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when one member of a group has loaned another a sum of money during the year, when consolidated FS are prepared, we are to reverse that:
CR investments
DR Long term liabilitiesbut what about the loan interest that was paid during the year?
should the retained earning of the P and S be adjusted?For the purposes of the consolidated Statement of Profit or Loss the interest paid by the borrower and received by the lender will be ignored but for the purposes of working W3 for the Consolidated Statement of Financial Position no adjustment will be made to either entity’s retained earnings
what i would have thought to be the effect of the loan interest is, in the CSPL the loan interest is to be deducted from the group investment income and the group finance costs. the part of the profits attributable to the NCI would need to be adjusted.
and in the CSFP, the consolidated retained earnings and nci would need to be adjusted as well:
1. if P is the lender, and thus received interest
DR retained earnings of P
CR retained earnings of S and share them betwen P(cons RE) and NCI2 if P is the borrower, and thus paid interest
CR retained earnings of P
DR retained earnings of S and share them betwen P(cons RE) and NCIwhat am i missing?
No – I’m sorry to say this but pretty well everything that you have written is incorrect
It’s a consolidation adjustment that is made purely to reflect the point that an entity cannot lend to itself nor profit from itself
But , so far as individual entities within the group are concerned, the finance income / finance cost is a genuine expense / revenue and is NOT ADJUSTED for the sake of the Statement of Financial Position
in the consolidated SPL and consolidated SFP,
-if when selling/transferring goods within the group, we have to account for PUPs and overvalued inventory, and
-if when selling/transferring PPE within the group, we have to account for PUPs and FV depreciation, then why not
-if when we are selling/transferring cash within the group
i do agree that for the individual FS of the P and S, the finance cost and the finance income are genuine expenses/income but in the Consolidated FS, they would have to go
again, i apologise for still not getting it.
If, as you accept, that the expense and the income are genuine so far as the individual entities are concerned, then the nci is entitled to their share of the “genuine” results of the subsidiary.
I’m really sorry if you don’t take on this aspect of consolidations but, when push comes to shove, you’re going to have to accept it because … that’s the way it is!
let me chew on it for a bit longer. i am sure something will click.
Again, many thanks
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