Week 11- Lecture 1
Topic: Consolidation:
intragroup transactions
Reference: Text; Leo & Hoggett:
Chapter 16
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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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 127 requires intragroup balances, transactions,
income and expenses to be eliminated in full
 AASB127 also requires tax effect accounting to be
applied where temporary differences arise due to the
elimination of profits and losses
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Eg; Transfers of inventory
• The broad effect of intragroup sales and purchases
of inventory can be illustrated by reference to the
diagram below
Purchases
inventory
for $100 on
1 June 2009
Sells inventory
for $150 on
25 June 2009
Subsidiary
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
Parent
All inventory
still held by
the parent at
30 June 2009
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Unrealised profit in ending inventory

The subsidiary would record sales of $150 and COGS of
$100 - recognising a profit of $50

The parent would record inventory of $150, despite the
fact that this inventory cost the group $100

The $50 profit made by the subsidiary is considered to
be unrealised at 30 June 2009, 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

The journal entries processed by each entity and the
consolidation journal adjustments required are
shown on the following slides
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Unrealised profit in ending inventory
Subsidiary
Parent
1 June 2009
Dr Inventory 100
Cr A/C Payable
100
25 June 2009
Dr Cash
Cr Sales
150
150
Dr COGS
100
Cr Inventory
100
Dr ITE
Cr CTL
15
Dr Inventory
Cr Cash
150
150
15
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Unrealised profit in ending inventory
Consolidation journal adjustments are required at 30
Note: Transactions (i) and (ii) can be
June 2009 for the following:
combined into a single entry as follows:
Dr Sales
150
Cr COGS
100
Cr Inventory
50
(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) Recognise tax effect of profit elimination
Dr DTA
15
Cr ITE
15
No profit and therefore no tax expense, from group
viewpoint. In future, when inventory sold by parent the
group will recognise the tax expense
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Unrealised profit in ending inventory
Parent
Sub
Adjustments
DR
Balance Sheet EXTRACT
Accounts Receivable
Inventory
Deferred Tax Asset
0
150
Accounts Payable
Current Tax Liability
150
0
100
15
0
0
0
0
0
150
100
50
15
35
Profit & Loss EXTRACT
Sales
COGS
Gross Profit
Income Tax Expense
Profit / (Loss) after tax
150
0
Group
CR
(ii) 50
(iii) 15
150
100
15
250
15
(i) 150
(ii) 50
(i) 150
(iii) 15
0
0
0
0
0
Notes:
1. Inventory is now recorded at the original $100 cost to the group
2. All impacts on the Profit and Loss resulting from the interentity sale have been removed
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Unrealised profit in ending inventory
What if the purchaser (i.e the parent), subsequently
sells some of the inventory to external parties
before the end of the year?
Purchases
inventory
for $100 on
1 June 2009
Sells
inventory for
$150 on 25
June 2009
Parent
Subsidiary
Sells 40% of
the inventory
for $100 on
30 June 2009
The journal entries processed by each entity and the
consolidation journal adjustments required are shown
on the following slides
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Unrealised profit in ending inventory
Subsidiary
1 June 2009
Dr Inventory
100
Cr A/C Payable
25 June 2009
Dr Cash
Cr Sales
Parent
100
150
150
Dr COGS
100
Cr Inventory
100
Dr ITE
Cr CTL
15
Dr Inventory150
Cr Cash
150
15
30 June 2009
Dr A/C Rec
Cr Sales
COGS calculated as 40% of the
inventory purchased
(i.e. 40% of $150) = $60
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
Dr COGS
Cr Inventory
100
100
60
Dr ITE
12
Cr CTL(30% of $40)
60
12
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Unrealised profit in ending inventory
Consolidation journal adjustments are required at 30
June 2009 for the following:
As with the previous example,
(i) Eliminate intragroup sale
journals (i) and (ii) can be
combined if desired
Dr Sales
150
Cr COGS
150
The WHOLE amount of the sale is eliminated regardless of
the amount subsequently disposed of by the parent.
(ii) Eliminate unrealised profit and adjust overstated inventory
Dr COGS
30
Cr Inventory
30
From a consolidated viewpoint the UNREALISED portion
(ie 60% of $50) of the profit needs to be eliminated.
(iii) Recognise tax effect of profit elimination
Dr DTA
15
Cr ITE (30% of $50) 15
Note that the Dr is recorded against the DTA, not the CTL
(as was done in the sub’s books)
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Unrealised profit in opening inventory

If inventory is sold between entities within the
group one year and not sold by the end of the year,
then we need to consider how this affects the
following year’s consolidated accounts

The profit will become realised when the
inventory is sold to an external party (in the next
financial year)

As inventory is a current asset you should assume
(unless specifically told otherwise) that it is sold
to external parties within 12 months of being
acquired by the group
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Unrealised profit in opening inventory
Go back to our original example (where all inventory
was still held by the parent at 30 June 2009)
Purchases
inventory
for $100 on
1 June 2009
Sells
inventory for
$150 on 25
June 2009
Parent
Subsidiary
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
Sells 100%
of the
inventory for
$175 on 30
July 2009
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Unrealised profit in opening inventory

To carry forward the net effect of last year’s
consolidation journals the following entry would be
required in the year ended 30 June 2009 (refer back to
slide 7):
Dr Retained earnings 35 Sales, COGS, ITE adjustments closed to R/E
Dr DTA
15
Cr Inventory
50

As the inventory has now been sold during the current
year (and the profit therefore realised) the above entry
must be amended to reflect the following:
Dr Retained earnings 35
Dr ITE
15
Cr COGS
50
No entry required in future years as the profit has been “realised”. (All accounts will close
to retained earnings)
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Transfers of property, plant & equipment
 Consider the following example
• Subsidiary purchases machine for $100 on 1 July 2008
• Depreciates asset at 10% per year
• On 30 June 2009, it sold the machine to Parent for $150
• The tax rate is 30%
 The journal entries processed by each entity and the
consolidation journal adjustments required are shown
on the following slides
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
14
Intragroup sale of depreciable assets
Subsidiary
1 July 2008
Dr Machine
Cr Cash
Parent
100
100
30 June 2009
Dr Dep’n expense
Cr Accum Dep’n
Dr Cash
Dr Accum Dep’n
Cr Machine
Cr Gain on sale
Dr ITE
Cr CTL
10
10
150
10
Dr Machine
Cr Cash
150
150
100
60
15
15
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Intragroup sale of depreciable assets
Consolidation journal adjustments are required at
30 June 2009 for the following:
(i)
Re-instate accumulated depreciation of asset
Dr Machine
10
Cr Accumulated depn
10
(ii) Eliminate unrealised profit and reduce asset to group written
down value
Dr Gain on sale
60
Cr Machine
60
(iii) Recognise tax effect of profit elimination
Dr DTA
18
Cr ITE
18
Note that the Dr is recorded against the DTA, not the CTL (as
was done in the sub’s books)
Transactions (i) and (ii) can be combined into a single entry as follows:
Dr Gain on sale
60
Cr Machine
50
Cr Accum. Depn
10
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
16
Intragroup sale of depreciable assets
Parent
Balance Sheet EXTRACT
Cash
Machine
Accumulated
Depreciation
Deferred Tax Asset
(150)
150
0
Sub
Adjustments
DR
CR
150
0
0
(i) 10
(ii) 60
(i) 10
(iii) 18
Income Tax Liability
0
15
Profit & Loss EXTRACT
Gain on sale of Machine
Depreciation
Gross Profit
Income Tax Expense
Profit after Tax
0
0
0
0
0
60
10
50
15
35
Group
0
100
(10)
18
15
(ii) 60
(iii) 18
0
10
10
(3)
(5)
Notes:
1.The machine is now recorded at the original cost (and corresponding accum depn)
2. All impacts on the Profit and Loss resulting from the interentity sale have been removed
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
17
Intragroup sale of depreciable assets
• The parent (being the purchaser) will depreciate the
asset but at different value than the subsidiary would
have depreciated.
WDV at date of transfer
Remaining useful life
Dep’n p.a.
Subsidiary
(originally)
Parent
(now)
Diff.
90
150
60
9 years
9 years
9 years
10
16.67
6.67
• On consolidation, necessary to reduce depreciation
(back to what it originally should have been), and
record related tax effect
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Intragroup sale of depreciable assets
The net effect of the 3 journals recorded on slide 17 will be
carried forward to future years as follows:
Dr Retained earnings
Dr DTA
Cr Accum. Depn
Cr Machine
42
18
10
50
In addition to the above, one year after transfer (30 June 2010)
the entry would be as follows:
Dr
Dr
Accum Dep’n
6.67
Cr
Depreciation Expense
6.67
ITE
Cr
2
2
DTA
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
Note that it is the DTA which is
credited (not the DTL) as the
entry recognises the realisation
of part of the unrealised profit
(and corresponding DTA)
through the use of the asset
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Intragroup sale of depreciable assets
In addition to the first entry on the previous page, two years
after transfer (30 June 2011) the entry would be as follows:
Dr
Dr
Dr
Accum Dep’n
13.34
Cr
Depreciation Expense
Cr
Retained Earnings
ITE
Retained Earnings
Cr
DTA
6.67
6.67
11 adj
10 adj
2
2
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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20
Transfers between inventory and
non-current assets
 When items are transferred between entities within
a group it is possible that that the transferring entity
will classify the asset differently to the transferor
entity. Possible scenarios include:
• Transfers from inventory to plant (refer page 778 of
text)
• Transfers from plant to inventory (refer page 780 of
text)
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Intragroup services
 Quite often in a group, one entity (normally the
parent) provides services (such as accounting, HR,
IT) to the other entities (normally the subsidiaries)
to reduce duplication
 Provider normally charges a management fee to the
user. This must be eliminated on consolidation as
follows:
DR
CR
Services revenue
xxx
Services expense
xxx
 If payable/receivable balances also exist, these
balances must be eliminated on consolidation
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Intragroup post-acquisition dividends
 Last week, elimination of dividends paid from pre-
acquisition profits was discussed. This week, need to
consider dividends paid from post-acquisition
profits
 Assume B (a wholly owned subsidiary) declared a
dividend of $100 to A (parent) out of post acquisition
profits
Journal Entry in B
Journal Entry in A
DR Div. declared 100
CR
Cash
100
DR Cash
100
CR
Div. Revenue
Journal Entry on consolidation
DR Div. revenue
100
CR Div. declared
100
100
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Intragroup post-acquisition dividends
 Where post acquisition dividends are declared (but not
yet paid) the treatment is as follows:
Journal Entry in B
DR Div. declared 100
CR Div. payable
100
Journal entries on consolidation
DR Div. revenue
100
CR Div. declared
100
DR Div. payable
100
CR Div. receivable
100
Journal Entry in A
DR Div. receivable 100
CR Div. revenue 100
P&L effects
B/S effects
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Intragroup post acquisition dividends
 What if A only owned 60% of B?
 Assume B declared a dividend of $100 (in total) out
of post acquisition profits
Journal Entry in B
DR Div declared
CR Cash
Journal Entry in A
100
100
DR Cash
60
CR Div. revenue
Journal Entry on consolidation
DR Div. revenue
60
CR Div. declared
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
60
60
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Intragroup borrowings
The consolidation journal entry to eliminate
intragroup balances in payable and receivable
accounts is:
DR
Payable (loan)
xxx
CR Receivable (loan)
xxx
To eliminate interest revenue and expense recorded
during the year by each entity:
DR
Interest revenue
xxx
CR Interest expense
xxx
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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Thank You
Compiled By: Mrs. Maheshwari Chand, Tr2,2014
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