Corporate Accounting

Executive Summary of Intragroup Transactions Accounting

As a per AASB 10, Consolidated Financial Statements, Para B86, while preparing the consolidated financial statements, the company is required to eliminate intragroup assets, liabilities, income, equity and expenses. Since both the holding and subsidiary entity are considered as a single entity in the consolidated financial statements, any intra group profits earned by either of the entity is also eliminated.

In this report, the manner of elimination of few commonly occurring items and/or transactions between the holding and subsidiary company, viz. intragroup transfers of plant and machinery and inventory and a charge from Mandora Services, the holding company, for the management services are discussed.

In this report, the Journal entries requires to be posted by Mandora Cement Pty Ltd. in the preparation of consolidated books of accounts are also provided.

Introduction to Intragroup Transactions Accounting

Manner of preparation of consolidated financial statements is provided by the AASB 10, Consolidated Financial Statements.

As per the accounting standard, at the time of preparation of consolidated financial statements, any intragroup transactions are required to be eliminated, as the financial statements are prepared using the entity concept, based on which ,the group is considered as a single reporting entity and there is no difference between the holding and subsidiary entity. Thus, any profits made by the holding or subsidiary entity is eliminated in the preparation of consolidated financial statements of the company.

This report discussed the entries required for intragroup transfers of plant and machinery and inventory and a charge from Mandora Services, the holding company, for the management services.

Analysis

Entries Required and Reasons Thereof:

Intra-group transfer of inventory:

Transfer of inventory (Sales) made by the holding company to the subsidiary company or vice versa, to the extent the good are lying in the inventory of the entity as at the period end, shall be reversed, i.e. any profit made by the transferring entity shall be reversed and the goods shall be recorded at the actual cost to the group.

Following example help in understanding the concept better:

If during the year, the holding company, Mandora Cement Pty Ltd. sold 1000 cement bags to the subsidiary company, Wagait Sand Supplies Pty Ltd. for $ 500,000 during the year, the cost of such cement bags was $ 400,000 for Mandora Cement Pty. Ltd. Such stock was held by Wagait Sand Supplies Pty Ltd. as it is at the period end. Thus, in order to eliminate the profit on this transfer, the following entry shall be posted:

Sales Dr. 500,000

Cost of Sales Cr. 400,000

Inventory Cr 100,000

(Being entry posted for elimination of intragroup sale of inventory and elimination of profit earned by Mandora Cement Pty Ltd on the transaction)

Deferred tax asset Dr. 30,000

Income tax expense Cr. 30,000`

(Being amount of deferred tax asset recorded on profit eliminated)

Intra-group transfer of Plant and machinery:

If the holding company transfers the plant and machinery to the subsidiary company or vice versa, the profit earned by the transferor shall be reversed as the transfer is within the group and no profit should be recorded on intra group transactions.

In order to understand the concept better, let’s assume that, during the year, Mandora Cement Pty Ltd. has transferred a machinery to Wagait Sand Supplies Pty Ltd. for a consideration of $ 80,000, the asset had accumulated depreciation of $ 30,000 and cost of $ 60,000. The remaining useful life of the asset was 6 years.

Consolidating Journal entries shall be:

Machinery Dr. 30,000

Accumulated Depreciation Cr. 30,000

(Being entry posted for reinstatement of accumulated depreciation)

Profit on sale of machinery Dr. 20,000

Machinery Cr. 20,000

(Being entry posted for reversal of unrealized gain on sale of machinery)

Deferred tax asset Dr. 6,000

Income tax expense Cr. 6,000

(Being entry posted for recording the deferred tax impact of gain on sale of asset)

Accumulated depreciation Dr. 3,333

Depreciation expenses Cr. 3,333

(Being depreciation on the plant adjusted to its original cost)

Income tax expense Dr. 1,000

Deferred tax asst (DTA) Cr. 1,000

(Being entry posted for recording the tax effect on depreciation adjustment)

Services provided Intra-group:

The revenue as well as cost for the service that has been rendered within the group, i.e. by the holding company to the subsidiary company or vice versa, shall be eliminated as intra group revenue and expenses are required to be eliminated.

Suppose, Mandora Cement Pty Ltd. has provided Consultancy services worth $ 100,000 to Wagait Sand Supplies Pty Ltd., the same needs to be reversed while preparing the consolidated financial statements and the entry for same is as under:

Consultancy Income Dr $ 100,000

Consultancy Expense Cr $100,000

(Being entry posted for elimination of consultancy revenue and expense, for the service provided intragroup)

References for Intragroup Transactions Accounting

AASB 128, Investment in associates and Joint Ventures, viewed on 22 September 2020 accessible at https://www.aasb.gov.au/admin/file/content105/c9/AASB128_08-15_COMPdec15_01-18.pdf.

AASB 10 Consolidated Financial Statements, viewed on 22 September 2020, accessible at https://www.aasb.gov.au/admin/file/content105/c9/AASB10_07-15_COMPdec15_01-18.pdf.

Corporations Act, 2001, viewed on 22 September 2020, accessible at https://www.legislation.gov.au/Details/C2017C00328.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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