Intra-Group Loan

Hi,

I have the same question as in the original topic here in BPP kit, BUT the answer is that there is going to be no effect on group RE.

Do I understand correctly, that there should be an effect on group RE in a sense of S’s RE attributable to the parent (60% parent, 40% NCI)?

And then only in a situation where parent owns 100% of S there will be no effect, is that right?

Thanks!

Hi,

The quetion on the kit is:

”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.

From the above it would follow that the answer is C, i.e. interest expense in S and interest income in P will be eliminated on consolidation, but it will effectively change the RE of each of the companies and hence P’s share of S’s RE will also change and from above (as explained) that would give decrease of $160K:

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

But my book answer bank suggests answer D – no effect on group RE.

What I am trying to understand is first which is right obviously and if we argue it’s decrease of $160K, I guess I am missing context in terms of which steps are taken to arrive at it. Meaning, the cost/income on loan is cancelled on consolidation, so everything else being equal there will be no change to profit and hence RE. So is it then correct to say, that what has an effect is one line adjustments to reflect share of P and NCI after bottom line and with the same being reflected in equity in SFP?

I am sorry if it is obvious, just trying to get the logic right all the way through.

Thanks!

hi,
so we dont have to add back the finance cost to the subsidiarys profit when allocating profits share to nci and the group?