AC3102 Jan2019 S3 Intra Group Elimination LKW 1jan2019

Consolidated Financial Statements
– Intra-Group Transactions and Eliminations

Learning objectives:-
1. Understand the principles underlying the elimination of intra-group balances
and transactions in consolidation;
2. Understand the rationale for consolidation adjustments to opening retained
earnings.
3. Appreciate the significance of upstream versus downstream transactions
and the consequential impact on non-controlling interests.
4. Prepare the consolidation adjustments with respect to unrealized profit or
loss arising from typical intra-group transactions such as intercompany
transfers of inventory and fixed assets.
5. Prepare consolidated statement of comprehensive income and consolidated
statement of financial position.
References
• TLK chapter 5
• SFRS(I) 10
(C) Lee Kin Wai 1
Consolidation process
Economic entity
Legal entities
Parent’s Consolidated
financial Subsidiary Consolidation Financial
statements Financial + Adjustment and = statements
+ statements eliminations
(C) Lee Kin Wai 2

Consolidation procedures
SFRS(I) 10.B86 - Consolidated financial statements:
(a) combine like items of assets, liabilities, equity, income, expenses and
cash flows of the parent with those of its subsidiaries.
(b) offset (eliminate) the carrying amount of the parent’s investment in
each subsidiary and the parent’s portion of equity of each subsidiary
(SFRS(I) 3 explains how to account for any related goodwill).
(c) 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 intragroup
transactions that are recognised in assets, such as inventory and
fixed assets, are eliminated in full). Intragroup losses may
indicate an impairment that requires recognition in the
consolidated financial statements. SFRS(I)1-12 Income Taxes
applies to temporary differences that arise from the elimination of
profits and losses resulting from intragroup transactions.
(C) Lee Kin Wai 3
What are the basic consolidation entries?
1. Eliminate investment at date of acquisition

2. Recognize the fair value differential (excess of fair value
over book value) of subsidiary’s net assets.
3. Recognize goodwill on acquisition and impairment
4. Amortization and Depreciation of fair value differential
5. Recognize Non-controlling interests share of subsidiary’s
equity from acquisition date to start of current year
6. Recognize Non-controlling interests share of current
year’s adjusted profit (after accounting for upstream
transactions)
7. Eliminate dividends declared by subsidiary in full and
recognize Non-controlling interests share of dividends
(C) Lee Kin Wai 4
What are the typical consolidation entries,
especially on intra-group transactions?
•Eliminate typical intra-group transactions: -
1. Outstanding intra-group receivables and
payables
2. Realized intra-group transactions such as intra-
group services.
3. Dividend income received from subsidiary
4. intra-group transfers of inventories
5. intra-group transfers of non-current assets
(C) Lee Kin Wai 5

Example 1 – elimination of intra-group balances
On 1-1-20x1, P owns 80% of S.
In Parent P’s separate accounts for year 31-12-20x5, there are
1. Long term loan receivable of $200,000 from Subsidiary S.
2. Accounts payable owing to subsidiary S of $600
In Subsidiary S’s separate accounts for year 31-12-20x5, there are

1. Long term loan payable to parent of $200,000.
2. Accounts receivable due from parent of $600
20X5
CJE 1
Dr. Long term loan payable $200,000
Cr. long term loan receivable $200,000
(eliminate intra-group loan receivable and loan payable)
CJE 2
Dr. Accounts payable 600
Cr. Accounts receivable 600
(eliminate intra-group account receivable and account payable)
(C) Lee Kin Wai 6
Example 2 – eliminate intra-group services
On 1-1-20x1, Parent P owns 70% of subsidiary S. P rents its warehouse to S for
$800 in 20X2.
20X2 - S separate accounts:-
Dr. rental expense (P/L) 800
Cr. Cash 800
(rental expense in S separate accounts).
20X2 - P separate accounts
Dr. Cash 800
Cr. Rental Income (P/L) 800
(rental income in P separate accounts).
What is CJE in 20x2?

20X2 - CJE to eliminate intra-group services provided
Dr. Rental Income (P/L) 800
Cr. rental expense (P/L) 800
(eliminate intra-group services provided between P and S)
•No CJE needed in 20x3 (and subsequently) because the rental income and
rental expense was fully realized in prior year 20x2.
(C) Lee Kin Wai 7
Example 3 - Realized transactions relating to interest
On 1-1-20x1, P acquires 90% of S.

On 1-1-20x5, P lends $100,000 to S at the rate of 4% per year.
Parent’s account (20x5) Subsidiary’s separate account (20x5)

1) 3)
Dr. Loan receivable from S 100,000 Dr. Cash 100,000
Cr. Cash 100,000 Cr. Loan payable to P 100,000
(P lends to S) (S borrows from P)
2) 4)
Dr. Cash 40,000 Dr. Interest expense (P/L) 40,000
Cr. interest Income (P/L) 40,000 Cr. Cash 40,000
(P receives interest income from S) (S pays interest expense to P )
(C) Lee Kin Wai 8

Example 3 - Realized transactions relating to interest
20X5
CJE1
Dr. Loan payable 100,000
Cr. Loan receivable 100,000
[eliminate intra-group receivables and payable in full]
CJE2
Dr. Interest income (Parent). 40,000
Cr Interest expense (Subsidiary) 40,000
[eliminate interest income and interest expense between P and S]
What are CJE in 20X6 (subsequent year)?

•CJE 1 to continue if loan receivable & payable still outstanding between P & S.
•Repeat CJE to eliminate interest income for 20x6 and interest expense for 20X6.
•However: - No CJE needed in 20x6 to eliminate prior year interest income and
interest expense because the interest income for 20x5 and interest expense for
20x5 was fully realized in prior year 20x5.
(C) Lee Kin Wai 9
Example 4 - Realized transactions relating to interest to
finance construction of asset (TLK page 244)
• On 1-1-20x1, Parent P borrows from an
unrelated bank (i.e. not related to the group)
$1,000,000 at 5% per year.
• On 1-1-20x1, P lends $1,000,000 to Subsidiary
S at 6% per year for the purpose of constructing a
warehouse. The warehouse was completed on 31-
12-20x1 and has a useful life of 20 years from 1
January 20x2.
• Interest is paid on 31 December but the loan
remains outstanding throughout the period.
• Ignore tax effects.
(C) Lee Kin Wai 10

Example 4 - Realized transactions relating to interest to finance construction of asset (TLK p.244)
Parent’s account (20x1) Subsidiary’s separate account (20x1)

1)
Dr. Cash 1,000,000
Cr. Loan payable to bank 1,000,000
(P borrows from external bank)
2) 5)
Dr. Loan receivable from S 1,000,000 Dr. Cash 1,000,000
Cr. Cash 1,000,000 Cr. Loan payable to P 1,000,000
(P lends to S) (S borrows from P)
3)
Dr. interest expense (P/L) 50,000
Cr. Cash 50,000
(P pays interest expense to external bank)
4) 6)
Dr. Cash 60,000 Dr. Fixed assets in progress 60,000
(P receives interest income from S) (S pays interest expense to P but S
capitalize the interest expense as
fixed asset / construction in progress)
(C) Lee Kin Wai 11
Example 4 - Realized transactions relating to interest to finance
construction of asset (TLK p.244)
•GROUP (economic entity) view:- Need to reflect the external transaction which is
the borrowing from the bank to finance the construction of the fixed assets.
• Thus, to eliminate the internal interest “income/ expense between P and S (i.e.
an internal transaction) and to capitalize the external interest into the cost of the
asset in line with IAS 23 Borrowing Costs (same as SFRS(I) 1-23)
31 Dec 20x1
CJE 1
Dr Interest income (P/L) 60,000
Cr Fixed assets in progress (B/S) 60,000
[eliminate interest income and internal interest capitalized in fixed assets]
CJE2
Dr Fixed assets in progress (B/S) 50,000
Cr Interest expense (P/L) 50,000
[capitalize the external interest in self-constructed fixed assets]
CJE3
Dr Loan payable to Parent 1,000,000
Cr Loan receivable from Subsidiary 1,000,000
[eliminate the intercompany loan balances between P and S]
(C) Lee Kin Wai 12
Example 4 - Realized transactions relating to interest to finance
construction of asset (TLK p.244)
Parent’s account Subsidiary’s separate account
Subsequent year 20x2 Subsequent year 20x2
1)
Dr. interest expense (P/L) 50,000
Cr. Cash 50,000
(P pays interest expense to external bank)
2) 3)
Dr. Cash 60,000 Dr. Interest expense (P/L) 60,000
(P receives interest income from S) (S pays interest expense to P)
4)
Dr. depreciation expense (P/L) 3,000
Cr. Fixed assets 3,000
$60,000 previously capitalized in 20x1 /
20 years = 3,000 per year
(C) Lee Kin Wai 13
Example 4 - Realized transactions relating to interest to finance construction of asset (TLK. 244)
• In 20x2, the construction of the fixed assets is completed and the asset will be depreciated over a 20-
year period.
• Consolidated accounts to reflect the depreciation of the capitalized interest from external sources &
eliminate the interest from the internal loan.
• Depreciation from the group’s perspective = 50,000 / 20 = 2,500
• Depreciation from the legal entity’s perspective = 60,000 / 20 = 3,000
• Excess depreciation to adjust on consolidation = 500
CJE in subsequent year (when asset construction is completed) 31 Dec 20x2
CJE 1
Dr Interest income (P/L) 60,000
Cr Interest expense (P/L) 60,000
[eliminate internal interest income and internal interest expense]
CJE2
Dr. Accumulated Depreciation (B/S) 500
Cr. Depreciation expense (P/L) 500
[adjust excess depreciation. Why ? Economically, the group borrows from external
bank at external interest to finance the construction of assets ]
CJE 3
Dr. Opening retained earnings 10,000
Cr. Fixed assets (B/S) 10,000
Adjust opening retained earnings and overstated fixed assets as at start of the year.
CJE4
Dr Loan payable to Parent 1,000,000
(C)Subsidiary
Cr Loan receivable from Lee Kin Wai
1,000,000 14
[eliminate the intercompany loan balances between P and S]
Example 5: Goodwill impairment in current year
•On 1-1-20X1, P owns 70% of S. Assume NCI is recognized at fair value on
acquisition date. Fair value of NCI at acquisition date is $300,000.
•P did not pay a control premium to buy S. Thus, the ratio of P’s goodwill to NCI’s
goodwill is 70% to 30% (i.e. proportionate) as there is no control premium.
•Suppose current year is 20x2.
•Net income of S in 20x2 is $100,000.
•Goodwill was impaired by $5,000 in year 31-12-20x2.
• What is the CJE in year 20x2 for current year goodwill ?
20X2
CJE 1
•Dr. Impairment of goodwill (P/L) 5,000
Cr. Goodwill (B/S –asset) 5,000
[current year goodwill impairment]
CJE 2
Dr. Non-controlling interest (P/L) 28,500
Cr. Non-controlling interest (B/S) 28,500
Non-controlling interest of current year income of S
= 30% x [100,000 – 5,000] = 28,500
(C) Lee Kin Wai 15
Example 6 : Prior year goodwill impairment
•Same facts as previous example.

•Assume NCI is recognized at fair value on acquisition date.
•Goodwill was previously impaired by $5,000 in year 20x2.
•Suppose current year is 20x5.
•What is the CJE in current year 20x5 for previous goodwill
impairment that occurred in year 20x2?
•CJE : Year 20x5

Dr. Retained earnings = 70% x 5,000 = 3,500
Dr. Non-controlling interest (B/S) = 30% x 5,000 = 1,500
Cr. Goodwill (B/S –asset) 5,000
[prior year goodwill impairment ]
Assume NCI is recognized at fair value on acquisition date and thus, NCI has a
share of goodwill impairment. (C) Lee Kin Wai 16
Example 7 – elimination of dividend declared by S
Parent P owns 70% of subsidiary S. Net dividend declared by S is $100.
S separate accounts:-
Dr. Dividend declared (out of Retained Earnings) 100
Cr. Cash 100
(dividend declared and paid by S in S separate accounts).
P separate accounts
Dr. Cash =70% x 100 = 70
Cr. Dividend Income (P/L) 70
[dividend income recognized by P in P’s separate accounts]
CJE to eliminate dividend declared by subsidiary in consolidated accounts

Dr. Dividend Income (P - P/L) 70
Dr. Non-controlling interests (B/S) 30
Cr. Dividend declared by S (SCE) 100
(eliminate dividends declared by S)
(C) Lee Kin Wai 17
Intra-group transfers on inventory
•Downstream sale = sale by parent to subsidiary
•Upstream sale = sale by subsidiary to parent
•Why need to eliminate intra-group transfers of inventory ?
–Profits or losses arising from intra-group transfers of inventory are not
realized from economic entity / group’s perspective.
–Profits or losses arising from intra-group transfers of inventory are
realized from economic entity / group’s perspective when inventory is
subsequently sold to external parties outside the economic entity.
•No adjustment for Non-controlling interests for downstream

sale. Reason : unrealized profit residing in parent.
•For upstream sale by subsidiary to parent, adjust Non-

controlling interests share in unrealized profit or losses.
Reason : unrealized profit residing in subsidiary.
(C) Lee Kin Wai 18

Example 8 : Downstream sale of inventory
Parent P has 70% share of subsidiary S.

In year 20X1, parent bought $20 of inventory and
sold the inventory to subsidiary for $120. During
the year 20x1, subsidiary sold the inventory to an
external customer for $400. Both P and S use
perpetual inventory system.
There is no unsold inventory at year end 20x1.

Assume a tax rate of 20%.
(C) Lee Kin Wai 19

What are the originating entries ?
Parent’s separate books Subsidiary’s separate books
Dr. inventory (B/S) 20 Dr. inventory (B/S) 120

Cr. Cash 20 Cr. Cash 120
(buy inventory from 3rd party) (S buys from P)
Dr. Cost of sales (P/L) 20 Dr. Cost of sales (P/L) 120
Cr. Inventory (B/S) 20 Cr. Inventory (B/S) 120
(P sells to S) (S sells to 3rd party)
Dr. Cash 120 Dr. Cash 400
Cr. Sales 120 Cr. Sales 400
(P sells to S) (S sells to 3rd party)
(C) Lee Kin Wai 20
elimination entries
Year 20x1
CJE1
Dr. Sales 120
Cr. Cost of sales 120
(eliminate downstream sale by P to S)
•From the group perspective, sales and cost of
sales will be overstated by $120 if the intra-group
sale is not eliminated.
•No consolidation entry in year 20x2 as profit is
fully realized in year 20x1 from group’s perspective
(C) Lee Kin Wai 21
and unrealized profit
In year 20X1, parent bought $20 of inventory and sold the
inventory to subsidiary for $120. During the year 20x1,
subsidiary sold 60% of the inventory to an external
customer for $400. Both P and S use perpetual inventory
system.
Thus there is 40% unsold inventory at year end 20x1.

The 40% unsold inventory at year end 20x1 is fully sold in
year 20x2.
(C) Lee Kin Wai 22

Example 9 : Downstream sale of inventory and unrealized
profit. What are the originating entries ?

(buy inventory from 3rd party) (S buys from P)
(P sells to S) (S sells to 3rd party =60% x
120= 72)
(P sells to S) (C) Lee(S sells 60% of inventory to
Kin Wai 23
3rd party for $400)
elimination entries – unrealized profit
20X1 : CJE1
Dr. Sales 120
Cr. Inventory (asset – B/S) = 40% x (120-20) = 40
(eliminate downstream sale by P to S)
Unrealized profit in unsold inventory in Subsidiary S assets = 40% unsold x
(120 -20) = 40
•Remove unrealized profit in inventory (asset).
•consolidated accounts report only the 60% sold to external parties with
sales of $400 and Cost of sales = 60% x original cost $20 = $12
20X1 : CJE2
Dr. Deferred Tax Asset (B/S) 8
Cr. Income tax expense (P/L) = 20% tax rate x unrealized profit $40 = 8
(tax effect of CJE 1)
•Since profit is not realized from group’s view, we reduce the group tax
expense. (C) Lee Kin Wai 24
elimination entries – unrealized profit
20X1 : CJE3
Suppose subsidiary S has current year net income after tax of $1,000.
Dr. Non-controlling interests (P/L) 300
Cr. Non-controlling interests (B/S) 300
(Non-controlling interests share of current year 20x1 profit)
Net income of subsidiary as reported 1,000

+/- No adjustment (#) 0
Adjusted subsidiary profit 1,000
Non-controlling interests = 30% x 1,000 = 300
# - No adjustment to Subsidiary profit because this is a downstream
sale by parent P to subsidiary S. Hence, profit in the downstream sale
resides in Parent P.
(C) Lee Kin Wai 25

unrealized profit in prior year was subsequently realized in
current year.
See previous example. What are the consolidation entries in year 20x2
when the 40% unsold inventory in year 20x1 is fully sold to external
customers in year 20x2 ?
CJE in 20x2 :
CJE 1
Dr. Opening Retained Earnings 40
Cr. Cost of sales (P/L) 40
(unrealized profit last year from sale by P to S is now realized in current
year 20x2)
•We debit retained opening earnings 1-1-20x2 of parent P as it contains
the unrealized profit due to unsold inventory carried over from 20x1.
•We credit Cost of sales (P/L) to recognize the realization of the
unrealized profit in year 20x2.
CJE 2
Dr. Income tax expense (P/L) 8
Cr. Opening Retained Earnings = 20% tax rate x 40 = 8
(C) Lee Kin Wai 26
(tax effect of CJE1)
unrealized profit in prior year was subsequently
realized in current year.
20X2 : CJE3
Suppose current year = 20x2 and subsidiary S has current year net income
after tax of $4,000.
Dr. Non-controlling interests (P/L) 1,200
Cr. Non-controlling interests (B/S) 1,200

+/- No adjustment (#) 0
Non-controlling interests = 30% x 4,000 = 1,200
# - No adjustment to Subsidiary profit because this is a prior year
downstream sale by parent P to subsidiary S. Hence, profit in the
prior year downstream sale resides in Parent P (i.e. P’s retained
earnings). (C) Lee Kin Wai 27
Example 11 : Upstream sale of inventory by S to P

In year 20X1, subsidiary bought $20 of inventory
and sold the inventory to parent for $120. During
the year 20x1, parent sold the inventory to an
external customer for $400. Both P and S use
perpetual inventory system.
There is no unsold inventory at year end 20x1.

(C) Lee Kin Wai 28


(P buys from S) (buy inventory from 3rd party)
(P sells to 3rd party ) (S sells to P)
(P sells to 3rd party ) (S sells to P)
(C) Lee Kin Wai 29
elimination entries
Dr. Sales 120
(eliminate upstream sale by S to P)
•From the group perspective, sales and cost of

sales will be overstated by $120 if the intra-group
sale is not eliminated.
(C) Lee Kin Wai 30

with unrealized profit
In year 20X1, subsidiary bought $20 of inventory
and sold the inventory to parent for $120. During
the year 20x1, parent sold 60% of the inventory to
an external customer for $400. Both P and S use
perpetual inventory system. Thus there is 40%
unsold inventory at year end 20x1. Assume a tax
rate of 20%. The 40% unsold inventory at year end
20x1 is fully sold in year 20x2.
Net income of subsidiary is $502 in year 20x1 and
$608 in year 20x2.
(C) Lee Kin Wai 31

(P buys from S) (buy inventory from 3rd party)
(P sells 60% of inventory to (S sells to P)
3rd party = 60%x120 = 72)
(P sells 60% of inventory to (S sells to P)
3rd party for 400 ) (C) Lee Kin Wai 32
Example 12 : Upstream sale of inventory by
S to P with unrealized profit
20X1 : CJE1
Dr. Sales 120
Cr. Inventory (asset – B/S) =40%x(120-20)= 40
(eliminate downstream sale by S to P )
Unrealized profit residing in unsold inventory in P’s assets = 40% unsold
x (120 -20) = 40
•Remove unrealized profit in inventory (asset).
•consolidated accounts report only the 60% sold to external parties with
sales of $400 and Cost of sales = 60% x original cost $20 = $12
20X1 : CJE2
Dr. Deferred Tax Asset (B/S) 8
Cr. Income tax expense (P/L)= 20% tax rate x unrealized profit $40 = 8
(tax effect of CJE 1)
•Since profit is not realized from group’s view, we reduce the group tax
expense. (C) Lee Kin Wai 33
Example 12 : Upstream sale of inventory by
S to P with unrealized profit
20X1 : CJE3
Net income of subsidiary as reported 502
Less unrealized profit from upstream sale (CJE1) -40 **
Add : income tax expense (CJE 2) 8 **
Adjusted subsidiary profit 470
Non-controlling interests = 30% x 470 = 141
** - We need to adjust Subsidiary profit because this is a
upstream sale by subsidiary S to Parent P. Hence, profit in
the upstream sale resides (C)inLeesubsidiary
Kin Wai
S. 34
Unrealized profit in prior year is subsequently realized in current year
Refer to previous example. What are the consolidation entries in year 20x2 when the
40% unsold inventory in year 20x1 is fully sold to external customers in year 20x2 ?
20x2 - unrealized profit is subsequently realized
CJE 1
Dr. Opening Retained earnings 70% x 40 = 28
Dr. Non-controlling interests (B/S) =30% x 40 =12
Cr. Cost of sales (P/L) 40
(unrealized profit last year from sale by S to P is now realized in current year 20x2)
•We debit retained opening earnings 1-1-20x2 of subsidiary S as it contains the
unrealized profit due to unsold inventory carried over from 20x1.
•We also adjust Non-controlling interests for its share in unrealized profit.
•We credit Cost of sales (P/L) to recognize realization of the unrealized profit in 20x2.
CJE 2
Dr. Income tax expense (P/L) = 20% tax rate x 40 = 8
Cr. Opening Retained Earnings = 70% x 8 = 5.6
Cr. Non-controlling interests (C)
(B/S)
Lee Kin Wai
= 30% x 8 = 2.4 35
(tax effect of CJE1)
Unrealized profit in prior year is subsequently realized in
current year
What are the consolidation entries in year 20x2 when the
40% unsold inventory in year 20x1 is fully sold to external
customers in year 20x2 ?
20x2 - unrealized profit is subsequently realized
CJE3
Net income of subsidiary as reported 608
Add- unrealized profit from upstream sale realized in current year ( CJE1) 40 @
Less : tax effect of CJE1 (CJE 2) -8 @
Adjusted subsidiary profit 640
Non-controlling interests = 30% x 640 = 192
@We need to adjust Subsidiary profit because this is a prior year upstream sale
by subsidiary S to Parent P. Hence, profit in the prior year upstream sale resides
in subsidiary S. (C) Lee Kin Wai 36
Intra-group transfer of non-current asset
•Why need to eliminate profit from transfer of non-current asset such as
land, plant and equipment, building?
–Profits or losses arising from intra-group transfers of non-current
asset are not realized from group’s perspective.
–Profits or losses arising from intra-group transfers of non-current
asset are realized from group’s perspective when non-current asset
is subsequently sold to external parties outside the economic entity.
•Downstream sale = sale by parent to subsidiary

•Upstream sale = sale by subsidiary to parent
•Need to adjust cost, depreciation and accumulated depreciation as-if

the intra-group transfer of non-current asset did not occur.
•No adjustment for Non-controlling interests for downstream sale.

Reason : unrealized profit residing in parent.
•For upstream sale by subsidiary to parent, adjust Non-controlling

interests share in unrealized profit or losses. Reason : unrealized profit
(C) Lee Kin Wai 37
residing in subsidiary.
Example 14 : Downstream sale of building
P owns 70% of S.
P bought a building for $100,000 on 1-1-20x0. Building is depreciated
over 10 years using straight line method with no residual value. On 1-1-
20x2, P sold the building to S for $300,000. After the transfer, S
depreciates the building over 8 years using straight line method with no
residual value. Tax rate is 20%.
Parent’s books Subsidiary’s books

Dr. Cash 300,000 Dr. Building 300,000
Dr. Accumulated depreciation 20,000 Cr. Cash 300,000
Cr. Building 100,000
Cr. Gain on sale 220,000 Dr. Depreciation 37,500 (=300,000/8)
Cr. Accumulated depreciation 37,500
(C) Lee Kin Wai 38

CJE in Year 20x2
CJE1
Dr. Gain on sale 220,000
Cr. Building =300,000 -100,000 = 200,000
(eliminate profit on sale of building and reinstate building and
accumulated depreciation as if sale did not occur)
We reinstate the cost and accumulated depreciation as at transfer date.
CJE2
Dr. Deferred Tax Asset (B/S) = 20% x 220,000 = 44,000
Cr. Income tax expense (P/L) 44,000
[tax effect of CJE1]
Group’s view : Profit on sale of building is unrealized.
So, the “group” need not pay tax.
(C) Lee Kin Wai 39
CJE in Year 20x2
CJE3
New depreciation recorded by S = 300,000 / 8 year = 37,500
Old depreciation if sale did not occur = 100,000/10 years =10,000
Adjust depreciation from new basis to old basis = 27,500
Dr. Accumulated depreciation 27,500
Cr. Depreciation expense 27,500
(adjust for excess depreciation)
Hence we reinstate the old depreciation charge as if sale did not occur,
CJE4
Dr. Income tax expense (P/L) = 20% x 27,500 = 5,500
Cr. Deferred Tax Asset (B/S) 5,500
Lower depreciation higher net income higher tax expense
(C) Lee Kin Wai 40
Year subsequent to sale.
See previous example.
Year subsequent to sale : CJE in Year 20x3
CJE 1
Dr. Retained earnings 220,000
Cr. Building = 300,000 -100,000 = 200,000
CJE 2
Dr. Deferred Tax Asset (B/S) = 20% x 220,000= 44,000
Cr. Retained earnings 44,000
So, the “group” need not pay tax.(C) Lee Kin Wai 41
Year subsequent to sale
CJE 3
Cr. Retained earnings 27,500
(adjust for prior years excess depreciation)
We reverse the excess depreciation in previous year 20x2.
CJE 4
We recognize the increase in tax due to reversal of excess depreciation
in previous year 20x2.
(C) Lee Kin Wai 42

CJE 5
New depreciation recorded by S = 300,000 / 8 year = 37,500
Old depreciation if sale did not occur = 100,000/10 years = 10,000
Adjust depreciation from new to old basis = 27,500
(adjust for current year excess depreciation)
CJE 6
[tax effect of current year excess depreciation in CJE5]
(C) Lee Kin Wai 43
Example 16 : Upstream sale of building by S to P
P owns 70% of S.
S bought a building for $100,000 on 1-1-20x0. Building is depreciated
over 10 years using straight line method with no residual value. On 1-1-
20x2, S sold the building to P for $300,000. After the transfer, P
depreciates the building over 8 years using straight line method with no
residual value. Net profit of S is $260,000 in 20x2 and $8,000 in 20x3.
Tax rate is 20%.
Parent’s books Subsidiary’s books
Dr. Building 300,000 Dr. Cash 300,000
Cr. Cash 300,000 Dr. Accumulated depreciation 20,000
Dr. Depreciation 37,500 (=300,000/8) Cr. Gain on sale 220,000
(C) Lee Kin Wai 44

Parent
Owns the building Non-controlling interests
New depreciation based on higher cost
NCI has a 30% share of

70% 30% the unrealized profit on
sale by S to P.
The unrealized profit is
Subsidiary realized over the years by
- Unrealized profit on sale of building by S to P NCI when we add back
excess depreciation to S’s
net profit to compute NCI
share of adjusted profit
(C) Lee Kin Wai 45
CJE in year 20x2
CJE 1
Dr. Gain on sale 220,000
CJE 2
Dr. Deferred Tax Asset (B/S) = 20% x 220,000 = 44,000
Cr. Income tax expense (P/L) 44,000
So, the “group” need not pay tax.
(C) Lee Kin Wai 46
CJE in year 20x2
CJE 3
New depreciation recorded by P = 300,000 / 8 year = 37,500
Old depreciation if sale did not occur = 100,000 /10 years =10,000
(adjust for excess depreciation)
CJE 4
(C) Lee Kin Wai 47
CJE in year 20x2

CJE 5

Less unrealized profit from upstream sale (CJE1) -220,000
Add : income tax expense (CJE 2) 44,000
Add excess depreciation (CJE 3) 27,500
Less tax on excess depreciation (CJE4) -5,500
Non-controlling interests = 30% x 106,000 = 31,800
(C) Lee Kin Wai 48
See previous example.
Year subsequent to sale : CJE in year 20x3
CJE 1
Dr. Retained earnings (Sub) = 70% x 220,000 = 154,000
Dr. Non-controlling interests (B/S) = 30% x 220,000 = 66,000
(eliminate profit on sale of building and reinstate building and accumulated
depreciation as if sale did not occur)
CJE 2
Dr. Deferred tax asset (B/S) 44,000
Cr. Retained earnings = 20% x 154,000 = 30,800
Cr. Non-controlling interests (B/S) = 20% x 66,000 = 13,200
So, the “group” need not pay tax. (C) Lee Kin Wai 49
CJE 3
Cr. Retained earnings = 70% x 27,500 = 19,250
Cr. Non-controlling interests (B/S) = 30% x 27,500 = 8,250
(adjust for prior years excess depreciation)
We reverse the excess depreciation in previous year 20x2.
CJE 4
Dr. Non-controlling interests (B/S) = 20% x 8,250 = 1,650
Cr. Deferred Tax Asset (B/S) = 20% x 27,500 = 5,500
We recognize the increase in tax due to reversal of excess depreciation
in previous year 20x2.
(C) Lee Kin Wai 50
CJE 5
New depreciation recorded by P = 300,000 / 8 year = 37,500
Old depreciation if sale did not occur = 100,000 /10 years =10,000
(adjust for current year excess depreciation)
CJE 6
[tax effect of current year excess depreciation in CJE5]
(C) Lee Kin Wai 51
CJE 7
(Non-controlling interests share of current year profit)

Add excess depreciation (CJE 5) 27,500
Less tax on excess depreciation (CJE6) -5,500
Non-controlling interests (P/L) = 30% x 30,000 = 9,000
(C) Lee Kin Wai 52

AC3102 Jan2019 S3 Intra Group Elimination LKW 1jan2019

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AC3102 Jan2019 S3 Intra Group Elimination LKW 1jan2019

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Consolidated Financial Statements

– Intra-Group Transactions and Eliminations

(C) Lee Kin Wai 2

(c) eliminate in full intragroup assets and liabilities, equity, income,

1. Eliminate investment at date of acquisition

(C) Lee Kin Wai 5

In Subsidiary S’s separate accounts for year 31-12-20x5, there are

What is CJE in 20x2?

On 1-1-20x1, P acquires 90% of S.

Parent’s account (20x5) Subsidiary’s separate account (20x5)

(C) Lee Kin Wai 8

What are CJE in 20X6 (subsequent year)?

(C) Lee Kin Wai 10

Parent’s account (20x1) Subsidiary’s separate account (20x1)

•Same facts as previous example.

•CJE : Year 20x5

CJE to eliminate dividend declared by subsidiary in consolidated accounts

•No adjustment for Non-controlling interests for downstream

•For upstream sale by subsidiary to parent, adjust Non-

(C) Lee Kin Wai 18

Parent P has 70% share of subsidiary S.

There is no unsold inventory at year end 20x1.

(C) Lee Kin Wai 19

Dr. inventory (B/S) 20 Dr. inventory (B/S) 120

Thus there is 40% unsold inventory at year end 20x1.

(C) Lee Kin Wai 22

Parent’s separate books Subsidiary’s separate books

Dr. inventory (B/S) 20 Dr. inventory (B/S) 120

Net income of subsidiary as reported 1,000

(C) Lee Kin Wai 25

Net income of subsidiary as reported 4,000

Parent P has 70% share of subsidiary S.

There is no unsold inventory at year end 20x1.

(C) Lee Kin Wai 28

Dr. inventory (B/S) 120 Dr. inventory (B/S) 20

•From the group perspective, sales and cost of

(C) Lee Kin Wai 30

Dr. inventory (B/S) 120 Dr. inventory (B/S) 20

•Downstream sale = sale by parent to subsidiary

•Need to adjust cost, depreciation and accumulated depreciation as-if

•No adjustment for Non-controlling interests for downstream sale.

•For upstream sale by subsidiary to parent, adjust Non-controlling

Parent’s books Subsidiary’s books

(C) Lee Kin Wai 38

(C) Lee Kin Wai 42

(C) Lee Kin Wai 44

NCI has a 30% share of

CJE in year 20x2

Net income of subsidiary as reported 260,000

Net income of subsidiary as reported 8,000

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