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Sir say parent (P)invests in loan stock of $10000@ 10% interes in its subsidiary (S).I understand that in the consolidated balance sheet investment of $10000 will be reduced from total investments of P and loan stock $10000 will be dededucted from curent liabilities of consolidate balance sheet. But why is retained earning of P not reduced in W3 calculation by finance charge on loan note that it had received from S. Likewise why finance charge is not added back to the retained earnings of S. Finance charge is not charged outside to the group so why is adjustment not done. If finance charge is added back then group retained earning would be different.
Please help“If finance charge is added back then group retained earning would be different.”
You’re correct – group retained earnings would be different
The ignoring of the intra-group finance income / expense is a matter for the consolidated statement of profit or loss where, on preparing that statement and adding across the incomes and expenses, any intra-group element would be ignored
However … for the statement of financial position the mantra that should by now be firmly in your brain tells us that the consolidated retained earnings figure comprises:
H’s own +
H’s share of S post-acq retained –
(goodwill impaired since acquisition … just our share)
That first part of the mantra … H’s own … refers to the retained earnings of the parent entity as found in its own statement of financial position and those retained earnings include the intra-group loan interest received (and any dividends received from group entities)
Better?
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