Group statements – chapter 5

Accounting 200
 Resources
You may use the 17th edition. However, we will only
refer to the 18th edition.

2
Learning objectives
• Identify and understand how to account for intragroup balances, transaction costs and bank
accounts.
• Identify and understand how to account for intragroup inventory sales, unrealized profits in closing
and opening inventories and the impact of the write down to NRV.
• Identify and understand how to account for intragroup PPE sales for depreciable and non-
depreciable property.

3
Resources GS
Chapter
Study everything in GS chapter 5. 5

Ignore tax implications. Ignore sections 5.12 – 5.14; 5.19 – 5.20. Ignore
examples 5.5 – 5.7; 5.12; 5.14 – 5.16.

The following should also be ignored (in the textbook only): examples 5.8; 5.13;
5.17 – 5.18 and self-assessment question 5.2. We have uploaded these examples
and questions excluding tax on ULink. You must study these from the document
on Ulink.

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Introduction to Chapter 5
Overview of the topic
Page
203

Lecture 1 Lecture 2
Direct method (No worksheet) Section
5.5

From chapter 5 onwards, the textbook does not make use of the
consolidation worksheet.

Required (of both entities):

• Statement of P/L and OCI;
• Statement of changes in equity;
• Statement of financial position

Using:
• Calculation of purchase difference (goodwill or gain from bargain purchase)
• Analysis of equity of S
• Pro forma journals

7
Intrgroup transactions and balances Sections
5.1 and
5.2
• These are mirror images of the same transaction.
• For example, P has a receivable and S has a payable. P may have interest income
and S has interest expense.
• As we are consolidating, we need to eliminate the common items.

• Intragroup balances:
• For example – Loans (i.e. intragroup borrowings)
• Intragroup transactions in this chapter:
• Management fees
• The sale of inventories
• The sale of non-depreciable property
• The sale of depreciable PPE

8
Example 5.1 Example
5.1

This is a basic example. In this example,

there was no mention of interest on the
loan. We would also need to eliminate the
interest income and expense.

9
Example 5.1 Example
5.1

We need to eliminate this common item upon

consolidation. Pro-forma journal is as follows:

10
Transaction costs, bank overdrafts and guarantees
Transaction costs upon consolidation Section
5.3
Treatment of transaction costs i.t.o. IFRS 9 based on measurement basis adopted:
• FV through OCI – capitalised against Investment in Subsidiary in P’s records
• FV through P/L – expensed in P/L

• IFRS 3 – transaction costs should be expensed.

• Hence if the separate financial statements apply the FVOCI method, we’d need to do a pro-forma journal to
adjust this upon consolidation.

Do the
example on
your own

12
Bank overdrafts Section
5.4
If the one entity has a + bank balance and the other has a – bank balance (i.e. bank overdraft), these
should not be offset. Only offset if ALL the criteria are met:
• Both entities have bank accounts at same financial institution;
• Bank itself would set off 2 amounts i.t.o. agreement between 2 entities concerned and the bank
• Group has the intention to settle amounts on a net basis

Not common in
practice in SA to
offset + and – bank
balances upon
consolidation

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Intragroup sales
Intragroup transactions - Principle Section
5.6
• Selling entity records sale and profit/loss in its individual records.
• From perspective of consolidated entity, profit is only realised when goods are sold to
third party.
• If the goods are still with the buying entity and it has not been sold/used by the buying
entity, the profit is considered “unrealised”.
• Only when it is sold outside the group, it is considered “realised” for the purposes of
the group.

• Unrealised intragroup profit/losses must be eliminated on consolidation

• Group only realises profit/loss on sale when economic benefits realises:
• Inventories – through sale
• PPE – through use of the asset

15
Explanatory example 1 Not in
textbook

• P purchased inventory from a third party for R80 000.

• P sold the inventory to S at a cost plus 25% (i.e. total sales to S = R100 000).
• S sold all the inventory to a third party for R190 000.
P S 100% P + 100% S
Revenue 100 000 190 000 290 000
Cost of sales 80 000 100 000 180 000
Closing inventory 0 0 0

But what did the group do? The group bought inventory from a
third party for R80 000 and sold the inventory to a third party for
R190 000.

16
Explanatory example 1 Not in
textbook

• P purchased inventory from a third party for R80 000.

• P sold the inventory to S at a cost plus 25% (i.e. total sales to S = R100 000).
• S sold all the inventory to a third party for R190 000.
P S 100% P + 100% S Consolidated
Revenue 100 000 190 000 290 000 190 000
Cost of sales 80 000 100 000 180 000 80 000
Closing inventory 0 0 0 0

We therefore need to
eliminate the
intragroup sale and
cost of sale.
But what did the group do? The group bought inventory from a
third party for R80 000 and sold the inventory to a third party for
R190 000.

17
Explanatory example 1 Not in
textbook

• P purchased inventory from a third party for R80 000.

• P sold the inventory to S at a cost plus 25% (i.e. total sales to S = R100 000).
• S sold all the inventory to a third party for R190 000.
100% P+ 100% S J1 Consolidated
Revenue 290 000 (100 000) 190 000
Cost of sales 180 000 (100 000) 80 000
Closing inventory 0 0
J1 Dr Cr
Revenue (P)(P/L) 100 000
Cost of sales (S)(P/L) 100 000
Elimination of intragroup sales

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Explanatory example 2 Section
5.7

• P purchased inventory from a third party for R80 000.

• P sold the inventory to S at a cost plus 25% (i.e. total sales to S = R100 000).
• S sold half the inventory for R95 000 and the remaining R50 000 of inventories are on hand.
P S 100% P + 100% S
Revenue 100 000 95 000 195 000
Cost of sales 80 000 50 000 130 000
Closing inventory 0 50 000 50 000

But what did the group do? The group bought inventory from a
third party for R80 000 and sold half the inventory to a third party
for R95 000. The group has half the inventory on hand which
costed R40 000.

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Explanatory example 2 Section
5.7

• P purchased inventory from a third party for R80 000.

• P sold the inventory to S at a cost plus 25% (i.e. total sales to S = R100 000).
• S sold half the inventory for R95 000 and the remaining R50 000 of inventories are on hand.
P S 100% P+ 100% S Consolidated
Revenue 100 000 95 000 195 000 95 000
Cost of sales 80 000 50 000 130 000 40 000
Closing inventory 0 50 000 50 000 40 000

We therefore need to
eliminate the But what did the group do? The group bought inventory from a
intragroup sale and third party for R80 000 and sold half the inventory to a third party
cost of sale AND the for R95 000. The group has half the inventory on hand which
unrealised profit costed R40 000.

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Explanatory example 2 Section
5.7

• P purchased inventory from a third party for R80 000.

• P sold the inventory to S at a cost plus 25% (i.e. total sales to S = R100 000).
• S sold half the inventory for R95 000 and the remaining R50 000 of inventories are on hand.
100% P+ 100% S J1 J2 Consolidated
Revenue 195 000 (100 000) 95 000
Cost of sales 130 000 (100 000) 10 000 40 000
Closing inventory 50 000 (10 000) 40 000
J1 Dr Cr
Revenue (P)(P/L) 100 000 Pay close attention to
Cost of sales (S)(P/L) 100 000
the entities affected.
Elimination of intragroup sales
This is very important
for your understanding
J2
Cost of sales (P)(P/L) 10 000 and doing the
Inventories (S)(SFP) 50 000 x 25/125 = 10 000 10 000 consolidation!
Elimination of unrealized profit of closing inventory

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What if the subsidiary was the seller? Section
5.7 (3)

The pro-forma journals would be the same, just switch the entities affected in the journals.
J1 Dr Cr
This does not impact the
Revenue (S)(P/L) 100 000 equity analysis (as the net
Cost of sales (P)(P/L) 100 000 impact on the consolidate
Elimination of intragroup sales P/L is 0). It still impacts the
consolidated f/s.
J2
This affects the equity
Cost of sales (S)(P/L) 10 000 analysis of S. This is
Inventories (P)(SFP) 50 000 x 25/125 = 10 000 10 000 important as it affects the
Elimination of unrealized profit of closing inventory portion of profit allocated to
P and NCI. It also impacts
the consolidated f/s.

Pay close attention to the entities affected. This

is very important for your understanding and
doing the consolidation! Also consider these
journals in the analysis of equity.

If it affects the P/L of S, take into account in

the equity analysis of S,

22
Example 5.2 Example
5.2

23
Example 5.2 Example
5.2
Normal consolidation procedures apply (i.e. apply what you have learnt in chapter 3 and
chapter 4).

In this example, there is an intragroup sale + unrealised profit (i.e. because P still has
unsold inventory which it purchased from S).

The journals for the intragroup sale and unrealized profit are as follows:

This does not impact the

equity analysis (as the net
impact on the consolidate
P/L is 0). It still impacts the
consolidated f/s.

This affects the equity

analysis of S. This is
important as it affects the
portion of profit allocated to
P and NCI. It also impacts
the consolidated f/s.

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Example 5.2 Example
5.2

The analysis is done like

normal (as you’ve done it in
chapters 3 – 4).

However, because S’s P/L

has been impacted in the pro-
forma journals, we need to
show this impact in the
analysis.

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Example 5.2 Example
5.2
Let’s prepare the consolidated f/s.

Pro-forma journals taken into

account in the consolidated f/s.
Analyis adjustment affects the
proportion attributed to P and
NCI.

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Unrealised profit in opening inventories Section
5.8
Closing inventories of year 1 becomes opening inventories of year 2
• Assume closing inventories is sold in following year
• Profit therefore realizes

Remember that P and S prepares their own financial records. In year 1, we made pro-forma adjustments which
impacted the closing balances of the consolidated f/s. When we do the consolidation for year 2, we therefore
need to make the year 1 adjustment at the beginning of year 2 (i.e. we need the starting point of year 2 to
correspond to the ending point of year 1).

27
Example 5.3 Example
5.3

Year 1 pro-forma journals to

eliminate the intragroup sale
and unrealised profit.

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Example 5.3
Example
For year 2, we need the opening balances to correspond to the closing balances of year 1 5.3

Year 1 pro-forma journals

This journal has no impact on the net profit of the
consolidated f/s and hence no adjustment in year 2 is
required.

This journal needs to be recognised again, assume to

record it at the beginning of year 2. Assume the profit is
realised in year 2.

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Example 5.3
Example
For year 2, we need the opening balances to correspond to the closing balances of year 1 5.3

This is the same as J2. The debit goes to

retained earnings as all P/L at the end of
year 1 goes to retained earnings.

You need to also assume the inventories are sold (i.e. profit is
realised) in year 2. Hence, you need to recognise this pro-forma
journal.

This is the net effect. You only need to do this journal. In effect, at
the end of year 1, we eliminated the unrealised profit, and in year
2 we assume it realizes.

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Example 5.4
Example
5.4

This example does the consolidation for year 1 and year 2. We will only focus on parts of year 2.

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Example 5.4
Example
5.4

This is based on the year 1

unrealized profit.

This is based on the year 2

intragroup sale + unrealized profit.

If you had to do the consolidation for

This will impact the analysis as it
year 3, you’d only consider the
impacts S’s P/L for the current year
unrealized profit of year 2.
and S’s SCE (i.e. prior year P/L)

32
Example 5.4
Example
5.4

Remember, these
adjustments affect the
profits attributable to P and
NCI.

It also impacts the opening

balances in the SCE (i.e.
retained earnings of the
parent and NCI).

33
Example 5.4
Example
5.4

Now do the rest of

example 5.4 on
your own.

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Inventories written down to NRV Section
5.10

• IAS 2 rule – carry inventories at lower of cost or NRV.

• You will do IAS 2 later this year.

• The buying entity may write down the cost of inventory to the net realizable value (i.e. which is lower than
cost). This will occur in the separate financial statements of the buying entity.

• Upon consolidation, for intragroup inventories that are on hand, assess whether the carrying amount in the
buying entity is higher or lower than the group’s purchase price.

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Inventories written down to NRV Section
5.10

The unrealized profit is R10

000. The group purchased the
inventory on hand at R40 000.

In P’s separate f/s, the carrying amount of

inventory is R39 000. Therefore, the pro-
forma journal to eliminate the unrealised
profit is not necessary. The inventory is
already recorded at R39 000 which is below
the R40 000 that the group purchased the
inventory at.

36
Inventories written down to NRV Section
5.10

In P’s separate f/s, the carrying amount

of inventory is R44 000.

Upon consolidation, the pro-forma journal

that is required is to only eliminate R4 000 of
the unrealized profit. This will bring the
closing inventory of the group to R40 000.

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Questions?