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1st para- If there is mid-year acquisition, you must be careful with the finance costs, as it may be that the finance costs include interest on loan from the parent which has only occurred in the second half of the year.
For example, if the subsidiary’s finance cost weere $400,000 and the parent has owned the subsidiary for six months, the finance costs to be consolidated would normally be $200,000.
2nd para- However, if the parent loaned the subsidiary $2m with 10% interest , there will be $100,000 in the second six months that wouldn’t be in the first six months.
3rd para- The true interest charge would be $300,000 without the intra-group interest, and therefore six months of this would be $150,000. This is the figure that would be included within the consolidated statement of profit or loss.
My query is I am clear from the 1st para & the example given but I am confused with the 2nd para and 3rd para. Please explain.
This is from Kaplan text book.
Hi,
In the second paragraph the loan is being made only once the parent subsidiary relationship exists, and so the interest is $100,000 for the six months post-acquisition. This needs to be eliminated.
The third paragraph is hen saying that on eliminating this $100,000 there is $300,000 left in finance costs that must be due to loans external to the group. This is then pro-rated prior to consolidation to give $150,000 that is then consolidated.
It is a minor complication to look out for if there is a mid-year acquisition and a loan between the parent and subsidiary.
Thanks
Thankyou, thought that the 1st and 2nd para links to the 3rd para which made me more confused.
It means that the 3rd para doesn’t links with 1st and 2nd para?
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