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HI 5020 Corporate Accounting: Session 8a Intra-Group Transactions

This document discusses intra-group transactions that occur between entities within a corporate group. It defines intra-group transactions and provides examples. The objectives are to understand how to eliminate intra-group dividends, account for intra-group inventory and asset sales, and the related tax effects. A worked example is provided to illustrate the journal entries to eliminate intra-group dividends in the consolidation process when a subsidiary pays dividends to its parent company out of post-acquisition earnings.

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Feku Ram
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77 views15 pages

HI 5020 Corporate Accounting: Session 8a Intra-Group Transactions

This document discusses intra-group transactions that occur between entities within a corporate group. It defines intra-group transactions and provides examples. The objectives are to understand how to eliminate intra-group dividends, account for intra-group inventory and asset sales, and the related tax effects. A worked example is provided to illustrate the journal entries to eliminate intra-group dividends in the consolidation process when a subsidiary pays dividends to its parent company out of post-acquisition earnings.

Uploaded by

Feku Ram
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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HI 5020

Corporate Accounting

Session 8a
Intra-group Transactions
Session Objectives
•Understand what the nature of intra-group
transactions are
•The reasons for eliminating intra-group
dividends on consolidation on pre- and post-
acquisition earnings and how to do this.
•How to account for intra-group sales of
inventory inclusive of related tax expense, and
•How intra-group sales of non-current assets
inclusive of the related tax expense effects are
accounted for.
Introduction
A group – Typically a group of entities comprising the parent
entity and each of its subsidiaries.

Two types of adjustments:


• pre-acquisition equity at acquisition date
• adjust for effects of intragroup
transactions
What is an Intra-group transaction?
It is a transaction undertaken between separate legal entities
within a legal entity, e.g. OfficeWorks conducting a transaction
with K-Mart, both part of the Coles Group (part of Wesfarmers)

3
Introduction
Intragroup Transactions include
• The payment of dividends to group members
• The payment of management fees or interest costs to a
group member
• The transfer of tax losses between entities with or without
consideration
• Intragroup sales of inventory
• Intragroup sales of non-current assets
• Intragroup loans
Pre and Post acquisition dividends [This is consistent
with the entity concept of consolidation covered by AASB
127 (previously covered)]

4
Post-acquisition Dividends
YOU CANNOT PAY DIVIDENT TO YOURSELF
Dividend payments
In the consolidation process it is necessary to eliminate:
• all dividends paid/payable to other entities within the
group
• all dividends received/receivable from other entities within
the group
Only dividends paid externally should be shown in the
consolidated financial statements
Post-acquisition Dividends
Post-acquisition Dividends
Only dividends paid externally should be shown in the consolidated
financial statements

Journal entry to eliminate dividends payable (in consolidation


journal):
Dr Dividends payable (statement of financial position)
Cr Dividends declared (statement of changes in equity)

Journal entry to eliminate dividends receivable (in consolidation


journal):
Dr Dividend income (statement of P&L and OCI)
Cr Dividend receivable (statement of financial position)
A Note
Consolidation journal entries are not written in the journals of either
company but are entered in a separate consolidation journal

Refer to Worked Example 26.1—Dividend payments by a subsidiary


out of post-acquisition earnings
Worked Example 26.1—Dividend payments to a
subsidiary out of post-acquisition earnings
Company A acquired all the issued capital of Company B on 1 July
2018 for a cost of $800 000. The share capital and reserves of Company B on
the date of acquisition are:
Share capital $500 000
Retained earnings $300 000
$800 000
Dividends of $50 000 declared by Company B come from profits earned since
1 July 2018 (that is, they are paid out post-acquisition earnings). The assets
of Company B are fairly stated at the date that Company A acquires its
shares, and therefore there is no goodwill to be recognised on consolidation.
Company A recognises dividend income when it is declared by the investee
(that is by Company B). The financial statements of Company A and Company
B as at 30 June 2019 (one year later) reveal the following:
Required: Provide the journal entries that would have appeared in the
separate accounts of company A and company B to account for the
dividends proposed by company B.
Worked Example 26.1—Dividend payments to a subsidiary out of
post-acquisition earnings (cont.)
Company A Company B
($000) ($000)
Reconciliation of opening and closing retained earnings
Profit before tax 200 100
Tax expense 50 40
Profit after tax 150 60
Opening retained earnings—1 July 2018 400 300
550 360
less Dividends declared 70 50
Closing retained earnings—30 June 2019 480 310

Statement of financial position


Shareholders’ funds
Retained earnings 480 310
Share capital 500 500

Liabilities
Accounts payable 1 000 100
Dividends payable 70 50
2 050 960
Assets
Cash 100 70
Accounts receivable 50 130
Dividends receivable 50 –
Inventory 200 160
Plant and equipment 850 600
Investment in Company B 800 –
2 050 960
Worked Example 26.1—Dividend payments to a
subsidiary out of post-acquisition earnings
Company A acquired all the issued capital of Company B on 1 July
2018 for a cost of $800 000. The share capital and reserves of Company B on
the date of acquisition are:
Share capital $500 000
Retained earnings $300 000
$800 000
Dividends of $50 000 declared by Company B come from profits earned since
1 July 2018 (that is, they are paid out post-acquisition earnings). The assets
of Company B are fairly stated at the date that Company A acquires its
shares, and therefore there is no goodwill to be recognised on consolidation.
Company A recognises dividend income when it is declared by the investee
(that is by Company B). The financial statements of Company A and Company
B as at 30 June 2019 (one year later) reveal the following:
Required: Provide the journal entries that would have appeared in the
separate accounts of company A and company B to account for the
dividends proposed by company B.
Worked Example 26.1—Solution
Prepare the consolidated worksheet for Company A and its controlled entity.
In relation to recognising the dividends, the entry in Company B’s own journal would
be:
Dr Dividend declared (statement of changes in equity) 50 000
Cr Dividend payable (statement of financial position) 50 000

As Company A recognises dividend income when the dividend is declared by the


investee, it would have the following entry in its own journal:

Dr Dividend receivable (statement of financial position) 50 000


Cr Dividend income (statement of P&L and OCI) 50 000

We need to know the entries the individual entities made (above) so that we can
reverse them on consolidation
Worked Example 26.1—Solution (cont.)

Elimination entry for dividends declared by Company B


Dr Dividend payable (statement of financial position) 50 000
Cr Dividend declared (statement of changes in equity) 50 000

Elimination entry for dividends receivable by Company A


Dr Dividend income (statement of P&L and OCI) 50 000
Cr Dividend receivable (statement of financial position) 50 000

Consolidation entry to eliminate investment in Company B


Dr Share capital 500 000
Dr Retained earnings 300 000
Cr Investment in Company B 800 000
Worked Example 26.1—Solution (cont.)
THE END

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