (P) 40,000
Cr Accumulated depreciation (S) 80,000
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Illustration 3:
Downstream Transfer of Fixed Assets
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Illustration 4:
Upstream Transfer of Fixed Assets
• Assume extension from illustration 3
• 1 Jan 20×2 S sold equipment to P for $360,000
• The original cost of equipment was $400,000
• The remaining useful life is 8 years from date of transfer
• Net profit after tax of S for YE 31 Dec 20×2: 500,000
YE 31 Dec 20×3: 800,000
• Assume a tax rate of 20%
Acc. Dep.
Profit
$80,000 $40,000
Original on sale Transfer
cost NBV NBV price
$400,000 $320,000 $320,000 $360,000
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Illustration 4:
Upstream Transfer of Fixed Assets
31 Dec 20×2
CJE 1: Adjustment of unrealized profit
Dr Equipment (S) 40,000
Dr Profit on Sale (P) 40,000
Cr Accumulated depreciation (S) 80,000
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Illustration 4:
Upstream Transfer of Fixed Assets
CJE 3: Correct the over-depreciation on unrealized profit
included in equipment
Dr Accumulated depreciation (P) 5,000
Cr Depreciation (P) 5,000
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Illustration 4:
Upstream Transfer of Fixed Assets
CJE 5: Allocation of current year profit to NCI
Dr Income to NCI 47,200
Cr NCI 47,200
*Depreciation will “unwind” the original profit on sale (net of tax) until the
end of the remaining useful life of 8 years is reached
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Illustration 4:
Upstream Transfer of Fixed Assets
31 Dec 20×3
CJE 1: Adjustment of unrealized profit in prior year
Dr Equipment (P) 40,000
Dr Opening RE (S) 36,000 (90% × $40,000)
Dr NCI 4,000 (10% × $40,000)
Cr Accumulated depreciation (P) 80,000
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Illustration 4:
Upstream Transfer of Fixed Assets
CJE 3: Correct the over-depreciation for prior and current year
Dr Accumulated depreciation (P) 10,000
Cr Depreciation (P) 5,000
Cr Opening RE (P) 4,500 (90% × $5,000)
Cr NCI 500 (10% × $5,000)
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Illustration 4:
Upstream Transfer of Fixed Assets
CJE 5: Allocation of current year profit to NCI
Dr Income to NCI 80,400
Cr NCI 80,400
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Content
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Illustration 5:
Unrealized Loss Arising from Intragroup Transfers
Example 1
• Parent transferred inventory to subsidiary during the year ended 31
Dec 20×6 Transfer price $60,000
Original Cost $80,000
Gross loss ($20,000)
• The loss on transfer indicated an impairment loss on the inventory
What is the consolidation journal entry?
Dr Sale 60,000
Cr Cost of Sales 60,000
Eliminate the transfer of inventory – no adjustment is
made to remove the unrealized loss
Implicit recognition of $20,000 of loss in the consolidated income statement
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Illustration 5:
Unrealized Loss Arising from Intragroup Transfers
Example 2
• Parent transferred fixed asset to subsidiary during the year ended 31 Dec
20×6
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Illustration 5:
Unrealized Loss Arising from Intragroup Transfers
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Illustration 6:
Transfers at a Loss
Background:
• Parent Co. transferred inventory to Subsidiary Co. on 4 April 20×1
• Assume that the inventory had not yet been resold to third parties
Situation A:
Transfer price $90,000
Original cost $120,000
Carrying amount in P’s books $100,000
Fair value $100,000
TP FV=CA OC
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Illustration 6:
Transfers at a Loss
Situation A:
Group Legal entity
LCNRV test at year end “What should be” “What is” Difference
Original cost $120,000 $90,000
NRV $100,000 $100,000
LCNRV $100,000 $90,000 $10,000
Illustration 6:
Transfers at a Loss
Situation B:
TP OC=CA FV
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Illustration 6:
Transfers at a Loss
Situation B:
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Illustration 6:
Transfers at a Loss
Situation C:
FV=CA OC TP
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Illustration 6:
Transfers at a Loss
Situation C:
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Illustration 6:
Transfers at a Loss
Situation C:
CJE 1: To reverse unrealized gain in inventory
Dr Sales 120,000
Cr Inventory 20,000
Cr Cost of sales 100,000
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Conclusion
• Consolidation adjustments are passed to eliminate intragroup balances and
transactions
• Consolidation is a three-step process that includes the preparation of
adjusting entries, preparation of a consolidation worksheet and analysis of
final balances
• From the group’s perspective, an asset on the statement of financial
position should be carried on the basis of the original cost transacted with
third parties and not internal transfer prices
• Internally-generated profit or loss should be eliminated unless the loss is
indicative of an impairment loss of the asset
• Multi-period consolidation requires correction of unrealized gains or losses
in opening retained earnings
• Special considerations apply to adjustments for transfers of long-term
assets between group companies and transfers made at a loss
• Utilizing the analytical check approach enables an efficient method to
deriving consolidated totals.
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