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Hi, I have a problem of understanding BPP’s answer to the question.
The extract is below.
Highveldt, a public listed company, acquired 75% of Samson’s ordinary shares on 1 April 20X4.The summarised statements of financial position of the two companies at 31 March 20X5 are shown below:
Highveldt
Retained earnings – 1 April 20X4 – 160
year to 31 March 20X5 – 190Samson
Retained earnings – 1 April 20X4 – 134
year to 31 March 20X5 – 76Note 2:Included in Highveldt’s investments is a loan of $60 million made to Samson at the date of acquisition. Interest is payable annually in arrears. Samson paid the interest due for the year on 31 March 20X5, but Highveldt did not receive this until after the year end. Highveldt has not accounted for the accrued interest from Samson.
Extract from BPP’s answer
Adjustment to RE of Highveldt
Accrued interest from Samson ($60m × 10%) 6Adjustment to RE of Samson
Accrued interest from Samson ($60m × 10%) – nilMy question is: Isn’t it wrong to increase retained earnings since it is intercompany operation?
Or is it right? What I am missing here?
Hi,
Before any intra-group transactions are accounted for the books of each of the parent and the subsidiary need to be accounted for correctly. As the interest has not been accrued/received then it needs to be accounted for.
The intra-group interest will then be eliminated from the group SPL.
Thanks
Hi, Sir.
If we took loan interest as an income in Parent and expense in Subsidiary, doesn it give us the wrong figure for retained earnings ?
You said that, intra group items will be removed from Consolidated SOCI. But here we have to find the retained earnings attributable to parent. And if the expense is taken into account, and providing that both of them are in the same group, why we did not just increased subsidiarys retained earnings ?
Please, can you explain me the reason behind ?
For example : we say that
“In Consolidated P/L we eliminate intra group dividend income, expense or finance income/expense” i.e if P receives X amount from S, both of them eliminate those figures.
Then why dont we reduce income/expense from retained earnings. I do not understand that how do we come to same figures in Con.SOPL and Con.SOFP by different methods ?
Hi,
Although the adjustment in profit or loss will impact the line items it does not impact the overall group profit. As the group profit is not changed then the group retained earning will not be changed either and so we do not need to make any further adjustments in the SFP.
It is the same for the elimination of intra-group sales. This changes things on a line-by-line basis on the face of the group SPL but there is no overall impact on group profit and so no overall impact on the group retained earnings.
Thanks
Sir, if we make adjustments in SPL, then the effect of the change would be:
A) Highveldts Profit for the year is reduced by 6000
B) Samsons Profit for the hear increased by 6000
This gives us the net effect of : (-6000) + (6000)*75%
So, based on Spl figures we would add less from Highveldts and More from Samsons profits to group r.e
Sir, please show me comparative example with sofp and spl adjustments. I am really confused here (
Lets assume this example :
– B/F Retained Earnings
Parent : 100k; Subsidiary 50k
– P profit for the year (including 4k from S) :30k
– S profit for the year (including 4k expense): 20kSOFP shows retained group earnings increase: 30k + 15k (20×75%) = 45
However, SPL adjustments give us :
– P Profit : 26 (deducting 4 income)
– S Profit : 24 (Adding back expense)So, group revised increase should be:
26 + 18k (24×75%) = 44
So, how these 2 figures are the same ? I do not understand, sir (
rustamov123 wrote:Sir, if we make adjustments in SPL, then the effect of the change would be:
No, if you make the adjustments above to increase and decrease the profits of the parent and subsidiary, the net effect on the group profit is zero. Use the standard working for the group SFP that we use and make the adjustment in the adjustment column to eliminate the intra-group interest. You will then see that the total profit figure remains unadjusted, and that there is then no change in the subsidiaries profit either used to calculate the NCI as the adjustment is made in the adjustment column. Why do we make it in the the adjustment column? Because it does not change the group profit overall.
Thanks
rustamov123 wrote:Lets assume this example :
This is why you need to use the standard working and use the adjustment column. P’s profit does not change and neither does S’s when we make the adjustment in the adjustment column, so you still end up with the same calculation as you have done in the group SFP.
Thanks
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