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Kaplan study pack says interest should be eliminated but exam kit (Highveldt) has accrued for same interest as receivable by addiing to parent’s retained earnings. Under what circumstance is this allowed?
It’s always allowed. It’s ignored for the purposes of the Consol I/S, but for the parent’s own accounts and the Subsid’s own accounts ( ie, not the consol accounts ) both companies should reflect loan interest receivable and payable as though they were ( as indeed they are ) separate entities. It’s ONLY for the consol exercise that we eliminate / ignore the intra-group interest receivable and payable
Mike,
from the view of the group:
why don’t we eliminate accrued interest in Highveldt’s profit for the period (assume Highveldt accounted for it) and increase Samson’s (subsidiary) profit for the year while calculating profit relates to NCI and to the group?If it is intra-group loan, should NCI be charged with finance costs in their profit or they shouldn’t?
Hi – it is necessary to put through the loan interest payable and the equivalent investment income receivable. For the subsidiary ( borrowing ) company, the entry will be Dr I/S and Cr Payables whereas for the parent ( lending ) company the equivalent entry is Dr Receivables and Cr I/S.
Now cancel the Receivable against the same amount out of the payable.
But you’ll notice that we DO NOT cancel the Retained Earnings ( I/S ) element of the entries – just the Receivable against the Payable.
Why would it not be fair to charge the nci with interest on the loan? If the subsidiary had had to borrow from anywhere else, they would have had to stand their share of the cost of that alternative borrowing.
Does that answer it?
I am still confused, I don’t see consistency..
We charge NCI with their share of finance costs on intra-group loans.
And the same time, we don’t let NCI to earn their profit on intra-group sales when we eliminate PUP.In the group accounts shall we need to show investment income and finance costs in separate lines? Won’t this inflate (blow up) expenses and incomes in group SOPL?
Hi
Yes, we show investment income and finance charges on separate lines.
Don’t forget, the nci will get their own copy of the subsidiary’s financial statements. these adjustments are only for the purposes of preparing consolidated financial statements for the benefit of the members of the parent company …. and, when all is said and done, they are only consolidation adjustments
Dear sir,
Is it correct to say that NCI will be charged their share of the subsidiary’s finance cost on loans from parent, although at the same time, the entire finance cost & income will be eliminated on consolidated group account ?
thanks for your clarification!
Lm
Yes. The nci will be given their share of the subsidiary’s profit for the year
The cancellation takes effect when preparing the consolidated statement of profit or loss but for the purposes of calculating the nci’s entitlement to profit for the year the base figure for the calculation is the subsidiary’s profit after tax as adjusted for matters such as pups and extra depreciation on fair value adjustments
Hi mike,
When there’s an intra group loan, (parent lends to sub) p shows investment income in its FS and s shows finance cost in its FS. BUT IN CONSOLIDATED FS please could you tell me what the treatmeant is for EACH AND EVERY item affected by this loan in CSoPL and CSoFP. In case of highveldt relevant info: high owns 75% of sam. Thus nci 25%. High lends $60m 10% loan to sam. Thus interest (investment income and finance cost) is $6m.
Thanks.When preparing the consolidated statement of profit or loss, add across the finance INCOME for the parent and the subsidiary and deduct from that sub-total the sum of $6,000,000
When preparing the consolidated statement of profit or loss, add across the finance EXPENSE for the parent and the subsidiary and deduct from that sub-total the sum of $6,000,000
When preparing the consolidated statement of financial position, add across the line for Long Term Assets (or whatever line includes the amount of the 10% loan made by the parent) and deduct from that sub-total the sum of $60,000,000 lent to the subsidiary (there may be other borrowers and that total loan could, for example, be $100,000,000 with only $60,000,000 lent to the subsidiary)
When preparing the consolidated statement of financial position, add across the line for Long Term Liabilities (or whatever line includes the amount of the 10% loan borrowed from the parent) and deduct from that sub-total the sum of $60,000,000 borrowed by the subsidiary (there may be other borrowers and that total loan could, for example, be $100,000,000 with only $60,000,000 lent to the subsidiary)
Of the total amount of the loan, we shall cancel only that value of the loan made by the parent to the subsidiary
But remember, all of this elimination / cancellation is a presentation exercise only! It has NO AFFECT on the base figures to be used in the calculation of the nci
OK?
Sir, in another forum you said that interest income and interest expense is already cancelled in the CSOPL when there is an intra group loan, there we do no have to make any adjustments to the retained earnings of parent and NCI. But in the above Highveldt question interest accrued has not been recorded by the parent which means parent has not recorded the interest income. If the parent has not recorded the interest income does it mean that interest is not cancelled in the CSOPL yet? If it is not cancelled then we will have to cancel it and make adjustments for the retained earnings of parent and NCI to cancel the interest. Is it wrong?
Highveldt has not yet accounted for the loan interest receivable
So account for it in Highveldt
And now cancel for the purposes of the consolidation
“Sir, in another forum you said that interest income and interest expense is already cancelled in the CSOPL when there is an intra group loan”
When preparing the CSoPoL, we shall cancel the intra-group loan interest receivable against the intra-group loan interest payable
So now, when we look at a Consolidated Statement of Profit or Loss, the intra-group element of interest receivable and interest payable should have been cancelled
I’m not sure that you have quoted me correctly above … did I really say that?
If I really said “… that interest income and interest expense is cancelled in the preparation of the CSOPL when there is an intra group loan” then that would make sense
OK?
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