Accounting for intragroup
transactions and minority
interests
Chapter 25
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-1
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
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-2
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-3
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-entity
transactions
• Typically eliminate these transactions by reversing
the original accounting entries made to recognise
the transactions in the separate legal entities
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-4
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-5
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-6
Dividend payments pre- and
post-acquisition (cont.)
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-7
Dividend payments pre- and
post-acquisition (cont.)
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
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-8
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
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-9
Journal entry to eliminate interentity 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
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-10
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-11
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-12
Inter-entity sale of inventory
(cont.)
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-13
Inter-entity sale of inventory
(cont.)
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-14
Inter-entity sale of inventory
(cont.)
• Consideration of tax paid on inter-entity sale of
inventory
–
Any tax paid by members of the group related to interentity sales where full amount of revenue has not been
earned from the group’s perspective, represents
prepayment of tax:
–
Dr
Cr
Deferred tax asset
Income tax expense
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-15
Inter-entity sale of inventory
(cont.)
• 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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-16
Inter-entity sale of inventory
(cont.)
•
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-17
Inter-entity sale of inventory
(cont.)
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-18
Inter-entity sale of inventory
(cont.)
• 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
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-19
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-20
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
Cr
Deferred tax asset
Income tax expense
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-21
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
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-22
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-23
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-24
Minority interests (cont.)
•
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-25
Minority interests (cont.)
–
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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-26
Minority interests (cont.)
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
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-27
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 noncurrent 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)
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-28
Summary (cont.)
•
•
•
•
Where there is sale of non-current assets within the group,
consolidation adjustments are required to eliminate any interentity 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
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider
25-29