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Dear tutor,
In ACCA suggested answer under heading “Management charges”, it says “At Group level, the inter-company balances should be eliminated on consolidation.” Why it has not considered eliminating inter-company transactions of management charges at group level?
In ACCA suggested answer under heading “Inter-company transfers”, it says “There is a risk that at Group level the inter-company trading is not eliminated on consolidation, which would lead to overstated receivables and payables.” Can you please explain this with the help of accounting entries.
Thanks and regards,
Re inter-company management charges – yes they could be eliminated but they’re probably netted off already in the “Operating expenses” line of SoPL.
Elimination of inter-group trading/balances is assumed knowledge of financial report (FR/F7) – or even financial accounting (FA/F3). Each company will account for sales/purchases in the normal way and for the purpose of consolidation, there will be Dr Revenue/Cr Cost of sales to cancel inter-group transactions (see page 106 of FR notes) – and the Receivable/Payable will just cancel out (see page 97 of FR notes) – any unrealised profit should also be removed on consolidation (also page 97 of FR notes) – please see accompanying FR lectures if you don’t understand this and ask on FR forum if you need more.
Suppose Parent has trade receivables totaling $1.2m of which $0.2m is owed by subsidiaries – and subsidiaries have total trade payable totaling $0.9m of which $0.2m is owed to the Parent. If $0.2m is adjusted for the consolidated FS will include $1m in respect of receivables and $0.7m in respect of payables. So if there is nor adjust both receivables and payables will be overstated (by the same amount).
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