Chapter 11

Consolidation: intragroup
transactions

Presenter

Associate Professor Parmod Chand

 Announcements

Final Exam - The FE format and instructions are available on

Moodle now. It will be held on Friday 11th February 2022 at 5pm.
Sitting arrangements will be published later.
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
 Transfers of inventory

The broad effect of intragroup sales and purchases of

inventory can be illustrated by reference to the diagram
below
Sells inventory
Purchases for $150 on 25 Parent
inventory for June 2019
$100 on 1 All inventory
June 2019 still held by the
Subsidiary parent at 30
June 2019
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
• The $50 profit made by the subsidiary is considered to be
unrealised at 30 June 2019, 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 2019
Dr Inventory 100
Cr A/C Payable 100

25 June 2019
Dr Cash 150 Dr Inventory 150
Cr Sales 150 Cr Cash 150
Dr COGS100
Cr Inventory 100

Dr ITE 15
Cr CTL 15
Unrealised profit in ending inventory
Consolidation journal adjustments are required at 30
June 2019 for the following: Note: Transactions (i) and (ii) can be
(i) Eliminate intragroup sale combined into a single entry as
follows:
Dr Sales 150 Dr Sales 150
Cr COGS 150 Cr COGS 100
Cr Inventory 50
(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 (50 x 0.3)
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
Unrealised profit in ending inventory

Parent Sub Adjustments Group

DR CR

S’ment of Financial Position -

EXTRACT

Accounts Receivable 0 150 150

Inventory 150 0 (ii) 50 100
Deferred Tax Asset (iii) 15 15

Accounts Payable 150 100 250

Current Tax Liability 0 15 15

S’ment of profit & loss EXTRACT

Sales 0 150 (i) 150 0

COGS 0 100 (ii) 50 (i) 150 0
Gross Profit 0 50 0
Income Tax Expense 0 15 (iii) 15 0
Profit / (Loss) after tax 0 35 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
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?

Sells
Parent
Purchases inventory for
inventory for $150 on 25
Sells 40% of
$100 on 1 June 2019
the inventory
June 2019 for $100 on
Subsidiary
30 June 2019

The journal entries processed by each entity and the

consolidation journal adjustments required are shown on
the following slides
Unrealised profit in ending inventory
Subsidiary Parent
1 June 2019
Dr Inventory 100
Cr A/C Payable 100

25 June 2019
Dr Cash 150 Dr Inventory 150
Cr Sales 150 Cr Cash 150 Dr COGS 100
Cr Inventory 100
Dr ITE 15
Cr CTL 15
30 June 2019
Dr A/C Rec 100
Cr Sales 100

Dr COGS 60
Cr Inventory 60

Dr ITE 12 (40 x 0.3)

COGS calculated as 40% of the
Cr CTL 12
inventory purchased
(i.e. 40% of $150) = $60
 Unrealised profit in ending inventory
Consolidation journal adjustments are required at 30
June 2019 for the following:
(i) Eliminate intragroup sale As with the previous example,
journals (i) and (ii) can be
Dr Sales 150 combined if desired
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 (50 x 0.6)
Cr Inventory 30
From a consolidated viewpoint the UNREALISED portion (ie 60%)
of the profit needs to be eliminated.
(iii) Recognise tax effect of profit elimination
Dr DTA 15 (50 x 0.3)
Cr ITE 15
Note that the Dr is recorded against the DTA, not the CTL (as was
done in the sub’s books)
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
Unrealised profit in opening inventory

Go back to our original example (where all inventory was still

held by the parent at 30 June 2019)

Purchases Sells
inventory for inventory for
$100 on 1 $150 on 25 Parent
June 2019 June 2019
Sells 100% of
the inventory
Subsidiary
for $175 on
30 July 2019
Unrealised profit in opening inventory

• To carry forward the net effect of last year’s consolidation

journals the following entry would be required on 1 July 2019
(refer back to slide 6):
Dr Retained earnings 35 Sales, COGS, ITE adjustments closed to
R/E
Dr DTA 15
Cr Inventory 50
• Once the inventory is sold to an external third party (and the
profit therefore realised) the above entry must be amended to
reflect the following for the remainder of the 2019/20 financial
year:
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)
Transfers of property, plant & equipment

• Consider the following example

• Subsidiary purchases machine for $100 on 1 July 2018

• Depreciates asset at 10% per year
• On 30 June 2019, 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
Intragroup sale of depreciable assets
Subsidiary Parent
1 July 2018
Dr Machine 100
Cr Cash 100

30 June 2019
Dr Dep’n expense 10
Cr Accum Dep’n 10

Dr Cash 150 Dr Machine 150

Dr Accum Dep’n 10 Cr Cash 150
Cr Machine 100
Cr Gain on sale 60

Dr ITE 18
Cr CTL 18
Intragroup sale of depreciable assets

Consolidation journal adjustments are required at 30 June

2019 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 WDV
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
Intragroup sale of depreciable assets

Parent Sub Adjustments Group

DR CR
Balance Sheet EXTRACT -
Cash (150) 150 0
Machine 150 0 (i) 10 (ii) 60 100
Accumulated 0 0 (i) 10 (10)
Depreciation
Deferred Tax Asset (iii) 18 18

Income Tax Liability 0 18 18

Profit & Loss EXTRACT

Gain on sale of Machine 0 60 (ii) 60 0
Depreciation 0 10 10
Gross Profit 0 50 (10)
Income Tax Expense 0 18 (iii) 18 0
Profit after Tax 0 35 (10)

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
 Intragroup sale of depreciable assets

• The parent (being the purchaser) will depreciate the asset

but at different value than the subsidiary would have
depreciated.
Subsidiary Parent Diff.
(originally) (now)
WDV at date of transfer 90 150 60
Remaining useful life 9 years 9 years 9 years
Dep’n p.a. 10 16.67 6.67

• On consolidation, necessary to reduce depreciation (back

to what it originally should have been), and record related
tax effect
Intragroup sale of depreciable assets
The net effect of the journals recorded on slide 16 will be
carried forward to future years as follows:
Dr Retained earnings 42
Dr DTA 18
Cr Accum. Depn 10
Cr Machine 50
In addition to the above, one year after transfer (30 June
2020) the entry would be as follows:
It is the DTA which is
Dr Accum Dep’n 6.67 credited (not the DTL) as
Cr Dep’n Expense 6.67 the entry is realising part
of the unrealised profit
(and corresponding DTA)
Dr ITE 2 (6.67 x 0.3) through the use of the
Cr DTA 2 asset
Intragroup sale of depreciable assets

In addition to the first entry on the previous page, two

years after transfer (30 June 2021) the entry would be
as follows:

Dr Accum Dep’n 13.34

Cr Depreciation Expense 6.67
Cr Retained Earnings 6.67

Dr ITE 2
Dr Retained Earnings 2
Cr DTA 4
 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 to textbook)

• Transfers from plant to inventory (refer to textbook)
 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 Services revenue xxx
CR Services expense xxx
• If payable/receivable balances also exist, these balances must
be eliminated on consolidation
 Intragroup dividends

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 DR Cash 100
CR Cash 100 CR Div. Revenue 100

Journal Entry on consolidation

DR Div. revenue 100
CR Div. declared 100
 Intragroup dividends

Where post acquisition dividends are declared (but not yet paid) the treatment is as
follows:
Journal Entry in B Journal Entry in A
DR Div. declared 100 DR Div. receivable 100
CR Div. payable 100 CR Div. revenue 100

Journal entries on consolidation

DR Div. revenue 100 P&L effects
CR Div. declared 100

DR Div. payable 100 B/S effects

CR Div. receivable 100
 Intragroup 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 Journal Entry in A

DR Div declared 100 DR Cash 60
CR Cash 100 CR Div. revenue 60

Journal Entry on consolidation

DR Div. revenue 60
CR Div. declared 60
 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
 Tutorial Questions

Leo 11e Chapter 11

1. Review Question 1
2. Review Question 4
3. Practice Question 11.3
4. Practice Question 11.6
5. Practice Question 11.7