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P consolidated statement of profit or loss for the year ended 31 December 20X7
P $000 Revenue (300 + 150 — 20) 430
Cost of sales and expenses (180 + 70 – 20 + 4 (W4)) (234)
Gross profit 196
Operating expenses (47 + 23) (70)
Profit from operations 126
Finance costs (2)
Profit before taxation 124
Tax (25 + 16) (41)
Profit for the year 83Amount attributable to:
Equity holders of the parent 74.25
Non-controlling interest (W2) 8.75********
=83(W1) Unrealised profit in inventory
Selling price 20
Cost (100/133% x $20) (15)Total profit 5
Provision for unrealised profit 80% x $5 4(W2) Non-controlling interest
NCI share of subsidiary’s profit after tax (25% x $39) 9.75
Less NCI share of PURP(25% x $4 ( W1)) (1)
=8.75****************my question is why have they deducted the purp from NCI share of subsidiary’s profit after tax?
It is 25% i.e. the subsidiary’s share (Less NCI share of PURP(25% x $4 ( W1)) (1)) so surely they add this to the subsidiary’s profit after tax because on on P’s statement of P or L it is to be deducted?ive put ************ next to the figure so you can see it easier thanks!
You have not typed the full question, but I would assume that it was the subsidiary that had originally sold the goods to the parent, and that the parent company is the one holding the inventory.
The subsidiary will have recorded the sale to the parent at full price and therefore the full cost will have been included in the subsidiaries profit. However on consolidation, the PURP has to be removed from the consolidated profit (by increasing the cost of sales).
Since the subsidiaries profit has been reduced on consolidation, then equally the share of profit belonging to the NCI has to be reduced as well.
thank you very much can i just ask what is the difference in calculation if P sold to S instead?
thanksIf P had sold to S, then the Statement of profit and loss would be exactly the same, but the amount attributable to the NCI would simply be 9.75 (because the PURP did not exist in S’s own profit). As always, the amount attributable to P would be the balance.
(The free lectures on this may help you)
When calculating the NCI you deduct the purp (when sub seller only) for statement of profit or loss. Do you do the same for SOFP? thanks
When preparing the SOFP, the PURP is subtracted from the inventory and also from the retained earnings of the company that sold the goods to the other company.
I do suggest that you watch the free lectures 🙂
in the consolidated SOFP:
if the parent sells to the subsidiary then the purp is deducted from the group retained earnings only
if the subsidiary is the seller the purp is deducted from the reporting date net assets of S only which is used to calculate retained earnings and NCI?the deduction of purp from inventory procedure remains the same
the deduction of inter entity payables/receivables/current accounts from both group receivables and payables/current liabilities procedure is the same
the calculation of goodwill is the same only variation is if there is a fair value adjustment
?
thanks
and finally the mid year acquisition i.e. reporting date retained earnings of S minus post acquisition profits of S to arrive at a balancing figure of pre acquisition retained earnings which is used for the calculation of group retained earnings and NCI.. what else in the SOFP and SOPOL does this effect? And what are the differences if P sold to S or vice versa in this?
For you first question – no!
(Have you watched the free lectures?)
The PURP is subtracted from the profits (and therefore the retained earnings) of whichever of the two companies originally sold the good to the other. If you watch the lectures then you will understand why.
Inter-entity payables and receivables have nothing to do with the PURP, and neither has the calculation of goodwill.
You really should watch the lectures – I cannot simply type them all out here!
i am watching the lectures but none of the examples in inter-entity sofp show what happens when P sells to S.
i understand that when S sells to P, the purp is deducted in the NCI calculation of S. But when S sells to P the purp figure is not used at all here.
in the group retained earnings, when S sells to P the purp is deducted from the post acquisition profits of S.. what happens when P sells to S is the purp deducted from P’s retained earnings and not S??
actually you do say in one of the lectures that it gets deducted from P’s retained profits instead..
however in my textbook they have deducted the purp from S’s “post” retained profits and not P which probably has the same effect in the consolidated retained earnigns but in the calculation of NCI this will give a different answer!!!!????????
I repeat, the PURP is subtracted from the profits of whichever company sold the goods to the other.
Since it is only done at the end of the year, it is obviously the post-acquisition profits that are affected (it is the profit for the current year).
Reducing the profits for the current year will automatically reduce the retained earnings of the relevant company at the end of the year.
If it is the subsidiary that sold the goods to the parent, then reducing its profit (and therefore retained earnings) by the PURP will, of course, affect the NCI.
in all the questions in both books and opentuition there are no dividends paid between intra group or outsiders. is this beyond f3? how would you deal with these if P or S are paying/receiving dividends?
thanks again!
You won’t be examined on this until Paper F7.
(If you want to know for practical reasons then do ask in the F7 forum. But if all you are worried about is F3, then forget it for the time being 🙂 )
Hi john. Can you please explain why NCI’s profit is also reduced due to unsold goods by P company. NCI is a third party and S co did make a profit by selling goods to P company if we talk about the company on its own and not as a group. I understand subtracting URP from the group since as a whole it is considered that the goods haven’t been sold yet but NCI is a third party and has shares in S Co that did sell goods. So shouldn’t NCI get it’s complete share of profit without URP being subtracted from its profit.
The NCI is only relevant when preparing the consolidated accounts – as though it is one big company. As far as the consolidated accounts are concerned they are only showing the profit that has been realised for the group as a whole, and the non-controlling interests share of that realised profit.
Oh so only in consolidated statements the realized profit’s share is considered for NCI but in reality they get their complete share without any reductions due to URP? Or they get only the realized portion’s percentage?
There is no affect in the subsidiary’s own accounts.
Although the consolidated accounts show the position as though it is one big company, it isn’t a separate legal entity. The only legal entities are the two individual companies and PURP is irrelevant for the individual companies.
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