AFA (2021) - 02 - Consolidation Process and Intragroup Transactions

Power and return
Consolidation
AF4106 Advanced Financial Accounting

Unit 2 – Consolidation Process and Intragroup
Transactions
https://youtu.be/ess7UICI17w
5 ifrsbox.com-consolidation-example
STUDY OBJECTIVES
After studying this unit, you should understand:
✓ Separate Financial Statements
✓ Consolidation Adjustments
1. Pre-acquisition Entries
2. Non-controlling Interest
3. Elimination of intragroup transactions
✓ Impact on NCI arising on adjustments of

unrealized profit or loss on upstream sale
✓ Intragroup transfers of inventory and PPE
✓ Intragroup transfers at loss
Introduction
• The financial statements of the parent and its subsidiaries used in
the preparation of the CFS are usually drawn up to the same date.
• If not, either the subsidiary must prepare
– special statements as at the same date as the group or
– if it is impracticable to do this, financial statements drawn up
to different reporting dates may be used if the difference is no
greater than three months.
• The CFS are to be prepared using uniform accounting policies for
like transactions and other events in similar circumstances.
• A parent company must provide financial information at two
levels:
– its Separate financial statements of the legal entity in
accordance with Companies Ordinance and HKAS 27 Separate
Financial Statements; and
– Consolidated financial statements in accordance with HKFRS
10 Consolidated Financial Statements
Advanced Financial Accounting (2021): U2 - 3

Separate Financial Statements
• Separate financial statements are those presented by an entity
in which the entity could elect to account for its investments in
subsidiaries, joint ventures and associate either
– at cost or
– as a financial asset in accordance with HKFRS 9 or
– using the equity method as described in HKAS 28.
• Dividends from a subsidiary, a joint venture or an associate are
recognised in the separate financial statements of an entity when
the entity’s right to receive the dividend is established.
• The dividend is recognised in profit or loss unless the entity
elects to use the equity method, in which case the dividend is
recognised as a reduction from the carrying amount of the
investment.

Consolidation Process
Legal entities Consolidated Adj Economic entity
Parent’s Subsidiaries' Consolidation adjustments Consolidated

Financial + Financial +/- (CJE) = financial
Statements Statements statements
Details of intra-
+ group transactions
and balances
• Consolidated financial statements are the financial statements of a

group in which the assets, liabilities, equity, income, expenses and cash flows of
the parent and its subsidiaries are presented as those of a single economic entity.
• Consolidation worksheet is prepared to:
– Combine parent and subsidiaries financial statements
– Adjust or eliminate intra-group transactions and balances
– Allocate profit to non-controlling interests

Consolidation Worksheet
• The consolidation worksheet provides a mechanism for efficiently combining
the accounts of the separate companies involved in the consolidation and for
adjusting the combined balances to the amounts that would be reported as if
all the consolidating companies were actually a single company.
• Keep in mind that there is no set of books for the consolidated entity.
• When consolidated financial statements are prepared, the account balances
are taken from the separate books of the parent and each subsidiary and
placed in the consolidation worksheet.
Col 1 Col 2 Col 3 Col 4 Col 5
Adjustments
Account Name Parent Subsidiary Dr Cr Consolidation
$ $ $ $ $
Investment in S Ltd 20,000 - 20,000 1 -
Other assets 35,000 27,000 62,000
55,000 27,000 62,000
Retained earnings 25,000 12,000 1 5,000 32,000

Share capital 30,000 15,000 1 15,000 30,000
55,000 27,000 62,000

Format of CFS
• On the face of CSPLOCI (also known as CSCI),
– All sales, expenses and other comprehensive income are combined
up to the lines “Total comprehensive income”.
– To reflect ownership, the “profit after tax” and “total comprehensive
income” figures are then allocated between the NCI and the owners
of the parent respectively.
Consolida te d Sta te me nt of Compre he nsive Income
for the ye a r e nde d 31 De ce mbe r 20X6
$'000
Sales 26,000
Cost of sales (13,000)
Gross profit 13,000
Administrative expense (8,000)
Profit from operations 5,000
Investment income 1,000
Profit before tax 6,000
Tax (1,500)
Profit after tax 4,500
Other comprehensive income
Gain on revaluation 1,500
Total comprehensive income 6,000
Profit attrib utab le to:

Owners of the parent 3,600
Non-controlling interest 900
4,500
Total comprehensive income attrib utab le to:
Non-controlling interest 1,200
6,000

Format of CFS
• On the face of CSFP, Consolidated Statement of Financial
– All assets and liabilities of Position as at 31 December 20X6
the group are combined ASSETS
with equity reflects Goodwill 82,000
Other assets 872,700
ownership by Parent and NCI. Total assets 954,700
• In group’s retained earnings, the EQUITY AND LIABILITIES $

Equity
parent’s share of the
Share capital 300,000
subsidiary’s post-acquisition Retained earnings 151,220
retained earnings are included. 451,220
Total equity 533,700
Liabilities
Non-current liabilities 330,000
Current liabilities 91,000
Total liabilities 421,000
Total equity and liabilities 954,700

Consolidation Adjustments
• As a part of this summation process, a
number of adjustments are made.
1) Pre-acquisition entries:
✓ Eliminating the carrying amount of
the parent’s investment in each
subsidiary,
Acquisition method ✓ Revaluing subsidiary’s assets and
liabilities at fair value,
✓ Eliminating the share capital and pre-
acquisition retained earnings in each
Adjustments subsidiary, and
• Pre-acquisition entries ✓ Recognizing NCI
• Intragroup transactions 2) Adjustments for intragroup
• Allocating profits to NCI transactions subsequent to the
acquisition date
3) Adjustment for allocation of
subsidiary’s post-acquisition profits to
NCI
Pre-acquisition Entry
• Eliminating the carrying amount of the parent’s investment in
each subsidiary, and the pre-acquisition equity in each subsidiary
at acquisition date and each subsequent year end.
• At acquisition date,
Parent Subsidiary Group

Dr P's Assets Dr S's Assets Dr Assets (P + S)
Investment in S Goodwill New item
Cr P's Liabilities Cr S's Liabilities Cr Liabilities (P + S)

P's Share capital S's Share capital P's Share capital
P's R/E Pre-acquisition S's R/E R/E (P)
P's Reserves Pre-acquisition S's reserves Reserves (P)
NCI New item

Two Goodwill Measurement Approaches
• The recognition of NCI at the date of acquisition is normally integrated with the
elimination of investment entry.
NCI – Full Goodwill NCI – Partial Goodwill

Share of BV of net assets Share of BV of net assets
Share of unamortized FV Share of unamortized FV

Adjustments (FV – BV) Adjustments (FV – BV)
Share of unimpaired goodwill

Dr Share capital of subsidiary
Dr Share capital of subsidiary Dr Retained earnings at acquisition
Dr Retained earnings at acquisition date
date Dr Other equity at acquisition date
Dr Other equity at acquisition date Dr FV adjustment (FV – BV)
Dr FV adjustments (FV - BV) Dr Goodwill (Parent only)
Dr Goodwill (Parent + NCI) Dr/Cr DTA/ DTL on FV adjustment
Dr/Cr DTA/ DTL on FV adjustment Cr Investment in subsidiary
Cr Investment in subsidiary Cr NCI (NCI % x FV of identifiable net
Cr NCI (At fair value) assets)

Reconstructing NCI on SFP
• As no consolidation ledgers are kept, there are no running balances of NCI.
The consolidation journal entries relating to NCI must be re-enacted each
year to arrive at the current balance of NCI.
Share of change in equity from
Share of equity at Share of change in
acquisition date to beginning
acquisition date equity in current period
of current year
Step 1: pre-acquisition Step 2: post-acquisition Step 3: post-acquisition
Acquisition Date Start of Current Period End of Current Period
NCI have a share of NCI have a share of NCI have a share of

1. Share capital 1. Change in share capital 1. Profit after tax
2. Retained earnings 2. Change in retained 2. Current amortization of fair
3. Other equity earnings value differential
4. Fair value adjustment 3. Change in other equity 3. Current impairment of
5. Goodwill (full method 4. Past amortization of fair goodwill
only) value adjustment 4. Dividends as a repayment
5. Past impairment of of profits
goodwill 5. Change in other equity
Allocation to Non-controlling Interests
Share of change in equity from
Share of equity at acquisition date to beginning of Share of change in
acquisition date current year equity in current period
Step 1: pre-acquisition Step 2: post-acquisition Step 3: post-acquisition
Acquisition Date Start of Current Period End of Current Period
Allocation of the change in equity from date of acquisition to the current year
Dr R/E (NCI% x Change in R/E from acquisition date to start of current period)
Cr NCI
Transfer NCI’s share of subsidiary’s R/E to NCI (Step 2)
Allocation of current Dr Income to NCI
profit (after FV adj) after Cr NCI
tax to NCI Allocation of current profit (after FV adj) after tax to NCI (Step 3)
Allocation of dividends to NCI Dr Dividend income (Parent)
Dr NCI
Cr Dividend declared (Subsidiary)
Allocation of dividends to NCI (Step 3)
Consolidation
• P acquired a 60% interest in S on 2 Example 1
January 20X1 when S’s share capital
and retained earnings were $80,000 Statement of financial position as at 31 December 20X8
and $30,000 respectively.
• Book values at the date of P S
acquisition were close to fair value. Carrying Carrying
amount amount
• FV of NCI as at the date of
acquisition was $75,000. ASSETS $ $
Investment in S 117,000 -
• The accounting policy is to recognize Other assets 578,000 294,700
NCI at FV at acquisition date. Total assets 695,000 294,700
Required:
1) Show the consolidation journal EQUITY AND LIABILITIES $ $
entries that have to be passed for Equity
the year ended 31 December 20X8 Share capital 300,000 80,000
2) Prepare the consolidation worksheet Retained earnings 140,000 48,700
for the year ended 31 December 440,000 128,700
20X8. Liabilities
Non-current liabilities 200,000 130,000
Current liabilities 55,000 36,000
Tax liabilities - -
Total equity and liabilities 695,000 294,700

Goodwill Calculation
Statement of financial position as at 31 December 20X8
•P acquired a 60% interest in S on 2 P S
January 20X1 when S’s share capital and Carrying Carrying
retained earnings were $80,000 and amount amount
$30,000 respectively. Book values at the ASSETS
Investment in S
$
117,000
$
-
date of acquisition were close to fair Other assets 578,000 294,700
value. Total assets 695,000 294,700
•FV of NCI as at the date of acquisition EQUITY AND LIABILITIES $ $

was $75,000. Equity
Share capital 300,000 80,000
Retained earnings 140,000 48,700
440,000 128,700
Entry related to this point Liabilities
Non-current liabilities 200,000 130,000
Tax liabilities - -
At acquisition At end of year Total equity and liabilities 695,000 294,700
Partial Full
Purchase consideration 117,000 117,000
Non-controlling interest 44,000 ($110K x 40%) 75,000
Cost of acquisition
business combination 161,000 192,000
Less: identifiable net assets - at

fair value
fair value (110,000) (110,000) (80,000 + 30,000)
Goodwill 51,000 82,000
• NCI's goodwill = $75,000 - $110,000 x 40% = $31,000

Elimination of Investment
Entry related to this point
Assume using full goodwill method
Statement of financial position as at 31 December 20X8
P S
At acquisition At end of year
Carrying Carrying
amount amount
ASSETS $ $
Investment in S Ltd 117,000 -
Other assets 578,000 294,700
Total assets 695,000 294,700
EQUITY AND LIABILITIES $ $

Equity
Share capital 300,000 80,000
Step 1 Retained earnings 140,000 48,700
440,000 128,700
Liabilities
Consolidation adjustments for 20X8 Non-current liabilities 200,000 130,000
CJE $ $ Tax liabilities - -
Total equity and liabilities 695,000 294,700
1 Dr Share capital of S 80,000
Full
Dr R/E of S 30,000 Purchase consideration 117,000
Dr Goodwill 82,000 Non-controlling interest 75,000
Cr Investment in S 117,000 Cost of acquisition 192,000
Cr NCI 75,000
Less: identifiable net assets - at fairvalue
fair value (110,000)
Elimination of investment in S Goodwill 82,000

Allocation of NCI’s share of R/E
Step 2
At acquisition At start of year At end of year
Allocation of NCI's share of change in R/E from the date of acquisition to start of the period
R/E on 1 Jan 20X8 38,200 Statement of comprehensive income and
R/E at acquisition date (30,000) statement of change in retained earnings for the
Change in R/E 8,200 year ended 31 December 20X8
NCI's share (40%) 3,280 P S
Consolidation adjustments for 20X8
Operating profit 160,000 60,000
CJE $ $ Dividend income from S 18,900 -
2 Dr R/E of S 3,280 Profit before tax 178,900 60,000
Tax expense (48,900) (18,000)
Cr NCI 3,280
Profit after tax 130,000 42,000
Allocation of NCI's share of change in R/E Retained earnings, 1 Jan 110,000 38,200
Dividends paid (100,000) (31,500)
from acquisition date to start of period
Retained earnings, 31 Dec 140,000 48,700
•P Co acquired a 60% interest in S Co on 2 January
20X1 when S’s share capital and retained earnings
were $80,000 and $30,000 respectively.
•Book values at the date of acquisition were close
to fair value.
•FV of NCI as at the date of acquisition was
$75,000.
Allocation of NCI’s share of Profit
Step 3
At acquisition At start of year At end of year
Allocation of NCI's share of change in R/E from the start to end of the period
PAT 42,000 Statement of comprehensive income and statement

NCI's share (40%) 16,800 of change in retained earnings for the year ended
31 December 20X8
P S
CJE $ $
Operating profit 160,000 60,000
3 Dr Income to NCI 16,800
Dividend income from S 18,900 -
Cr NCI 16,800
Profit before tax 178,900 60,000
Allocation of NCI's share of current profit Tax expense (48,900) (18,000)
Retained earnings, 1 Jan 110,000 38,200
Dividends paid (100,000) (31,500)
•P Co acquired a 60% interest in S Co on 2 January Retained earnings, 31 Dec 140,000 48,700
20X1 when S’s share capital and retained earnings
were $80,000 and $30,000 respectively.
•Book values at the date of acquisition were close
to fair value.
•FV of NCI as at the date of acquisition was
$75,000.

Elimination of Dividend Declared
Consolidation adjustments for 20X8 Step 3
CJE $ $
4 Dr Dividend income of P 18,900
Dr NCI 12,600 At acquisition At start of year At end of year
Cr Dividend paid by S 31,500

Elimination of dividend paid by S to P
Statement of comprehensive income and statement

of change in retained earnings for the year ended
31 December 20X8
NCI at acquisition date (CJE 1) 75,000 P S
R/E allocated to NCI (CJE 2) 3,280
Income allocated to NCI for 20X8 (CJE 3) 16,800 Operating profit 160,000 60,000
Less: Dividends paid to NCI (CJE 4) (12,600) Dividend income from S 18,900 -
NCI at 31 Dec 20X8 82,480 Profit before tax 178,900 60,000
Tax expense (48,900) (18,000)
Retained earnings, 1 Jan 110,000 38,200
Dividends paid (100,000) (31,500)
Retained earnings, 31 Dec 140,000 48,700

Analytical check on NCIs’ balance
Perform an analytical check on the balance of NCI as at 31 Dec 20X8
$
Equity NCI’s share of book value of NCI’s share of BV at 31 Dec 20X8
Share capital 80,000 net assets of subsidiary at
Retained earnings 48,700 year-end -/+ unrealized = $128,700 x 40%
Total equity 128,700 profit/loss from upstream sale = $51,480
NCI’s balance at
year-end = NCI’s share of unamortized BV = FV = No FV Adj = $0
balance of FV adjustments at
year-end
Goodwill – NCI’s share of

goodwill impairment
NCI's balance of goodwill at
year-end = $31,000 – no impairment
= $31,000
= $82,480
Consolidation Worksheet for CSFP
P S Adjustments
Carrying Carrying
Account Name amount amount Dr Cr Consolidation
ASSETS
Investment in S 117,000 - 117,000 1 -
Goodwill 1 82,000 82,000
Other assets 578,000 294,700 872,700
Total assets 695,000 294,700 954,700
EQUITY AND LIABILITIES $ $ $

Equity
Share capital 300,000 80,000 1 80,000 300,000
Retained earnings 140,000 48,700 1 30,000 151,220
2 3,280
3 16,800
4 18,900
31,500 4
Non-controlling interest 4 12,600 75,000 1 82,480
3,280 2
16,800 3
Total equity 440,000 128,700 533,700
Liabilities
Non-current liabilities 200,000 130,000 330,000
Current liabilities 55,000 36,000 91,000
Total liabilities 255,000 166,000 421,000
Total equity and liabilities 695,000 294,700 243,580 243,580 954,700
CJE $ $ $ $
1 Dr Share capital of S 80,000 3 Dr Income to NCI 16,800
Dr R/E of S 30,000 Cr NCI 16,800
Dr Goodwill 82,000
Cr Investment in S 117,000 Allocation of NCI's share of current profit
Cr NCI 75,000
Elimination of investment in S
2 Dr R/E of S 3,280
Dr NCI 12,600
Cr NCI 3,280 Cr Dividend paid by S 31,500
Allocation of NCI's share of change in R/E Elimination of dividend paid by S to P

Disclosure on CSFP
Consolidated statement of financial position as at
31 December 20X8
Account Name Consolidation ASSETS
ASSETS Goodwill 82,000
Goodwill 82,000 Other assets 872,700
Other assets 872,700 Total assets 954,700
Total assets 954,700
EQUITY AND LIABILITIES $

Equity Equity
Share capital 300,000 Share capital 300,000
Retained earnings 151,220 Retained earnings 151,220
Non-controlling interest 82,480 451,220
Total equity 533,700 Non-controlling interest 82,480
Liabilities 533,700
Non-current liabilities 330,000 Liabilities
Current liabilities 91,000 Non-current liabilities 330,000
Total liabilities 421,000
Current liabilities 91,000

Consolidation Worksheet for CSCI
P S Adjustments
Carrying Carrying
Account Name amount amount Dr Cr Consolidation
$ $ $
Operating profit 160,000 60,000 220,000
Dividend income from S 18,900 - 4 18,900 -
Profit before tax 178,900 60,000 220,000
Tax expenses (48,900) (18,000) (66,900)
Profit after tax 130,000 42,000 153,100
Profit attributable to NCI - - 3 16,800 (16,800)
Profit attributable to Owners 130,000 42,000 136,300
R/E, 1 January 20X8 110,000 38,200 1 30,000 114,920
2 3,280
Dividends paid (100,000) (31,500) 31,500 4 (100,000)
R/E, 31 December 20X8 140,000 48,700 151,220
CJE $ $
1 Dr Share capital of S 80,000
Dr R/E of S 30,000 3 Dr Income to NCI 16,800
Dr Goodwill 82,000 Cr NCI 16,800
Cr Investment in S 117,000
Cr NCI 75,000 Allocation of NCI's share of current profit
Elimination of investment in S
2 Dr R/E of S 3,280 Dr NCI 12,600
Cr NCI 3,280 Cr Dividend paid by S 31,500
Allocation of NCI's share of change in R/E Elimination of dividend paid by S to P

Disclosure on CSCI and CSCE
Consolidated statement of comprehensive income
for the year ended 31 December 20X8
Account Name Consolidation $
$ Operating profit 220,000
Operating profit 220,000 Dividend income from S -
Profit before tax 220,000
Dividend income from S -
Tax expenses (66,900)
Profit before tax 220,000 Profit after tax 153,100
Tax expenses (66,900)
Profit after tax 153,100 Profit attributable to:
Profit attributable to NCI (16,800)
Profit attributable to Owners 136,300 153,100
R/E, 1 January 20X8 114,920
Consolidated statement of changes in retained
Dividends paid (100,000) earnings for the year ended 31 December 20X8
R/E, 31 December 20X8 151,220 $
Retained earnings, 1 Jan 114,920
Profit after tax attributable to owners 136,300
Dividend paid (100,000)
Retained earnings, 31 Dec 151,220

Effects of amortization, depreciation and disposal of
undervalued or overvalued assets and liabilities
subsequent to acquisition
• At acquisition date, we recognize:
– Fair value of identifiable net assets,
– Intangibles, contingent liabilities, and
– DTA or DTL on the above
• In subsequent years:
– Amortization, depreciation and cost of sales of the acquired assets must be
based on the fair value as at acquisition date
– Since net assets are carried at book value in the separate financial statements,
the subsequent amortization/depreciation/disposal are adjusted in the
consolidation worksheet.
BV of expense in (FV- BV) adjustment FV of expense

separate financial to expense in consolidated
+ = financial
statements
Adjusted in consolidation statements
worksheet
Consolidation at Acquisition Date
Example 2a Statement of financial position as at 31 December 20X1
• On 31 Dec 20X1, P Co purchased 90% P Co S Co
of S Co’s outstanding ordinary shares Carrying
from S Co’s present shareholders for Carrying amount amount Fair value
$8.26m cash and issuance of 1 ASSETS
million shares of P Co’s ordinary Land 1,560,000 780,000 1,170,000
shares, which had a market value of Leased building 10,400,000 5,200,000 6,500,000
$5m. Equipment 9,100,000 2,600,000 2,210,000
• However, goodwill impairment loss Investment in S 13,260,000
does not have any tax effect. Inventories 1,170,000 650,000 780,000
• Fair value of NCI at acquisition date Receivables 910,000 390,000 390,000
was $1.4m. Other current assets 780,000 520,000 520,000
Cash 1,690,000 260,000 260,000
• Tax rate was 20% throughout.
Total assets 38,870,000 10,400,000
• Assume that offset is allowable
between deferred tax asset and EQUITY AND LIABILITIES $ $
deferred tax liabilities. Equity
Required: Prepare the consolidated Share capital 25,870,000 6,500,000
adjustments for the preparation of Retained earnings 5,590,000 1,170,000
consolidated financial statement as Total equity 31,460,000 7,670,000
at 31 Dec 20X1. Liabilities
Loan liabilities 4,810,000 1,820,000 1,820,000
If the investment is carried at FV through Other liabilities 2,600,000 910,000 910,000
P/L and it shows $14m now. Then we Contingent liabilities 130,000
should Dr R/E (or P/L, if the increase is Total liabilities 7,410,000 2,730,000
in current year) $0.74m, Cr investment Total equity and liabilities 38,870,000 10,400,000
$0.74m to restate it back to $13.26m
(original cost of investment) before we Net asset 7,670,000 8,970,000
perform the consolidation entries. Advanced Financial Accounting (2021): U2 - 26
Goodwill Calculation
S Co
• On 31 Dec 20X1, P Co purchased 90% of S Co’s outstanding Carrying
ordinary shares from S Co’s present shareholders for Account Name amount Fair value
ASSETS
$8.26m cash and issuance of 1 million shares of P Co’s Land 780,000 1,170,000
ordinary shares, which had a market value of $5m. Leased building 5,200,000 6,500,000
Equipment 2,600,000 2,210,000
• Fair value of NCI at acquisition date was $1.4m. Investment in S
Inventories 650,000 780,000
• Tax rate was 20% throughout. Receivables 390,000 390,000
• Assume that offset is allowable between deferred tax asset Other current assets 520,000 520,000
Cash 260,000 260,000
and deferred tax liabilities Total assets 10,400,000

Consideration transferred Equity
Share capital 6,500,000
= Cash consideration + FV of share issued Retained earnings
Total equity
1,170,000
7,670,000
= $8,260,000 + (1,000,000 x $5) Liabilities
Loan liabilities 1,820,000 1,820,000
= $13,260,000 Other liabilities 910,000 910,000
Contingent liabilities 130,000
Deferred tax liability Total liabilities 2,730,000
= 20% x ($8,970,000 - $7,670,000) = $260,000 Total equity and liabilities 10,400,000
Net asset 7,670,000 8,970,000

Partial Full
Purchase consideration 13,260 13,260
Non-controlling interest 871 ($8,710 x 10%) 1,400
Cost of acquisition
business combination 14,131 14,660
Less: identifiable net assets - at
fair
fairvalue
value (8,710) (8,710) (8,970 - 260)
Goodwill 5,421 5,950
• NCI's goodwill = $1,400k - $8,710k x 10% = $529k
Elimination of Investment
S Co
Carrying
Account Name amount Fair value Diff
ASSETS
At acquisition At end of year Land 780,000 1,170,000 390,000
Leased building 5,200,000 6,500,000 1,300,000
Consideration transferred Equipment 2,600,000 2,210,000 (390,000)
Investment in S
= $13,260,000 Inventories 650,000 780,000 130,000
Deferred tax liability Receivables 390,000 390,000 -
Other current assets 520,000 520,000 -
= 20% x ($8,970,000 - $7,670,000) = $260,000 Cash 260,000 260,000 -
Consolidation adjustments for 20X1 Total assets 10,400,000
CJE $ $ EQUITY AND LIABILITIES $

Equity
Share capital 6,500,000
1 Dr Share capital of S 6,500,000 Retained earnings 1,170,000
Dr R/E of S 1,170,000 Total equity 7,670,000
Liabilities
Dr Land 390,000 Loan liabilities 1,820,000 1,820,000 -
Dr Leased building 1,300,000 Other liabilities 910,000 910,000 -
Contingent liabilities 130,000 130,000
Dr Inventories 130,000 Total liabilities 2,730,000
Dr Deferred tax asset 104,000 Total equity and liabilities 10,400,000
Dr Goodwill 5,950,000
Net asset 7,670,000 8,970,000
Cr Equipment 390,000 Full
Cr Contingent liabilities 130,000 Purchase consideration 13,260
Cr Deferred tax liability 364,000 Non-controlling interest 1,400
Cr Investment in S 13,260,000 Cost of acquisition
business combination 14,660
Cr NCI 1,400,000 at fair value
Less: identifiable net assets - fair value (8,710) (8,970 - 260)
Elimination of investment in S Goodwill 5,950
Perform an analytical check on the balance of NCI as at 31 Dec 20X1
NCI’s share of BV at 31 Dec 20X1
= $7,670,000 x 10%
NCI’s share of book value of
= $767,000
net assets of subsidiary at
year-end - unrealized profit (+ NCI’s share of FV Adj after tax:-
unrealized loss) from i) Land = 10% x $390K x (1-20%
upstream sale tax)
ii) Building = 10% x $1.3m x (1-
NCI’s balance at
year-end = NCI’s share of unamortized
20% tax)
iii) Equipment = 10% x ($390K) x
(1-20% tax)
balance of FV adjustments at iv) Inventory = 10% x $130K x (1-
year-end 20% tax)
v) C.L. = 10% x ($130K) x (1-20%
tax)
= (i) + (ii) - (iii) + (iv) – (v)
= $104,000
NCI's balance of goodwill at Goodwill – NCI’s share of goodwill
year-end impairment
= $529,000 – no impairment
= $529,000
= $1,400,000
Multi-year Consolidation
• Information on S Co during the period 1 Jan
20X2 – 31 Dec X3 are as follows:
– S Co’s profit after tax for 20X2 -
$728,000
– S Co’s profit after tax for 20X3 -
At acquisition At end of 20X2 At end of 20X3 $400,000
– S Co’s dividend paid for 20X3 - $455,000
• There were no other change in equity.
Example 2b • For the period 1 Jan 20X2 – 31 Dec 20X3, the
following information applies to S Co:
CJE $ $
– Undervalued inventories of $130,000
sold in 20X2
1 Dr Share capital of S 6,500,000 – Undervalued land of $390,000 – land
Dr R/E of S 1,170,000 was sold in 20X3
Dr Land 390,000 – Undervalued buildings of $1.3m – useful
life 50 years from 1 Jan 20X2.
Dr Leased building 1,300,000
– Overvalued equipment of $390,000 –
Dr Inventories 130,000 useful life 5 years from 1 Jan 20X2
Dr Deferred tax asset 104,000 – Contingent liabilities of $130,000 –
Dr Goodwill 5,950,000 materialized (paid off) in 20X2.
Cr Equipment 390,000 – Goodwill – impairment loss of $520,000
Cr Contingent liabilities 130,000 in 20X2 recognized.
Cr Deferred tax liability 364,000 Required: Prepare the consolidated adjustments
for the preparation of consolidated financial
Cr Investment in S 13,260,000 statement as at 31 Dec 20X3.
Cr NCI 1,400,000
Same elimination entry used in the
Elimination of investment in S acquisition date
Amortization of FV Adj 1 year c/y

At acquisition At start of 20X3 At end of 20X3
CJE $ $
2 Dr R/E 117,000
Dr NCI 13,000 CJE $ $
Cr Inventory 130,000
3 Dr Gain on disposal 390,000
Dr DTL 26,000 Cr Land 390,000
Cr R/E 23,400
Cr NCI 2,600 Dr DTL 78,000
Amortization of Inventory FV adjustment Cr Tax expense 78,000
Amortization of Land FV adjustment
Action In S's book In Group Tax effect

1 Undervalued inventories of $130,000 Dr R/E Dr R/E 117,000 Dr DTL 26,000
sold in 20X2 Cr Inventory Dr NCI 13,000 Cr R/E 23,400
(CJE 2) Cr Inventory 130,000 Cr NCI 2,600
(At cost) (At FV - Cost)
2 Undervalued land of $390,000 sold in 20X3 Dr Bank Dr Gain 390,000 Dr DTL 78,000
(CJE 3) Sales proceed Cr Land Cr Land on disposal 390,000 Cr Tax expense 78,000
| Cr Gain
Fair value (At cost)
|
NBV

CJE $ $ At acquisition At start of 20X3 At end of 20X3
4 Dr Depreciation 26,000
CJE $ $
Dr R/E 23,400
Dr NCI 2,600 5 Dr Acc. Depreciation 156,000
Cr Depreciation 78,000
Cr Acc. Depreciation 52,000
Cr R/E 70,200
Cr NCI 7,800
Dr DTL 10,400
Cr Tax expense 5,200 Dr Tax expense 15,600
Cr R/E 4,680 Dr R/E 14,040
Cr NCI 520 Dr NCI 1,560
Cr DTA 31,200
Amortization of building FV adjustment
Amortization of equipment FV adjustment

3 Undervalued buildings of $1.3m Dr Dep Dr Dep 26,000 Dr DTL 10,400
– useful life 50 years from 1 Jan 20X2. Cr Acc Dep Dr R/E 23,400 Cr Tax expense 5,200
(CJE 4) Dr NCI 2,600 Cr R/E 4,680
Cr Acc Dep 52,000 Cr NCI 520
4 Overvalued equipment of $390,000 Dr Dep Dr Acc Dep 156,000 Dr Tax expense 15,600
– useful life 5 years from 1 Jan 20X2 Cr Acc Dep Cr Dep 78,000 Dr R/E 14,040
(CJE 5) Cr R/E 70,200 Dr NCI 1,560
Cr NCI 7,800 Cr DTA 31,200
CJE $ $
6 Dr Contingent liability 130,000
Cr R/E 117,000 At acquisition At start of 20X3 At end of 20X3
Cr NCI 13,000 CJE $ $
Dr R/E 23,400 7 Dr R/E 468,000

Dr NCI 2,600 Dr NCI 52,000
Cr DTA 26,000 Cr Goodwill 520,000
Amortization of contingent liability FV adjustment
Impairment of goodwill

5 Contingent liabilities of $130,000 Dr Exp Dr Contig. Liab 130,000 Dr R/E 23,400
– materialized (paid off) in 20X2. Cr Bank Cr R/E 117,000 Dr NCI 2,600
(CJE 6) Cr NCI 13,000 Cr DTA 26,000
6 Goodwill No Entry Dr R/E 468,000 Not relevant

– impairment loss of $520,000 Dr NCI 52,000
in 20X2 recognized. Cr Goodwill 520,000
(CJE 7)
Subsidiary in its own financial statement has Dr expense and Cr bank when they settle the claim. But actually the
contingent liability has been provided in the consolidated financial statement, thus on consolidation we should Dr
contingent liability and Cr bank. Thus the appropriate consolidation adjustment is Dr contingent liability and Cr
expense. It was last year’s expense, thus we Cr R/E.
1 year c/y
Allocation of prior year profit to NCI $ $

Profit after tax 728,000 728,000 At acquisition At start of 20X3 At end of 20X3
increase in COGS (130,000)
deferred tax thereon 26,000 (104,000)
increase in depreciation of buildings (26,000)
Already covered
decrease in depreication of equipment 78,000
deferred tax thereon (15,600) 62,400 in CJE 2 - 7
recognised contingency 130,000
Because we have already shared
deferred tax thereon (26,000) 104,000
between R/E and NCI in each
goodwill impairment loss (520,000) (520,000)
249,600 249,600
individual journal entry, we don’t
NCI share (10%) 24,960 need to share again when we share
R/E to NCI. But for current year
Consolidation adjustments for 20X3 income and expense, we cannot share
between parent and NCI in each
CJE $ $
individual journal entry (since
8 Dr R/E 72,800 subsidary’s income, expense, assets
Cr NCI 72,800 and liabilities are added 100% to the
consolidated financial statement), thus
Allocation of NCI's share of past profits
we share to NCI after making all the
necessary adjustments.
Allocation of current year profit to NCI $ $ 1 year c/y
lower gains on disposal of undervalued land (390,000)
increase in depreciation of buildings (26,000)
decrease in depreication of equipment 78,000 CJE $ $
deferred tax thereon (15,600) 62,400 3 Dr Gain 390,000
129,600 129,600 Cr Land 390,000
NCI share (10%) 12,960
Dr DTL 78,000
CJE $ $ Cr Tax expense 78,000
5 Dr Acc. Depreciation 156,000 Amortization of Land FV adjustment
Cr Depreciation 78,000
Cr R/E 70,200
Cr NCI 7,800 CJE $ $
Dr Tax expense 15,600 4 Dr Depreciation 26,000
Dr R/E 14,040
Dr R/E 23,400
Dr NCI 1,560
Cr DTL 31,200
Dr NCI 2,600
Cr Acc. Depreciation 52,000
Amortization of equipment FV adjustment
Dr DTL 10,400
Consolidation adjustments for 20X3 Cr Tax expense 5,200
CJE $ $ Cr R/E 4,680
Cr NCI 520
9 Dr Income to NCI 12,960 Amortization of building FV adjustment
Cr NCI 12,960
Allocation of NCI's share of current profit

Elimination of Current Year Dividend Declared
1 year c/y
• Information on S Co’s profit after tax and dividends paid during 20X3 are as follows:
– S Co’s dividend paid - $455,000
– P Co’s dividend income from S Co - $409,500
CJE $ $
10 Dr Dividend income 409,500
Dr NCI 45,500
Cr Dividend paid 455,000
Elimination of dividend paid by S to P

1 year c/y
Analytical Check
NCI’s balance at
year-end NCI’s share of BV at 31 Dec 20X3
= ($7,670,000 + $728,000 -
$455,000 + $400,000) x 10%
= = $834,300
NCI at acquisition date
$
1,400,000 (CJE 1)
NCI’s share of FV Adj after tax:- Amortization of inventory FV adj (10,400) (CJE 2)
i) Building = 10% x $1.3m x Amortization of building FV adj (2,080) (CJE 4)
48/50 x (1-20% tax) Amortization of equipment FV adj 6,240 (CJE 5)
ii) Equipment = 10% x ($390K) x
Amortization of contingent liab FV adj 10,400 (CJE 6)
3/5 x (1-20% tax) Impairment of goodwill (52,000) (CJE 7)
Allocation of NCI share of prior year R/E 72,800 (CJE 8)
= (i) – (ii) = $81,120
NCI's share of current profit after tax 12,960 (CJE 9)
Goodwill – NCI’s share of Less: Dividends declared to NCI (45,500) (CJE 10)
goodwill impairment NCI at 31 Dec 20X3 1,392,420
= $529,000 - $52,000 (CJE7)
= $477,000
= $1,392,420
Rationale for Adjusting Intragroup Transactions
• The consolidation process includes procedures that
A eliminate all effects of intragroup transactions, e.g.
– buying or selling of inventory;
Intragroup – transferring of PPE;
transaction
– rendering or procuring of service;
– providing financing among the companies within
B the group
• Transfer of assets within the group usually includes a

profit margin:
Group – risks and rewards of ownership of assets remain
in the group
– profit is unrealized until the asset is sold to a third
party
– time lag between purchase and resale of assets
results in overstatement/understatement of
group profit/loss and assets.
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Rationale for Adjusting Intragroup Transactions
Intragroup sale or
A purchase B
The group
• Consolidation adjustments are used so that only transactions with external

parties are reflected in the consolidated amounts.
• In preparing the CFS, separate CJE are prepared for adjustment of

intragroup transactions and recorded only on the consolidation worksheet.
– deferred tax adjustment may be made in relation to the elimination of
profits and losses from intra-group transactions.

Elimination of Intragroup Transactions and
Balances
• “Offsetting” effect on the group’s net profit from realized transactions
– Revenue recorded by the service providing company offsets the
expense recorded by the service receiving company
– However, elimination is still required to avoid overstatement of
individual line items and balances
Co. A Co. B
Transactions relating to interest Dr Bank Dr Interest expense
Cr Interest income Cr Bank
Transaction relating to service provided Dr Bank Dr Service expense
Cr Service income Cr Bank
Recognition of dividend payable and
receivable in the same period Dr Dividend receivable Dr Dividend declared
Cr Dividend income Cr Dividend payable

Adjustment to Opening Retained Earnings
• When a transaction is recognized by an individual entity in one period and by the
group in another period
– CJEs are passed through consolidated opening R/E
– Consolidated opening R/E should be the same as the consolidated closing R/E of
the previous period
• The summation of the opening R/E of the individual entities in the group will not be
equal to the consolidated opening R/E
– CJEs that have a “one-sided effect” on group R/E must be re-enacted to opening
group R/E of the next period, e.g.
• Unrealized profit from intragroup balances in the previous year are adjusted
against opening group R/E in the subsequent year if such item is unsold
CJE CJE
Adj
Yr 1 Yr 1 Yr 2
Unadj. Group Closing Adj. Group Adj. Group

R/E Closing R/E Opening R/E
Intragroup Transfers of Inventory
and Non-current Assets
• If the transferred asset is an inventory:
– It should be carried at original cost and not the transferred price
– Adjustments are made to:
✓ eliminate the profit element
✓ recognize profit only when the inventory is sold to external party
• If the transferred asset is a PPE:
– The asset should be carried at original cost less accumulated depreciation
rather than the transferred price
– Subsequent depreciation is based on original cost and not the transferred
price
Purchase from Intragroup sale or Sales to

external party A purchase B external party
The group

Adjustments to Eliminate Unrealized Profit
Unrealized profit
A owns 100% share of B. On 1 March 20X7, A of $3,000
purchased inventory at a cost of $7,000. One month
later, A sold it to B at a price of $10,000. Assume tax A B Adj Group
rate is 30%. Sales 10,000 (10,000) -
COGS (7,000) 10,000
In the period of sale (3,000) -
Profit 3,000 -
Elimination intragroup inventory sale:
Sales Dr 10,000
COGS Cr 10,000 Inventory 10,000 (3,000) 7,000
Elimination unrealized profit on inventory:

COGS Dr 3,000
Inventory Cr 3,000
Elimination intragroup inventory sale
resulting to DTA:
DTA Dr 900
(1) Eliminate cost of Tax expense Cr 900
(1) Intragroup
sales
sales is
reversed (2) Reverse unrealized Unrealized profit of $3,000 x 30% = $900
cost of sales
Per Group Per Individual
Unsold % x Unrealized profit
Or Dr Sales 10,000 CA < TB TD DTA
Cr COS 7,000 Inventory 7,000 10,000 3,000 900
Cr Inventory 3,000
Inventory Held Two or More Periods
• Prior to future sale to external party, an eliminating entry is needed in the
consolidation worksheet each time consolidated statements are prepared to
restate the inventory to its cost to the consolidated entity.
• If B continues to hold the inventory purchased from A, the following entry is
needed in the consolidation worksheet each time a CSFP is prepared for years
following the year of intragroup sale, for as long as the inventory is held:
In the period of sale In the following periods (if unsold)

Sales Dr 10,000 Elimination intragroup inventory sale:
COGS Cr 10,000 No effect on retained earnings
Elimination unrealized profit on inventory: Elimination unrealized profit on inventory:

COGS Dr 3,000 R/E Dr 3,000
Inventory Cr 3,000 Inventory Cr 3,000
Elimination intragroup inventory sale Elimination DTA resulting from intragroup

resulting to DTA: unrealized profit on inventory sale:
DTA Dr 900 DTA Dr 900
Tax expense Cr 900 R/E Cr 900

Inventory Sold in Two or More Periods
If B sold all inventory purchased from A in previous period, the following entry is needed
in the consolidation worksheet each time a CSFP is prepared for years following the year
of intragroup sale:
In the period of sale In the following periods (if sold)
Sales Dr 10,000
No effect on retained earnings
COGS Cr 10,000
Elimination unrealized profit on inventory: Elimination unrealized profit on inventory:

COGS Dr 3,000 R/E Dr 3,000
Inventory Cr 3,000 Inventory Cr 3,000
Adjust COGS from transfer price to original

Combined effect of two entries: cost as a result of sale:
R/E Dr 3,000 Inventory Dr 3,000
COGS Cr 3,000 COGS Cr 3,000
Combined New Entry New Entry

A B Adj Group
Sales 12,000 12,000
The adjustment on COGS is recognized when the
COGS (10,000) (10,000) asset is sold to external party
Realized profit 3,000 3,000 It shifts profits from prior year’s R/E to the current
Profit 2,000 5,000 year’s income when a sale to a third party is made.
Inventory 10,000 (3,000) 7,000
(10,000) 3,000 (7,000) Unrealized profit of
- - $3,000 now realized
Inventory Sold in Two or More Periods
• If B sold all inventory purchased from A in previous period, the following
entry is needed in the consolidation worksheet each time a CSFP is prepared
for years following the year of intragroup sale:
In the period of sale In the following periods (if sold)
resulting to DTA: Elimination DTA resulting from intragroup
unrealized profit on inventory sale:
DTA Dr 900
DTA Dr 900
Tax expense Cr 900
R/E Cr 900
Combined effect of two entries:

Tax expense Dr 900 Crystallization of DTA into tax expense as
R/E Cr 900 unrealized profit is earned:
Combined New Entry Tax expense
DTA
Dr 900
Cr 900
New Entry
The tax expense is recognized when the inventory is sold to external party

Downstream and Upstream Sale
Downstream sale Upstream sale
Unrealized profit resides
Parent in Parent’s book Parent
90 % 90 %
owned owned
Subsidiary Unrealized Subsidiary

profit resides in
Subsidiary’s
Sales were made from parent book Sales were made from
to subsidiary subsidiary to parent
For sales from parent to For sales from subsidiary to parent,

subsidiary, NCI’s share of the unrealized profit resides in the
profit of the subsidiary is not subsidiary. Thus, NCI’s share of the
affected because the unrealized profit or loss needs to be
adjustment affects the adjusted from the carrying amount
parent’s profit not the of the asset
subsidiary
Downstream Sales of Inventory
• P invested in 70% of shares of S 2009 2010
• Tax rate: 20% Sale of inventory from P to S $60,000
• Net profit after tax of S: Original cost of inventory $(50,000)
Gross profit $10,000
$800,000 (31 Dec 2009) Percentage unsold to 3rd party at year end 10% 4%
$900,000 (31 Dec 2010)
Example CJE 4: Allocation share of current profit

2009 to NCI
Income to NCI Dr 240,000
Consolidation entries for downstream sales NCI Cr 240,000
CJE 1: Elimination intragroup inventory sale $
Sales Dr 60,000 Profit after tax of S 800,000
COGS Cr 60,000 Less: unrealized profit -
Add: Tax on unrealized profit -
CJE 2: Elimination unrealized profit on
inventory Adjusted profit 800,000
COGS Dr 1,000 NCI's share (30%) 240,000
Inventory Cr 1,000
($10,000 x 10%) NCI share the unadjusted PAT
CJE 3: Elimination intragroup inventory sale
resulting to DTA
DTA Dr 200
Tax expense Cr 200 ($1,000 x 20%)
2009 2010
Sale of inventory from P to S $60,000
• Or Dr R/E 1,000 Original cost of inventory $(50,000)
Gross profit $10,000
• Cr Inventory 400 Percentage unsold to 3rd party at year end 10% 4%
• Cr COS 600
Consolidation entries for downstream sales
2010 CJE 1: Elimination unrealized profit on inventory
2009 R/E Dr 1,000
Inventory Cr 1,000
Consolidation entries for downstream sales

CJE 2: Adjust COGS from transfer price to
CJE 2: Elimination unrealized profit on original cost as a result of sale
inventory Inventory Dr 600
COGS Dr 1,000 COGS Cr 600
Inventory
($10,000 x 10%)
Cr 1,000 New Entry
Unrealized profit now realized = $10,000 x (10% - 4%) = $600
CJE 3: Elimination intragroup inventory sale CJE 3: Elimination intragroup inventory sale
resulting to DTA resulting to DTA
DTA Dr 200 DTA Dr 200
Tax expense Cr 200 R/E Cr 200
($1,000 x 20%) CJE 4: Crystallization of DTA into tax expense
as unrealized profit is earned
The resulting effect is to remove $400 unrealized profit on unsold Tax expense Dr 120
inventory DTA Cr 120
Tax on unrealized profit now realized = $600 x 20% = $120
New Entry
• P invested in 70% of shares of S
• Tax rate: 20% 2009 2010
• Net profit after tax of S: Sale of inventory from P to S $60,000
Original cost of inventory $(50,000)
$800,000 (31 Dec 2009) Gross profit $10,000
2009 2010
Consolidation entries for downstream sales Consolidation entries for downstream sales
CJE 4: Allocation share of current profit CJE 5: Allocation share of previous
to NCI profit to NCI
Income to NCI Dr 240,000 R/E Dr 240,000
NCI Cr 240,000 NCI Cr 240,000
$
2010 Profit after tax of S 900,000
Less: unrealized profit -
Consolidation entries for downstream sales Add: Tax on unrealized profit -
Adjusted profit 900,000
CJE 6: Allocation share of current
profit to NCI NCI's share (30%) 270,000
NCI Cr 270,000 NCI share the unadjusted PAT

Upstream Sales of Inventory
• Tax rate: 20% Sale of inventory from S to P $200,000
$800,000 (31 Dec 2009) Gross profit $30,000
CJE 4: Allocation share of current

2009 Example profit to NCI
Consolidation entries for upstream sales NCI Cr 237,840 $
CJE 1: Elimination intragroup inventory Profit after tax of S 800,000
sale Less: unrealized profit (9,000)
Sales Dr 200,000 Add: Tax on unrealized profit 1,800
COGS Cr 200,000
inventory NCI's share (30%) 237,840
COGS Dr 9,000 Elimination unrealized profit on inventory:
Inventory Cr 9,000 COGS Dr 9,000
($30,000 x 30%) Inventory Cr 9,000
CJE 3: Elimination intragroup inventory
sale resulting to DTA
DTA Dr 1,800 resulting to DTA:
Tax expense Cr 1,800 DTA Dr 1,800
($9,000 x 20%) Tax expense Cr 1,800
2009 2010
• P invested in 70% of shares of S Sale of inventory from S to P $200,000
• Tax rate: 20% Original cost of inventory $(170,000)
• Net profit after tax of S: Gross profit $30,000
$800,000 (31 Dec 2009)
Percentage unsold to 3rd party at year end 30% 0%
$900,000 (31 Dec 2010)
Consolidation entries for upstream sales
2010 inventory
2009 R/E Dr 6,300
NCI Dr 2,700
Consolidation entries for upstream sales Inventory Cr 9,000
inventory Unrealized CJE 2: Adjust COGS from transfer price to
original cost as a result of sale
COGS Dr 9,000 profit now
Inventory Dr 9,000
Inventory Cr 9,000 realized =
($30,000 x 30%) $30,000 x (30%
COGS Cr 9,000 New Entry
- 0%) = $9,000 CJE 3: Elimination intragroup inventory sale
CJE 3: Elimination intragroup inventory sale resulting to DTA
resulting to DTA DTA Dr 1,800
DTA Dr 1,800 NCI Cr 540
Tax expense Cr 1,800 R/E Cr 1,260
($9,000 x 20%)
CJE 4: Crystallization of DTA into tax expense
Tax expense Dr 1,800
Tax on unrealized profit now realized = $9,000 x 20% = $1,800
DTA Cr 1,800 New Entry
$800,000 (31 Dec 2009) Gross profit $30,000
2009 2010
Consolidation entries for upstream sales Consolidation entries for upstream sales
CJE 4: Allocation share of current profit CJE 5: Allocation share of previous
to NCI profit to NCI
NCI Cr 237,840 NCI Cr 240,000
2009 $
Reproduced NCI as at 31 Dec 2009 in Profit after tax of S 800,000
2010 $ 2010 Less: unrealized profit (9,000)
NCI on profit after tax of S 240,000 CJE5 Add: Tax on unrealized profit 1,800
Less: NCI on unrealized profit (2,700) CJE1 Adjusted profit 792,800
Add: NCI on tax on unrealized profit 540 CJE3
Total NCI 237,840

$800,000 (31 Dec 2009) Gross profit $30,000
$
Profit after tax of S 900,000
2010 Add: unrealized profit 9,000
Less: Tax on unrealized profit (1,800)
Consolidation entries for upstream sales Adjusted profit 907,200
NCI's share (30%) 272,160
CJE 6: Allocation share of current profit to
NCI CJE 2: Adjust COGS from transfer price to
Income to NCI Dr 272,160 original cost as a result of sale
NCI Cr 272,160 Inventory Dr 9,000
COGS Cr 9,000
NCI share the adjusted PAT CJE 4: Crystallization of DTA into tax expense
1) Realized profit & tax from prior years is Tax expense Dr 1,800
added back DTA Cr 1,800
2) Unrealized profit & tax from unsold
inventory in current year is deducted
(none in this year)

Adjustments of Transfers of PPE
When PPE are transferred at a marked-up price
• The unrealized profit must be eliminated from the carrying amount of PPE
• It is treated as if the transfer did not take place from the group’s perspective
1) Restate the carrying amount of PPE: to the NBV at the point of transfer
2) Profit on sale of PPE: adjusted out of:
✓ consolidated income statement if sale occurred in the same period
✓ opening R/E if sale occurred in the previous period
3) Subsequent depreciation: based on original cost of asset and estimated
useful life. The difference between the old and new depreciation is adjusted
to:
✓ current year in consolidated income statement
✓ prior year in opening R/E for accumulated depreciation
– In fact, P/L on transfer of PPE is realized through the higher or lower
depreciation charge subsequently
4) Tax effect must be adjusted on the unrealized profit and subsequent
corrections of depreciation

Impact on NCI on Unrealized Profit from
Intragroup Transfer of PPE
• Downstream sales:
– No impact on NCI
• Upstream sales (For sales from subsidiary to parent or to another
subsidiary):
– NCI is adjusted for:
✓Unrealized profit on sale of PPE and its tax effect
✓Correction of over/under-depreciation and its tax effect
• For intragroup sales from a subsidiary, we shall ask NCI, being
shareholders of the subsidiary, to share its portion of the consolidated
adjustment, no matter it is the sales of inventory, PPE, or intangibles.
• Thus we adjust downward the unrealised gain on disposal in the year of
disposal. The unrealised gain is reversed/realised through the sales to third
party or through the use of the assets. For the unrealised gain on disposal,
we shared to NCI, thus for the realisation of the gain through sales (if we
sell to third party, the gain is shared to NCI or through the use (through
crediting depreciation), we also share to NCI.
Downstream Transfer of PPE Example
• P controls 90% of S. On 1 Jan 20X2, P sold
equipment to S for $360,000. P S Adj Group
• The original cost of the equipment was Cost 360,000 40,000 400,000
$400,000 purchased on 1 Jan 20X0.
Acc. Dep (80,000) (80,000)
• The remaining useful life was 10 years from
the original purchase date.
NBV 360,000 320,000
• The remaining useful life is 8 years from the
date of transfer. Gain (40,000) 40,000 -
• Assume a tax rate of 20%. Dep
Sales of equipment to subsidiary: Consolidation entries for downstream transfer of PPE
Bank Dr 360,000
Acc Dep Dr 80,000 CJE 1: Adjustment of unrealized profit
Equipment Cr 400,000 Equipment Dr 40,000
Gain on disposal Cr 40,000 Gain on disposal Dr 40,000
Acc. Dep Cr 80,000
Parent Entry
CJE 2: Reverse tax on profit on sale
DTA Dr 8,000
Purchase of equipment from Parent: Tax expense Cr 8,000
Equipment Dr 360,000 ($40,000 x 20%) 20X2
Bank Cr 360,000
Subsidiary Entry CA < TB TD DTA
Equipment 320K 360K 40K 8K
Downstream Transfer of PPE
Consolidation entries for downstream transfer of PPE
CJE 3: Correct the over-depreciation on P S Adj Group
unrealized profit Cost 360,000 40,000 400,000
Acc Dep Dr 5,000 Acc. Dep (45,000) (80,000) (120,000)
Depreciation Cr 5,000 5,000
CJE 4: Increase in tax arising from NBV 315,000 280,000
correction of over-depreciation
Gain (40,000) 40,000 -
Dep 45,000 (5,000) 40,000
DTA Cr 1,000
($5,000 x 20%)
20X2
Depreciation Dep exp: $45,000
Transfer $360,000
8 yrs
NBV: $315,000
Depreciation
Dep Exp: $40,000
No Transfer
$400,000 Excess 5K
10 yrs
NBV: $280,000
As at 31 Dec 20X2
Downstream Transfer of PPE
20X2 20Y0
Eight years after the transfer

CJE 1: Adjustment of unrealized profit CJE 1: Adjustment of unrealized profit
Equipment Dr 40,000 Equipment Dr 40,000
Gain on disposal Dr 40,000 R/E Dr 40,000
Acc. Dep Cr 80,000
Acc. Dep Cr 80,000
CJE 2: Reverse tax on profit on sale CJE 2: Reverse tax on profit on sale
DTA Dr 8,000 DTA Dr 8,000
CJE 3: Correct the over-depreciation on CJE 3: Correct the over-depreciation on
unrealized profit unrealized profit
Acc Dep Dr 5,000 Acc Dep Dr 40,000
Depreciation Cr 5,000 R/E Cr 35,000
Depreciation Cr 5,000
New Entry
($5,000 x 8 years)
CJE 4: Increase in tax arising from correction
of over-depreciation CJE 4: Increase in tax arising from
Tax expense Dr 1,000 correction of over-depreciation
DTA Cr 1,000 R/E Dr 7,000
DTA Cr 8,000
($1,000 x 8 years)
Upstream Transfer of PPE
• P controls 90% of S. On 1 Jan 20X2, S sold Example
equipment to P for $360,000
• The original cost of equipment was $400,000 Amount
purchased on 1 Jan 20X0. As at 31 With to be
• The remaining useful life was 10 years from the Dec 20X2 sale adjusted
original purchase date. Cost 400,000 360,000 40,000
• The remaining useful life is 8 years from date of Acc. Dep 120,000 45,000 75,000
transfer Current Dep 40,000 45,000 (5,000)
• Net profit after tax of S for 20X2
Profit on sale 40,000 (40,000)
YE 31 Dec 20X2 : 500,000 Tax on profit 8,000 (8,000)
YE 31 Dec 20X3 : 800,000
Consolidation entries for upstream transfer of PPE
• Assume a tax rate of 20%
CJE 1: Adjustment of unrealized profit
Sales of equipment to Parent:
Bank Dr 360,000 Equipment Dr 40,000
Acc Dep Dr 80,000 Gain on disposal Dr 40,000
Equipment Cr 400,000 Acc. Dep Cr 80,000
Gain on disposal Cr 40,000
Subsidiary Entry DTA Dr 8,000
Tax expense Cr 8,000
Purchase of equipment from Subsidiary:
Equipment Dr 360,000
Bank Cr 360,000
Parent Entry
Consolidation entries for upstream transfer of PPE
Amount
CJE 3: Correct the over-depreciation on As at 31 With to be
unrealized profit Dec 20X2 sale adjusted
Acc Dep Dr 5,000 Cost 400,000 360,000 40,000
Depreciation Cr 5,000 Acc. Dep 120,000 45,000 75,000
CJE 4: Increase in tax arising from Current Dep 40,000 45,000 (5,000)
correction of over-depreciation Profit on sale 40,000 (40,000)
Tax expense Dr 1,000 Tax on profit 8,000 (8,000)
DTA Cr 1,000
$20,00 Dep exp: $45,000

Depreciation
Transfer 0
$60,000
$40,000
$360,000
Acc. Dep. 8 yrs NBV: $315,000
$40,000
Depreciation Dep Exp: $40,000

No Transfer
$400,000 Excess 5K
10 yrs
NBV: $280,000
As at 31 Dec 20X2
• P controls 90% of S. On 1 Jan 20X2, S sold
equipment to P for $360,000 Amount
• The original cost of equipment was $400,000 As at 31 With to be
purchased on 1 Jan 20X0 Dec 20X2 sale adjusted
• The remaining useful life is 8 years from date of Cost 400,000 360,000 40,000
transfer Acc. Dep 120,000 45,000 75,000
• Net profit after tax of S for Current Dep 40,000 45,000 (5,000)
YE 31 Dec 20X2 : 500,000 Profit on sale 40,000 (40,000)
YE 31 Dec 20X3 : 800,000 20X2 Tax on profit 8,000 (8,000)
$
• Assume a tax rate of 20%
Consolidation entries for upstream sales
Less: unrealized profit (40,000)
CJE 5: Allocation share of current profit to Add: Tax on unrealized profit 8,000
NCI
Income to NCI Dr 47,200 Add: Over-depreciation 5,000
NCI Cr 47,200 Less: Tax on over-depreciation (1,000)
NCI share the adjusted PAT NCI's share (10%) 47,200
CJE 3: Correct the over-depreciation on CJE 1: Adjustment of unrealized profit
unrealized profit Equipment Dr 40,000
Acc Dep Dr 5,000 Gain on disposal Dr 40,000
Depreciation Cr 5,000 Acc. Dep Cr 80,000
of over-depreciation CJE 2: Reverse tax on profit on sale
Tax expense Dr 1,000 DTA Dr 8,000
DTA Cr 1,000 Tax expense Cr 8,000
20X2 20X3
Equipment Dr 40,000
Equipment Dr 40,000
Gain on disposal Dr 40,000 R/E Dr 36,000
Acc. Dep Cr 80,000 NCI Dr 4,000
Acc. Dep Cr 80,000
CJE 2: Reverse tax on profit on sale CJE 2: Reverse tax on profit on sale
DTA Dr 8,000 DTA Dr 8,000
NCI Cr 800
CJE 3: Correct the over-depreciation on CJE 3: Correct the over-depreciation on
unrealized profit
unrealized profit
Acc Dep Dr 5,000
Depreciation Cr 5,000 Acc Dep Dr 10,000
Dep Cr 5,000
R/E Cr 4,500
NCI Cr 500
CJE 4: Increase in tax arising from
of over-depreciation
correction of over-depreciation New Entry
Tax expense Dr 1,000 R/E Dr 900
DTA Cr 1,000 NCI Dr 100
DTA Cr 2,000
• P controls 90% of S. On 1 Jan 20X2, S sold
equipment to P for $360,000 Amount
• The original cost of equipment was $400,000 As at 31 With to be
purchased on 1 Jan 20X0 Dec 20X2 sale stored
• The remaining useful life is 8 years from date of Cost 400,000 360,000 40,000
transfer Acc. Dep 120,000 45,000 75,000
• Net profit after tax of S for Current Dep 40,000 45,000 (5,000)
YE 31 Dec 20X2 : 500,000 Profit on sale 40,000 (40,000)
YE 31 Dec 20X3 : 800,000 Tax on profit 8,000 (8,000)
Tax rate = 20%
Consolidation entries for upstream sales Consolidation entries for upstream sales
CJE 5: Allocation share of current profit to 20X3 CJE 5: Allocation share of previous profit to
NCI NCI
NCI Cr 47,200 20X2 NCI Cr 50,000
$
Reproduced NCI as at 31 Dec
Less: unrealized profit (40,000)
20X2 in 20X3 $ 20X3
NCI on profit after tax of S 50,000 CJE6 Add: Tax on unrealized profit 8,000
Less: NCI on unrealized profit (4,000) CJE1 Add: Over-depreciation 5,000
Add: NCI on tax on unrealized profit 800 CJE2 Less: Tax on over-depreciation (1,000)
Add: NCI on over-depreciation 500 CJE3 Adjusted profit 472,000
Less: NCI on tax on over-depreciation (100) CJE4
Total NCI 47,200
$
20X3 Profit after tax of S 800,000
Add: Over-depreciation 5,000
CJE 6: Allocation share of current profit to Less: Tax on over-depreciation (1,000)
NCI
Income to NCI Dr 80,400 Adjusted profit 804,000
NCI Cr 80,400 NCI's share (10%) 80,400
CJE 3: Correct the over-depreciation on CJE 1: Adjustment of unrealized profit

unrealized profit Equipment Dr 40,000
Acc Dep Dr 10,000 R/E Dr 36,000
Dep Cr 5,000 NCI Dr 4,000
R/E Cr 4,500 Acc. Dep Cr 80,000
NCI Cr 500
CJE 4: Increase in tax arising from correction DTA Dr 8,000
of over-depreciation R/E Cr 7,200
R/E Dr 900 NCI Cr 800
NCI Dr 100
DTA Cr 2,000

Transfers of Inventory & PPE at a Loss
• Need to reassess whether the loss is indicative of impairment loss
• If it is indicative of impairment loss:
– Unrealized loss is not adjusted out of the carrying amount of asset
– Only reverse the sales and cost of sale (to the extent of the sales) for
inventory
– Only reverse the excess over cost and accumulated depreciation (to
the extent of the sales) for PPE
• If it is not indicative of impairment loss:
– Same treatment as with unrealized profit
– Unrealized loss is adjusted out of the carrying amount of asset
– Realized only when the inventory is sold to external party or
under/over- depreciation of PPE is corrected

Unrealized Loss from Intragroup Transfers
• Parent transferred inventory to subsidiary
during the year ended 31 Dec 20X6 Transfer price $60,000
• The loss on transfer indicated really an Original Cost $80,000
impairment loss on the inventory
What is the consolidation journal entry? Gross loss ($20,000)
CJE 1: Elimination intragroup CJE 2: Elimination unrealized loss

inventory sale Inventory Dr 20,000
Sales Dr 60,000 COGS Cr 20,000
COGS Cr 60,000
Eliminate the transfer of Inventory – no adjustment is made

to remove the unrealized loss and the transfer price already
reflected the cost after impairment loss!

NCI’s share of book
value of net assets of
subsidiary at year-end -
unrealized profit (+
unrealized loss) from
upstream sale
NCI’s balance
at year-end = NCI’s share of balance
of FV adjustments at
year-end
NCI's balance of
goodwill at year-end
End Advanced Financial Accounting (2021): U2 - 68

AFA (2021) - 02 - Consolidation Process and Intragroup Transactions

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AFA (2021) - 02 - Consolidation Process and Intragroup Transactions

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AF4106 Advanced Financial Accounting

✓ Impact on NCI arising on adjustments of

Advanced Financial Accounting (2021): U2 - 3

Advanced Financial Accounting (2021): U2 - 4

Parent’s Subsidiaries' Consolidation adjustments Consolidated

• Consolidated financial statements are the financial statements of a

Advanced Financial Accounting (2021): U2 - 5

Retained earnings 25,000 12,000 1 5,000 32,000

Advanced Financial Accounting (2021): U2 - 6

Profit attrib utab le to:

Advanced Financial Accounting (2021): U2 - 7

• In group’s retained earnings, the EQUITY AND LIABILITIES $

Advanced Financial Accounting (2021): U2 - 8

Parent Subsidiary Group

Cr P's Liabilities Cr S's Liabilities Cr Liabilities (P + S)

Advanced Financial Accounting (2021): U2 - 10

NCI – Full Goodwill NCI – Partial Goodwill

Share of unamortized FV Share of unamortized FV

Share of unimpaired goodwill

Advanced Financial Accounting (2021): U2 - 11

Step 1: pre-acquisition Step 2: post-acquisition Step 3: post-acquisition

Acquisition Date Start of Current Period End of Current Period

NCI have a share of NCI have a share of NCI have a share of

Step 1: pre-acquisition Step 2: post-acquisition Step 3: post-acquisition

Acquisition Date Start of Current Period End of Current Period

Advanced Financial Accounting (2021): U2 - 14

•FV of NCI as at the date of acquisition EQUITY AND LIABILITIES $ $

Less: identifiable net assets - at

• NCI's goodwill = $75,000 - $110,000 x 40% = $31,000

EQUITY AND LIABILITIES $ $

Advanced Financial Accounting (2021): U2 - 16

PAT 42,000 Statement of comprehensive income and statement

Advanced Financial Accounting (2021): U2 - 18

Cr Dividend paid by S 31,500

Statement of comprehensive income and statement

Advanced Financial Accounting (2021): U2 - 19

Goodwill – NCI’s share of

EQUITY AND LIABILITIES $ $ $

Advanced Financial Accounting (2021): U2 - 21

EQUITY AND LIABILITIES $

Advanced Financial Accounting (2021): U2 - 22

Advanced Financial Accounting (2021): U2 - 23

Advanced Financial Accounting (2021): U2 - 24

BV of expense in (FV- BV) adjustment FV of expense

EQUITY AND LIABILITIES $

Net asset 7,670,000 8,970,000

CJE $ $ EQUITY AND LIABILITIES $

Consolidation adjustments for 20X3

Action In S's book In Group Tax effect

Consolidation adjustments for 20X3

Action In S's book In Group Tax effect

Dr R/E 23,400 7 Dr R/E 468,000

Action In S's book In Group Tax effect

6 Goodwill No Entry Dr R/E 468,000 Not relevant

Allocation of prior year profit to NCI $ $

Advanced Financial Accounting (2021): U2 - 35

At acquisition At start of 20X3 At end of 20X3

Advanced Financial Accounting (2021): U2 - 36

• Transfer of assets within the group usually includes a

Ureply for student: http://polyu.ureply.mobi

Advanced Financial Accounting (2021): U2 - 38

• Consolidation adjustments are used so that only transactions with external