September 15, 2020 at 8:32 pm #585776
Hi there, I hope you’re well.
I was watching the lecture thats been created where inter-entity trading exists when creating a consolidated income statement. I just have a quick query which the lecture doesnt really discuss, if thats okay?
Allow me to use the example income statement provided in the lecture notes for the subsidiary:
Cost of sales: (£50,000)
Gross Profit: £60,000
Profit before taxation: £50,000
Income tax: (£14,000)
Profit for the year: £36,000
In this example income tax is a fixed figure of £14,000 meaning that an unrealised profit from inter-entity trading reduces profit for the year by £2,000.
However, in practice the income tax will be a percentage figure, and therefore the net effect on profit for the year wouldn’t be equal to a reduction of £2,000, it would be the tax rate (for example 20%) x PBT which would give us: £48,000 (£2,000 reduction reflected in PBT) x 0.2 = £9,600. Giving us a profit for the year of £38,400, available to be split between shareholders of the parent and NCI as specified in their percentages of ownership.
This would actually lead to an increase in profit for the year by £2,400, unlike the £2,000 reduction in profit for the year when a fixed figure for tax is used.
So my question is, when calculating NCI where inter-entity trading exists, does the calculation involve reducing the profit for the year of the subsidiary by the £2,000 unrealised profit which increases COGS, or by the by the final effect on profit for the year (which would be adding to profit for the year the additional £2,400 assuming tax rate wasn’t constant, but a percentage of 20%).
I feel the latter makes more sense here as it provides an accurate reflection of what the total available profit for the year of the subsidiary is, to be split between NCI and shareholders of the parent. Please correct me if this is wrong.
Thanks in advance, so sorry for the long message.
September 16, 2020 at 9:05 am #585800
It is the individual companies that pay tax, and the amount of tax will not be affected by the provision for unrealised profit.
September 16, 2020 at 8:35 pm #585865
I see. So when calculating the profit for the year attributable to the NCI we deduct the provision from unrealised profit from the profit for the year, then multiply the figure by the NCI’s percentage ownership of the subsidiary? Thanks.
September 17, 2020 at 11:11 am #585903
Yes (and that it what I have done in both the lecture and in the printed answer in the lecture notes).
September 17, 2020 at 12:12 pm #585920
Thank you very much, apologies for reiterating the existing content.
September 17, 2020 at 1:25 pm #585930
You are welcome 🙂
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