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Hi,
I was just practising one of the consolidating question in the BBP book, and I have a query about working 4, NCI.
In this example, there is an intragroup sale, which I understand is eliminated from the Revenue and Cost of Sales in the main consolidated statement, and also the profit on sale is eliminated on any inventory still existing in the group.
When I looked at the answer for the working 4, I noticed that the profit for unsold inventory has been deducted, but why not also the sale itself?
Thanks for your help.
The transaction can be eliminated in two ways. The first is the way that I do it and it’s different than the BPP and the Kaplan method.
Method 1
Cancel IN FULL $ for $ the value of the intra-group transactions from Revenue and from Cost of sales
Then consider / calculate the unrealised profit in the inventory and add that unrealised profit figure to cost of sales
Method 2
Reduce Revenue by the sales value of the intra group sales
Reduce cost of sales by the net figure of the intra group sale less the unrealised profitIt looks easier but you can easily get confused with the calculation of the unrealised profit so I always suggest that you do it my way (Method 1)
Just check that BPP answer again and see if they have done it “their way”
If you still can’t sort it out, post again with more detail
Mike, shouldn’t we also add the unrealised profit back to the inventory in case we’re required to prepare CFP?
Hi Mike,
Thanks very much for your reply. I have a feeling I may not have explained my question very well. Within the consolidated statement of Comprehensive Income, I used method 1, as did the BPP book, and I arrived at the correct answer.
However, below the statement is a section entitled “Profit Attributable to” and it’s this section I’m querying. I’m a bit confused about the working 4 (NCI) calculation. In the BPP answer, they deduct the PUP, which I understand you should. But why not also deduct in full the intragroup transaction, just like you outlined in method 1?
Thanks again.
Victoria, I believe that the unrealized profit should be subtracted from the inventory figure, not added.
right. logically thinking, we’re increasing costs by decreasing closing balance of inventory, innit? I’ve always been a complete mess with these add-ings and less-ings :((
as for your Q about why not also deduct in full the intra-group transaction, I believe that we’ve already done it in full, so why do it one more time? next step, we eliminate just our deemed future profit in our accounts
I think that’s right! They way I look at it is, if we debit RE then, by elimination, we have to credit inventory.
You might also be right in relation to the intragroup transaction, but the working 4 calculation in the BPP book starts with the figure from the individual statements, therefore, I don’t think it’s been adjusted yet.
Neil, the subtext at the foot of the statement of profit or loss is not affected by the intra-group sales / purchases
The statement says : “Of this amount, $XXXX is attributable ….” so no elimination of intra group sales / purchases is relevant
Ok?
I’m not sure I understand! In the NCI working (in the BPP book answer), it starts with the PFY and TCI figures taken directly from the individual statement of the subsidiary. Would those figures not be affected by sales to the parent (or vice versa)? Or are you saying they are but just ignore it? But in that case why account for the PUP?
Sorry for being a bit slow!
I can’t speak for BPP but here’s what I think.
I start by looking at the consolidated figures – after all, the narrative says “Of this amount ….”
The nci share of the subsidiary’s results is found in the calculation working W4B Nci share of this years subsidiary profits.
The profit figure used to find the nci share is this year’s subsidiary adjusted time-apportioned (translated if necessary) profit after tax
So it’s adjusted for pups etc but there’s no further adjustment for things like cancelled intra-group sales or purchases
Ok?
Thanks again. I’d be lying if I said I completely understand, but I’ll try to go through a few more practice questions to see if it sinks in!
Thanks! Incidentally, do you have a lecture dealing specifically with this?
Dealing with what? The calculation of the nci share of the consolidated profits? The calculation of working W4B? Surely that’s already covered in lectures
Isn’t it?
Dealing with the calculation of the NCI share of the consolidated profits. I’m sure you’re right, I’ll see if I can find it.
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