Intragroup Transactions PDF

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Intragroup Transactions Rationale for eliminating I/G transitions What are I/G transactions - Intra groups transactions – transactions that occur between entities within the group Why eliminate? - From the perspective of a group entity, only transactions with external parties can alter financial position, or affect its profit or loss - Intra-group exchanges do not increase group entity resources or revenues or cost - They must be eliminated on consolidation because, from a group perspective they do not occur - Without the elimination, group revenues and expenses would be overstated. Also, group assets and liabilities would be overstated. Hence, elimination si required to avoid distortion of the gross amounts for revenues, expense, assets and liabilities How to eliminate? - AASB 10 requires intragroup balances, transactions and expenses to be eliminated in full

Intragroup services – pro-forma entries To eliminate the service expense and revenue

If payable/receivable balances also exist, these balances must be eliminated on consolidation

Intragroup borrowings – pro-forma entries To eliminate intragroup balances in loan payable and receivable

To eliminate interest revenue and expenses recorded by each entity

If interest payable/receivable balances also exist , these balances must be eliminated

I/G transfers of inventory

Unrealized profit in ending inventory: with 100% unrealized profit - The parent would have recorded inventory assets of $150 - The subsidiary would have recorded sales of $150 and COGS of $100 – recognizing a profit of $50 - From the group’s viewpoint, the $50 profit is considered to be unrealized at 30 June 2012, as the inventory is yet to be sold to an external party - To work out the required elimination, it is helpful to consider the journal entries that have been recorded in the books of subsidiary and parent respectively What have been recorded by the subsidiary and the parent

What need to be eliminated

Unrealized profit in ending inventory: with < 100% unrealized profit

What have been recorded by the subsidiary and the parent

What need to be eliminated

Unrealized profit in opening inventory - If inventory is sold between entities within the group and not sold to external parties by the end of the year, then we need to consider how this affects the following years consolidation accounts - Again the profit will become realized only when the inventory is sold to an external party

Unrealized profit in opening inventory

Intragroup sale of depreciable assets...