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On page 138,139, ACCA textbook F7 instruct the accounting record for Intra-group sales of non-current assets in consolidation
The double entry is as follows.
(a) Sale by parent
DEBIT Group retained earnings
CREDIT Non-current assets
with the profit on disposal, less the additional depreciation.
(b) Sale by subsidiary
DEBIT Group retained earnings (Parent ‘s share of Subsidiary)
DEBIT Non-controlling interest (NCI’s share of Subsidiary)
CREDIT Non-current assets
With the profit on disposal, less additional depreciationIt can be deduced that the additional depreciation will be add back to Group retained earnings in case a), but I think it is more reasonable if the additional depreciation will be added back to Group retained earnings (Parent’s share of Subsidiary) and Non-controlling interest (NCI’s share of Subsidiary) as the additional depreciation is an expense of Subsidiary as it owed the asset after it purchase the asset, so it should be add back to Parent ‘s share of Subsidiary and NCI’s share of Subsidiary in consolidation. It’s similar to case b)
Please help me to explain more why IFRS adopt this accounting treatment.
Thank you!The pup on the transfer is easy enough, isn’t it? An entity sells an asset to another entity within the group at a price that is greater than that asset was being carried at
And that excess is an unrealised profit
But as time goes by, and depreciation is calculated and charged on that asset, the element of unrealised profit is reduced equivalent to that annual depreciation
If, at the date of transfer, the selling entity has recognised a profit of $1,000 and the asset had an estimated 5 years of remaining useful life, that’s $200 annual depreciation
Now consider this … say the asset is looked at again after 3 of those 5 years. How much of that $1,000 is it still appropriate to provide as unrealised profit? Surely, that should be only $400 ($1,000 less 3 x 20% depreciation)
Can you therefore see that it’s the unrealised profit that is being reduced by that depreciation so the adjusting entry is always now to reduce the consolidated retained earnings by adjusting the individual retained earnings of the selling entity by the NET figure ie by the profit on sale less the related depreciation
It is, in effect, the realisation of that profit over the period of the asset’s estimated remaining useful life
Does that make sense?
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