Document classification: Internal
ACCM4300
FINANCIAL REPORTING
Workshop 10 :
Consolidation : Intragroup
Transactions (AASB10)
WARNING
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This material in this communication may be subject to copyright under the Act. Any further
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Do not remove this notice.
Unless otherwise specifically referenced, material in this slide deck has been adopted from
Financial reporting in Australia / Janice Loftus, Ken Leo, Sorin Daniliuc, Noel Boys, Belinda Luke,
Hong Ang, Karyn Byrnes. Second edition. John Wiley & Sons Australia, Ltd; Leo, K, Knapp, J,
McGowan, S, Sweeting, J & Meng, L, Company Accounting, 12th edition, John Wiley & Sons
Australia, Ltd, Queensland.
.
Prepared by © Kaplan Business School
Document classification: Internal
Learning objectives
After this workshop you should be able to:
1. Justify the need for adjusting for intragroup
transactions
2. Determine worksheet entries for intragroup
transactions involving profits and losses in
inventories
3. Determine worksheet entries for intragroup
transactions involving profits and losses on the
transfer of property, plant and equipment
4. Construct the worksheet entries for intragroup
services
5. Construct the worksheet entries for intragroup
dividends
Document classification: Internal
Learning objectives
After this workshop you should be able to:
1. Justify the need for adjusting for intragroup
transactions
2. Determine worksheet entries for intragroup
transactions involving profits and losses in
inventories
3. Determine worksheet entries for intragroup
transactions involving profits and losses on the
transfer of property, plant and equipment
4. Construct the worksheet entries for intragroup
services
5. Construct the worksheet entries for intragroup
dividends
Document classification: Internal
Introduction
• In this workshop, the group under discussion is
restricted to one where:
̶ There are only two entities within the group (i.e.
one parent and one subsidiary)
̶ The parent owns all the shares of the subsidiary.
(Loftus,2020)
Document classification: Internal
Introduction
• Adjustments involving equity at the acquisition date,
namely the business combination valuation entries (if
any) and the pre-acquisition entry, eliminating the
investment account in the parent’s financial statements
against the pre-acquisition equity of the subsidiary.
• Elimination of intragroup balances and the effects of
transactions whereby profits or losses are made by
different members of the group through trading with
each other.
Document classification: Internal
Rationale for adjusting for
intragroup transactions
• Whenever related entities trade with each other, or
borrow and lend money to each other, the separate
legal entities disclose the effects of these transactions
in the assets and liabilities recorded and the profits and
losses reported.
• Hence, the effects of transactions within the group
must be adjusted for in the preparation of the
consolidated financial statements.
Document classification: Internal
Rationale for adjusting for
intragroup transactions
• The requirement for the full adjustment for the effects of
intragroup transactions is stated in paragraph B86(c) of AASB
10/IFRS 10 Consolidated Financial Statements:
• Eliminate in full intragroup assets and liabilities, equity, income,
expenses and cash flows relating to transactions between
entities of the group.
• Intragroup losses may indicate an impairment that requires
recognition in the consolidated financial statements.
• AASB 112[IAS 12] Income Taxes applies to temporary differences
that arise from the elimination of profits and losses resulting
from intragroup transactions.
Document classification: Internal
Workshop Activity 1
Jessica Ltd sold inventory during the current period to its wholly owned subsidiary,
Amelie Ltd, for $15 000. These items previously cost Jessica Ltd $12 000. Amelie
Ltd subsequently sold half the items to Ningbo Ltd for $8000. The tax rate is 30%.
The group accountant for Jessica Ltd, Li Chen, maintains that the appropriate
consolidation adjustment entries are as follows:
Required
Discuss whether the entries suggested by Li Chen are correct, explaining on a
line-by-line basis the correct adjustment entries.
Document classification: Internal
Learning objectives
After this workshop you should be able to:
1. Justify the need for adjusting for intragroup
transactions
2. Determine worksheet entries for intragroup
transactions involving profits and losses in
inventories
3. Determine worksheet entries for intragroup
transactions involving profits and losses on the
transfer of property, plant and equipment
4. Construct the worksheet entries for intragroup
services
5. Construct the worksheet entries for intragroup
dividends
Document classification: Internal
Transfers of inventories
• Paragraph B86(c) of AASB 10/IFRS 10 states that the
profits and losses resulting from intragroup transactions
that require consolidation adjustments to be made are
those ‘recognised in assets’.
• The test for realisation is the involvement of an external
party in relation to the item involved in the intragroup
transaction.
• If the parent then sells the inventories to a party
external to the group, the intragroup profit becomes
realised to the group.
Document classification: Internal
Transfers of inventories – Example 1
On 1 January 2022, Jessica acquired $10,000 worth of
inventory for cash from Amelia Ltd. The inventories had
previously cost Amelia Ltd $8,000. 30 June 2022, all the
inventories sold by Amelie Ltd to Jessica Ltd are still on
hand.
The adjustment entries in the consolidation worksheet
at 30 June 2022 are:
Sales Revenue
Cost of Sales
Inventories
Dr
Cr
Cr
DTA Dr
600
Income tax expense
Document classification: Internal
10 000
8 000
2 000
Cr
600
Transfers of inventories – Example 2
Transferred inventories partly sold
On 30 June 2022, only 25% of the inventories sold by
Amelie Ltd to Jessica Ltd are still on hand. 75% of the
inventories is sold to external party
The adjustment entry for the preparation of
consolidated financial statements at 30 June 2022 is:
Sales
Dr 10 000
Cost of Sales Cr
9 500
Inventories
Cr
500
DTA Dr
150
Income tax expense
Cr
Document classification: Internal
150
Transfers of inventories – Example 3
Transferred inventories completely sold
• On 1 January 2022, Jessica Ltd acquired $10 000
worth of inventories for cash from Amelie Ltd.
• The inventories had previously cost Amelie Ltd
$8000.
• By the end of the year, 30 June 2022, Jessica Ltd had
sold all the transferred inventories to an external
party for $18 000.
Document classification: Internal
Transfers of inventories – Example
3 (contd.)
The adjustment entry for the preparation of
consolidated financial statements at 30 June 2022 is:
Document classification: Internal
Sales
Dr 10 000
Cost of Sales Cr
10 000
Transfers of inventories – Example
3 (contd.)
Example: Transferred inventories completely sold
Amelie Ltd records a profit of $ 2 000
Jessica Ltd records a profit of $ 8 000
Total recorded profit is $10 000
Profit to the group = Selling price to external entities
less cost to the group
= $18 000 − $8000
= $10 000
Document classification: Internal
Workshop Activity 2
Koala Ltd owns all of the shares of Kangaroo Ltd. In relation to the
following intragroup transactions, all parts of which are independent
unless specified, prepare the consolidation worksheet adjusting
entries for preparation of the consolidated financial statements as at
30 June 2022. Assume an income tax rate of 30%.
a) In April 2022, Koala Ltd sells inventory to Kangaroo Ltd for
$12000. This inventory had previously cost Koala Ltd $8000,
and it remains unsold by Kangaroo Ltd at the end of the period.
b) All the inventory in (a) is sold to Cockatoo Ltd, an external party,
for $16500 on 19 June 2022.
c) Half the inventory in (a) is sold to Galah Ltd, an external party,
for $7200 on 20 June 2022. The remainder is still unsold at the
end of the period.
d) Koala Ltd, in January 2022, sold inventory for $8000. This
inventory had been sold to it by Kangaroo Ltd in the previous
year. It had originally cost Kangaroo Ltd $4800, and was sold to
Koala Ltd for $9600.
Document classification: Internal
Learning objectives
After this workshop you should be able to:
1. Justify the need for adjusting for intragroup
transactions
2. Determine worksheet entries for intragroup
transactions involving profits and losses in
inventories
3. Determine worksheet entries for intragroup
transactions involving profits and losses on the
transfer of property, plant and equipment
4. Construct the worksheet entries for intragroup
services
5. Construct the worksheet entries for intragroup
dividends
Document classification: Internal
Transfers of property, plant and
equipment
• The worksheet adjustment entries are shown in two
parts:
̶ The entries to adjust for any profit or loss on sale of
the assets
̶ The entries relating to any depreciation of the assets
after sale.
• If a non-depreciable asset is transferred, only the first
of these entries is required, and realisation of the profit
or loss occurs, as with inventories, on sale of the asset
to an external party.
Document classification: Internal
Transfers of property, plant and
equipment – Example 1
̶ Transfer in current year
• Jessica Ltd sold Amelie Ltd plant for $18 500 cash on
1 July 2021. It had cost Jessica Ltd $20 000 when
acquired one year previously.
• Depreciation charged on plant by Jessica Ltd is 10%
p.a. on cost, and Amelie Ltd applies a rate of 6% p.a.
on cost.
• The income tax rate is 30%.
Document classification: Internal
Transfers of property, plant and
equipment – Example 1 (Contd.)
The journal entries in the records of Jessica Ltd at the
date of sale, 1 July 2021, are:
Jessica Ltd
Cash
Dr 18 500
Proceeds from Sale of Plant Cr
18 500
Carrying Amount of Plant Sold Dr 18 000
Accumulated Depreciation
Dr 2 000
Plant
Cr
Document classification: Internal
20 000
Transfers of property, plant and
equipment – Example 1 (Contd.)
The journal entries in the records of Amelie Ltd at the
date of sale, 1 July 2021, are:
Amelie Ltd
Plant
Cash
Document classification: Internal
Dr 18 500
Cr
18 500
Transfers of property, plant and
equipment – Example 1 (Contd.)
• From the group’s viewpoint, there is no sale of
plant to entities external to the group.
• The consolidation adjustment entry is:
Proceeds from Sale of Plant
Dr 18 500
Carrying Amount of Plant Sold
Cr
18 000
Plant
Cr
500
Document classification: Internal
Transfers of property, plant and
equipment – Example 1 (Contd.)
The consolidation worksheet adjustment entry is:
Deferred Tax Asset
Dr 150
Income Tax Expense
Cr
150
(30%  $500)
Document classification: Internal
Transfers of property, plant and
equipment
Depreciation and realisation of profits or losses
• The profit is realised when the buying entity, say the
parent, sells the transferred inventories or land to an
external party.
• The former course of action is impractical because
adjustments for the profit would have to be made
for every year in the life of the group after the
transaction occurred.
Document classification: Internal
Transfers of property, plant and
equipment
Depreciation and realisation of profits or losses
The realisation of the profit or loss on a depreciable
asset transferred within the group is assumed to
occur when the future benefits embodied in the
asset are consumed by the group.
Document classification: Internal
Transfers of property, plant and
equipment
Depreciation and realisation of profits or losses
̶ Depreciation
• The adjustment for depreciation at the end of the
first year after the sale is determined by comparing
the depreciation charge on the cost to the legal
entity with the depreciation charge on the cost to
the group:
Document classification: Internal
Transfers of property, plant and
equipment - Example
Depreciation and realisation of profits or losses
̶ Depreciation
Amelie Ltd : Cost of asset
= $18 500
Depreciation expense = 6%  $18 500
Group:
= $1110
Cost of asset
= $18 000
Depreciation expense = 6%  $18 000
= $1080
Adjustment
= $1110 − $1080
= $30
Document classification: Internal
Transfers of property, plant and
equipment
Depreciation and realisation of profits or losses
̶ Depreciation
• On consolidation, depreciation is reduced by $30.
• The worksheet entry is:
Accumulated Depreciation
Dr 30
Depreciation Expense
Cr
30
• The amount of profit realised is in proportion to the
depreciation charged, namely 6% p.a.
Income tax exp
Dr 9
DTA
Cr 9
Document classification: Internal
Workshop Activity 3
Dingo Ltd owns all of the shares of Bilby Ltd. In relation to the
following intragroup transactions, all parts of which are
independent unless specified, prepare the consolidation
worksheet adjusting entries for preparation of the consolidated
financial statements as at 30 June 2022. Assume an income
tax rate of 30%.
a) On 1 January 2022, Bilby Ltd sold an item of plant to Dingo
Ltd for $2000. Immediately before the sale, Bilby Ltd had
the item of plant on its accounts for $3000. Bilby Ltd
depreciated items at 5% p.a. on the diminishing balance
and Dingo Ltd used the straight-line method over 10 years.
b) On 1 July 2021, Dingo Ltd sold a motor vehicle to Bilby Ltd
for $12 000. This had a carrying amount to Dingo Ltd of
$9600. Both entities depreciate motor vehicles at a rate of
10% p.a. on cost.
Document classification: Internal
Learning objectives
After this workshop you should be able to:
1. Justify the need for adjusting for intragroup
transactions
2. Determine worksheet entries for intragroup
transactions involving profits and losses in
inventories
3. Determine worksheet entries for intragroup
transactions involving profits and losses on the
transfer of property, plant and equipment
4. Construct the worksheet entries for intragroup
services
5. Construct the worksheet entries for intragroup
dividends
Document classification: Internal
Intragroup services
• Many different examples of services between related
entities exist.
• For instance:
̶ Jessica Ltd may lend to Amelie Ltd some specialist
personnel for a limited period of time for the
performance of a particular task by Amelie Ltd.
̶ For this service, Jessica Ltd may charge Amelie Ltd a
certain fee, or expect Amelie Ltd to perform other
services in return.
̶ One entity may lease or rent an item of plant or a
warehouse from the other.
Document classification: Internal
Intragroup services
̶ A subsidiary may exist solely for the purpose of
carrying out some specific task, such as research
activities for the parent, and a fee for such
research is charged.
̶ In this situation, all service revenue earned by the
subsidiary is paid for by the parent, and must be
adjusted in the consolidation process.
Document classification: Internal
Intragroup services
Realisation of profits or losses
• With the transfer of services within the group, the
consolidation adjustments do not affect the profit of
the group.
• In a transaction involving a payment by a parent to a
subsidiary for services rendered, the parent shows an
expense and the subsidiary shows revenue.
• The net effect on the group’s profit is zero.
Document classification: Internal
Workshop Activity 4
Numbat Ltd owns all of the shares of Goanna Ltd. In
relation to the following intragroup transactions. On 1 July
2017, Goanna Ltd rented a spare warehouse to be used
jointly by Numbat Ltd and Galah Ltd with each company
paying half the agreed rent to Goanna Ltd. The rent paid to
Goanna Ltd in the 2017–18 year was $300 while the rent
paid in the 2021–2022 year was $350.
Required
prepare the consolidation worksheet adjusting entries for
preparation of the consolidated financial statements as at
30 June 2022. Assume an income tax rate of 30%.
Document classification: Internal
Learning objectives
After this workshop you should be able to:
1. Justify the need for adjusting for intragroup
transactions
2. Determine worksheet entries for intragroup
transactions involving profits and losses in
inventories
3. Determine worksheet entries for intragroup
transactions involving profits and losses on the
transfer of property, plant and equipment
4. Construct the worksheet entries for intragroup
services
5. Construct the worksheet entries for intragroup
dividends
Document classification: Internal
Intragroup dividends
• Three situations are considered in this section:
̶ Dividends declared in the current period but not
paid
̶ Dividends declared and paid in the current period
̶ Bonus share dividends from post-acquisition
equity.
Document classification: Internal
Intragroup dividends - Example
Dividends declared in the current period but not paid
• Assume that, on 25 June 2022, Amelie Ltd
declares a dividend of $4000. At the end of the
period, the dividend is unpaid.
Document classification: Internal
Intragroup dividends – Example
(Contd.)
Dividends declared in the current period but not paid
• The entries passed by the legal entities are:
Amelie Ltd
Dividend Declared (In retained earnings)Dr
4 000
Dividend Payable
Cr
4 000
Jessica Ltd
Dividend Receivable
Dividend Revenue
Document classification: Internal
Dr 4 000
Cr
4 000
Intragroup dividends – Example
(Contd.)
Dividends declared and paid in the current period
• Assume Amelie Ltd declares and pays an interim
dividend of $4000 in the current period.
• Entries by the legal entities are:
Jessica Ltd
Cash
Dr 4 000
Dividend Revenue
Cr
4 000
Amelie Ltd
Interim Dividend Paid (In retained earnings) Dr 4 000
Cash
Cr
4 000
Document classification: Internal
Intragroup dividends
Bonus share dividends
• A subsidiary may occasionally pay a dividend to its
parent in the form of shares rather than cash.
• For consolidation purposes, two alternative
adjustments are possible:
̶ Eliminate the bonus dividend paid against the
share capital of Amelie Ltd — that is, reverse the
entry made by the subsidiary to record the
dividend:
̶ Do not eliminate the bonus dividend paid but set
up a new capitalised profits reserve in the
consolidation worksheet.
Document classification: Internal
Workshop Activity 5
Emu Ltd owns all of the shares of Cassowary Ltd. In
relation to the following intragroup transactions, all parts of
which are independent unless specified, prepare the
consolidation worksheet adjusting entries for preparation of
the consolidated financial statements as at 30 June 2022.
Assume an income tax rate of 30%.
a) During June 2022, Cassowary Ltd declared a $2000
dividend. The dividend was paid in August 2022.
b) In January 2022, Cassowary Ltd paid a $4500 interim
dividend.
Document classification: Internal
Summary
➢ Intragroup transactions can take many forms and may involve
transfers of inventories or property, plant and equipment, or
they may relate to the provision of services by one member of
the group to another member.
➢ Intragroup transfers of inventories, property, plant and
equipment, services, dividends and debentures and their
adjustment in the consolidation process are associated with a
need to consider the implications of applying tax-effect
accounting in the consolidation process
➢ Note again that there are no actual adjusting entries made in
the records of the individual legal entities which constitute the
group. The consolidation process may be performed by the
use of special consolidation worksheets.
Document classification: Internal
Additional Readings and Resources
Please refer to the additional resources listed below, available under
Weekly Content > Week 10 on your Resource List.
Australian Accounting Standards Board (AASB), 2022, AASB 10
Consolidated Financial Statements, AASB.
Silvia of CPDbox 2021, IFRS 10 Consolidated Financial Statements:
Summary 2021, [online video] YouTube.
AG OnlineTutor 2020, Inter-Company transactions - Elimination
(consolidation accounting), [online video] YouTube.
Leo, K, Knapp, J, McGowan, S, Sweeting, J & Meng, L 2021 Company
Accounting: Chapter 11, 12th edition, John Wiley & Sons Australia, Ltd,
Queensland.
Document classification: Internal