微信客服：xiaoxionga100
微信客服：ITCS521
ACCT3011-无代写
时间：2024-09-04
The University of Sydney Page 1
ACCT3011 – Module 4
Intragroup transactions
(borrowing & inventory)
The University of Sydney Page 2
Learning objectives
After completing this module students should be able to:
1. Explain why consolidation worksheet adjustments are required where
there have been intragroup transactions
2. Prepare and explain worksheet adjusting entries to eliminate:
• Intragroup management fees
• Intragroup borrowings
• Intragroup inventory sales, including recognition of tax effects
• Unrealised profits or losses in both opening and closing inventory,
including recognition of tax effects
3. Review how all of this presents in Wesfarmers Annual Report
The University of Sydney Page 3
References
Textbook:
• Arthur et al Chapter 4 of Arthur et al. (Pages 193 – 224, that’s is, to
end of section 4.4.
Note error on page 213; credit to Tax Expense should be $15,000
(not $50,000)
Other readings:
• Wesfarmers 2023 Annual Report
Accounting standards:
• AASB 10 Consolidated Financial Statements
• AASB 102 Inventories
The University of Sydney Page 4
The University of Sydney Page 5
Objective 1
Explain why consolidation worksheet adjustments are required where
there have been intragroup transactions
(Arthur et al Section 4.1)
The University of Sydney Page 6
Recap Part 2c in consolidation process
3 key steps in the consolidation process
STEP 1: Acquisition Analysis – compare what we paid and what we received
STEP 2: Consolidation Adjusting Entries
STEP 2a: Business Combination Valuation Entry – Fair Value Adjustment (Module 3)
STEP 2b: Pre-acquisition Elimination Entry (and Goodwill Impairment if any)
STEP 2c: Intragroup Transactions Elimination Entry (Modules 4 and 5)
STEP 3: Non-controlling Interest (Module 6)
The University of Sydney Page 7
Context of intragroup transactions
• The Economic Entity Concept: the consolidated financial statements are the
statements of a group and are presented as those of a single economic entity.
• Thus, the consolidated financial statements should ONLY show the effects of
transactions with entities external to the economic entity.
A Ltd
(Parent)
B Ltd
(Subsidiary)
A Ltd Group
C Ltd
(External)
Upstream
transaction
Downstream
transaction
• On consolidation, ALL intragroup transactions, whether
upstream or downstream, must be eliminated in FULL
(AASB10 B86) despite ownership interest
• except dividends that are eliminated to extent
paid within the group (see Module 6)
• Eliminate both transactions and unrealized profit. If
one entity in the group has earned profit from another
entity in the group, it is unrealized from the group’s
viewpoint, until sold externally. And so that profit must
also be eliminated.
• We may have transactions to eliminate and/or
unrealized profits to eliminate, in any one accounting
period – distinguish the two clearly.
FLOW OF
TRANSACTION
(i.e. upstream
versus downstream)
look out for its
importance with
‘NCI’ in Module 6
The University of Sydney Page 8
Intra-group transactions: 3 Golden Rules
3 GOLDEN RULES from AASB 10 B86 – our consolidation adjusting entries:
1. Eliminate intragroup transactions
2. Eliminate unrealized profits
3. Recognize tax timing differences
We will practice writing consolidation entries for intragroup transactions by taking a
deductive approach! We will ask ourselves five questions to logically come to an answer.
1. Is this a prior period or a current period transaction?
2. What has been recorded by the legal entities?
3. What should be reported by the group?
4. What adjustments are necessary to get from the legal entities’ records, to what the
group should record? (Golden rules 1 and 2)
5. What tax effect adjusting entries must be recorded regarding the adjustments at
step 4? (Golden rule 3)
The University of Sydney Page 9
Objective 2
Prepare and explain worksheet adjusting entries to eliminate:
• Intragroup management fees
(Arthur et al Section4.2)
The University of Sydney Page 10
Transaction a: Intragroup services – Management fees
Parent Subsidiary
TRANSACTION #1
The parent charges a management fee of $100 to
the subsidiary and receives cash.
Parent
Dr Cash
Cr Management fee received
Subsidiary
Dr Management fee expense
Cr Cash
How should the group eliminate the
effect of this intragroup transaction?
And why?
Eliminate through consolidation adjusting entries.
Because it is NOT a transaction with anyone outside of the group.
The University of Sydney Page 11
Transaction a: Intragroup services – Management fees
Parent Subsidiary
TRANSACTION #1
The parent charges a management fee of $100 to the
subsidiary and received cash.
Parent Sub Consolidation adj Group
Dr Ref Cr
Cash 100 (100)
Mgt fee received 100
Mgt fee expense 100
0
0
0
Natural elimination
100
100
Consolidation journal eliminate as follows:
Dr Management fee received XX
Cr Management fee expense XX
Note: no impact on net profit (i.e. fee/expense
are both in consolidated profit) and so no tax
effect adjustment required.
Pro
forma
entry
The University of Sydney Page 12
Objective 2
Prepare and explain worksheet adjusting entries to eliminate:
• Intragroup borrowings
(Arthur et al Section 4.3)
The University of Sydney Page 13
Transaction b: Intragroup payables/receivables balances
Parent
Upstream transaction: parent is
given a loan from subsidiary.
Dr Cash
Cr Payable
Subsidiary
Dr Receivable
Cr Cash
Parent Sub Consolidation adj Group
Dr Ref Cr
Cash 100 (100)
Receivable 100
Payable 100
0
0
0
Natural elimination
100
100
Consolidation journal eliminate as follows:
Dr Payable XX
Cr Receivable XX
Consolidation issue:
Short term finance
(interest free)
No tax effect, because no net profit or net
asset impact.
Pro
forma
entry
The University of Sydney Page 14
Transaction b: Intragroup payables/receivables balances
Let’s look at a different scenario for intragroup management fees and revisit
TRANSACTION #1
The parent charges a management fee of $100 to
the subsidiary. At balance date the outstanding
amount has not been paid the subsidiary.
Does this mean there are two consolidation
adjusting journal entries?
Consolidation journal eliminate P&L as follows:
Dr Management fee received XX
Cr Management fee expense XX
Consolidation journal eliminate B&S as follows:
Dr Accrued fees payable XX
Cr Accrued fees receivable XX
Note the
additional
adjusting
journal entry
The University of Sydney Page 15
Transaction c: Intragroup borrowing and lending
Parent Sub Consolidation adj Group
Dr Ref Cr
Loan receivable 800
Loan payable 800
Interest revenue 80
Interest paid 80
Cash 800+80 (800)+(80)
Parent: loan to subsidiary
Dr Loan rec’b 800
Cr Cash 800
Dr Cash 80
Cr Interest revenue 80
Subsidiary
Dr Cash 800
Cr Loan payable 800
Dr Interest exp 80
Cr Cash 80
The subsidiary borrows $800,000 from the parent with an interest of 10% per annum.
0
0
0
Natural elimination
800
0
0
800
80
80
No external
entity involved.
So all accounts
should be 0
for the group.
The University of Sydney Page 16
Transaction c: Intragroup borrowing and lending
Consolidation adjusting journal:
Dr Loan payable 800
Cr Loan receivable 800
Dr Interest revenue 80
Cr Interest expense 80
Dr Interest payable 80
Cr Interest receivable 80
What if: the subsidiary borrows $800,000 from the parent with an interest of 10% per
annum and the interest has not yet been paid.
Again, there’s no need for a tax effect adjustment. Why?
No timing difference or change to consolidated net assets.
The University of Sydney Page 17
Objective 2
Prepare and explain worksheet adjusting entries to eliminate:
• Intragroup inventory sales, including recognition of tax effects
(Arthur et al Section 4.4)
The University of Sydney Page 18
Intragroup sales of inventory
Profit realisation for the group does not occur until the inventory is sold outside the group to a third party
3 GOLDEN RULES
WORKSHEET ADJUSTING ENTRIES FOR
INTRAGROUP SALES OF INVENTORY
1. Eliminate intragroup transactions Eliminate the effect of intragroup sales and
purchases
Eliminate any outstanding intercompany balances
at year end (finance transactions)
2. Eliminate unrealized profits Eliminate any unrealized profit held within the
carrying amount of inventory assets (consider
both closing and opening inventory)
3. Recognize tax timing differences Consider all necessary tax effect journals
We also need to be clear about whether we have a PERIODIC or PERPETUAL system as
our consolidation adjustments will differ slightly.
The University of Sydney Page 19
RECAP: Perpetual versus Periodic Systems of Inventory
Inventory Purchased
(purchased 2 units)
Inventory Sold
(sold 2 units)
Closing Inventory
(2 units left on hand??)
Opening Inventory
(3 units on hand)
Inventory losses?
PERPETUAL (continuous records)
When inventory is purchased:
- Dr Inventory
Cr Cash/Pay’b (asset)
When inventory is sold:
- Dr Cash/Receivable
Cr Sales
- Dr COGS
- Cr Inventory (asset)
An annual stocktake will also be undertaken…of course – a part of good management control. A journal entry
will made to adjust for any losses.
Remember this from ACCT1006?
The University of Sydney Page 20
RECAP: Perpetual versus Periodic Systems of Inventory
Inventory Purchased
(purchased 2 units)
Inventory Sold
(sold 2 units)
Closing Inventory
(2 units left on hand??)
Opening Inventory
(3 units on hand)
Inventory losses?
PERIODIC (relies on physical count at year end)
- The company maintains 3 ledger accounts that
are combined into COGS in the P&L:
PERIODIC (relies on physical count at year end)
When inventory is purchased:
- Dr Purchases
Cr Cash/Pay’b (asset)
When inventory is sold:
- Dr Cash/Receivable
Cr Sales
- Not perpetual – so no inventory entry. At year end an
annual stocktake will also be undertaken and we will:
- Dr Inventory
Cr Closing inventory (COGS)
Opening Inventory (count) Debit
+ Purchases (company records) Debit
– Closing inventory
(determined through an annual stocktake)
Credit
= Inventory Sold (COGS) Debit
The University of Sydney Page 21
Transaction d: Intragroup Sales of Inventories
– What are the scenarios to consider?
1. Intragroup sales of inventories in the current period
a. Case 1: The inventories are all sold externally by the end of the period
• So no unrealized profit in closing inventories
b. Case 2: The inventories remain unsold to external entities by the end of
the period
• So the profit made by the selling entity is 100% unrealized from the
group’s perspective – unrealized profit in closing inventories
c. Case 3: The inventories are partially sold to external entities by the end
of the period
• The carrying value of closing inventories includes some unrealized
profit
2. Intragroup unrealized profit at the end of the prior period
• Unrealized profit in opening inventories
The University of Sydney Page 22
CASE 1: Intragroup sale in current period
– all sold to an entity external to the group before the end of the year
Parent Subsidiary
TRANSACTION #1
External Supplier
sold inventory to the
parent for $500,000
on 1.6.2019
TRANSACTION #2 (INTERNAL)
Parent sold that inventory to Sub for
$750,000 (markup 50%) on 25.6.2019
TRANSACTION #3
Subsidiary sold all of
that inventory externally
for $800,000 on
30.6.2019
– Parent
1 June 2019 (external)
Dr Inventory 500
Cr Cash 500
25 June 2019 (INTERNAL)
Dr Cash 750
Cr Sales 750
Dr COGS 500
Cr Inventory 500
– Subsidiary
25 June 2019 (INTERNAL)
Dr Inventory 750
Cr Cash 750
30 June 2019 (external)
Dr Cash 800
Cr Sales 800
Dr COGS 750
Cr Inventory 750
Assume
perpetual
inventory
system
The University of Sydney Page 23
2. Do we have to also eliminate the $250 profit?
No - because inventory all sold externally
$300 realized profit = $250 (parent) + $50 (subsidiary)
CASE 1: Intragroup sale in current period
– all sold externally by the group before the end of the year
Parent Sub Consolidation adj Group
Dr
(eliminate)
Ref Cr
(eliminate)
Sales 750 800
COGS 500 750
800750
750 500
1. Eliminate 100% of the internal sales
Dr Sales 750
Cr COGS 750
Assume perpetual
inventory system
The University of Sydney Page 24
CASE 2: Intragroup sale in current period
– all still held by the group at the end of the year
Parent Subsidiary
TRANSACTION #1
External Supplier
sold inventory to the
parent for $500,000
on 1 June 2019
TRANSACTION #2 (INTERNAL)
Parent sold that inventory to Sub for
$750,000 (markup of 50%) on 25.6.2019
All inventory still
held by subsidiary
at 30 June 2019
– Parent
1 June 2019 (external)
Dr Inventory 500
Cr Cash 500
25 June 2019 (INTERNAL)
Dr Cash 750
Cr Sales 750
Dr COGS 500
Cr Inventory (asset) 500
– Subsidiary
25 June 2019 (INTERNAL)
Dr Inventory (asset) 750
Cr Cash 750
Assume
perpetual
inventory
system
The University of Sydney Page 25
CASE 2: Intragroup sale in current period
– all still held by the group at the end of the year
Assume perpetual
inventory system
You can also combine them into one:
Dr Sales 750
Cr COGS 500
Cr Inventory 250
Parent Sub Consolidation adj Group
Dr
(eliminate)
Ref Cr
(eliminate)
Sales 750
COGS 500
Inventory 750
0750
250
0750250
500
1. Eliminate 100% of the internal sales
Dr Sales 750
Cr COGS 750
2. Eliminate 100% of the unrealized profit
Dr COGS 250
Cr Inventory (asset) 250
The University of Sydney Page 26
CASE 2: Intragroup sale in current period
– all still held by the group at the end of the year
– The tax problem – now, unlike case 1, our consolidation elimination has
changed the CV of a taxable asset. See how our journal entry reduces the
CV of Inventory…..so we need to also record a DTA
– Can you also explain – why do we credit ITE?
3. Account for the tax adjustments
Dr DTA 75 (Prepayment of tax by parent on behalf of the group)
Cr ITE 75 (reduce ITE by the amount paid by parent)
Parent Sub Consolidation adj Group
Dr
(eliminate)
Ref Cr
(eliminate)
Sales 750
COGS 500
Inventory 750
0750
250
0750250
500
The University of Sydney Page 27
CASE 3: Intragroup sale in current period
– only part still held by the group at the end of the year
Parent Subsidiary
TRANSACTION #1
External Supplier
sold inventory to the
parent for $500,000
on 1 June 2019
TRANSACTION #2 (INTERNAL)
Parent sold inventory for $750,000
(markup of 50% on cost) on 25 June 2019
TRANSACTION #3
Subsidiary still holds 30%
(i.e. 70% sold externally)
by 30 June 2019
– Parent
1 June 2019 (external)
Dr Inventory 500
Cr Cash 500
25 June 2019 (INTERNAL)
Dr Cash 750
Cr Sales 750
Dr COGS 500
Cr Inventory 500
– Subsidiary
25 June 2019 (INTERNAL)
Dr Inventory 750
Cr Cash 750
30 June 2019 (external)
Dr Cash xxx
Cr Sales xxx
Dr COGS 525
Cr Inventory (70%*$750) 525
Assume
perpetual
inventory
system
The University of Sydney Page 28
CASE 3: Intragroup sale in current period
– only part still held by the group at the end of the year
Parent Subsidiary
TRANSACTION #1
External Supplier
sold inventory to the
parent for $500,000
on 1 June 2019
TRANSACTION #2 (INTERNAL)
Parent sold inventory for $750,000
(markup of 50% on cost) on 25 June 2019
TRANSACTION #3
Subsidiary only held 30%
(i.e. 70% sold externally
for $xxx) of that inventory
on 30 June 2019
Assume perpetual
inventory system
Parent Sub Consolidation adj Group
Dr
(eliminate)
Ref Cr
(eliminate)
Sales 750 xxx
COGS 500 525
Inventory 225
xxx750
75
35075075
150
1. Eliminate 100% of the internal sales
Dr Sales 750
Cr COGS 750
2. Only 30% of the profit is unrealized:
Dr COGS 75
Cr Inventory (asset) 75
500*70% sold
500*30% on hand
The University of Sydney Page 29
CASE 3: Intragroup sale in current period
– only part still held by the group at the end of the year
– So again, we could combine this into 3 lines of journal:
– And then our tax entry: Profit on transfer 750-500 =250 x 30% = 75
Elimination of the transaction and the unrealised profit:
Dr Sales 750
Cr COGS 675
Cr Inventory 75
3. Account for the tax adjustments
Dr DTA ($75*30%) 22.5
Cr ITE 22.5
The University of Sydney Page 30
How about the periodic system? Consider case 2 again
Subsidiary Parent
TRANSACTION #1
External Supplier
sold inventory to the
subsidiary for $200,000
on 1 June 2018
TRANSACTION #2 (INTERNAL)
Subsidiary sold inventory for $250,000 (markup
of 25% on cost) ON CREDIT on 25 June 2018
All inventory still
held by parent at
30 June 2018
– Subsidiary
1 June 2018 (external)
Dr Purchases 200
Cr Cash 200
25 June 2018 (INTERNAL)
Dr A/Receivable 250
Cr Sales 250
Year end stocktake:
Dr Inventory (asset) 0
Cr Closing inventory (COGS) 0
– Parent
25 June 2018 (INTERNAL)
Dr Purchases 250
Cr A/Payable 250
Year end stocktake:
Dr Inventory (asset) 250
Cr Closing inventory (COGS) 250
Upstream transaction
Assume
PERIODIC
inventory
system
where
Opening Inv.
+ Purchases
– Closing Inv.
= COGS
The University of Sydney Page 31
2. Eliminate 100% of the payable/receivable
Dr Accounts payable 250
Cr Accounts receivable 250
Unrealised profit in closing inventory
- Periodic inventory system
1. Eliminate 100% of the internal sales
Dr Sales 250
Cr Purchases (COGS) 250
3. Eliminate unrealized profit
Dr Closing inventory (COGS) 50
Cr Inventory (asset) 50
4. Tax effect
Dr Deferred tax asset 15
Cr Income tax expense 15
1. Eliminate 100% of the internal
sales
Dr Sales 750
Cr COGS 750
2. Eliminate 100% of the
unrealized profit
Dr COGS 250
Cr Inventory (asset) 250
3. Account for the tax adjustments
Dr DTA 75
Cr ITE 75
Compare to the entries under the
perpetual inventory system
(from slides 25 and 26)
The University of Sydney Page 32
Parent Sub Consolidation adj Group
Dr Ref Cr
Sales 1
Opening Inventory
+Purchases 1
- Closing Inventory 3
=COGS
Income Tax Expense 4
DTA 4
Accounts Receivable 2
Inventory 3
Cash
Accounts Payable 2
200
(200)
250
250
250
250 0
0250
250
250
250
250
250
50
50
15
1515
200
(200)
15
0
0
200
0
0
200
0
The University of Sydney Page 33
Summary: Current Period Transfer of Inventory- Cases 1 to 3 (Periodic)
[For perpetual system, replace (1) op. inventory, (2) purchases, and (3) cl. Inventory by COGS]
Case 1:
all sold
Case 2:
unsold
Case 3:
partially sold (70% sold)
Adjusting Entries
required on
consolidation
Dr Sales 750
Cr Purchases (COGS) 750
Dr Sales 750
Cr Purchases (COGS) 750
Dr Cl. Inventory(COGS)250
Cr Inventory (asset) 250
Dr DTA 75
Cr ITE 75
Dr Sales 750
Cr Purchases(COGS) 750
Dr Cl. Inventory (COGS) 75
Cr Inventory (asset) 75
Dr DTA 22.5
Cr ITE 22.5
Unrealized Profit No unrealized profit.
Entire profit on intragroup
sale is unrealized.
30% of profit on intragroup
sale is unrealized.
Adj. to Sales and
Purchases
The adjustment to sales (purchases) is always the amount of sales (purchases) within the
group (i.e. $750)
Adj. to Inventory and
Closing Inventory (COGS)
→Adjust unrealized
profit within the group
The adjustment to inventory is always equal to the percentage of inventory still on hand
within the group multiplied by the profit on the sale within the group (i.e. the unrealized
profit = % of inventory still on hand * (transfer price – original cost)).
0% * ($750-$500)
= $0
100% * ($750-$500)
= $250
30% * ($750-$500)
= $75
Adj. to Tax Effect
The tax effect is always equal to the tax rate multiplied by the unrealized profit
30% * $0 = $0 30% * $250 = $75 30% * $75 = $22.5
The University of Sydney Page 34
Intragroup inventory sales
Tutorial
Questions
The University of Sydney Page 35
Objective 2
Prepare and explain worksheet adjusting entries to eliminate:
• Unrealised profits or losses in both opening and closing inventory,
including recognition of tax effects
(Arthur et al Section 4.4)
The University of Sydney Page 36
Transaction d: Intragroup Sales of Inventories
– What are the scenarios to consider?
1. Intragroup unrealized profit at the end of the prior period
– An intragroup sale occurred during previous period, and all or part of the
inventory was still on hand by the end of last year
– This means that last year we eliminated unrealised profit in closing
inventory. We did a journal entry to reduce profit…. (Cases 2 or 3)
– And so this year we must recognise that we have unrealised profit in
opening inventory (to ensure that last period’s closing inventory = this
period’s opening inventory)
2. Consider – if there was an intragroup transaction last year, and all of that
inventory had been on sold to an external party by the end of last year (Case 1),
there would have been no unrealised profit last year, and so no entry will be
required this year.
The University of Sydney Page 37
Intragroup sale in the prior period and remains unsold (DOC 30 June 2019)
- unrealized profit in opening inventory. Assume perpetual system
Subsidiary Parent
TRANSACTION #1
External Supplier
sold inventory to the
subsidiary for $200,000
on 1 June 2018
TRANSACTION #2 (INTERNAL)
Subsidiary sold inventory for $250,000 (markup
of 25% on cost) for cash on 25 June 2018
All inventory still held by
parent at 30 June 2018 and
still at 30 June 2019
– Subsidiary
1 June 2018 (external)
Dr Inventory 200
Cr Cash 200
25 June 2018 (INTERNAL)
Dr Cash 250
Cr Sales 250
Dr COGS 200
Cr Inventory 200
– Parent
25 June 2018 (INTERNAL)
Dr Inventory 250
Cr Cash 250
Upstream transaction
The University of Sydney Page 38
Unrealised profit in opening inventory
(assuming still unrealised by 30 June 2019)
– Recall the journal entries we did last year (30.6.2018):
– Now we need to repeat the impact of those journal entries at 30.6.2019:
Account for the tax adjustments:
Dr DTA 15
Cr ITE 15
Elimination of the transaction and the unrealised profit:
Dr Sales 250
Cr COGS 250
Dr COGS 50
Cr Inventory (asset) 50
Op. RE (1/7/18) 50
Inventory (asset) 50
DTA 15
Op. RE (1/7/18) 15
The University of Sydney Page 39
CWS (extract) Parent Sub Consolidation adj Group
30 June 2018 Dr Ref Cr
Sales
COGS 0 (200) 200
Income Tax Expense
Closing R/E 0 35 0
DTA 0 0 15 15
Inventory 250 0 50 200
CWS (extract) Parent Sub Consolidation adj Group
30 June 2019 Dr Ref Cr
Opening R/E
DTA
Inventory
250 250
(15) 15 0
0250
0
0
15 15
15 050
50 200
35
We can observe that we
are effectively ‘moving’
profit from one period to
anther
Closing R/E
- Closing
inventory/gross profit
overstated by $50
- ITE overstated by $15
The University of Sydney Page 40
What if the unrealized profit in opening inventory
becomes realized in the current period?
Subsidiary Parent
TRANSACTION #1
External Supplier
sold inventory to the
subsidiary for $200,000
on 1 June 2018
TRANSACTION #2 (INTERNAL)
Subsidiary sold inventory for $250,000 (markup
of 25% on cost) for cash on 25 June 2018
– Parent (for year ending 30 June 2019)
20 June 2019
Dr Cash 320
Cr Sales 320
Dr COGS 250
Cr Inventory 250
Upstream transaction
TRANSACTION #3
Parent sold all of that
inventory externally
for $320,000
on 20 June 2019
The University of Sydney Page 41
Unrealised profit in opening inventory
(realised in the current period)
parent sub elim
(Dr)
elim
(Cr)
group
Sales 320 - 320
COGS (250) - 50 (200)
ITE (21) - 15 (36)
Opening retained earnings - 35 50 15 0
Consolidation journals: Dr Cr
Op. RE (1/7/18) 50
COGS 50
Income tax expense 15
Op. RE (1/7/18) 15
Check:
120x 30%
= 36
The University of Sydney Page 42
Unrealised losses in inventory
(not covered in this unit)
– Less common
– AASB 102 requires inventory valuation at lower of cost or NRV. So write
down is more likely to have been already recorded prior to
intercompany sale. Given AASB 102 requirements, difficult to see how a
consolidation adjustment could eventuate
– If there is a transfer at a loss, the effects must also be eliminated on
consolidation
– Tax effect of unrealised losses would cause DTL
The University of Sydney Page 43
More notes on tax effect accounting
– Textbook assumes that individual (legal) entities (that is, parent entity and
subsidiary entity) pay tax separately
– Of course, the group is not a legal entity and so does not pay tax (textbook
assumes that tax consolidation does not apply)
– Therefore, we would never see debits or credits to “current tax payable” as part
of our consolidation journal entries (but we would see “current tax payable”
coming into the worksheet from the individual parent and subsidiary entities)
– This means that tax effect adjustments on consolidation accounting are limited to
the following accounts:
– DTA
– DTL
– Income tax expense
The University of Sydney Page 44
Objective 3
Understand related treatments in the Wesfarmers Annual Report
(Wesfarmers 2023 Annual Report)
The University of Sydney Page 45
What’s in Wesfamers consolidated financial statements?
Not much! Because of course its all eliminated
See page 137
The University of Sydney Page 46
Next module
Intragroup Transactions:
Non-current assets
ACCT3011 – Module 4
Intragroup transactions
(borrowing & inventory)
The University of Sydney Page 2
Learning objectives
After completing this module students should be able to:
1. Explain why consolidation worksheet adjustments are required where
there have been intragroup transactions
2. Prepare and explain worksheet adjusting entries to eliminate:
• Intragroup management fees
• Intragroup borrowings
• Intragroup inventory sales, including recognition of tax effects
• Unrealised profits or losses in both opening and closing inventory,
including recognition of tax effects
3. Review how all of this presents in Wesfarmers Annual Report
The University of Sydney Page 3
References
Textbook:
• Arthur et al Chapter 4 of Arthur et al. (Pages 193 – 224, that’s is, to
end of section 4.4.
Note error on page 213; credit to Tax Expense should be $15,000
(not $50,000)
Other readings:
• Wesfarmers 2023 Annual Report
Accounting standards:
• AASB 10 Consolidated Financial Statements
• AASB 102 Inventories
The University of Sydney Page 4
The University of Sydney Page 5
Objective 1
Explain why consolidation worksheet adjustments are required where
there have been intragroup transactions
(Arthur et al Section 4.1)
The University of Sydney Page 6
Recap Part 2c in consolidation process
3 key steps in the consolidation process
STEP 1: Acquisition Analysis – compare what we paid and what we received
STEP 2: Consolidation Adjusting Entries
STEP 2a: Business Combination Valuation Entry – Fair Value Adjustment (Module 3)
STEP 2b: Pre-acquisition Elimination Entry (and Goodwill Impairment if any)
STEP 2c: Intragroup Transactions Elimination Entry (Modules 4 and 5)
STEP 3: Non-controlling Interest (Module 6)
The University of Sydney Page 7
Context of intragroup transactions
• The Economic Entity Concept: the consolidated financial statements are the
statements of a group and are presented as those of a single economic entity.
• Thus, the consolidated financial statements should ONLY show the effects of
transactions with entities external to the economic entity.
A Ltd
(Parent)
B Ltd
(Subsidiary)
A Ltd Group
C Ltd
(External)
Upstream
transaction
Downstream
transaction
• On consolidation, ALL intragroup transactions, whether
upstream or downstream, must be eliminated in FULL
(AASB10 B86) despite ownership interest
• except dividends that are eliminated to extent
paid within the group (see Module 6)
• Eliminate both transactions and unrealized profit. If
one entity in the group has earned profit from another
entity in the group, it is unrealized from the group’s
viewpoint, until sold externally. And so that profit must
also be eliminated.
• We may have transactions to eliminate and/or
unrealized profits to eliminate, in any one accounting
period – distinguish the two clearly.
FLOW OF
TRANSACTION
(i.e. upstream
versus downstream)
look out for its
importance with
‘NCI’ in Module 6
The University of Sydney Page 8
Intra-group transactions: 3 Golden Rules
3 GOLDEN RULES from AASB 10 B86 – our consolidation adjusting entries:
1. Eliminate intragroup transactions
2. Eliminate unrealized profits
3. Recognize tax timing differences
We will practice writing consolidation entries for intragroup transactions by taking a
deductive approach! We will ask ourselves five questions to logically come to an answer.
1. Is this a prior period or a current period transaction?
2. What has been recorded by the legal entities?
3. What should be reported by the group?
4. What adjustments are necessary to get from the legal entities’ records, to what the
group should record? (Golden rules 1 and 2)
5. What tax effect adjusting entries must be recorded regarding the adjustments at
step 4? (Golden rule 3)
The University of Sydney Page 9
Objective 2
Prepare and explain worksheet adjusting entries to eliminate:
• Intragroup management fees
(Arthur et al Section4.2)
The University of Sydney Page 10
Transaction a: Intragroup services – Management fees
Parent Subsidiary
TRANSACTION #1
The parent charges a management fee of $100 to
the subsidiary and receives cash.
Parent
Dr Cash
Cr Management fee received
Subsidiary
Dr Management fee expense
Cr Cash
How should the group eliminate the
effect of this intragroup transaction?
And why?
Eliminate through consolidation adjusting entries.
Because it is NOT a transaction with anyone outside of the group.
The University of Sydney Page 11
Transaction a: Intragroup services – Management fees
Parent Subsidiary
TRANSACTION #1
The parent charges a management fee of $100 to the
subsidiary and received cash.
Parent Sub Consolidation adj Group
Dr Ref Cr
Cash 100 (100)
Mgt fee received 100
Mgt fee expense 100
0
0
0
Natural elimination
100
100
Consolidation journal eliminate as follows:
Dr Management fee received XX
Cr Management fee expense XX
Note: no impact on net profit (i.e. fee/expense
are both in consolidated profit) and so no tax
effect adjustment required.
Pro
forma
entry
The University of Sydney Page 12
Objective 2
Prepare and explain worksheet adjusting entries to eliminate:
• Intragroup borrowings
(Arthur et al Section 4.3)
The University of Sydney Page 13
Transaction b: Intragroup payables/receivables balances
Parent
Upstream transaction: parent is
given a loan from subsidiary.
Dr Cash
Cr Payable
Subsidiary
Dr Receivable
Cr Cash
Parent Sub Consolidation adj Group
Dr Ref Cr
Cash 100 (100)
Receivable 100
Payable 100
0
0
0
Natural elimination
100
100
Consolidation journal eliminate as follows:
Dr Payable XX
Cr Receivable XX
Consolidation issue:
Short term finance
(interest free)
No tax effect, because no net profit or net
asset impact.
Pro
forma
entry
The University of Sydney Page 14
Transaction b: Intragroup payables/receivables balances
Let’s look at a different scenario for intragroup management fees and revisit
TRANSACTION #1
The parent charges a management fee of $100 to
the subsidiary. At balance date the outstanding
amount has not been paid the subsidiary.
Does this mean there are two consolidation
adjusting journal entries?
Consolidation journal eliminate P&L as follows:
Dr Management fee received XX
Cr Management fee expense XX
Consolidation journal eliminate B&S as follows:
Dr Accrued fees payable XX
Cr Accrued fees receivable XX
Note the
additional
adjusting
journal entry
The University of Sydney Page 15
Transaction c: Intragroup borrowing and lending
Parent Sub Consolidation adj Group
Dr Ref Cr
Loan receivable 800
Loan payable 800
Interest revenue 80
Interest paid 80
Cash 800+80 (800)+(80)
Parent: loan to subsidiary
Dr Loan rec’b 800
Cr Cash 800
Dr Cash 80
Cr Interest revenue 80
Subsidiary
Dr Cash 800
Cr Loan payable 800
Dr Interest exp 80
Cr Cash 80
The subsidiary borrows $800,000 from the parent with an interest of 10% per annum.
0
0
0
Natural elimination
800
0
0
800
80
80
No external
entity involved.
So all accounts
should be 0
for the group.
The University of Sydney Page 16
Transaction c: Intragroup borrowing and lending
Consolidation adjusting journal:
Dr Loan payable 800
Cr Loan receivable 800
Dr Interest revenue 80
Cr Interest expense 80
Dr Interest payable 80
Cr Interest receivable 80
What if: the subsidiary borrows $800,000 from the parent with an interest of 10% per
annum and the interest has not yet been paid.
Again, there’s no need for a tax effect adjustment. Why?
No timing difference or change to consolidated net assets.
The University of Sydney Page 17
Objective 2
Prepare and explain worksheet adjusting entries to eliminate:
• Intragroup inventory sales, including recognition of tax effects
(Arthur et al Section 4.4)
The University of Sydney Page 18
Intragroup sales of inventory
Profit realisation for the group does not occur until the inventory is sold outside the group to a third party
3 GOLDEN RULES
WORKSHEET ADJUSTING ENTRIES FOR
INTRAGROUP SALES OF INVENTORY
1. Eliminate intragroup transactions Eliminate the effect of intragroup sales and
purchases
Eliminate any outstanding intercompany balances
at year end (finance transactions)
2. Eliminate unrealized profits Eliminate any unrealized profit held within the
carrying amount of inventory assets (consider
both closing and opening inventory)
3. Recognize tax timing differences Consider all necessary tax effect journals
We also need to be clear about whether we have a PERIODIC or PERPETUAL system as
our consolidation adjustments will differ slightly.
The University of Sydney Page 19
RECAP: Perpetual versus Periodic Systems of Inventory
Inventory Purchased
(purchased 2 units)
Inventory Sold
(sold 2 units)
Closing Inventory
(2 units left on hand??)
Opening Inventory
(3 units on hand)
Inventory losses?
PERPETUAL (continuous records)
When inventory is purchased:
- Dr Inventory
Cr Cash/Pay’b (asset)
When inventory is sold:
- Dr Cash/Receivable
Cr Sales
- Dr COGS
- Cr Inventory (asset)
An annual stocktake will also be undertaken…of course – a part of good management control. A journal entry
will made to adjust for any losses.
Remember this from ACCT1006?
The University of Sydney Page 20
RECAP: Perpetual versus Periodic Systems of Inventory
Inventory Purchased
(purchased 2 units)
Inventory Sold
(sold 2 units)
Closing Inventory
(2 units left on hand??)
Opening Inventory
(3 units on hand)
Inventory losses?
PERIODIC (relies on physical count at year end)
- The company maintains 3 ledger accounts that
are combined into COGS in the P&L:
PERIODIC (relies on physical count at year end)
When inventory is purchased:
- Dr Purchases
Cr Cash/Pay’b (asset)
When inventory is sold:
- Dr Cash/Receivable
Cr Sales
- Not perpetual – so no inventory entry. At year end an
annual stocktake will also be undertaken and we will:
- Dr Inventory
Cr Closing inventory (COGS)
Opening Inventory (count) Debit
+ Purchases (company records) Debit
– Closing inventory
(determined through an annual stocktake)
Credit
= Inventory Sold (COGS) Debit
The University of Sydney Page 21
Transaction d: Intragroup Sales of Inventories
– What are the scenarios to consider?
1. Intragroup sales of inventories in the current period
a. Case 1: The inventories are all sold externally by the end of the period
• So no unrealized profit in closing inventories
b. Case 2: The inventories remain unsold to external entities by the end of
the period
• So the profit made by the selling entity is 100% unrealized from the
group’s perspective – unrealized profit in closing inventories
c. Case 3: The inventories are partially sold to external entities by the end
of the period
• The carrying value of closing inventories includes some unrealized
profit
2. Intragroup unrealized profit at the end of the prior period
• Unrealized profit in opening inventories
The University of Sydney Page 22
CASE 1: Intragroup sale in current period
– all sold to an entity external to the group before the end of the year
Parent Subsidiary
TRANSACTION #1
External Supplier
sold inventory to the
parent for $500,000
on 1.6.2019
TRANSACTION #2 (INTERNAL)
Parent sold that inventory to Sub for
$750,000 (markup 50%) on 25.6.2019
TRANSACTION #3
Subsidiary sold all of
that inventory externally
for $800,000 on
30.6.2019
– Parent
1 June 2019 (external)
Dr Inventory 500
Cr Cash 500
25 June 2019 (INTERNAL)
Dr Cash 750
Cr Sales 750
Dr COGS 500
Cr Inventory 500
– Subsidiary
25 June 2019 (INTERNAL)
Dr Inventory 750
Cr Cash 750
30 June 2019 (external)
Dr Cash 800
Cr Sales 800
Dr COGS 750
Cr Inventory 750
Assume
perpetual
inventory
system
The University of Sydney Page 23
2. Do we have to also eliminate the $250 profit?
No - because inventory all sold externally
$300 realized profit = $250 (parent) + $50 (subsidiary)
CASE 1: Intragroup sale in current period
– all sold externally by the group before the end of the year
Parent Sub Consolidation adj Group
Dr
(eliminate)
Ref Cr
(eliminate)
Sales 750 800
COGS 500 750
800750
750 500
1. Eliminate 100% of the internal sales
Dr Sales 750
Cr COGS 750
Assume perpetual
inventory system
The University of Sydney Page 24
CASE 2: Intragroup sale in current period
– all still held by the group at the end of the year
Parent Subsidiary
TRANSACTION #1
External Supplier
sold inventory to the
parent for $500,000
on 1 June 2019
TRANSACTION #2 (INTERNAL)
Parent sold that inventory to Sub for
$750,000 (markup of 50%) on 25.6.2019
All inventory still
held by subsidiary
at 30 June 2019
– Parent
1 June 2019 (external)
Dr Inventory 500
Cr Cash 500
25 June 2019 (INTERNAL)
Dr Cash 750
Cr Sales 750
Dr COGS 500
Cr Inventory (asset) 500
– Subsidiary
25 June 2019 (INTERNAL)
Dr Inventory (asset) 750
Cr Cash 750
Assume
perpetual
inventory
system
The University of Sydney Page 25
CASE 2: Intragroup sale in current period
– all still held by the group at the end of the year
Assume perpetual
inventory system
You can also combine them into one:
Dr Sales 750
Cr COGS 500
Cr Inventory 250
Parent Sub Consolidation adj Group
Dr
(eliminate)
Ref Cr
(eliminate)
Sales 750
COGS 500
Inventory 750
0750
250
0750250
500
1. Eliminate 100% of the internal sales
Dr Sales 750
Cr COGS 750
2. Eliminate 100% of the unrealized profit
Dr COGS 250
Cr Inventory (asset) 250
The University of Sydney Page 26
CASE 2: Intragroup sale in current period
– all still held by the group at the end of the year
– The tax problem – now, unlike case 1, our consolidation elimination has
changed the CV of a taxable asset. See how our journal entry reduces the
CV of Inventory…..so we need to also record a DTA
– Can you also explain – why do we credit ITE?
3. Account for the tax adjustments
Dr DTA 75 (Prepayment of tax by parent on behalf of the group)
Cr ITE 75 (reduce ITE by the amount paid by parent)
Parent Sub Consolidation adj Group
Dr
(eliminate)
Ref Cr
(eliminate)
Sales 750
COGS 500
Inventory 750
0750
250
0750250
500
The University of Sydney Page 27
CASE 3: Intragroup sale in current period
– only part still held by the group at the end of the year
Parent Subsidiary
TRANSACTION #1
External Supplier
sold inventory to the
parent for $500,000
on 1 June 2019
TRANSACTION #2 (INTERNAL)
Parent sold inventory for $750,000
(markup of 50% on cost) on 25 June 2019
TRANSACTION #3
Subsidiary still holds 30%
(i.e. 70% sold externally)
by 30 June 2019
– Parent
1 June 2019 (external)
Dr Inventory 500
Cr Cash 500
25 June 2019 (INTERNAL)
Dr Cash 750
Cr Sales 750
Dr COGS 500
Cr Inventory 500
– Subsidiary
25 June 2019 (INTERNAL)
Dr Inventory 750
Cr Cash 750
30 June 2019 (external)
Dr Cash xxx
Cr Sales xxx
Dr COGS 525
Cr Inventory (70%*$750) 525
Assume
perpetual
inventory
system
The University of Sydney Page 28
CASE 3: Intragroup sale in current period
– only part still held by the group at the end of the year
Parent Subsidiary
TRANSACTION #1
External Supplier
sold inventory to the
parent for $500,000
on 1 June 2019
TRANSACTION #2 (INTERNAL)
Parent sold inventory for $750,000
(markup of 50% on cost) on 25 June 2019
TRANSACTION #3
Subsidiary only held 30%
(i.e. 70% sold externally
for $xxx) of that inventory
on 30 June 2019
Assume perpetual
inventory system
Parent Sub Consolidation adj Group
Dr
(eliminate)
Ref Cr
(eliminate)
Sales 750 xxx
COGS 500 525
Inventory 225
xxx750
75
35075075
150
1. Eliminate 100% of the internal sales
Dr Sales 750
Cr COGS 750
2. Only 30% of the profit is unrealized:
Dr COGS 75
Cr Inventory (asset) 75
500*70% sold
500*30% on hand
The University of Sydney Page 29
CASE 3: Intragroup sale in current period
– only part still held by the group at the end of the year
– So again, we could combine this into 3 lines of journal:
– And then our tax entry: Profit on transfer 750-500 =250 x 30% = 75
Elimination of the transaction and the unrealised profit:
Dr Sales 750
Cr COGS 675
Cr Inventory 75
3. Account for the tax adjustments
Dr DTA ($75*30%) 22.5
Cr ITE 22.5
The University of Sydney Page 30
How about the periodic system? Consider case 2 again
Subsidiary Parent
TRANSACTION #1
External Supplier
sold inventory to the
subsidiary for $200,000
on 1 June 2018
TRANSACTION #2 (INTERNAL)
Subsidiary sold inventory for $250,000 (markup
of 25% on cost) ON CREDIT on 25 June 2018
All inventory still
held by parent at
30 June 2018
– Subsidiary
1 June 2018 (external)
Dr Purchases 200
Cr Cash 200
25 June 2018 (INTERNAL)
Dr A/Receivable 250
Cr Sales 250
Year end stocktake:
Dr Inventory (asset) 0
Cr Closing inventory (COGS) 0
– Parent
25 June 2018 (INTERNAL)
Dr Purchases 250
Cr A/Payable 250
Year end stocktake:
Dr Inventory (asset) 250
Cr Closing inventory (COGS) 250
Upstream transaction
Assume
PERIODIC
inventory
system
where
Opening Inv.
+ Purchases
– Closing Inv.
= COGS
The University of Sydney Page 31
2. Eliminate 100% of the payable/receivable
Dr Accounts payable 250
Cr Accounts receivable 250
Unrealised profit in closing inventory
- Periodic inventory system
1. Eliminate 100% of the internal sales
Dr Sales 250
Cr Purchases (COGS) 250
3. Eliminate unrealized profit
Dr Closing inventory (COGS) 50
Cr Inventory (asset) 50
4. Tax effect
Dr Deferred tax asset 15
Cr Income tax expense 15
1. Eliminate 100% of the internal
sales
Dr Sales 750
Cr COGS 750
2. Eliminate 100% of the
unrealized profit
Dr COGS 250
Cr Inventory (asset) 250
3. Account for the tax adjustments
Dr DTA 75
Cr ITE 75
Compare to the entries under the
perpetual inventory system
(from slides 25 and 26)
The University of Sydney Page 32
Parent Sub Consolidation adj Group
Dr Ref Cr
Sales 1
Opening Inventory
+Purchases 1
- Closing Inventory 3
=COGS
Income Tax Expense 4
DTA 4
Accounts Receivable 2
Inventory 3
Cash
Accounts Payable 2
200
(200)
250
250
250
250 0
0250
250
250
250
250
250
50
50
15
1515
200
(200)
15
0
0
200
0
0
200
0
The University of Sydney Page 33
Summary: Current Period Transfer of Inventory- Cases 1 to 3 (Periodic)
[For perpetual system, replace (1) op. inventory, (2) purchases, and (3) cl. Inventory by COGS]
Case 1:
all sold
Case 2:
unsold
Case 3:
partially sold (70% sold)
Adjusting Entries
required on
consolidation
Dr Sales 750
Cr Purchases (COGS) 750
Dr Sales 750
Cr Purchases (COGS) 750
Dr Cl. Inventory(COGS)250
Cr Inventory (asset) 250
Dr DTA 75
Cr ITE 75
Dr Sales 750
Cr Purchases(COGS) 750
Dr Cl. Inventory (COGS) 75
Cr Inventory (asset) 75
Dr DTA 22.5
Cr ITE 22.5
Unrealized Profit No unrealized profit.
Entire profit on intragroup
sale is unrealized.
30% of profit on intragroup
sale is unrealized.
Adj. to Sales and
Purchases
The adjustment to sales (purchases) is always the amount of sales (purchases) within the
group (i.e. $750)
Adj. to Inventory and
Closing Inventory (COGS)
→Adjust unrealized
profit within the group
The adjustment to inventory is always equal to the percentage of inventory still on hand
within the group multiplied by the profit on the sale within the group (i.e. the unrealized
profit = % of inventory still on hand * (transfer price – original cost)).
0% * ($750-$500)
= $0
100% * ($750-$500)
= $250
30% * ($750-$500)
= $75
Adj. to Tax Effect
The tax effect is always equal to the tax rate multiplied by the unrealized profit
30% * $0 = $0 30% * $250 = $75 30% * $75 = $22.5
The University of Sydney Page 34
Intragroup inventory sales
Tutorial
Questions
The University of Sydney Page 35
Objective 2
Prepare and explain worksheet adjusting entries to eliminate:
• Unrealised profits or losses in both opening and closing inventory,
including recognition of tax effects
(Arthur et al Section 4.4)
The University of Sydney Page 36
Transaction d: Intragroup Sales of Inventories
– What are the scenarios to consider?
1. Intragroup unrealized profit at the end of the prior period
– An intragroup sale occurred during previous period, and all or part of the
inventory was still on hand by the end of last year
– This means that last year we eliminated unrealised profit in closing
inventory. We did a journal entry to reduce profit…. (Cases 2 or 3)
– And so this year we must recognise that we have unrealised profit in
opening inventory (to ensure that last period’s closing inventory = this
period’s opening inventory)
2. Consider – if there was an intragroup transaction last year, and all of that
inventory had been on sold to an external party by the end of last year (Case 1),
there would have been no unrealised profit last year, and so no entry will be
required this year.
The University of Sydney Page 37
Intragroup sale in the prior period and remains unsold (DOC 30 June 2019)
- unrealized profit in opening inventory. Assume perpetual system
Subsidiary Parent
TRANSACTION #1
External Supplier
sold inventory to the
subsidiary for $200,000
on 1 June 2018
TRANSACTION #2 (INTERNAL)
Subsidiary sold inventory for $250,000 (markup
of 25% on cost) for cash on 25 June 2018
All inventory still held by
parent at 30 June 2018 and
still at 30 June 2019
– Subsidiary
1 June 2018 (external)
Dr Inventory 200
Cr Cash 200
25 June 2018 (INTERNAL)
Dr Cash 250
Cr Sales 250
Dr COGS 200
Cr Inventory 200
– Parent
25 June 2018 (INTERNAL)
Dr Inventory 250
Cr Cash 250
Upstream transaction
The University of Sydney Page 38
Unrealised profit in opening inventory
(assuming still unrealised by 30 June 2019)
– Recall the journal entries we did last year (30.6.2018):
– Now we need to repeat the impact of those journal entries at 30.6.2019:
Account for the tax adjustments:
Dr DTA 15
Cr ITE 15
Elimination of the transaction and the unrealised profit:
Dr Sales 250
Cr COGS 250
Dr COGS 50
Cr Inventory (asset) 50
Op. RE (1/7/18) 50
Inventory (asset) 50
DTA 15
Op. RE (1/7/18) 15
The University of Sydney Page 39
CWS (extract) Parent Sub Consolidation adj Group
30 June 2018 Dr Ref Cr
Sales
COGS 0 (200) 200
Income Tax Expense
Closing R/E 0 35 0
DTA 0 0 15 15
Inventory 250 0 50 200
CWS (extract) Parent Sub Consolidation adj Group
30 June 2019 Dr Ref Cr
Opening R/E
DTA
Inventory
250 250
(15) 15 0
0250
0
0
15 15
15 050
50 200
35
We can observe that we
are effectively ‘moving’
profit from one period to
anther
Closing R/E
- Closing
inventory/gross profit
overstated by $50
- ITE overstated by $15
The University of Sydney Page 40
What if the unrealized profit in opening inventory
becomes realized in the current period?
Subsidiary Parent
TRANSACTION #1
External Supplier
sold inventory to the
subsidiary for $200,000
on 1 June 2018
TRANSACTION #2 (INTERNAL)
Subsidiary sold inventory for $250,000 (markup
of 25% on cost) for cash on 25 June 2018
– Parent (for year ending 30 June 2019)
20 June 2019
Dr Cash 320
Cr Sales 320
Dr COGS 250
Cr Inventory 250
Upstream transaction
TRANSACTION #3
Parent sold all of that
inventory externally
for $320,000
on 20 June 2019
The University of Sydney Page 41
Unrealised profit in opening inventory
(realised in the current period)
parent sub elim
(Dr)
elim
(Cr)
group
Sales 320 - 320
COGS (250) - 50 (200)
ITE (21) - 15 (36)
Opening retained earnings - 35 50 15 0
Consolidation journals: Dr Cr
Op. RE (1/7/18) 50
COGS 50
Income tax expense 15
Op. RE (1/7/18) 15
Check:
120x 30%
= 36
The University of Sydney Page 42
Unrealised losses in inventory
(not covered in this unit)
– Less common
– AASB 102 requires inventory valuation at lower of cost or NRV. So write
down is more likely to have been already recorded prior to
intercompany sale. Given AASB 102 requirements, difficult to see how a
consolidation adjustment could eventuate
– If there is a transfer at a loss, the effects must also be eliminated on
consolidation
– Tax effect of unrealised losses would cause DTL
The University of Sydney Page 43
More notes on tax effect accounting
– Textbook assumes that individual (legal) entities (that is, parent entity and
subsidiary entity) pay tax separately
– Of course, the group is not a legal entity and so does not pay tax (textbook
assumes that tax consolidation does not apply)
– Therefore, we would never see debits or credits to “current tax payable” as part
of our consolidation journal entries (but we would see “current tax payable”
coming into the worksheet from the individual parent and subsidiary entities)
– This means that tax effect adjustments on consolidation accounting are limited to
the following accounts:
– DTA
– DTL
– Income tax expense
The University of Sydney Page 44
Objective 3
Understand related treatments in the Wesfarmers Annual Report
(Wesfarmers 2023 Annual Report)
The University of Sydney Page 45
What’s in Wesfamers consolidated financial statements?
Not much! Because of course its all eliminated
See page 137
The University of Sydney Page 46
Next module
Intragroup Transactions:
Non-current assets
