Consolidation Subsequent to

the Acquisition Date

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Agenda
Intragroup balances & transactions
Intragroup balances
Intragroup transactions
Unrealized intragroup profits and losses
Intragroup sale of inventory

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Intragroup Transactions & Balances
 It is very common for companies within the
same group to trade among themselves. Group Financial Statements

 Any unsettled balances due to timing

differences in settlements could result in
balances being owed to or from other Parent
companies.

Intra-group Transactions
 All intragroup balances and transactions must & Balances
be fully eliminated at the group level in order
to show the group as a single entity.

 COSFP only discloses and reports the

Subsidiary
transactions with outsiders to avoid double
counting of assets & liabilities.

 The normal accounting treatment is to deduct

a similar amount from both the parent and
subsidiary's accounts. 3
Intragroup Balances
 Other group balances may
Group Financial Statements
exist between member
companies of a group and
these usually take the forms Parent
of:
 Intragroup loans and
Intragroup Balances
advances
 Intragroup dividend
receivable and payable
Subsidiary
 Intragroup bills of exchange

All intragroup balances

should be eliminated in full.
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Intragroup Loan and Advances
 Exists when a parent provides loans or advances to one of its
subsidiaries or vice versa.

Elimination process:
Dr Loan payable xxx
Cr Loan receivable xxx
(To eliminate intragroup balances)

Dr Interest revenue xxx

Cr Interest expenses xxx
(To eliminate interest revenue & expenses during the year)

 Leaving only any loan amount held by parties outside the group as
liability in the consolidate statement of financial position.
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Intragroup Dividend Receivable & Payable
 Parent recognises dividend income for its investment in a
subsidiary when the shareholders’ right to receive dividend has
been established.

 Dividend receivable in the parent’s account is an intragroup

item & must be eliminated on consolidation with the dividend
payable in the subsidiary’s account.

 If subsidiary is partially-owned, a portion of the dividend

payable by the subsidiary is payable to NCI interest.

 This portion of the dividend payable is not eliminated but

included in other payables in consolidated statement of
financial position.

Elimination process:
Dr Dividend payable as per subsidiary’s books xxx
Cr Dividend receivable as per parent’s books xxx
Cr Dividend payable to NCI xxx
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Intragroup Bills of Exchange
 Exist when one company sells goods and draws a bill of
exchange on another company in the group which
accepts the goods and the bill of exchange drawn.
 On consolidation, intragroup bills of exchange (bills
receivable per the seller/ drawer and bills payable per
the buyer/ drawee) are cancelled to the extent that they
have not been discounted to an outside party.
 When the seller/drawer has discounted some of these
bills for financing, the amount discounted cannot be
eliminated but must be shown as a liability.

Elimination process:
Dr Bill payable xxx
Cr Bill receivable xxx
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Intragroup Transactions
 Closely related to intragroup balances are
intragroup transactions, some of which give Group Financial Statements
rise to profits or losses.

 These are called post-acquisition intragroup

transactions and can take many forms such as:
Parent
 Sales of inventories between member
companies
 Sales of PPE between member companies
 Sales of inventories by one company but Intragroup Transactions
treated as PPE by another member
company
 Intragroup loans between member
companies giving rise to interest Subsidiary
receivable and payable
 Management fees charged by parent
company.

 IFRS 10/ MFRS 10 requires the consolidated

accounts should eliminate all intragroup
transactions. 8
Example 1 Example

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Example 1 Example

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 Example
Example 1

W1- Group Structure

• Parent & subsidiary
B Ltd controls 80% of C Ltd

W1: Group
W4: Non- • Date of acquisition
controlling 31 December 20x5
structure
interest

W2: W3: Group • NCI

Goodwill Retained NCI = 20%
computation Earnings
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 Example
Example 1

B Ltd C Ltd 3rd party

(Parent) (Subsidiary )

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 Example 1 Workings

Dr. Trade receivables RM100,000 Consolidation Adjustments:

B Ltd
(Parent) Cr. Sales RM100,000
(To eliminate intragroup account
balances)
20X8
Sold Dr. Sales RM100,000
Inventory
$100,000 Cr. Purchases RM100,000
(on credit)

C Ltd Dr. Purchases RM100,000

(Susidairy) Cr. Trade payable RM100,000

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 Example
Example 1

B Ltd C Ltd
(Parent) (Subsidiary )

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Example 1 Workings

Cash-in- Received
Consolidation Adjustments:
transit $70,000
$10,000
(To adjust for cash-in-transit)
Dr. Trade debtors $100,000
B Ltd Cr. Sales $100,000 Dr. Cash at bank 10,000
Dr. Cash at bank 70,000
Cr. Trade debtors 10,000
Cr. Trade debtors 70,000
Cash (To eliminate intragroup account
$80,000
Dr. Purchases $100,000 balances)
Cr. Trade creditors $100,000 Dr. Trade creditors 20,000
C Ltd Dr. Trade creditors 80,000 Cr. Trade debtors 20,000
Cr. Cash at bank 80,000
Trade creditors = 100k – 80k = 20k
Trade debtors = 100k – 70k – 10k = 20k

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 Example
Example 1

Discount B Ltd C Ltd

House (Parent) Unpaid (Subsidiary )
$4,000
Bill Bill
receivable payable

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Example 1 Workings

Consolidation Adjustments:

(To eliminate intragroup account

balances)
Dr. Bill payable $6,000
Cr. Bill receivable $6,000

(To eliminate intragroup account

balances)
Dr. Interest income S1,000
Cr. Interest expense $1,000

Interest Interest
income expense
Discount House
B Ltd C Ltd
$4,000 Unpaid
(Parent) (Subsidiary )
$20,000
Bill
Bill payable
receivable
$6,000
$10,000 17
$10,000
Unrealised Intragroup Profits or Losses
Group Financial Statements
 Consolidation problems arise
due to unrealised profits or
losses on intragroup
Parent
transactions.

 Typically involved sale of assets Intragroup Transactions

between entities in a group

where selling entity has recorded
profit or loss and the assets Subsidiary
remain with the purchasing entity
at the end of a reporting period.

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Unrealised Intragroup Profits or Losses
Intragroup profits or losses are only realised when the
goods or assets involved are sold to outside parties.

However, if the goods sold by one entity to another entity in

the group remain with the buying entity at the balance sheet
date, then the profit or loss made by the selling entity is said
to be unrealised. Why?

Need to eliminate any unrealised intragroup profits and

losses from the consolidated financial statements.

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Example 2- No unrealised Profits or
Losses Example & Workings

Parent Sell asset RM200

Dr. Cash 200
Cr. Asset 150
Cr. P/L (gain) 50

Dr. Asset 150

Cr. Cash 150
Parent Subsidiary Dr. Cr. Total
Cashflow 50 50 100

Sell asset RM150 Asset

P/L 50 50 100

Subsidiary
Dr. Cash 150
Cr. Asset 100
Cr. P/L(gain) 50
Buy asset RM100
Dr. Asset 100
Cr. Cash 100

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 Example & Workings

Example 2- Unrealised Profits or Losses

To eliminate unrealised profit
Parent
Dr. Gain on sale of PPE (P/L) 50
Cr. Asset 50
Dr. Asset 150
Cr. Cash 150
Parent Subsidiary Dr. Cr. Total
Cashflow (150) 50 (100)

Sell asset RM150 Asset 150 - 50 100

P/L 50 50 -

Subsidiary
Dr. Cash 150
Cr. Asset 100
Cr. P/L (Gain) 50
Buy asset RM100
Dr. Asset 100
Cr. Cash 100

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Unrealised Intragroup Profits or Losses
Unrealised profits eliminated on consolidation
should be allocated suitably between parent & NCI.

Calculation of NCI interests’ share of after-tax

profits & net assets that the directions of intragroup
sales matter and should be identified correctly.

Upstream and downstream sales.

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Unrealised Intragroup Profits or Losses
Upstream Sales
 Sales by Subsidiary to their Parent

 When full unrealised profits are eliminated on Subsidiary

consolidation, NCI should be allocated for their
share of unrealised profits. Upstream
sales

 NCI are considered to be internal to the group in

intragroup transactions, their share of the profits Parent NCI
in the consolidated profit or loss should be
based on the subsidiaries’ profit that have been
realised in transactions with parties external to
the group. Unrealised profits

 NCI’s share of profit in a selling subsidiary

should be calculated as
NCI’s per follows: after tax profit minus
Subsidiary’s
cent holding X Unrealised profit
in subsidiary

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Unrealised Intragroup Profits or Losses
Downstream Sales
 Sales by a Parent to its Subsidiaries.
Unrealised
profits
 The profit are recorded by parent.
Parent

 Amount of the subsidiaries’ profits Downstream

sales
are not affected by the elimination of
unrealised profits.
Subsidiary
 No adjustment made in the
calculation of NCI’s share of profits
or losses.

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Intragroup Sale of Inventory
 When an intragroup sale of inventory is transacted at cost to the selling entity,
no intragroup profit or loss can possibly arise.

 Inventory are transferred from one location (the seller) to another location (the
buyer) but all within the confines of the group.

 When inventory are transferred between member entities in a group at prices

other than costs, intragroup profit or losses arise.

 If all these inventory have been sold to parties outside the group within the
relevant accounting period, intragroup profits or losses on such transfers would
have been realized as the group concerned.

 If part of the inventory transferred are still held within the group at the end of
the relevant accounting period, you must adjust for the profit or loss element.

 Otherwise, the group’s profit and the closing inventory firgure in the
consolidated accounts would have included the unrealised profits or losses. 25
 Example
Example 4
 H Bhd is a parent company with a few subsidiaries. The following intragroup sales
were recorded for the years ended 31 December 2018 and 2019 respectively.

 Year 2018
Intragroup sales at invoice prices amounted to RM1,000,000 of which RM400,000
remained in the closing inventories of the buying companies.

 Year 2019
Intragroup sales at invoice prices amounted to RM1,600,000 of which RM600,000
remained in the closing inventories of the buying companies.

 The profit element on intragroup sales to the selling entities was at 20% of the
invoice prices.

Required:
Show the journal entries to eliminate the above intragroup transactions in the
consolidated accounts of H Bhd for both financial years 2018 and 2019.

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 Example 4
Workings

Year 2018
Intragroup sales at invoice prices amounted to RM1,000,000 of which RM400,000 remained in the closing
inventories of the buying companies.

The profit element on intragroup sales to the selling entities was at 20% of the invoice prices
CI = Closing inventory
Dr. Accounts receivable RM1,000,000
Seller Cr. Sales RM1,000,000
Cost of sales
= RM1,000,000 x
80% Sales =
= RM800,000 RM1,000,000

Buyer CI = RM400,000 Buyer Dr. Purchases RM1,000,000

Cr. Accounts payable RM1,000,000
Group CI = RM800,00 x 40%
= RM320,000 Consolidation Adjustments:
Unrealised Profit
(To eliminate intragroup sales)
= RM400,000 –
Dr. Sales RM1,000,000
RM320,000
RM600,000 Cr. Purchases RM1,000,000
= RM80,000
Inventories sold to
3rd party (To eliminate unrealised profit & adjust inventory)
Dr. Cost of goods sold RM80,000
Cr. Closing inventory RM80,000
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Intragroup Sale of Inventory
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.

To carry forward the net effect of last year’s consolidation journals.
Dr. Opening retained profits xxx
Cr. Opening inventories in profit or loss xxx

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Example 4
Workings

Year 2019
Intragroup sales at invoice prices amounted to RM1,600,000 of which RM600,000 remained in the
closing inventories of the buying companies.

The profit element on intragroup sales to the selling entities was at 20% of the invoice prices

Dr. Accounts receivable RM1,600,000

Seller Cr. Sales RM1,600,000

Unrealised Sales =
Profit in year 2015 RM1,600,000
= RM80,000
Dr. Purchases RM1,600,000
Buyer Cr. Accounts payable RM1,600,000
Consolidation Adjustments:

(To carry forward the net effect of last year’s

consolidation journals the following entry would be
required in year 2018)
Dr. Opening retained profits RM80,000
Cr. Cost of goods sold RM80,000

(To eliminate intragroup sales)

Dr. Sales RM1,600,000
Cr. Purchases RM1,600,000 29
 Example 4
Workings

Year 2019
Intragroup sales at invoice prices amounted to RM1,600,000 of which RM600,000 remained in the
closing inventories of the buying companies.

The profit element on intragroup sales to the selling entities was at 20% of the invoice prices

Cost of sales
Seller
600,000/1,600,000
= RM1,600,000 x 80%
= RM1,280,000 Sales = = 37.5% inventory not sold
RM1,600,000

Buyer CI = RM600,000 Buyer Consolidation Adjustments:

Group CI
(To eliminate unrealised profits in closing inventory)
= RM1,280,000 x 0.375
Dr. Cost of sales RM120,000
= RM480,000
Cr. Closing inventory RM120,000

RM1,000,000
Inventories sold to Unrealised Profit
3rd party = RM600,000 – RM480,000
= RM120,000
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