FRloan interest from sub to parent

The profit given in the question, 21m, is for the year ended 30 sept 2009 (12months).
According to the 2nd additional information given in the question, interest on loan can be calculated as 8%*50m*(6/12) =2m. And this is a post-acq item.

We do time-apportionment, with an assumption that all transactions took place evenly throughout the year. Here, there is an exemption to this assumption. Interest on loan is a post-acq item and will not affect pre-acq profit.
so, we add that expense back to the profit, as if it never happened. now, the profit is 21+2 = 23m. now time apportion it. 11.5m for pre & post acq.
but, there is an expense of 2m in post-acq period. thus, post-acq profit is 11.5 - 2 = 9.5m.

Now, check it
pre-acq 11.5m
post acq 9.5m
total 21m

Thanks again, Najiya:) I am clearer now with your analysis.

But why 2m as an expense in post acq period? Do you mean when doing CIS, the 2m loan interest should be regarded as expense for S? Just as S borrowing these 50m from the third party @8%?

Many many thanks.

not sure my question is clear, I mean 2m is intra group interest, should be eliminated when doing CIS, why should we still admit 2m as post acq expense?

coaqin1981,

najiya got 11.5 as pre and post acq profit.

now, we have to cancel intra group loan interest.

dr investment income 2m
cr finance costs 2m

but to find post acq profit, we have t add the expense and then post acq profit is 11.5-2=9.5m

Hi Najiya, can you explain my question, I still cant understand why adding back 2m for post acq profit. Thanks.

Hi caoqin1981,
you are welcome:)

Here, we are given the profit of S for the whole year as 21m. we are splitting this 21m into pre- & post-acq profits (of S, not of group), no intra-group adjustment here.
If we think only about S, then 2m is an expense..rite?

While doing CIS comes the group concept.
we subtract 2m from Investment Income of P and Finance Costs of S. That is, cancellation of intra-group loan interest, as Vipin said.

Hope that clears your doubt.

caoqini1981,
21m is profit of the salva not the consolidated profit.
21m is split as pre and post acq.

we have to add the expense 2m which was post acq expense. ur doubt why to add since the expense is intra group. but we are not finding the consolidated profit here. but the post acq profit of salva.

i know i am not Najiya. when she comes she might explain it as well, i suppose.

intra group intreset is cancelled by
dr investment income 2m
cr finance costs 2m

suppose say, the 8% loan was taken in post acq period from a third party instead of parent, in that case what is pre acq profit. is it 11.5 or 10.5?

Hi Vipin,

I think the calculation remains the same, giving pre-acq profit of 11.5m

Thank you Najiya, Vipin. I know now when doing CIS, subtract 2m from Investment Income of P and Finance Costs of S. Fair for both sides. From the exam answer paper, I notice the Finance cost calculation is:
Pandar 1800

---

fine
Salva post (3000-2000)X6/12+2000

---

why add back again 2m
Intra group interest (2000) ----I know this is for Cr. finance cost 2m for S

And in calculating Pardar's group R.E., investment income has already been less 2m from P as intra group interest.

we usually do calculation like 6/12 or 9/12 for a mid acq assuming the expense or profit is spread evenly throughout the period. suppose say, the loan was taken at the begining of the period then we spread the interest of the year evenly throughout the 12 months.

but here, we know the loan is post acq and the interest is post acq.
we do ( 3000-2000)*6/12. this step , we take out 2m bcoz we dont do spread the interest amt throughout the year . now we have to consider the post acq interest and so we add back. so we get, ( 3000-2000)*6/12+2000.

in other words, since we already know that 2m is the interest specifically for the post acq period. we dont spread that amt evenly throught out the year by 6/12 or 9/12. 9/12 if they had acquired 9 months before. 2m is soley for post acq period and so we add back directly.

Thanks!!!, I m fine with time apportion. My question is when doing CIS, we have already
1) -2m in investment income ---P
2) -2m in finance cost

---

S
Above has been eliminated intra group loan interest
If we add back 2m, it seems extra step. I mean 2m as expense for S post expense to be added back in CIS.

2m is added back to find salva post acq finance cost.

see, when finding post finance cost of salva we SHOULD consider 2m and it SHOULD be added. to find group finance cost it should be deducted again.

so steps are ,
pamdar 1800
salva 2500(it includes 2m)
intra group interest (2000)

group---2300

agree to find group finance cost, should -2m, when we do CIS, why admit 2m for S post acq expense? when we do CIS, S and P in one group, 2m is not S's expense again.

If the finance cost of S includes the intra-group interest of 2000, then only we need to cancel it..rite?

Yes, that's why Salva post acq finance cost is (3000-2000)X6/12 in CIS. I think

caoqin1981,

Salva post acq finance cost is NOT (3000-2000)X6/12 in CIS but
(3000-2000)*6/12 +2000

(3000-2000)X6/12 , we are deducting 2m here bcoz we know it is post acq. dont be confused we have to consolidate it later.

to avoid ur confusion, let me tell you this.

while finding finance cost , find parents and subsidiary seperatley which should include intra group interest if any. then add this 2 figures then deduct intra group interest.

group finance cost= parents' +subsidary's- intra group.

so while calculating subsidiary's finance costs we should consider all intra group interest and dont deduct any interest bcoz it is intra group.

2000 deducted here is not the intra-group interest.
the calculation is ((3000 - 2000)*6/12) + 2000
the finance costs associated with the loan note are separated out and charged in full to the post-acq period.

group finance cost= parents’ +subsidary’s- intra group,I cant understand this. I think group finance is P and S integrated as ONE to outsiders, therefore, intra-group interest is invalid to be admitted and shown as investment income or loan interest expense when doing Consol.

"I think group finance is P and S integrated as ONE to outsiders, therefore, intra-group interest is invalid to be admitted and shown as investment income or loan interest expense when doing Consol."
that is correct, caoqin.

now, to find the consolidated finance cost it is good to do step by step.

first find
parents’ finance cost
then find subsidary’s finance cost
last step deduct intra group finance costs.

deduction of intra group interest do it at last step.

then u get consolidated finance cost ie group finance cost.


group finance cost= parents’ finance cost +subsidary’s finance cost- intra group finance costs.

Wait,I think I can understand now. 2m should not be regarded as expense, but has been subtract from S's this year's profit to show as loan interest expense charged in S's IS. So when we do CIS, we should add 2m back to post acqu bcoz it is NOT EXPENSE, but already been regarded as EXPENSE.

Dear Both, I m clear now :))))))

it is not like that.
suppose say the loan was taken from a third party not from the parent. all the steps will be same expect we dont deduct intra group interest.
ie.
pre acq profit is 11.5 and post acq 9.5
salva finance cost is 2.5 m

and we need not deduct intra group interest as it was from third party.

so are u with us?

HI Vipin, U r right one two three steps. My step is just eliminate intra group int. within 2 step, no 3 step, and amount is the same 2300.
1. P 1800
2.S (3000-2000)X6/12

And I think 2000 is the intra group int to be eliminated. And I think it also agree to your comment group finance cost= parents’ finance cost +subsidary’s finance cost- intra group finance costs. :)

pls dont do like that. you show ur step correctly. dont mix the steps. final ans may be right.
but salva post acq finance cost must be 2.5m and not 0.5 m.

OK. I think u r right, bcoz P's 1800 is as individual. So

1 P as individual
2 S as individual
3 intra group transaction

One two three step will not missing anything. Consol last thing to take

I think I completely can change my mind now. Thank you.

You are welcome.
now, u got it. similar confusion i had. we can do more complicated problem if we do step by step.

Yes, very clear now. Also thank to Najiva. Can do better now. step by step is good.

You are welcome