ACCT4070-L4_-_Group_Reporting_-_Consolidation_under_IAS27

ACCT4070-L4_-_Group_Reporting_-_Consolidation_under_IAS27 -...

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Advanced Accounting I
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Group Reporting (4) - Consolidation under IAS27 (Elimination of Intragroup Transactions)
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Learning Objectives After reading Chapter 4, you should be able to: Understand the principles underlying elimination of intragroup balances and transactions Understand the rationale for consolidation adjustments to opening retained earnings (RE) Appreciate the significance of upstream vs downstream sales & the impact on NCI Pass the appropriate consolidation adjustments to eliminate unrealized profit or loss from transfer of fixed assets and inventory
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Unit Outline Elimination of Intragroup Transactions and Balances Adjustments of unrealized profit or loss arising from inter-company transfers Impact on NCI arising from adjustments of unrealized profit or loss Special Considerations for inter-company Transfer of Fixed Assets Special Considerations when Intragroup Transfers are made at a Loss
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Elimination of Intra-group Transactions and Balances Operational and financial interdependencies within the group entities Lead to intra-group transactions and balances Intra-group transactions include: Buying or selling of inventory ; Transferring of long lived assets ( IAS16 : PPE , Fixed Assets ) ; Rendering or procuring of services ; and Providing financing among the companies within the group Transfer of assets within the group usually includes a profit margin : Risks and rewards of ownership of assets remain in the group Profit is unrealized until the asset is sold to a third party The time lag between purchase and resale of assets results in overstatement of profit of the selling company and asset value of the buying company from the Group’s perspective
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Elimination of Intra-group Transactions and Balances Intra-group balances arise from unsettled balances of intra-group transactions E.g. Loan receivable/payable, Dividend receivable/payable, Accounts receivable/payable from or to group companies From an economic perspective, an entity is not able to transact with itself, therefore : All intragroup transactions and balances have to be eliminated in full during consolidation Elimination adjustments are made in relation to the original entries passed in the separate financial statements
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Elimination of Intra-group Transactions and Balances Elimination of unrealized profits and losses Profit or loss from selling an item to a related party normally is considered realized at the time of the sale from the selling company’s perspective The profit is not considered realized for consolidation purposes until confirmed, usually through resale to an unrelated party Unrealized intercompany profit is the unconfirmed profit from an intercompany transfer
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Elimination of Intra-group Transactions and Balances Parent Subsidiary Purchase $10,000 Sale /purchase $15,000 Sale $25,000 Gain $5,000 Gain $10,000 Gain $15,000 T1 T2 T3 Consolidation entities
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Illustration 1: Inter-company Sale Process – Case A
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  • Spring '12
  • Yeung
  • Fixed Assets, NCI, Generally Accepted Accounting Principles, unrealized profit, Dr Opening RE

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