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can some1 explain in practice how to deal with an element of depreciation in unrealised profit of the sale of nca either with the P selling to S or vice versa.
Yes, calculate the depreciation on the unrealised profit and make the adjustment. typically, the asset has been sold within the group at a profit ( not always – beware ). In that situation, the buying company will be charging depreciation on the inflated price. so far as the group is concerned, the asset should be included within the fin stats at true cost to the group – accum depreciation.
You’ve eliminated the unrealised profit. Now you need to make the adjustment for this excess depreciation. Now here’s where we have a problem! Some of the printed solutions make a NET adjustment in the records of the selling company. Other solutions make a gross adjustment ( for the pup ) in the records of the seller and a further adjustment for the excess depreciation in the records of the buyer.
Personally, I find this second method more conceptually correct, and that’s the way I teach it.
I don’t think there is official guidance on the matter so I suppose it’s up to you!
thx a lot..as a self study student i sometimes find it difficult to grasp some explanations..
in the BPP txt it solves using the 1st timing,but i found it illogical and thats wat i wanted to sort out..
im using the 2nd method as its the buying Co. who charges the depreciation. thats right?
u hv some tips to share, plz dont 4get me
n thx agnRegarding the NET adjustment, can you please explain a bit more?
I am a bit confused why we adjust from the selling company since its the buyer company that has overstated depreciationYes, it’s strange isn’t it! The justification is that, for each year that passes, the selling company has actually realized that element of the profit. Personally I don’t like it, but that’s irrelevant! It’s just the way it is according to IASB / IFRSIC.
In summary, make the NET adjustment in the retained earnings of the selling company
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