ADJUSTMENTS FOR INTRA

GROUP TRANSACTIONS
IFRS10 – CONSOLIDATED FINANCIAL
STATEMENTS

• Eliminate in full intragroup assets and liabilities,

equity, income, expenses and cash flows relating to
transactions between entities of the group
• Profits or losses resulting from intra groups
transactions that are recognised in assets such as
inventory and fixed assets are eliminated in full.
INTRAGROUP TRADING
• A parent and their subsidiary may trade with one another
during a financial period which can lead to the following
issues:
1. Receivables and payables, sales and purchases in the
parent and subsidiary that cancel each other out. These
receivables and payables should not be consolidated as it
results in the group having a receivable or payable to itself
2. Unrealised profits on sale of inventory
 EFFECT OF INTRAGROUP TRADING

• This should be eliminated from the consolidated

income statement.

1. Consolidated sales revenue

parent revenue + subsidiary revenue –
intragroup sales

2. Consolidated cost of sales

parent cost of sales + subsidiary cost of sales –
EXAMPLE

Parent $ Subsidiary $

Receivables 60 000 40 000

Payables 80 000 56 000

As a result of trading during the year parent receivables

balance included an amount due from subsidiary of $5 000
SOLUTION

Receivables 60 000 + 40 000 – 5 000 = 95 000

Payables 80 000 + 56 000 – 5 000 = 131 000

UNREALISED PROFIT

• Profits are recognised from transactions between

members of a group.
• Unrealised profits arise when one group company
sells to another and those goods have not been sold
on externally by the end of the year.
• Where goods are still held by a group company at
the reporting date any unrealised profit must be
cancelled.
ADJUSTMENTS FOR UNREALISED PROFIT
IN INVENTORY

1. Determine the value of closing inventory still held within the

group at the reporting date that are a result of intragroup
trading
2. Use mark up or margin to calculate how much of that value
represent s profit earned by selling company
IF SELLER IS PARENT COMPANY

• The profit element is included in the holding

company’s accounts and relates entirely to the
controlling group.

• Dr Group retained earnings

• Cr group inventory
IF SELLER IS THE SUBSIDIARY

• The profit element is included in the subsidiary

companies accounts and relates partly to the group

• Dr subsidiary cost of sales

• Cr group inventory
EXAMPLE

Parent Subsidiary

Revenue 630 000 240 000

Cost of sales 210 000 120 000

Parent had sold $42 000 worth of goods to subsidiary. These goods had cost the
parent $28 000.
At the end of year the subsidiary had half of the goods still in stock.
SOLUTION

Consolidated 630 000 + 240 000 – 42 000 = 828 000

revenue

Unrealised profit 42 000 – 28 000 = 14 000

Half of goods were stuck in inventory = 0.5

0.5 x 14 000 = 7 000

Consolidated cost of 210 000 + 120 000 – 42 000 + 7 000 = 295 000
sales

Consolidated Closing inventory for parent + closing inventory for subsidiary

Inventory – unrealised profit
TRANSFER OF NON CURRENT ASSET
• intra group sales are not limited to inventory as it could be
extended to non-current asset.
• If sale of an asset had been recognized separately then it
should be eliminated during consolidation as no gain or loss
should be permitted for this transaction.
• Adjustments must be made for:
1. Profit on sale
2. Depreciation
EXAMPLE

• Alpha the parent company sold a machine to beta the

subsidiary. On the day the machine had a carrying value of
$600 000 but it was sold for $750 000.
• This resulted in a profit of $150 000.
• Profit must be eliminated in the consolidated income
statement:

• Other income – profit on disposal

UNREALIZED PROFIT ON TRANSFER OF
NON CURRENT ASSETS
Adjustments

Carrying value at reporting date x

Carrying value at reporting date if intra group transfer x

had not occurred
Adjustment x

Corresponding double entry

Dr retained earnings of seller X

Cr non current assets( Parent NCA + Subsidiary NCA – X

adjustment)
EXAMPLE

• On 1 January Parent sold a machine with a NBV of $100 000

to subsidiary at a transfer price of $120 000. Group policy
dictates that the machine is depreciated over its remaining
life of 5 years. Find value of machinery in group

Calculation

Parent machinery 300 000

Subsidiary machinery 200 000

EXAMPLE

Adjustments
Carrying value at report date 96 000
Carrying value if transfer had not occurred 80 000
Profit 16 000

Machinery (consolidated) 484 000

DIVIDENDS

• Intra group dividend payment should be eliminated from the

consolidated financial statements.
• Only dividend paid to external recipients should be in the
financial statements

• Adjustment – dividend received by parent from subsidiary

should be shown as a deduction to other income in the
consolidated income statements
 EXAMPLE

• S Co is a 60% subsidiary of P Co. S Co pays a dividend of $1 000. S

Co had total retained earnings of $ 5 000 before paying dividend.
Adjustments
1. $400 of dividend is paid to non controlling interest( permanently
leaves the group) and $600 is for the group.
2. Retained earnings to be consolidated= $3 000
EXAMPLE

Group Non controlling

interest
Dividend 600 400
Reserves 2 400 1 600
Total 3 000 2 000
 INTRA GROUP SERVICES
• Intra group services are provided by individual entities or group
members that benefit the group as a whole. Example of such
services:
1. Administration
2. Information technology
3. Finance
4. Distribution
• These will create service revenues and expenses in the accounts of
representative entities.
• Revenue of one entity will balance out from the expense of another
entity and there is no effect on group profit.
CALCULATION

• Consolidated other income :

Parent’s other income + subsidiary's other income – intra
group service income

• Consolidated expense :
Parent’s expense + subsidiary’s expense – intra group service
expense
 EXAMPLE

• Company B is a subsidiary of company A. Company A rents

out its premises to Company B for $5 000 annually.
Parent Subsidiary
Other income 20 000 6 000
Rent 14 000 25 000
 EXAMPLE

Consolidated other 20 000 + 6 000 – 5 000 = 21 000

income

Consolidated rent 14 000 + 25 000 – 5000 = 34 000

EXAMPLE
• Parent gave subsidiary a loan of 4 000. this was deposited into
the subsidiary bank account. Interest was charged of 10%
Consolidation:
1. Consolidated other income = parent other income + subsidiary
other income – inter group interest charge
2. Consolidated finance cost= parent finance cost + subsidiary
finance cost – inter group interest charge
3. Consolidated loans payable= parent loans + subsidiary loans –
intergroup loan
4. Consolidated loans granted= parent loans + subsidiary loans –
intergroup loan
CONSOLIDATED STATEMENT OF PROFIT &
LOSS
EXAMPLE:
• The income statements for X and Y for the year ended 31 August
2021 are shown below. X acquired 75% of the ordinary share
capital of Y several years ago.
X Y
$000 $000
Revenue 1200 400
Cost of sales (1080) (360)

Gross profit 120 40

Administrative expenses (75) (30)

Profit before tax 45 10

Tax (15) (6)

Profit for the year 30 4

THE CONSOLIDATED INCOME STATEMENT OF X
FOR THE YEAR ENDED 31 AUGUST 2021
$000
Revenue (1200+400) 1600
Cost of Sales (1080+360) -1440

Gross profit 160

Administrative expenses
(75+30) -105

Profit before tax 55

Tax (15+6) -21

Profit for the year 34

Attributable to:
Group (Bal fig) 33
Non-controlling interest (W1) 1
34
WORKING 1 (W1) : NON-CONTROLLING
INTEREST (NCI)
• NCI share of subsidiary profit for the year
(NCI% x subsidiaries profit for the year)

25% x $4000 = $1000

• If a subsidiary is acquired part way through the year, then the subsidiary
results should only be consolidated from the date of acquisition, that is the
date on which control is obtained.
QUESTION:
• The following income statements have been produced by P and S
for the year ended 31 March 2019.
• On the 30 November 2018 P acquired 75% of the issued ordinary
share capital of S. No dividends were paid by either company
during the year. The investment income is from quoted
investments and has been correctly accounted for.
• The profits of both companies are deemed to accrue evenly over
the year.
• Prepare the consolidated income statement to incorporate P and S
for the year ended 31 March 2019.
SOLUTION: P CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 2019