Groups
Week 10
PFJE’s are done every time group accounts done repeatedly
When its first year of acquisition we may Dr Goodwill (A) or Cr Bargain Purchase Gain
(P/L).
When we repeat the credit for Bargain Purch gain in following years, it will not be recog in
P/L but rather in Retained Earnings. As Barg Purch should be in group RE, not in sep FS as
purch gain only happens through PFJE. Thus you redo the @ acq elim of equity PFJE but it
will be CR Retained Earnings (E) not CR barg purch(P/L)
Must remember to eliminate pre-acq acc dep pf sub as it reps prior usage
The group may now have additional depreciation of PPE as group acquires the asset at fair
value at acquisition while separate FS of sub has asset at carrying value.
This can be calculated by taking the R100 FV adj amt/ EUL @acq or sep FS dep-group dep
But now if asset kept and in 20x3 the group has now used the asset for 2 years, remember
each year there’s an additional depreciation of R25. However, to the extent that
depreciation relates to previous years it must be recog in retained earnings
Thus
DR RE (E)
25
DR Dep Exp(p/L) 25
Cr Acc Dep (-A) 50
Groups Part 2
UNREALISED PROFIT IS PROFIT YOU DON’T RECOGNISE AS UNRELAISED PROFIT IS
WITHIN GROUP
Intercompany Sale of Inventory from Wholly Owned Sub to Parent
Co. P has, since the date of acquisition, acquired inventory from Co. S at its normal selling
price (set at a group level) less a discount of 20%.
The normal selling price of inventory in Co. S is determined to achieve a gross profit
percentage of 50%.
Co. P sells inventory to third party customers at the normal selling price (set at a group
level).
During the financial year ending 31.12.x3, Co. S sold inventory to Co. P for R3200 (20x2:
R2400). Inventory on hand at year end recognised by Co. P, purchased from Co. S only,
amounted to R1600 (20x2: R2400) as at 31.12.x3.
Cost
Price
50%
+
Mark Up
=
Transfer
price
80%
30%
S (normal
S to P
selling price)
(transfer price)
Sales
100
80
Cost
50
50
GP
50
30
+
Mark up
=
20%
Selling
price
100%
PFJES:
② INTERCO SALE
DR
CR
•
Income
Expense
Revenue
Cost of sales (Purchases)
R3200
R3200
②Elimination of intercompany sale (purchase) during the year.
③ CB INV ADJ
DR
CR
Expense
Asset
Cost of sales
Inventory (1600 x 30/80)
30(MU)/80(TP)*1600
R600
R600
③Elimination of unrealised profit in closing inventory which should be carried at the lower of cost or
net realisable value (i.e. cost to group and not transfer price)
The closing balance of inventory is overstated at a group level due to Co P recording the
inventory at the transfer price. If the closing balance of inventory is reduced then the cost of
sales expense must also be higher. This results in a smaller net profit at a group level.
Inventory is carried at the transfer price in P’s sep FS but to the group it must be recorded
at cost to the group which is the cost to S. Thus, we perform this PFJE to eliminate the
intercompany mark up that is put on closing stock not sold.
Cos=o/b + purch – C/b
- decrease of c/b
- (-)
+
THUS COS INCREASES
① OB INV ADJ
DR
Equity
Retained earnings (2400 x
R900
30/80)
CR
Expense
Cost of sales
R900
①Elimination of unrealised profit included in opening inventory (needs to be included at cost to group
and not overstated at transfer price) which was included in the gross profit of Co. S in the prior year
(hence removed from retained earnings).
•
The retained earnings in the prior year is overstated as Co S would have recognised a
gross profit on sale when the inventory was sold to Co P. This gross profit would have
been recognised in retained earnings. From a group perspective this R900 is unrealised
in the previous year as this arose from an inter-company transaction. Therefore, profit of
R900 relating to 31.12.x2 cannot be recognised from a group perspective. (But we
cannot reduce last years cost of sales as it has been closed off so instead we reduce
RE as this is where it would have been closed off to. (my notes))
• The cost of sales expense is too high from a group perspective as Co P recognised a
cost of sales expense based on the transfer price and NOT the cost price of the
inventory to the group. Therefore, we increase group profit by adjusting the cost of sales
expense. Crediting an expense makes profit higher. This opening inventory has been
sold and the gross profit can be realised from a group perspective.
• O/B of inventory assumed to be sold this year > cos is too high at starting point > MU on
O/b must be elim
O/B of inventory is assumed to be sold in this year.
In current year O/b of inventory would have been overstated by previous year’s unrealised
profit. (because P will record inventory at transfer price but cost to group is cost to S). But
opening inventory is assumed to be sold thus we must reduce cost of sales with the unrealised
profit (intercompany markup) THUS CR COS
Last year we would have processed DR COS 900 CR Inventory 900 for closing inventory the
Cos=
ob
= decrease
Thus cos decrease
Thus Cr COS
Thus Dr RE
+ p–
C /b
Or to work out why DR RE do:
Cos = ob + p - cb for last year (this year’s ob is last year’s c/b)
- decrease
- (-)
+
Cos +
Thus increase cos thus decrease profit thus this year decrease RE as PFJE not repeated and
profit closed off to RE.
Partly Owned Sub
Even when parent does not purch 100% of sub but control is established the parent will
continue to consolidate 100% of the Assets and Liabilities of the Sub
By purchasing more than half od voting rights of co(sub) ctrl exists
Sub is thus partly ownerd and will be consolidated from aqu date
From that date 100% of FV of net assets of sub will be recog in group FS and 100% of post
acq profit should be recog as group profit
The remaining eg 20% not purchased by parent is the NCI.
NCI
o Reps shareholders of the sub
o Equity
o Recog and measure NCI at their proportionate share of the fair value of net assets of
sub
o Allocate NCI share of post-aqu changes in equity of sub
o It is the share of the FV of net assets in sub @ aqu date plus any post aqu changes in
equity of sub
o No NCI in sep FS
Consolidation requires that all assets abd liability of sub are added to the parent however
the equity of the sub must be split between PEH (parent equity holders) and NCI.
Since NCI shares in FV of net assets of sub, if there’s a group adj arising from the @ aqu
adj, NCI will also share in this
LE 8: Goodwill/ BP calculation with partly owned sub
(w1) Goodwill at acquisition
Book value of Co. S’s net assets:
750
100%
Adjustments for fair value (PPE)
100
100%
Fair value of Co. S’s net assets:
850
100%
20% of Co. S’s net assets
(170)
NCI portion
80% of Co. S’s net assets acquired by Co. P:
680
PEH portion
Fair value of consideration paid:
900
100%
Difference (Goodwill)
220
900-680
As you pay all of the
cash for 80% of sub
PFJE’s
DR
DR
Equity
Equity
Share capital
Retained earnings
R100
R650
DR
DR
CR
CR
Asset
Asset
Equity
Asset
PPE - Land (FV ADJ)
Goodwill
Non-controlling interest NEW
Investment
R100
R220
R170
R900
DR P/L
Non-controlling interest
180
CR Equity
Non-controlling interest
180
(NCI share of Co. S profit: 900 x 20% = 180 where 900=100% of sub’s profits after group adj)
Dr NCI (P/L) as it is a reduction in group profit, taking away portion of profit attrib to the NCI
(that does not belong to the PEH)
CR NCI(E) as NCI(E) shares in post aqu changes in equity of sub in respective
proportion(20%) of shareholding percentage. Thus increase in equity of sub implies increase in
equity NCI. SUB made a profit/ gain so NCI has a gain.
SN: if sub made a loss these accounts are switched
LE 10 When Sub Makes a profit in year 1 and Year 2
DR
CR
Equity
Equity
Retained earnings
Non-controlling interest
70
70
[(NCI share of Co. S profit: = co. s after adjustment year 1 profit x NCI percentage
Cant DR NCI (P/L) with prior year’s profit thus DR RE as P/L would have been closed off to RE.
(remember PFJE’s are repeated each year from scratch)
DR
CR
P/L
Equity
Non-controlling interest
Non-controlling interest
142.5
142.5
[(NCI share of Co. S profit: [(1500 – 25 - 50) x 10%] = co. s after adjustment year 2 profit x NCI
percentage
Lecture example 10 – partly-owned subsidiary and inter-company transactions
(dividends)
Co. P and Co. S declared dividends of R80 and R50 on 31.12.x2, paid in cash on 15.1.x3.
Co.P owns 70% of Co. S
Consolidated statement of changes in equity for the year ended 31.12.x2
Share
Retained
capital
earnings
400
2 000
Noncontrolling
Overall
Balance as at 31.12.x1
Total
interest Total
2 400
225 (w1)
2 625
Total comprehensive income
1 695 (w2) 1 695
270 (w2)
1 965
Dividends
(80) *
(80)
(15)
(95)
3 615
4 015
480
4 495
Transactions with owners
Balance as at 31.12.x2
400
* reps reduction in group RE attrib to PEH. Only div declared by S. not ((80+15)=95) because
15 is div by co. S to NCI not PEH.
80=shareholders of group = PEH
95= External Shareholders = PEH + NCI
PFJES
DR
Income
Dividend Income (P/L)
Full Sub dividend x PEH portion
50x70%
35
DR
Equity
Non-controlling interest (E)
Full sub dividend x NCI portion
50x30%
15
CR
Equity
Dividends declared (E)
50
Full sub dividend declared
Dr Div Inc (P/L) to elim interco div income from sub declaring div to parent
Dr NCI (E) . reduced by 15 why? Because JE by sub was Dr Div (E) 50, CR Shareholders 4
Div (E) 50, thus equity is going down > but NCI shares in changes in equity thus NCI will
share in that reduction by % of NCI thus 50x30%. Div declared reduced s.holders claim on
RE of CO, as a result when partly owned sub declares div it is deducted from each of PEH
and NCI’s proportionate claims (on Co (sub)) respectively
Cr div declares as need to Elim div that has been distrib inside the group (including NCI).
For group pov the only div that reduced RE is div declared by the parents as RE reps
retained profits attrib too s.holders of the parent.
DR
Liability
Dividends payable
CR
Asset
Dividends receivable
If goodwill is impaired
PFJE
35
35
DR
(P/L)
Impairment expense for goodwill
(P/L)
CR
Negative
Accumulated impairment for
Asset
goodwill(-A)
NCI will not share in goodwill impairment
When partly owned sub sells inventory to parent will have to get NCI by
(Profit +- other adj – CB inv PFJE+ OB inv PFJE) x 30%
Don’t adj for Dr rev, Cr COS (PFJE 2 )as no change in equity
If parent sold inventory to sub, unrealised profit is sitting in parent sep FS thus NCI won’t share
in this , thus the inv adj will be performed under the parent column not the sub column
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