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Dear Sir,
I will summarize all the adjustments that I should make with respect to intra-group loans when preparing consolidated financial statements..I want get those adjustments confirmed.
In preparing CSOFP we remove loan payable and receivable figures.In CSOPL we deduct loan interest from both investment income and finance cost. Is that all? or should I make any adjustment to Group Retained Earnings and NCI (If loan is granted by parent to subsidiary) ?
IF I don’t need to make any adjustment to group RE or NCI,
lets say a loan was given to subsidiary by parent and relevant interest on this loan is $1000. On consolidation we just remove this from investment income and finance cost. Right?
However if there weren’t such a loan subsidiary’s profit will be increased by 1000 and parent’s profit will be decreased by 1000. if this subsidiary is partly owned say 80% by parent..Parent’s retained earnings will be again increased by 800 and NCI will be increased by 200.. So on consolidation net impact of the removal of interest on an intragroup loan given by a parent to a subsidiary should be,
Parent Retained earnings should be decreased by (+800-1000) = -200
NCI should be increased by = +200IF my logic is wrong, correct me..
But If you demonstrate that no adjustment should be made to retained earnings and NCI.. I expect the answer for following BPP question.
”On 1 July 20×7, Spider acquired 60% of the equity shares capital of FLY and on that date made a $10Mn loan to FLY at a rate of 8% per annum.
What will be the effect on group retained earnings at the year end date of 31 December 20×7 when this intra group transaction is cancelled.
A) RE will increase by $400K
B) RE will be reduced by $240K
C) RE will be reduced by $160K
D) There will be no effect on group retained earnings.Answer is (C)
loss of invesment income 10*0.08*6/12 = (400)
Saving of interest payable 400*0.6 = 240
Net reduction in RE = (160)Thank you in advance.
“In preparing CSOFP we remove loan payable and receivable figures.In CSOPL we deduct loan interest from both investment income and finance cost. Is that all? or should I make any adjustment to Group Retained Earnings and NCI (If loan is granted by parent to subsidiary) ?”
The adjustment to the consolidated figures is automatic
When you adjust the subsidiary’s figures, the amount attributable to the parent will increase (but at the same time the amount received by the parent will decrease) so the consolidation affect is automatic after you have amended the two entities’ figures
“On consolidation we just remove this from investment income and finance cost. Right?”
Correct
And I’ve just answered your previous post about the effect on the consolidated Spider / Fly issue in answer to Siesta with a post entitled MCQ, 2 minutes ago
Here it is again!
In Spider’s (S) records there is a line for investment income (the interest on the loan made to Fly) of $400,000
In Fly’f (F) records there is a line for finance charges (the interest on the S loan) of $400,000
On cancellation, the S retained earnings will decrease by $400,000 and the F retained earnings will increase by $400,000
Let’s say that, before cancellation, S had retained earnings of $3,000 and F had retained earnings of $1,600
Without cancellation, the consolidation would be $3,000 + 60% x $1,600 = $3,960
Following cancellation S now has $2,600 and F has $2,000
The consolidation now will be $2,600 + 60% x $2,000 = $3,800
And that is a decrease of $160
OK?
But sir, we dont make any adjustment to retained earnings. do we? we just remove interest income and expense from CSOPL..but that’s not enough.. Am I wrong? We must make adjustment to RE and NCI..otherwise above impact doesn’t reflect. does it?
“But sir, we dont make any adjustment to retained earnings. do we? we just remove interest income and expense from CSOPL..but that’s not enough.. Am I wrong? We must make adjustment to RE and NCI..otherwise above impact doesn’t reflect. does it?”
What on Earth are you thinking?????
The basis of the calculation of working W3 Consolidated Retained Earnings is …
H’s own +
H’s share of S post acq retained less
Goodwill impaired since acquisition (just our share)
If we adjust H’s retained earnings and we adjust S’s retained earnings … how can this NOT affect the consolidation
And, of course, when we adjust the S retained earnings, that will have a direct consequential affect on the nci
When is this exam you’re facing?
Sir now I got the point… Since we are adjusting subsidiary’s profit it will automatically correct the parent’s share. One more thing sir.. how to deal with intra group dividends ?
Cancel the dividend receivable in the parent against the same amount of dividend payable in the subsidiary and leave just the dividend payable to the nci as a liability in the subsidiary
Have you read the course notes at all?
This is all explained in the detailed course notes as well as being on video
Sir,
I went through all the all the adjustment related to intra group loans and dividends.. For last time please check the following adjustments and confirm them.INTRAGROUP LOANS:
*Eliminate both loan receivable and loan payable balance from CSOFP.
*Eliminate both interest income and interest expense on intra group loan from CSOPL.
* Deduct interest income from Parent’s retained earnings and to reverse interest expense-which has already been deducted from subsidiary’s profit- add it back to subsidairy’s RE.. (This will increase the group retained earnings indirectly as above MCQ) (In working 3)
INTRAGROUP DIVIDENDS
* Eliminate any dividends receivable and payable from CSOFP.
*Eliminate dividend income from CSOPL.
*DON’T DO ANY ADJUSMENT TO REATINED EARINGS AND NCI (WORKING 3 AND 4)If I am wrong, correct me.. If I bother you asking same thing again I’m sorry 🙁
“*DON’T DO ANY ADJUSMENT TO REATINED EARINGS AND NCI (WORKING 3 AND 4)”
These dividends need to be shown when calculating working W3 consolidated retained earnings ie the dividend income from the subsidiary (and associate) must be included within the parent’s bit of the working W3 calculation
That calculation is:
H’s own (ie including dividends from group entities) +
H’s share of S post-acq retained –
Goodwill impaired since acquisition (just our share)
WATCH THE VIDEOS!! It’s all in there
If the dividend has already been accounted for and paid.. Dividends are included in our RE right? no need to show it again? watched the dividend example on the site and in that example companies had not accounted for dividends..I think thats why its is included in W3
But if it’s already been paid and accounted for, it’s also included within working W3 except it’s not separately shown
Okay lets say during the year Parent has paid no dividend..but its 80% subsidiary has paid $10,000 as dividends and accounted for it correctly..As per the question year end RE balances in the question are;
-Parent 80,000 (dividend income is included since it’s year end RE)
-Subsidiary 60,000 (after the the dividend payment)Since parent has received a dividend income of 8,000 we will eliminate this from CSOPL..
How will our W3 get affected by this ?______________Parent_________Subsidiary
As per question 8,0000 _________60,000
Dividend______??????__________??????It won’t! Working W3 is a working to calculate the consolidated retained earnings figure for the consolidated statement of financial position
and is arrived at by following the well-known mantra:
H’s own +
H’s share of S post-acq retained –
Goodwill impaired since acquisition (just our share)
If you’re looking at the consolidated statement of profit or loss, when we arrive at the line Investment Income, we simply do not include the dividends received from the subsidiary nor from the associate in the cross addition to get to the figure for Investment Income for that statement
But sir,
if we don’t deduct dividend income received from subsidiary from Parent’s RE and add the same figure to subsidiary’s RE in W3, we don’t effectively eliminate the intra group dividends.. Do we? because CSOPL is just a working..So if we eliminate intra group dividend from CSOPL, we also have to adjust RE… Just because we remove it from CSOPL that doesn’t eliminate that figure from RE since our RE figures are based on the result of individual companies. In individual financial statements we already deduct parent’s share of dividend from subsidiary’s RE and this is included in parent’s retained earnings.
Are you reading my responses or are you simply pursuing a crusade on your own?
I’ve fully explained the treatment
Did the subsidiary pay a dividend to the parent entity? And did the parent entity receive the cash in respect of that dividend? So the parent entity’s Retained Earnings are correct!
For presentation purposes we need to ignore the dividend from subsidiary and associate entities when preparing the statement of profit or loss but no adjustment is made to the parent’s nor the subsidiary’s retained earnings figure
Working W3 Consolidated Retained earnings is calculated as:
H’s own (this is the figure from the H entity’s own retained earnings account) +
H’s share of S post-acq retained (this is the H share of the S post-acquisition RETAINED earnings – and dividends are not retained) –
Goodwill impaired since acquisition (just our share)
Hi,
What is it that is causing you the headache? What is the December 2009 question doing and what do you not specifically understand?
Thanks
Hi,
No, neither of the are cancelled out as they are balances with the formed owners of the subsidiary and not the subsidiary itself.
We only cancel out intra-group trading balances (inventory and PPE) alongside any intra-group loans between the parent and the subsidiary.
Thanks
Sorry, is this intra group loan included into F7 ? I haven’t met this in my text book except intra group loans between P and S.
Hi,
It isn’t an intra-group loan it is calculating the fair value of consideration when the parent acquires the subsidiary through the issue of debt. It isn’t a commonly examinable aspect of the syllabus but could feature.
Thanks
Sir, why then in this question we add income to R.E of Parent and retain the expense in subsidiary ?
Included in Highveldt Co’s investments is a loan of $60m made to Samson Co at the date of
acquisition. Interest is payable annually in arrears. Samson Co paid the interest due for the year on
31 March 20X5, but Highveldt Co did not receive this until after the year end. Highveldt Co has not
accounted for the accrued interest from Samson Co.Hi,
If the subsidiary has not accounted for the interest then we need to do so to ensure that the individual company accounts are correct first before then making and adjustments to the group accounts.
Thanks
So, that means that after accounting for 6k finance income, we have to eliminate that in consolidated sofp. But this has not been done.
Sorry for being disturbing. I just do not understand the reason why we dont change retained earnings figures. Had we calculated the consolidated SPL then the effect of correction for intra group items would be :
B/F Retained earnings + (Parent’s Retained earnings – 6000) + (Subsidiary’s Retained earnings + 6000)×share of ownership
Then this gives us totally different closing retained earnings from SOFP.
We don’t need to make any adjustment to the figure in the group SFP as the adjustment does not impact the overall profit in the group. On one hand we reduce the finance cost and on the other we reduce the interest income. If we are not adjusting the overall profit then we do not need to adjust the retained earnings in the group SFP.
Thanks
Sir,
Generally, only inventory and PPE transaction between group and remained in stock at year end need a provision unrealized profit and adjust AR, AP; but loan interest is still recorded as an income, i.e. Highveldt included 6M in consol RE?
Thank you, Sir.Hi,
Any intra-group interest in the group SPL is eliminated from finance costs and investment income.
Thanks
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