UNIT 3:SUNDY ASPECTS &INTRA

GROUP TRANSACTIONS Revision

& Tax implications
FINANCIAL ACCOUNTING 3A: AFE3871
2024
SCHOOL OF ACCOUNTING
WHERE ARE WE?

. Study unit 01: IAS 12 Income tax (GAAP Handbook)

Study unit 02: Business combinations (GS Vol 1 Chapter1)
Study unit 03: Revision (intragroup transactions ,adjustments and sundry aspects) &
tax implication, GS Chapters 5& 6
Study unit 03: Pref. shares GS Vol 1 Chapter 6.17-6.23
Study unit 04: Interim acquisition (GS Chapter 8)
Study unit 05: IFRS 16 Leases (GAAP Handbook Chapter 10)
Study unit 06: Associates and Joint Ventures (GS Vol 2 Chapter 11)
Study unit 07: Complex groups (GS Vol 1 Chapter 7)
Study unit 08: Joint Arrangements (GS Vol 2 Chapter 12)
Study unit 09: Change in ownership (GS Vol 2 Chapter 13-14)
Study unit 10: Employee Benefits (GAAP Handbook Chapter 12)
Study unit 11: Cash Flows (Self study)
GROUP STATEMENTS
•. Group Statements Volume 1 and 2
• Volume 1
• Revision, tax, adjustments and sundry aspects +
Control (Chapter 1,3,4,5,6)
• Including IFRS 10 – Control (Volume 2, Chapter 10)
• Pref. shares GS 6.17-6.23 (Chapter 6)
• Complex groups (Chapter 7)
• Interim acquisition (Chapter 8)
• Business combinations (Chapter 2 Volume 1)
• Volume 2
• Associates and Joint ventures(Chapter 11)
• Joint arrangements (Chapter 12)
• Change in ownership (Chapter 13-14)
LEARNING OUTCOMES
By the end of the unit students must be able to:
Eliminate intragroup balances (loans, unrealized profit (sell of inventories,
sell of PPE (depreciable &non-depreciable)), transaction costs) including tax
implications
Recording fair value adjustments of assets at acquisition and since
acquisition including tax implications
Recording fair value adjustments of Investment in subsidiary and tax
implications
WHY DO WE ELIMINATE INTRAGROUP TRANSACTIONS
AND BALANCES?

• From a group perspective XLtd cannot do business with itself !!!

• Types of intragroup transactions/balances:

1. Elimination of transaction costs with the acquisition of the investment in the
subsidiary;
2. Loans
3. overdraft
4. Intragroup sales of inventory;
5. Intragroup sales on depreciable property, plant and equipment; and
6. Intragroup sales on non-depreciable property, plant and equipment;
7. Revaluation
INTAGROUP TRANSACTIONS
For all the following examples we will use the following as the base and just build on that: The
following are the Trial balances of H &S Ltd for the year ended 31 December 2023
The following trial balances of H Ltd and S Ltd for the year ended 31 December 2010 are given to
you:

.
Debits
H Ltd
R
S Ltd
R
Property, plant and equipment 340 000 400 000
Investment in S Ltd at cost price 160 000 -
Inventories 150 000 120 000
Debtors 80 000 64 000
Bank 20 000 16 000
Cost of sales 300 000 240 000
Operating expenses 50 000 40 000
Income tax expense 56 000 44 800
Dividends paid 40 000 80 000
1 196 000 1 004 800

Credits R R
Share capital (R1 par value) 100 000 80 000

Revaluation surplus 01/01/2023

Retained earnings (balanace as at 01/01/2010)
)
420 000
-
339
45
000
000
Long-term loans 90 000 72 000
Creditors 36 000 28 800
Revenue 550 000 440 000
1 196 000 1 004 800
• P Ltd acquired 60 000 shares in S Ltd on 1 January 2018. At that stage, the net assets of S Ltd consisted of the
following:
• Share capital R80 000
• Retained earnings R110 000
• The revaluation surplus of S Ltd arose on 31 December 2023 when S Ltd revalued its property, plant and
equipment. The revaluation surplus remained unchanged since that date.
• The dividend that P Ltd received from S Ltd was set off against operating expenses in the trial balance of P Ltd.
• Non-controlling interest is measured in accordance with the proportional method.
INTER COMPANY LOANS
How do intragroup balances arise?
• Intragroup balances arise due to amount owed to or receivable from entities
within the group.
• It arises due for examples due to the sell or rendering of goods or services;
and the provision of loans for example:
• Example: H Ltd made a loan to S Ltd to the value of N$300 000. Interest is
payable at 11% per annum. The interest for 2023 was paid in cash. The loan
has not yet been repaid.

. Group
Statements
Example 5.2
PRO-FORMA JOURNAL ENTRIES

Note:
All transactions and
balances in the separate
records of P Ltd and S Ltd
are reversed in a PFJE
(except for BANK for which we
NEVER do PFJEs)
TRANSACTION COSTS
• In its separate AFS P Ltd recognise the transactions costs as an expense
(FV through p/l) or capitalise it in the investment (FV through OCI) in
terms of IFRS 9.
• In terms of IFRS 3, all acquisition related costs, which include transaction
costs, should be recognised as an EXPENSE.
• On consolidation all capitalised transactions costs should be recognised as
an expense:
• Elimination of transaction costs with the acquisition of the investment in the
subsidiary
In the separate financial records of S Ltd:
• H Ltd pays N$10 000 transactions costs in obtaining the investment in S
Ltd. H Ltd elected to classify the investment in S Ltd at FV trough OCI in
terms of IFRS 9.
• Journal entry is:Dr Investment in S (SofP)10 000 Cr Bank (SoFP)(10 000)

In the consolidated financial records

• The transaction costs must be expensed:
UNREALISED PROFITS
• Unrealised profits occur when the different entities within the group SELL assets to
each other
• “Unrealised” profits mean that the profit was actually not yet made (realised) from
a GROUP perspective
• These unrealised profits need to be ELIMINATED by way of PFJEs.
• This is explained in more detail in the next slide.
EXAMPLE:SELLING INVENTORY
• During the year ended 31 December 2023 S Ltd sold inventories
to H Ltd at a 50% profit markup on the cost. Total sales of such
inventories by S Ltd to H Ltd amount to N$130 000 for the year.
N$50 000 of these inventories are still on hand (not yet sold to
third parties) in the records of H Ltd as at 31 December 2023.
• Assume a normal tax rate of 28%
• REQUIRED
• Prepare the pro-forma journal entries of the P Ltd group of companies
for the year ended 31 December 2023 in respect of only the above 2
transactions
SOLUTION

• If profit percentage is based on COST:

The profit markup is 50% on COST (refer to given information).
Formula to use= inventories on hand x [markup % ÷ (100 + markup %)]
= 50 000 x 50/150
= 16 667 (unrealised profit)
Test: cost = 50 000 selling price – 16 667 profit = 33 333
33 333 cost + 50% markup = 50 000 selling price

If profit percentage is based on SELLING PRICE:

The same result would have been obtained if the question said that the
inventories were sold at a 33⅓% profit on the SELLING PRICE
Formula to use = inventories on hand x [profit % ÷ 100]
= 50 000 x 33⅓ / 100
= 16 667 (unrealised profit)
PRO-FORMA JOURNAL ENTRIES

This journal assumes that all

inventories have been resold
Group
to 3rd parties. This is not the Statements
case as there is still a portion Chapter 5.5-
5.6
(N$50 000) on hand - Will be
reversed next slide
FIRST ELIMINATE THE SALES
PFJE: ELIMINATION OF UNREALISED PROFIT
IN CLOSING INVENTORIES

OR: 50 000 x
50/150
= 16 667

Group
Statements
Example 5.2
UNREALISED PROFIT IN OPENING
INVENTORY
• If the inter-company sales happened last year, the unrealised profit would have been
in the opening inventory
• The PFJEs will then change as follows: 
If unrealised profit in closing inventory If unrealised profit in opening inventory
UNREALISED PROFIT IN OPENING INVENTORY
If the unrealised profit was in opening inventory, it would have been sold to 3 rd parties (realised) in the
current year (inventories are normally sold quickly)
Therefore, the journal in the previous slide needs to be reversed (no longer unrealised)
Therefore, the following journals need to be done IN ADDITION to the journal on the previous slide:


LONG
METHOD
(SHOW
BOTH
JOURNAL 1
AND 2)
COMBINED JOURNALS
 Journals  and  on the previous 2 slides can also be combined as follows (textbook approach):
Combined

Group SHORTCUT
Statements METHOD
Example 5.3-
5.4
IMPACT OF UNREALISED PROFIT ON ANALYSIS

• If the subsidiary (S Ltd) is the SELLING COMPANY, we also

have to adjust the Analysis (for inventories and PPE)
• This is because, if S Ltd is the selling company, S Ltd’s Retained
Earnings and Profit are affected. S is making the profits
• Since we use an Analysis of owners’ EQUITY (including Retained
Earnings and Profit), we need to adjust the equity of S Ltd before
analysing it
• SELF STUDY GS EXAMPLES
• CHAPTER 5.9-5.17
SELLING OF DEPRECIABLE PROPERTY,
PLANT AND EQUIPMENT
On 1 January 2023 H Ltd sold a building to S Ltd with a carrying amount
of N$120 000 (for H Ltd) at N$145 000. At that stage the building had a
remaining useful life of 20 years.
Assume a normal tax rate of 28%
EIMINATION OF UNREALISED
PROFIT IN PPE
P is seller does not affect
analysis

Profit eliminated because

group cannot trade with itself

S Ltd’s PPE reduced to N$120

000 (carrying amount) because
from a group perspective the
sale did not take place
REVERSAL OF EXCESS DEPRECEATION ON SOLD PPE

• S Ltd based its depreciation for the year on N$145 000 (the cost for S Ltd).
However, from a group perspective it should have been based on the carrying
amount for the group of N$120 000. From a group perspective the sale between
P Ltd and S Ltd did not take place; from a group perspective the asset had a
carrying amount of
N$120 000 on 1 Jan 2023.
LOGIC FOR REVERSAL

Depreciation in the records of S Ltd

Carrying amount on date of purchase =
145 000 (cost)
Depreciation for 2010
= 145 000 ÷ 20 yrs
= 7 250
• Depreciation for the Group
Carrying amount on date of sale to
S Ltd
= 120 000
Depreciation for 2010
= 120 000 ÷ 20 yrs = 6 000

I.e. a difference of N$1 250. The Group therefore has

to decrease (credit) its depreciation expense by N$1
250 by way of a PFJE (remember the starting point is
the TB of S Ltd)
WHAT IF THE SELL OCCURRED EARLIER?

• Assume that P Ltd sold the PPE to S Ltd on 1 Jan 2021 instead of 1 Jan
2023.
• The PFJEs will then change as follows in respect of ELIMINATION OF
PROFIT:

If sold on 1 Jan 2023 If sold on 1 Jan 2021


(CONT)
If sold on 1 Jan 2021 & reporting Sold 2021 Reporting 31 December
31 Dec 2021 2023


X 2 yrs
(2021 &
2022)
(summary of what happened in 2021&2022)

(what happened in 2015)

(CONT)
• Journals  and  on the previous 2 slides can also be combined as
follows (textbook approach):

Combined
SELLING NON-DEPRECIABLE PPE

 The same as depreciable PPE EXCEPT for: NO depreciation hence

no income tax implications but capital gains implication which is
out of the Namibian context.
POINTS TO REMEMBER

• “Retained earnings” in the preceding PFJEs obviously means the Retained

earnings OPENING BALANCE.
• In the case of the unrealised profits in PPE we did not adjust the analysis,
because S Ltd was NOT the selling company
• If the PPE is subsequently sold to a third party, we need additional PFJEs to
reverse the effect of the previous elimination (similar to inventories)
• See examples in Group Statements textbooks
• You can also get a mixed scenario where the asset sold by the one group entity
is classified as inventory, whilst the other group entity classifies the same asset
purchased as PPE (or the other way around).
• See examples in Group Statements textbooks
INTERCOMPANY TRANSACTIONS
.

REVALUATION
S
Group
Statements
Example 6.1-6.5
AT ACQUISITION DATE Group
Statements
Chapter 3.9

• Goodwill/gain on bargain purchase is calculated as the difference between:

• Consideration paid (cost of investment), and
• FAIR VALUE of subsidiary’s net assets (equity) at acquisition date
• What if subsidiary’s assets at acquisition equity is not at fair value?
• IFRS 3 par 18: "The acquirer (P) shall measure the identifiable assets and liabilities
at their at acquisition date fair value"
• This presents a challenge because not all of S's assets are at fair value
• So we can either:
• FV the assets in S's books before acquisition if allowed in terms of IFRS, or
• FV the assets on consolidation using pro-forma journal entries = MOST LIKELY
• The most common examples are:
• Inventory that is undervalued at acquisition date
• PPE that is over or under valued at acquisition date
• These changes are made to the values in the AT ACQUISITION part of the
ANALYSIS
REVALUATION AT ACQUISITION DATE

1. At acquisition date the buildings of S Ltd (with a carrying amount in the records of S Ltd
of N$170 000) were regarded not to be fairly valued. For this reason the buildings were
revalued N$70 000 higher than what they appeared at in the separate financial records of
S Ltd. S Ltd did not record this revaluation in its separate financial records. The buildings
had a remaining useful life of 30 years as at the acquisition date (31 December 2014).
2. At acquisition date the land of S Ltd (with a carrying amount in the records of S Ltd of
N$230 000) was regarded not to be fairly valued . For this reason the land was revalued
N$100 000 higher than what it appeared at in the separate financial records of S Ltd.
S Ltd did not record this revaluation in its separate financial records.
3. At acquisition date the inventories (trading stock) of S Ltd (with a carrying amount in the
records of S Ltd of N$90 000) was regarded not to be fairly valued. For this reason the
inventories were revalued N$8 000 higher than what it appeared at in the separate
financial records of S Ltd. S Ltd did not record this revaluation in its separate financial
records.
• Assume a normal tax rate of 28%
Prepare the pro-forma journal entries of the P Ltd group of companies for the year
ended 31 December 2015 in respect of only the above 3 transactions.
Also prepare the main elimination journal entry
SOLUTION BUILDINGS

. following journal entry is done BEFORE the main

The
elimination journal:

DEFERRED TAX
The fact that the buildings are actually worth N$70 000 more than their
carrying amount in the records of S Ltd, means that S Ltd can sell them
at a profit of N$70 000 in future. S Ltd (and therefore the group) will
have to pay tax on this profit in future and therefore we provide for this
tax liability by crediting the “deferred tax (SoFP)” account.
SUBSEQUENT TREATMENT BUILDINGS

• REVALUATION OF BUILDINGS
• In the case of PPE, additional depreciation needs to be recognised for consolidation
purposes (because the group value of PPE is higher than the value of PPE in the separate
financial records of S Ltd (on which S Ltd based its depreciation))
Tip: the tax
• We therefore need to put through additional PFJEs (this will be illustrated and explained in adjustment is
more detail in the next couple of slides). always in the
OPPOSITE
DIRECTION
as the
adjustment to
profit (e.g. in
this case we
debited profit
(depr.) and
credited the
If we adjust profit, we always have to adjust the income tax expense as well, otherwise tax expense)
the group income tax expense will not correspond to the group profit (i.e. will not be at
28%). A corresponding deferred tax asset or liability is created because of the temporary
difference that arises between NamRa and the Group.
LOGIC BEHIND

Depreciation in the records of S Ltd Depreciation for the Group

Carrying amount
Carrying amount = 170 000 = 170 000 + 70 000
= 240 000
Depreciation per annum
= 170 000 ÷ 30 yrs Depreciation per annum
= 5 667 per annum = 240 000 ÷ 30 yrs
= 8 000 per annum

I.e. a difference of N$2 333 per annum. The group therefore has to
increase its depreciation by N$2 333 per annum by way of a PFJE
(remember the starting point is the TB of S Ltd)
WHAT IF THE BUILDINGS WERE
SUBSEQUENTLY SOLD? Group
Statements
Example 6.4
• Assume that example 2 also said that the buildings were sold for N$300 000 on 31
December 2023. The following ADDITIONAL PFJEs need to be done:

The PPE and Accumulated Depreciation amounts are the balances as per the previous
PFJEs (but now journalised in the opposite direction to reverse the revaluation (same
reason as for inventories)).

The deferred tax amount can also be tested as follows:

R19 600 – R6 533 (the balance as calculated from previous PFJEs).
WHAT IS THE LOGIC BEHIND THE PREVIOUS
PFJE?
.
Profit on sale of PPE in the records of
S Ltd Profit on sale of PPE for the Group

Carrying amount = 170 000 Carrying amount = 113 333

less (170 000 ÷ 30 yrs x 10 yrs)
= 113 333
Profit is therefore
300 000 – 113 333 = 186 667
+ 70 000 – 23 333 = 160 000
Profit is therefore
300 000 – 160 000 = 140 000

I.e. a difference of N$46 667. It is obvious that S Ltd’s profit is

overstated from a group perspective and therefore it has to be
reduced (debited) by N$46 667.
REVALUATION OF LAND Group Statements
Example 6.1-6.2

1. At acquisition date the land of S Ltd (with a carrying amount in the records of S Ltd of N$230 000)
was regarded not to be fairly valued . For this reason the land was revalued N$100 000 higher
than what it appeared at in the separate financial records of S Ltd. S Ltd did not record this
revaluation in its separate financial records.

• Assume a normal tax rate of 28%

SOLUTION

• The following journal entry is done BEFORE the main elimination journal:
• PPE (Land) 100 000
Revaluation surp 100 000

DEFERRED TAX
The reason why we generally provide for this tax liability is the same as for the
revaluation of the buildings. However, because NamRa does not grant any tax
allowances on land, the profit that will be made upon the future sale of the land
is a CAPITAL GAIN, and hence capital gains tax (CGT) applies. In NAMIBIA CGT rate
is 0% in terms of the CGT tax principles, (0%) of capital gains will be taxed. THIS
WILL ALWAYS BE THE CASE FOR LAND hence no DT.
WHAT HAPPENS AFTER ACQUISITION DATE? LAND
In the case of PPE, additional depreciation needs to
be recognized.
This is NOT done for LAND because land is not
depreciated
No further journal entries are required.
INVENTORY REVALUATION Group Statements
Example 6.7-6.8

.1.At acquisition date the inventories (trading stock) of S Ltd (with a carrying amount in the records of S
Ltd of N$90 000) was regarded not to be fairly valued. For this reason the inventories were revalued
N$8 000 higher than what it appeared at in the separate financial records of S Ltd. S Ltd did not record
this revaluation in its separate financial records.
Assume a normal tax rate of 28%.
• The following journal entry is done BEFORE the main elimination
journal:

DEFERRED TAX
In the case of inventories, we record the revaluation in Retained Earnings (at The reason why we provide for
acquisition). This is done to be consistent with the standard on inventories (IAS this tax liability is the same as for
2) which says that adjustments to the value of inventories are recorded in the revaluation of the buildings.
profit or loss. Retained Earnings at acquisition is an accumulation of S Ltd’s
profits up until the acquisition date.
WHAT HAPPENS AFTR ACQUISITION DATE

• INVENTORIES
• In the case of inventories, the revaluation needs to be reversed in the
Since Acquisition period because inventories are sold quickly. When
the inventories are sold we need to reverse the previous revaluation,
otherwise the group inventory balance will be overstated.
• We therefore need to put through additional PFJEs (this will be
illustrated and explained in more detail in the next couple of slides).
PFJE: REVERSAL OF INVENTORY
REVALUATION UPON SALE OF
INVENTORIES SINCE ACQUISITION
• The following journal entry is done AFTER the main elimination journal (i.e. in the since
acquisition period):

The RETAINED EARNINGS account is debited because the inventories were sold
BEFORE THE CURRENT YEAR. If they were sold in the current year, we would
have debited COST OF SALES

The RETAINED EARNINGS account is credited because the inventories were sold
BEFORE THE CURRENT YEAR. If they were sold in the current year, we would
have credited INCOME TAX EXPENSE
WHAT IS THE LOGIC BEHIND THE PREVIOUS
PFJE
Inventory balance of S Ltd
At acquisition date = 90 000
Balance of the same inventories now =
0 (all sold)
Inventory balance for the Group (in
respect of S Ltd only)
At acquisition date
= 90 000 + 8 000 = 98 000
Balance of the same inventories now
= 98 000 – 90 000 = 8 000
(90 000 sold by S Ltd)

I.e. a difference of N$8 000 to be reversed at group level (otherwise inventories

will be overstated). Even if the question does not say that inventories have been
sold, you have to make this adjustment because inventories are generally sold
quickly after purchase. (assumption)
1. At acquisition date the buildings of S Ltd (with a carrying amount in the records of S Ltd of
N$170 000) were regarded not to be fairly valued. For this reason the buildings were revalued
N$70 000 higher than what they appeared at in the separate financial records of S Ltd. S Ltd did
not record this revaluation in its separate financial records. The buildings had a remaining useful
life of 30 years as at the acquisition date (31 December 2014).
2. At acquisition date the land of S Ltd (with a carrying amount in the records of S Ltd of
N$230 000) was regarded not to be fairly valued . For this reason the land was revalued
N$100 000 higher than what it appeared at in the separate financial records of S Ltd. S Ltd did
not record this revaluation in its separate financial records.
3. At acquisition date the inventories (trading stock) of S Ltd (with a carrying amount in the records
of S Ltd of N$90 000) was regarded not to be fairly valued. For this reason the inventories were
revalued N$8 000 higher than what it appeared at in the separate financial records of S Ltd. S Ltd
did not record this revaluation in its separate financial records.
4. P Ltd acquired 60000 ordinary shares of S Ltd’s 80000 ordinary shares for N$160 000 on 31 Dec
2014, when the Retained earnings of S Ltd were N$110 000
RQD: Prepare the at acquisition analysis of shareholders equity and the at acquisition proforma
consolidation journal entry.
ANALYSIS OF SHAREHOLDERS EQUITY @ Acqn

PFJE: MAIN ELIMINATION JOURNAL

PFJE: MAIN ELIMINATION JOURNAL

Note the adjustments made to Retained Earnings and Revaluation Surplus

based on the 3 PFJEs that were processed before the main elimination journal.

As mentioned earlier, a gain on bargain purchase is recognised in profit or loss

when it arises. However, since P Ltd acquired its interest in S Ltd BEFORE THE
CURRENT YEAR, this profit would have been accumulated in the opening
balance of Retained Earnings (and hence we credit the Retained Earnings
account).
 •FAIR VALUE
ADJUSTMENT ON
INVESTMENT IN
SUBSIDIARY
FAIR VALUE ADJUSTMENT ON INVESTMENT
IN SUBSIDIARY
• In the parent’s (P Ltd) SEPARATE FINANCIAL RECORDS, the parent may carry the
investment in subsidiary account either at:
• Cost, or
• Fair value (“available-for-sale financial asset” / at fair value through OCI)
• These revaluations (called “fair value adjustments”) are done in EQUITY (through
OCI). This is commonly called a “Remeasurement reserve” or “Mark-to-market
reserve”.
• This is an accounting policy choice (the question will specify which policy the parent
follows, or will give you some clue).
• For example: if the investment in the given TB or F/S (as at the current date) is higher
than the original cost given in the additional information, you will know that the
parent revalued the investment to fair value
(CONT)
• In the CONSOLIDATED F/S, the investment in subsidiary
account needs to be eliminated (as discussed and illustrated
earlier)
• However, if the parent carries the investment at fair value, we
cannot simply eliminate the investment at cost
• Therefore we need to do the following by way of PFJEs:
1. Reverse previous FAIR VALUE ADJUSTMENTS first (to arrive at the
cost of the investment).
2. Then eliminate the cost of the investment as normal.
• The fair value of the investment in S was determined at N$220 000 on
the 31 December 2023
• Tax rate is 28%

REQUIRED
Provide the pro-forma journals to eliminate the fair value adjustment as at 31
December 2023

N/B The Analysis is not affected because the equity of S Ltd is

not affected (only the assets of P Ltd)
SOLUTION

Even though the question gave the amounts for

the mark-to-market reserve and deferred tax,
Fair value adjustments on the investment are
also capital gains for the same reason as the
revaluation of land (as discussed earlier)
therefore ignore DT implications as this is CGT
which is 0 in Namibia.

pro forma consolidation

journal
mark to market reserve 60 000 The exact
Investment 60 000 opposite as the
above journal
CONCLUSION & HOMEWORK
• READ IFRS 10,IFRS 3
• Revise all the examples in Group statements volume 1 Chapter 5
THANK YOU