Unrealised profits - Example 3 - ACCA Financial Reporting (FR)
YouTube video
10 Comments
K
kiki16·
Hello Sir, should the URP of $ 500 not be deducted from the NCI (20%*10000-500) since it is Nick who sold the goods to parents?
thanks
K
Kamran·
I think the example in the lecture preceding this highlights why they are the same amount. S bought goods from outside the group for $8m. It then sold those goods to P for $10m. For now lets assume P sold all $10m for $12m.
The SPLs would look like this, without adjustment
P S Group
Revenue 12 10 22
Costs (10) (8) (18)
2 2 4
This is wrong, the group as a whole paid 8, and sold for 12. the group profit is right, the Group Rev and costs are not. they have double counted the transaction of 10.
So actually the GSPL should look like
P S Adj Group
Revenue 12 10 (10) 12
Costs (10) (8) 10 (8)
2 2 nil 4
K
Kamran·
Formatting went weird, heres the tables again
incorrect GSPL
P S Group
Revenue 12 10 22
Costs (10) (8) (18)
2 2 4
Correct SPL
P S Adj Group
Revenue 12 10 (10) 12
Costs (10) (8) 10 (8)
2 2 nil 4
K
Kamran·
Ill try once more. the comment box doesnt like tabs and spaces.
incorrect GSPL
Narrative P ...S ...Group
Revenue 12 ..10 ..22
Costs .....(10) (8) (18)
...............2 ....2 ....4
thank you for the excellent lecture. I understand that we have eliminate the intra group sales: not revenue incurred and no cost of sales incurred, that's why we need to remove the sales and add back the cost of sale. but I still do not understand why the professor did not deduct the revenue from the subsidiary's column and add the cost of sales back to the parent's column?
N
Ngesi·
Hi Sir, first of all, thanks a lot for the lectures and the deliveries, just master piece all through. I have just one concern, I might be wrong but why do we have to adjust the Pup at the level of Nick's SPL? Does the NCI need to suffer the PUP of $500 as well? The transaction is between Gary and Nick and I would have thought the adjustment be made at the level of Gary's SPL or the Gary's Group SPL.
Please could you kindly shade more light on your proceeding?
Thank you.
S
Sanjar·
Good question!
Could someone kindly explain it, BIG please!!!!
Thank you in adv
P
Phuong·
Regarding this, we have to look at the nature of the transaction. The selling is upstream, so it's the subsidary selling to the parent -> after we wiped out the transaction entirely (the 10m adjusted), what is left is the overstated inventory of the subsidary.
The standard formula for calculating Cost of Sales is:
Cost of Sales = Opening Inventory + Purchases - Closing Inventory
Right now, that remaining one-quarter of inventory is sitting in the buyer's warehouse. Its value includes the 500 profit that the seller added on. To fix the balance sheet, you have to reduce the value of Closing Inventory by 500 to bring it back down to its original cost. We place the 500 expense under the S column to accurately reflect that the Subsidiary's individual profit must be reduced. This is crucial for calculating the Non-Controlling Interest (NCI) later.
M
Mohit·
With respect to your example, I believe we are deducting the P's Cost of sale and the S's Revenue, which is $5000.
B
Barb·
I beg to differ! I believe that, wrt your example, we are deducting $5,000 from the AGGREGATE Cost of Sales and $5,000 from the AGGREGATE Revenue.
This is NOT an adjustment that is to be made in individual company records - it's an adjustment on consolidation
thanks
The SPLs would look like this, without adjustment
P S Group
Revenue 12 10 22
Costs (10) (8) (18)
2 2 4
This is wrong, the group as a whole paid 8, and sold for 12. the group profit is right, the Group Rev and costs are not. they have double counted the transaction of 10.
So actually the GSPL should look like
P S Adj Group
Revenue 12 10 (10) 12
Costs (10) (8) 10 (8)
2 2 nil 4
incorrect GSPL
P S Group
Revenue 12 10 22
Costs (10) (8) (18)
2 2 4
Correct SPL
P S Adj Group
Revenue 12 10 (10) 12
Costs (10) (8) 10 (8)
2 2 nil 4
incorrect GSPL
Narrative P ...S ...Group
Revenue 12 ..10 ..22
Costs .....(10) (8) (18)
...............2 ....2 ....4
Correct GSPL
Narrative P ...S ....Adj Group
Revenue 12 .10 ..(10) 12
Costs ....(10) (8) ..10 ..(8)
..............2 .....2 ....nil ..4
Please could you kindly shade more light on your proceeding?
Thank you.
Could someone kindly explain it, BIG please!!!!
Thank you in adv
The standard formula for calculating Cost of Sales is:
Cost of Sales = Opening Inventory + Purchases - Closing Inventory
Right now, that remaining one-quarter of inventory is sitting in the buyer's warehouse. Its value includes the 500 profit that the seller added on. To fix the balance sheet, you have to reduce the value of Closing Inventory by 500 to bring it back down to its original cost. We place the 500 expense under the S column to accurately reflect that the Subsidiary's individual profit must be reduced. This is crucial for calculating the Non-Controlling Interest (NCI) later.
This is NOT an adjustment that is to be made in individual company records - it's an adjustment on consolidation