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Ex.
S Co sells plant costing $ 10000 to P Co for $12500, My question is the actual cost of palnt is $ 10000 but after Sold to P Co the cost increased by $ 2500 , when we make the consolidation the non current assets increased by 2500 and it will artificial figures in Non Current assets in group company.
So I can’t understand the conceptBasically, the unrealised profit would have to be removed from the consolidated accounts as a consolidation adjustment.This is to deal with the fact that as you correctly suggest the group has gained nothing as a result of the transaction.Furthermore,excess depreciation will be charged on the $2500 in the buyers accounts.This will also have to be adjusted in the group accounts over time.One suggested method is to credit the sellers account with the excess depreciation related to the intra group sale.
Jon
Whereas I really do appreciate your assistance and your active involvement in the site, this particular page is called “Ask the Tutor”
Now, to the best of my knowledge and belief, you do not fit into that title. In fact, there’s only one person that does as at today’s date, and that’s me!
Please let me ask you not to get involved in answering posts on the Ask the Tutor page.
I have no problem at all with you answering similar posts on the “Forum” pages where questions and comments are posted (some of which would be more sensibly posted on the Ask the Tutor page!) but leave this page to me.
Thank you for your understanding 🙂
Mohammed, Jon Bain’s post is essentially correct. His last sentence that deals with the excess charge for depreciation states that “One suggested method is to credit the sellers account with the excess depreciation related to the intra group sale.”
I’m not sure what any other method may be in relation to “One suggested method ….”
There was in former times an alternative way of dealing with it but that disappeared 4 or 5 years ago and I’m not going to tell you what it was ….. because it’s gone and would only serve to confuse
Incidentally, have you watched the video recording of this part of consolidations? It should be explained in there (a slight worry now in my mind – did I re-record the lecture when the treatment of the excess depreciation changed?)
No doubt you’ll let me know
Sorry for my comment Mike Little. In honesty I didn’t look properly at the page title before commenting. I believe I clicked on the forum title latest comments then clicked on the title post on my phone and then commented.I assumed it was in the P2 or F7 forum.I promise I will look more carefully in future.
Hi Jon
No harm done – as I stated, your post was essentially correct, so let’s move on
🙂
Thanks for all ,
One more question in the same point.
The excess depreciation will be charged to which company P or SIt will not be charged to either company. When a group company buys from another company in the same group, clearly the buying company will be charging depreciation on the cost to the buying company ie they will be depreciating the inflated price.
So the charge for depreciation in the buyer’s records will be inflated and needs to be adjusted on consolidation.
That adjustment – the “excess depreciation” on the unrealised profit will be used to REDUCE the pup in the seller’s records.
So, it’s not charged to either company – it is credited in the seller’s retained earnings by reducing the value of the pup charge
Is that ok?
In my last post, that I have just read again, the last word I have used is “charge”
Of course, we don’t reduce the pup “charge”! Pup is a provision – it’s not an expense!
We reduce the provision on the balance sheet, not the charge in the profit or loss.
Are you still ok with that?
Question Regarding the excess depreciation. When adding it back to S’s retained earnings isnt this misrepresenting the NCI’s share of profits? Because P is the company that buys the NCA from S and suffers the depreciation. So shouldnt the depreciation be added back to P’s books. If you have time please explain
For a long time – in fact, until relatively recently – I would have agreed with you
But I’m persuaded that, as the years roll by, the element of the unrealised profit that relates to each separate one of those rolling years is being realised
This IS, apparently, the correct way of dealing with it but the minds of those on the IAASB are much more clever than even Jim Kerr (look him up if you don’t know)
I got an email stating someone replied to this but I am not seeing the reply sighsssss
ok now seeing it as i replied (a little weird) thanks for the response. I guess I will have to try my best and still put it into that context and I will look him up thanks again
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